Unconscious Discrimination in Asset Management

This article originally appeared here in Institutional Investor on August 10, 2020

August 10, 2020

Andrew Cenci/Bloomberg
Andrew Cenci/Bloomberg

Imagine that Dr. Evil, the diabolical genius in the Austin Powers movies, has a mind-control device that he uses to get you to make a decision that guarantees failure.  As described by former professional poker player Annie Duke in her upcoming book How to Decide, Dr. Evil can only succeed if he avoids detection, so he entices you to make a losing decision that is easy to explain away once, but guarantees failure when repeated over time. Eat a donut one day, you get a sugar buzz, feel good, and are no worse for the wear. Eat one every day for a year, and you’re guaranteed to both feel and look differently. 

What’s transpired with race in asset management is akin to eating a donut every day for a generation or more.  

The wave of tragedies that brought Black Lives Matter back to center stage presents an opportunity to engage in a dialogue that has been uncomfortable and avoided. In an upcoming miniseries on the Capital Allocators podcast, I had the opportunity to listen and learn from some industry leaders about the nature of the problem and the path to a more equitable future.

To lay the cards on the table, many people in the majority are afraid to say the wrong thing and offend those they intend to support. I include myself in that list. We need to break through that fear and be open to a conversation that has been taboo.

Black people have faced conscious and unconscious discrimination in asset management for a long time. Conscious discrimination is just bad. It happens daily, it sucks, and it will continue to occur. There are racists in our midst and that will not disappear in our lifetimes.

Unconscious discrimination is pervasive and perhaps more pernicious to careers. For example, Jake Walthour described joining Lehman Brothers in the early 1990s. This was not an insurmountable obstacle by any stretch, thanks to supportive organizations like SEO (Sponsors for Educational Opportunity) and Toigo Foundation, which focus on career advancement for underrepresented minorities. But once he arrived, he found that some of his equally unprepared colleagues were flying on planes to visit clients within a week,  as family connections had already put them in the tribe of those in power. Wall Street is a sell-side business, and tribal affinity is effective in sales — whether tribes are defined by school, interest, community, religion, gender, or race. However, with the number of Black leaders in corporate America limited, so too were opportunities for Black professionals to sell to them. The more junior analysts had experiences inside the boardroom, the more they learned and the faster they rose to the top of their analyst class for promotion.

Unconscious bias also finds its way into the investment process and creates obstacles for minority-owned firms. Kim Lew, CIO of Carnegie Corporation, uncovers layers of unconscious bias in manager selection. One team member might gravitate to investment managers that played college lacrosse, because managers with this background have proved they can thrive in environments marked by teamwork and intense competition. But the team member may not have considered that the pool of college lacrosse alumnae is almost entirely composed of white males. Lew asks her team to dig deeper into the root drivers of successful managers to widen the filter, because the same characteristics could also describe a former server in a thriving restaurant. 

The lack of diversity in asset management is a particularly tricky problem because of the bottom-line nature of the industry. It remains a challenge to connect racial or gender diversity directly to investment performance. Academic research shows that cognitive diversity fosters better decision making. While racial and gender diversity is correlated with cognitive diversity, it is not necessarily the same thing. Shundrawn Thomas, President of Northern Trust Asset Management, believes that investment performance is cyclical and mean reverting, and success in the asset management industry necessarily draws on more than just short-term outcomes. Excellence in client relationships, operations, and communication can be as valuable as performance in maintaining long-term client relationships and a strong business over time. The wider the aperture of the drivers of success, the more the asset management business looks like any other industry, driven by multiple factors that together benefit from diversity.

Solving deep-seated inequities is hard, but not insurmountable. The W.K. Kellogg Foundation took on the task of becoming an anti-racist organization in 2007. Joel Wittenberg, CIO of the Kellogg Foundation, applied practices from the Kellogg Corporation to develop an initiative in the investment program called Expanding Equity. The foundation developed 23 workstreams across attracting, belonging, promotion, and equity that it practices internally and shares with majority-owned external managers. Among that group, KKR, Värde Partners, and Beacon Capital Partners have adopted Expanding Equity to encourage long-term, sustainable diversity practices. 

The longstanding prevalence of unconscious racial bias looks a lot like a series of individual, relatively innocuous decisions that collectively created a serious problem. Open dialogue and education is the first step towards stopping the pattern of eating a donut a day. It will take time before we see diverse leadership and a normalized workforce in both our industry and corporate America. In the end, we will be better off for it.