The ‘Hows’ of Hiring Diverse Managers for Nonprofits

The ‘Hows’ of Hiring Diverse Managers for Nonprofits
3 min 46 sec

While fiduciaries have duties of loyalty, care, and prudence to beneficiaries, over time fiduciary obligations have evolved beyond the early “prudent person” rule; the Uniform Prudent Management of Institutional Funds Act now recognizes that nonprofits also have an obligation to their mission.

While great care and diligence is always required in investment decision-making, when structuring a “prudent” portfolio nonprofit trustees can and should consider serving their mission by evaluating the benefits of hiring diverse managers. Extensive research has shown that diverse teams provide a broader perspective. Diversity at the decision-making levels can yield more robust research, better investment returns, and improved results for beneficiaries.

Fiduciaries do need to carefully consider risk in evaluating and hiring entrepreneurial diverse managers. In some cases diverse firms have smaller asset bases, presenting a higher organizational risk. This does not have to be an obstacle; the investor can evaluate the risk for each opportunity and size its allocations prudently.

Another critical issue is measuring and evaluating the diverse-, women-, or disabled-owned (DWDO) opportunity set. The manager research process should be open, inclusive, and cover the entire universe of managers (this blog post describes Callan’s process). Within private markets, a forward calendar should include diverse managers’ funds in order to identify these opportunities.

The process for incorporating DWDO managers into the portfolio should include these steps:

Assess the current state of existing portfolio managers

The organization’s first action should be to survey its managers on their diversity statistics at both the organizational- and strategy-level, and ask questions about internal policies and actions being taken to improve DEI. (Below we provide more detail on specific questions that can aid this effort.) This is an effective way to communicate the importance of DEI to your existing managers and to encourage the investment management industry to take action to improve DEI.

Create a clear mission for investing with diverse managers

Next, the organization should define what “diversity” means for the institution (i.e., by gender, race, sexual orientation, disability, veteran status, etc.). Most commonly organizations define diverse organizations as those with more than 50% ownership by diverse persons. But the definition can also include a minimum level of diversity in decision-making roles (i.e., board, C-suite/executives, investment team), or a minimum level of diverse participation in carried interest distribution (for private markets strategies).

The organization should also include language in its investment policy statement that encourages the inclusion of diverse managers. And it should monitor majority-owned firms’ policies and procedures to encourage more inclusive cultures.

Clarify roles and responsibilities

The organization should identify the staff members and/or oversight body, such as the board of trustees or investment committee, responsible for approving and implementing diversity, equity, and inclusion (DEI) policies, as well as for regularly monitoring the portfolio’s investment manager diversity statistics and policies.

Identify the implementation strategy

These are some options for how the organization can put its strategy into place:

Manager search “Rooney Rule”: When available, require that a minimum number of diverse managers are included for consideration and/or finalist interviews

Required minimum allocation: Aspire to a minimum allocation to diverse managers as a percentage of total portfolio assets

Dedicated portfolio allocation: Carve out a portion of total portfolio assets to be managed by diverse managers

Source qualified diverse managers

When conducting manager searches, organizations should use a comprehensive manager database with significant diverse manager representation. A structural issue that prevented emerging diverse managers from receiving serious consideration has been requirements around minimum assets under management or the length of track records, which eliminated managers early in the process despite attractive returns. As part of the manager search process, minimum requirements can be adjusted to accommodate lower AUMs and shorter track records for greater representation.

Given the investment industry’s demographics, institutional investors have a long road ahead in terms of improving diversity, equity, and inclusion in existing portfolio structures. While change will not happen overnight, taking the steps outlined above is a solid first step in making progress toward a more inclusive industry. Among the questions that managers should be asked about their diversity efforts are the following:

  • Does your firm have a formal diversity and inclusion policy or initiative, including diversity within your vendor relationships?
  • Do you have recruitment initiatives focused on women, people of color, and/or other underrepresented candidates?
  • Does your firm have a formal mentorship program for women, people of color, and/or others that are underrepresented in leadership?
  • Does your firm have policies intended to increase the level of gender, racial, and ethnic diversity of senior leadership and investment teams?
  • What steps are you taking to promote a diverse and inclusive workplace culture?

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