Why University Endowments Should Hire Women- and Minority-Owned Investment Firms

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, corporate America Wall Street at Silicon Valley struggle to build a workforce that reflects the changing face of our society. The challenges for blacks and Hispanics are most evident at the highest levels of corporate management, including among investment firms.

Among Fortune 500 companies, only six CEOs are black, and there was only 19 Black CEOs in the history of the United States. Hispanics are a little better represented at the helm, but only 20 now run these larger companies. The difference 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 had many more opportunities and formed a majority of university graduates since the 1980s. While many women with college degrees have ample opportunities to enter the workforce, many still struggle to gain a level playing field as their careers progress, especially in the upper echelons of large corporations. Although they constitute more than 50% of the population, women lead only 32 of Fortune 500 companiesa measly 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 in assets under management in the United States, only 1.4% is invested in women- or minority-owned businesses. Tracking the ownership of investment firms is a useful initial measure to assess diversity within the financial sector. In a separate space analysis of 204 companiesKnight and research firm Global Economics Group found that companies owned by diverse interests are at least three times more likely to have diverse portfolio management teams than companies owned by white men.

America’s wealthiest colleges and universities can help address the lack of diversity in investing. They show leadership on the environment, public health, and other key societal issues, and many schools have made real commitments to promote diversity, especially in their admissions policies. The commitment to diversity aligns well with the stated values ​​of these institutions and permeates other aspects of university life, including faculty hiring, procurement, and curriculum.

But universities have generally not extended this commitment to the management of their endowment funds. Over the past few decades, these funds have grown considerably and now total more than 800 billion dollars in the USA. The funds generate income that supports basic university operations and guarantees scholarships. The resistance of university investment offices to consider a wider range of asset management firms is apparently based in part on fears that companies held by various owners generate lower returns and thus provide less support for essential university operations. .

The evidence does not support this concern. The Knight Foundation’s 2021 Financial Industry Study found no difference in performance between companies owned by diverse owners and those owned by white men. Other Recent Consulting Firm Research McKinsey & Co.. and the harvard business review even offer evidence that companies with diverse leadership can outperform the types of asset management companies that have been the mainstay of university endowments.

Encouragingly, a growing number of universities have begun to engage in discussions about identifying and hiring companies with diverse interests that can offer competitive returns. But there are limits to the productivity of these discussions without more data to help assess which practices are working and which are not. As Pearson’s Law states, “When performance is measured, performance improves. When performance is measured and reported, the rate of improvement accelerates. Currently, too many schools resist disclosing information about their investment firms, which hampers their ability 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 preliminary results of an investigation we studied how the 25 largest private university foundations and the 25 largest public universities employ investment companies owned by diverse interests. We worked with Global Economics Group to verify detailed school data, using ownership information available in third-party databases.

Unfortunately, only 12 schools fully participated in our intermediate study, among them several with large endowments, including Princeton, the University of Texas, Columbia, Duke and the University of California. Four other schools participated indirectly, applying our criteria but calculating 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 participated 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 bigger public issue, including on campuses. We’re also asking for more detailed data disaggregating numbers for minority-owned businesses, so we can get more accurate racial and ethnic breakdowns. Based on the Global Economics Group analysis of the data currently available, black owners control 11% and Hispanic owners control 5% of the relatively small amount of assets controlled by various owners.

A range of traditional industry practices and customs impede the progress of women and people of color in the investment industry. A striking 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 the overly stringent requirements for assets under management that endowments impose on potential external fund managers. These standards unintentionally exclude companies owned by diverse interests whose leaders often find it more difficult to raise funds initially from friends, family members or classmates. Without rethinking their habits, too many universities and other institutional investors are missing out on great talent and future economic opportunities. Improving diversity is not just the right thing to do; it’s also a smart strategy for generating strong returns.

About Hubert Lee

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