Frances McDormand, the actress who won an Academy Award this year for her performance in “Three Billboards Outside Ebbing, Missouri,” introduced much of the world to a new idea when she accepted her Oscar.
“I have two words to leave you with tonight: inclusion rider,” she said.
Throughout Hollywood, the concept of an inclusion rider — a special clause in the contract of a lead actor or actress or prominent director that insists on a guarantee of gender and ethnic diversity among the cast and crew — has become increasingly popular since then. The Oscar winners Matt Damon, Ben Affleck and Brie Larson have said they would insist on one, as have the director and producer Ava DuVernay and others.
But what if inclusion riders took the leap from Hollywood to Wall Street?
What would happen if the biggest pension funds and university endowments — the financial industry equivalent of A-list actors — were to insist that they would invest only in private equity, venture capital or hedge funds that have certain hiring practices to address the diversity gap?
Wall Street investment funds have a long of history of being the antithesis of diverse. Only 9 percent of senior executives in private equity are women, according to the industry research firm Preqin. Fewer than 2 percent of private equity firms are run by women. About 2 percent of all funding for venture capital went to companies with all-female founding teams, and just 12 percent to teams with at least one woman.
And yet, study after study shows that firms that include women on their investment committees empirically outperform their peers. And even if the returns were simply the same, wouldn’t there be a moral imperative to improve the balance?
Goldman Sachs has privately been working on what might be considered a first step toward the advancement of female investment managers. The firm is working on a $500 million initiative to fund female-led investment firms using its own capital and that of its clients, according to an internal memo and people involved in the effort who were not authorized to discuss the initiative because it had not been publicly announced.
The $500 million figure is small relative to the size of the asset management industry, but it could serve as a model for other initiatives. And with Goldman’s name attached, it could give cautious investors more exposure and experience investing in female-led funds to drive them to do more — eventually changing the depressing statistics around women in the investment world.
“Whether these dismal numbers are due to poor sourcing, lack of supply or outright bias or some combination thereof, the end result is clear: Picture a founder or C.E.O. in your mind, and it’s probably a man,” Stephanie Cohen, a partner and chief strategy officer at Goldman who is spearheading the initiative, wrote in a memo to her colleagues. “Investing in women entrepreneurs with great ideas will help, but it’s going to take a lot more than just smartly directed dollars.”
The Goldman initiative, which will include offering seed capital for female investment managers as well as making direct investments in businesses led by female entrepreneurs, is one of a handful of such efforts that financial institutions are making. Perhaps most important: The Goldman effort is a for-profit initiative. The firm, which has used its philanthropic arm to start projects like 10,000 Women to support female entrepreneurs on a nonprofit basis, sees the initiative’s potential to generate strong investment returns. “The bottom line is this makes sense for our business,” Ms. Cohen wrote in her note.
(Goldman itself is still working on diversity. Just five of the 31 members of its management committee are women.)
But to truly change things, the big investment firms — the Blackstones and KKRs and TPGs — must fundamentally change the way they hire and develop talent. Those firms have become more diverse in recent years, but there are still too few women and minorities making meaningful investment decisions. The same is true in Silicon Valley and venture capital, which is dominated by white men. That, in turn, means there are fewer women and minorities who can jump ship to start their own firms and take advantage of opportunities like the one Goldman is planning to support.
That’s why the idea of an inclusion rider from some of the big pension funds is such an attractive idea. Virtually every major investment firm seeks money from the big pension funds and college endowments. If those big pools of money demanded, as part of their investment, specific hiring and development requirements, the movement could create a new generation of genuinely diverse investors.
The idea could take hold by way of governmental fiat — a bill introduced in California would prevent public pension funds based in that state from investing in asset managers that do not comply with race and gender pay equity policy. But wouldn’t it be better if it were voluntary? There’s reason to believe it could be.
The New York State Common Retirement Fund recently said it would vote against boards that did not include women. And a number of large pension funds — including Japan’s Government Pension Investment Fund, the biggest in the world; JPMorgan Asset Management; Standard Life; and BlackRock — signed a pledge in Britain to encourage that country’s largest companies to increase female representation in the senior ranks to 30 percent by 2020. (The pension funds are not requiring such changes, however, and it does not include the biggest investment firms themselves.)
Of course, it is possible that investment funds could refuse to take their money, pushing back on the idea that investors can steer the funds’ policies. It’s happened before: There are private equity funds that have threatened to not accept investments from public pensions because of certain disclosure laws required where the investor is based.
That’s why it would be so important for those A-list pension and endowment funds to get on board with the idea. They’re the ones with the money and clout to force real change.
Without a push from the very top of the investor class, it is hard to see how progress would be made. It is trite, but follow the money.
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