The CFA just released its new Diversity, Equity and Inclusion Code in a draft, asking for reactions.
I’m grateful leaders including Kim Lew, Keon Holmes, Kim Strand, Marlene Timberlake D’Amo, Wylie Tolette, Erinn R. King, Justine Phoenix, and Marg Franklin of the CFA Institute are taking on inclusion in investment management. It is the single most critical issue regarding future performance of portfolios headquartered in the U.S. I share more about why later in this reaction.
First, let me share my summary reaction—there is a lot to love in this new code. In the preamble, it provides a values-driven synthesis often missing in investor discourse:
We recognize that a diversity of perspectives will lead to better investor outcomes; an inclusive investment industry will better serve our diverse society. Further, we recognize that an organization with an inclusive culture, awareness and education, and effective working relationships is a better place to work.
The trinity of values expressed here:
· Better investor outcomes (financial)
· Better service
· Better workplaces
Is bold in its simplicity. Typically, the investing world allows itself to fall prey to a false dichotomy, that “better values” financially are at odds with “better values” around social justice and equity. This framework breaks with that paralyzing approach and replaces it with timeless wisdom—that what works for all of us works best at scale.
I am reminded of a highly successful investing mentor of mine who shared a story about the false choice of investing in “profitable but evil industries” or “good but financially less rewarding” industries.
He told me that if you want returns without values, you are soon adrift as an investor and create more harm than good for your portfolio over the long term. Many of us are stewards of fortunes with time horizons much longer than our individual walks on this earth. The story he shared to bring it home for me was that enslaving people as an institution created significant wealth and featured a global Who’s Who of investors. Areas of the world that enslaved people benefited tremendously from the return on their business model. It was, of course, entirely legal at the time, and investors kept meticulous records well within the law.
Now we all acknowledge, then investors accepted unaccounted-for costs of lives lost, innovations lost, suffering, and cultural destruction. In fact, many studies show this short-term profitable model long-term impoverished more people than were made wealthy. No one wants to think they would invest in a labor camp or slavery as a business model, even were it legal, but without the context of better service, better workplaces, and diversity of perspectives from this proposed code, it’s clear from history investors can be set adrift. It’s humble and prudent not to believe we are so much better than our forebearers that we can’t also lose sight of the forest for the trees. That’s why I’m pleased to see CFA focusing on creating a context for prosperity that puts the diversity of perspective and inclusive culture at the foundation.
An investment management culture of inclusion and diversity throughout the organization, from intern to CIO and board, is an effective vaccine to ensure practices and investments at the firm are of the highest moral caliber while meeting the financial needs of the endowment.
Reactions to the principles
The CFA has six principles for its Diversity, Equity and Inclusion Code. I will briefly quote each and then provide a short reaction.
Principle 1: Pipeline – We commit to expanding the pipeline of diverse talent.
Reaction: From my perspective at Valor Ventures in Atlanta, the pipeline of diverse talent is present and ready. However, for firms, including mine, the pipeline of senior talent certainly needs expansion. That sort of expansion will only come through commitment, programs, and processes to bring raw talent up through the ranks to the highest levels of organizations.
Valor, for example, is committed to developing GP-capable talent within. We’re also looking outward to add GP talent from outside our firm, likely from an entrepreneurial background. As we look to fill these senior roles, we don’t just “want” diversity and inclusion—we insist on it.
Principle 2: Talent acquisition – We commit to designing and implementing inclusive and equitable hiring and onboarding practices.
My take here is that many firms do not realize that their hiring habits and onboarding practices are not already equitable, because persons at the firms today often feel that they were hired in an equitable manner. Unfortunately, these equitable hiring practices have often resulted in almost exclusively male leadership teams and most of those teams are also majority white, at least in my industry, venture capital.
I believe it’s critical for our industry to hold the mirror of this code up to ourselves, and realize that despite “good intentions” most established firms haven’t experienced good outcomes in diversifying teams and including perspectives from all races and genders. Intentions do not create returns. As we all know, only timely, disciplined, diligent action does—and that’s also true of our talent strategies. It will take more than intentions, and this code is a tremendous start.
I would add that, to release the power of this principle, a firm has to commit to tracking.
Several leaders of investment firms, both in private and public equities, have approached me in the last five years to discuss “how I find talent that’s female and/or of color.” They tell me “they just can’t find it.” I realize these kinds of conversations can be triggering for some, but bear with me, because if we can’t hear the voice of the status quo we can’t change it. For what it’s worth, I believed these gentlemen were sincere—simply ignorant of the clear processes that would support achieving their goals. Because this is so important, and yet so often not discussed, I’m going to share with you what I shared with them. I’m glad to say several of those firms have since successfully hired more diverse team members for the first time.
1. START: Really commit.
Don’t accept hiring another “one of the same.” Make it personal for yourself as a leader at your firm that, as an issue of firm survival, you hire diversity. You don’t accept poor performance in your book—don’t accept poor performance in your talent recruitment either.
a. Benchmark the diversity you want so you have a sense of what ideal would look like for you. What does diversity look like in your city? Are you like most urban core cities, which have a minority white population? Start tracking.
b. Coach and mentor your existing team on developing a network of influence that looks like America.
c. Recruit with a written process that includes a written job and compensation plan, written interview questions asked of all candidates, and a rigorous search process. This helps you stop “pre filling” roles with fraternity mates before anyone outside of your network has even had a shot.
d. Start relationships with private equity programs at HBCUs, with Indigenous People, etc.
2. STOP: Stop the habits that have gotten you to a homogenous, monocultural team that does not serve you in our present multi-cultural, multi-hued, post-gendered society.
For example, examine:
a. How your firm celebrates and does team building. Is it excessively alcohol, sport, or (you name it-) centered, so that not everyone is regularly comfortable? Think about culture like you think about accessibility—make your culture more broadly accessible.
b. If you’re not getting the diverse candidates you’re looking for, stop going to the same old networks for those referrals. Instead, tap the types of leaders you seek to attract to help refer the top talent you’re looking for.
c. Stop participating in panels that are not inclusive. This is not just a great look for your firm, it also forces you to engage with a community of diverse thought and opinion in professional settings and will broaden your entire team’s network while also advocating for inclusion in practice.
Principle 3: Promotion and retention – We commit to designing and implementing inclusive and equitable promotion and retention practices to reduce barriers to progress.
This is such an important next step—once you have learned to attract and hire diverse talent, retaining it also changes firm culture in positive and powerful ways. I look forward to seeing this evolve in our industry. I have to note from the perspective of executing on this principle, that tracking in recruitment leads naturally to tracking in retention.
Principle 4: Leadership – We commit to using our position and voice to promote DEI and improve DEI outcomes in the investment industry and to being held responsible for our firm’s progress.
These last few years, every firm has come out with a “statement” or a “policy.” I applaud CFA for taking the next logical step and creating a culture of numbers-based reporting and commitment. The disciplines of repetition and reporting will create the learning moments our industry needs to move forward. I am confident we can get there together.
Principle 5: Influence – We commit to using our role, position, and voice to promote and increase measurable DEI results in the investment industry.
CFA has phrased this principle in such a way that it opens the door to the creativity and unique culture of individual investment management firms. There are so many ways to promote and increase measurable DEI results—and each firm is free to embrace their best by this approach from CFA.
Principle 6: Measurement – We commit to measuring and reporting on our progress in driving better DEI results within our firm. We will provide regular reporting on our firm’s DEI metrics to our senior management, our board, and CFA Institute.
This is a landmark statement for the investment industry—to commit to measuring and reporting on better DEI results. I’m thrilled to see CFA encourage this step and the reporting facet of the approach. I would add to this principle that reporting is just part of it. Starting where you are is a baseline, but having an informed benchmark for the area you operate within is also critical. Developing proper benchmarks is not often discussed because for some reason, there’s always someone in the room that talks about how benchmarking will lead to hiring for lesser skills or that “affirmative action doesn’t work.”
It’s time we stopped those false beliefs and embraced the truth. Just like with our portfolios, if we don’t have a bar, we can’t hope to balance our investments to reach it in real-time.
I know you and I both appreciate the beauty of building a robust, resilient portfolio. Building talent isn’t so different. Having a bar, like you do for alternatives if I may extend the metaphor, will only help you achieve the performance you’re looking for.
Building on better results
One of the most exciting things about this commitment by CFA is the timing. For most of our professional lives, those of us who are senior professionals in the industry have experienced an investment management culture that can be described as:
1) Self-reported meritocracy
2) Monoculture based on a past history of monoculture—ie “this is how it is done.” From the particular brands of shoes and suits, to the acceptable sports (golf, sometimes sailing), to the proper brands of watches and cars, to the standard returns striations and standard strategies, there hasn’t been a culture of progress in investment in my lifetime. For the most part, this has served the status quo but it also came with a certain self-congruence that made it almost understandable. It’s at least comfortable to know what rooms look like and talk like before you get there.
Until it isn’t. Now all that has changed. In a scant half-decade, many of the fundamental assumptions and first principles of the environment in which we invest have been overturned.
The best returns of the next 20 years will not come from the practices that created the returns of the last 20 years.
Many investors sense this and are feeling uncomfortable with the trope that “past returns are the only predictor of future success.” Consider the investing environment’s fundamental shifts in the last few years.
Here are a few that influence my own work at Valor in venture capital:
Then and Now
|5 years ago||Now|
|Physical proximity is critical. You have to be in the heart of (New York, London, Shanghai, SFO, etc.) to be a real player.||Most knowledge work works just fine on Zoom, thank you--and sometimes, even better.|
|White privilege is such a powerful force it’s effectively a predictor of success.||As the newest minority in America, white people often don't recognize their waning centricity. This myopia can be a barrier to best returns.|
|Most returns have come from a white majority, historically, and so the lenses that have worked for us in this reality will continue to work.||America is now a majority minority country in all of the major innovation hubs, including my home city Atlanta, LA, New York, SFO, Austin, etc. Companies that provide outlier, top tier returns will be predicated on earning acceptance from new diverse majority.|
|All models of private equity returns should be benchmarked on the past.||Most models of private equity returns should be reevaluated on base case assumptions. To monitor proper risk exposure, returns assumptions should be re-evaluated in the light that all past data reflects a sunsetting majority white American culture that is rapidly shifting into a new model.|
|New industries are going to be a lot like old industries—we can invest in space or quantum computing, for example, the way we invested in AI, blockchain and SaaS.||This is a radical error. AI, blockchain and SaaS are all incremental innovations. The last century of investment management has been in incremental innovation. Investment models in net-new, economic-refactoring developments like space colonization and quantum computing have to be evaluated on a fundamentals return basis because they are unlike previous industries along enough axes to create significant skew from prior models.|
Generating alpha now
Informed by these principles in the CFA’s draft code, investors stand a stronger chance of finding the alpha they are seeking. As investors, we’re more aggressive, more technical, more data-driven, more connected than ever before. We’ve got more investment vehicles and more ways to track them than ever. Yet our culture remains strangely bound to outdated norms.
We’re all operating in a young era when more culturally, racially, and gender diverse teams are the new majority and shaper of returns. These principles will reward our industry with greater alpha, innovation, introspection, and intensity of purpose. CFA is inviting us all to the table of bounty. Let’s enjoy the journey–together.