Why (Actually) Looking at Your DEI Survey is a Good Idea

As the Chief Investment Officer at Saint Paul & Minnesota Foundation, a critical part of my role in implementing the Foundation’s Strategic Plan has been to align our investment portfolio with the mission of the Foundation while leveraging our investment dollars to encourage greater diversity within the investment industry.?

When I stepped into the role, I inherited a portfolio that was full of managers who were very male and very white. While this this scenario is pretty common - about 80% of the institutional investment industry is male and white - there are two main issues with the lack of diversity within the portfolio:

• VALUES - One of the core values of Saint Paul & Minnesota Foundation is “We commit to equity: strengthened by a deeper understanding of the many facets of identity, we seek to dismantle the belief in and power structures that support a hierarchy of human value. To do this, we lift up values and voices of equity and justice in everything we do.” By investing the majority of our $2B portfolio in funds managed by white dudes, we were not fully living out this core value. The lack of diversity in our managers also raised questions about the types of systems and structures being upheld by the underlying assets.??

"We commit to equity: strengthened by a deeper understanding of the many facets of identity, we seek to dismantle the belief in and power structures that support a hierarchy of human value. To do this, we lift up values and voices of equity and justice in everything we do."

• PERFORMANCE - In 2021 the National Association of Investment Companies (NAIC), the largest network for diverse-owned alternative asset firms, reported that diverse owned firms outperformed their equivalent benchmarks in 83% of the periods measured (Examining the Returns | 2021). As an asset allocator, I have first-hand experience with managers demonstrating group-think, resulting in both higher risk and materially lower returns. In every case, these managers were teams who looked like each other, went to similar schools, and grew up in similar communities.

Despite the fact that diverse owned firms consistently outperform their benchmarks and competitors, according to the Knight Foundation, only about 1.4% of U.S. assets are invested with them.?

Looking at this portfolio full of homogenous asset managers, my team and I reassessed our existing diversity equity and inclusion investment policies, as well as the Foundation’s DEI survey and process. On the policy front, we found an opportunity to broaden the language to include additional diverse identifiers to reflect the full spectrum of underrepresented asset managers. For the survey, we found that the Foundation had historically relied on an external consultant to conduct the DEI survey. While that process yielded results, we believed that bringing the work in-house would allow for additional customization, as well as the potential for much deeper direct engagement between staff and managers. We opted to revise the DEI due diligence questionnaire (DEI DDQ) at the same time.??

Our overarching goal was to create a process that allows us to track improvement over time and clearly communicate our expectations with asset managers. Why? As mentioned up top, this industry has a long way to go in terms of improving representation. The only way to get there is to partner closely with our current and potential managers, help them develop their own internal DEI programs, and help them see the value that greater diversity can bring to their returns.?

How do we define diversity?

There are countless ways to measure diversity. For the purposes of our DEI DDQ we focus on women and/or Black, Indigenous, People of Color (BIPOC). We consider a firm to be majority diverse if it is 50% or more women and/or BIPOC owned. A firm is considered substantially diverse if it is 25% or more women and/or BIPOC owned. Our data collection format is derived from the U.S. Department of Labor Equal Opportunity Employer Information Report (EEO-1).

Building our DEI DDQ

When building our DEI DDQ we felt it crucial to look both at the demographic makeup of our managers and to also really develop understanding of the policies and procedures that each organization has in place for their internal DEI practices. Our survey revisions included an expanded set of questions to encourage qualitative responses and opportunities to include any DEI-related activities beyond the scope of the survey.

As noted above, we felt that collaboration with our managers would be a key component to 1) deepening our relationship with each firm and 2) impacting change over time in the institutional investing industry more broadly. Our goal was to be able to share survey results and offer the Foundation as a resource to each manager as they evolve their processes.?

The resulting DEI DDQ is a four-part survey:

1. DEI related policies and procedures
2. Demographic information at the firm level
3. Demographic information at the fund level
4. Demographics of the ownership group

We use the survey results to get a deeper look into the decision-making teams at each firm and determine how diverse or non-diverse they really are. Our focus on the people in the decision making and ownership seats helps us identify firms that are “diversity washing” when combined with the detailed questionnaire and interviews. The demographic survey is segmented by seniority and investment decision-making level to help tease out this crucial information, but ultimately the best data comes from one-on-one discussion and on-site visits.

What’s been the outcome?

When launching the DEI DDQ we made it clear to our existing managers that failure to complete the survey would result in them receiving the lowest grade possible and have a material impact on our decision to continue our investment. We also made it very clear that we are here to assist them in completing the survey and working with them over the long term to continuously improve their results - as their results improve, their and our financial returns are statistically likely to improve as well.?

The most valuable and impactful component of our new program has been the direct interaction with leaders and their teams. First, I had not at all appreciated just how little direct feedback managers get from the actual investor or limited partner. Each and every one of our managers has indicated that we are the only LP who has ever 1) shared their DEI survey score and 2) unpacked the scoring methodology, set expectations for the future and offered resources and ideas on how to improve over time. The general experience is, apparently, that managers fill out these surveys and they never hear about them again. When we share the DEI assessment scores and are super transparent as to why a manager received the score they did, we have deeper conversations with our managers and develop a more meaningful relationship than we would have otherwise.?

Second, it also turns out that our industry heavily over-indexes to high academic achievers and this can really help when sharing letter grades in a diversity assessment. When we tell a manager they’ve scored poorly, in many cases, this is quite literally the first “F” anyone in the room has ever received. This conversation can lead to an (often hilarious) existential crisis. When sharing scores we come prepared to talk through their results, troubleshoot and provide insights on where we think they can make realistic changes to improve their scores. These conversations have resulted in several firms making policy changes in the way they recruit and promote talent, and provide a venue for open discussion among investment teams and leaders on how to better communicate DEI-related activities that are not always highlighted effectively.?

In 2021 we worked with our partners at United Nations Principles for Responsible Investing (UNPRI) to incorporate most of our DEI DDQ into the UNPRI DEI DDQ that is now available for any institutional investor to use when evaluating managers. As a UNPRI signatory, we were thrilled to share our process and hope this tool can further support the Foundation’s mission on a global scale.?

Lessons Learned

There are inevitably firms led by individuals who still don’t believe the data that shows diverse teams are better decision-makers, provide more alpha to investors, and reduce portfolio risk. There are also firms that choose not to participate in any level of DEI discussion, and firms that attempt to misrepresent their commitment to improving diversity in the industry. That’s okay with us - we want to work with folks aligned with our values of maximizing returns by fostering fabulous diverse investment decision making teams. There are so many great investment opportunities that we do not need to waste our time on the ones who are still trying to live out their merry wee Wolf of Wall Street fantasy.

Launching our DEI DDQ has improved our investment funnel. Managers reach out to my team not just to pitch us on their fund, but to start a conversation when they aren’t fundraising. They have heard from one of our existing managers about our collaborative process and are interested in replicating the work within their own firm.?

Systemic change in our industry will be slow. Many of the programs and policies our managers have implemented will take time to materially impact the demographic portion of our results. We continue to believe that the best way to measure our managers is progress over time and willingness to engage rather than having minimum scores to remain in the portfolio. We expect that you will improve and we will be right here to remind you that change is required and that we are here ready to help you when you get stuck.

What next?

It’s been rewarding to see the largely positive response from our managers in regard to this important work. As noted above, we’ve received a lot of value in approaching this in a collaborative way that has pushed our full due diligence process to a higher level.

I would not have guessed that actually sharing the results of the surveys you ask your managers to complete would be ground breaking, but apparently it is. And doing so in a slightly irreverent manner makes folks feel comfortable to say what they need to out loud. Huh. Imagine that ???