Why University Endowments Should Hire Investment Firms Owned By Women And Minorities – Forbes

By 2050, a majority of people in the United States will be members of racial minority groups. Yet despite changing demographics, and decades of efforts to promote diversity and inclusion, U.S. businesses from Wall Street to Silicon Valley are struggling to build workforces that reflect the changing face of our society. The challenges for Black and Hispanic people are most obvious at the highest reaches of corporate management, including among investment firms.

Among Fortune 500 companies, only six CEOs are Black, and there have been only 19 Black CEOs in U.S. history. Hispanics are slightly better represented at the helm, but only 20 are now running these largest companies. The gap is particularly dramatic in the financial sector where only 2.4% of executive committee members, 1.4% of managing directors, and 1.4% of senior portfolio managers are Black.

Women have had far greater opportunities and have constituted a majority of college graduates since the 1980s. While many women with college degrees have ample opportunities to enter the job market, many still struggle to gain equal footing as their careers progress, especially at the upper reaches of big companies. Though they constitute more than 50% of the population, women lead only 32 of the Fortune 500 companies, a paltry 6.4%.

The investment sector has been one of the slowest to change. A December 2021 study commissioned by the Knight Foundation found that of more than $82 trillion of assets under management in the U.S., only 1.4 % is invested with firms owned by women or minorities. Tracking ownership of investment firms is a useful initial metric for assessing diversity within the financial sector. In a separate analysis of 204 firms, Knight and the research firm Global Economics Group found that diverse-owned firms are at least three times more likely to have a diverse portfolio management teams compared to firms owned by white men.

The wealthiest U.S. colleges and universities can help address the lack of diversity in the investment field. They provide leadership on environmental, public health and other key societal issues, and many schools have made real commitments to promote diversity, especially in their admission policies. The commitment to diversity aligns well with these institutions’ stated values and permeates other aspects of university life, including faculty hiring, procurement, and curriculum.

But universities generally have not extended this commitment to the management of their endowment funds. In recent decades, these funds have grown dramatically and now total more than $800 billion in the U.S.. The funds generate revenue that supports core university operations and underwrites scholarships. The resistance in university investment offices to considering a wider array of asset management firms apparently is based in part on fears that diverse-owned firms will generate lower returns and thus provide less support for essential university operations.

The evidence does not bear out this anxiety. The 2021 Knight Foundation financial industry study found no difference in performance between diverse-owned and white male-owned firms. Other recent research by the consulting firm McKinsey & Co. and the Harvard Business Review even offer evidence that firms with diverse leadership may outperform the types of asset management firms that have been the mainstay for university endowments.

Encouragingly, a growing number of universities have begun to engage in conversations about identifying and hiring diverse-owned firms that can deliver competitive returns. But there are limits on how productive these discussions will be without more data to help evaluate practices that are working and those that are not. As Pearson’s Law stipulates “When performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.” Currently, too many schools are resisting disclosure of information about their investment firms, inhibiting the capacity to measure their performance.

Last month, the NYU Stern Center for Business and Human Rights, which I direct, and the Knight Foundation jointly published the interim results of a survey we conducted of how the 25 largest private and 25 largest public university endowments employ diverse-owned investment firms. We worked with Global Economics Group to verify detailed data from the schools, using ownership information available from third-party databases.

Regrettably, only 12 schools fully participated in our interim study, among them several with significant endowments, including Princeton, the University of Texas, Columbia, Duke and the University of California. Four other schools participated indirectly, applying our criteria but crunching the numbers themselves. Among the schools in this group were Harvard and Stanford. The institution where I teach, New York University, declined to participate. The 16 schools that did participate have endowment assets of $314 billion, or 54% of the total.

In the next phase of our work, we hope that many more schools will provide financial data and that diversity in investment management will become a more prominent issue publicly, including on campuses. We also are calling for more detailed data disaggregating the numbers relating to minority-owned firms, so that we can obtain more accurate racial and ethnic breakdowns. Based on Global Economics Group’s analysis of currently available data, Black owners control 11% and Hispanic owners control 5% of the relatively small amount of assets controlled by diverse owners.

A range of traditional industry practices and customs are inhibiting progress for women and people of color in the investment industry. One prominent example is the unconscious reliance on personal networks in which connections tend to share the same race, gender, social background, and school ties. Another is overly stringent requirements for assets under management that endowments impose on potential outside money managers. These standards unintentionally exclude diverse-owned firms whose leaders often have a harder time raising early rounds of funds from friends, family members or school classmates. As a result of failing to rethink their ways, too many universities and other institutional investors are missing out on great talent and future economic opportunities. Improving diversity is not only the right thing to do; it’s also a smart strategy for generating strong returns.

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