January 13, 2021 at 5:00 am ET
In December, NASDAQ filed a proposal that pushes for greater diversity on the boards of over 3,000 companies listed on its exchange. Under this proposal, companies will be required to have two board directors from diverse backgrounds: one woman and one person who identifies as a person of color or LGBTQ. If the U.S. Securities and Exchange Commission approves the plan, all companies would have to disclose board-level diversity statistics within one year of the policy being passed.
Requiring one “diverse” board member is a good start, but more needs to be done to address the systemic inequality that permeates the financial system — starting with the asset management industry, which wields enormous influence within the sector. According to the Knight Foundation, in 2016 our industry was responsible for $69.1 trillion in assets under management — yet just 1.3 percent of the firms managing that wealth were owned by women or people of color. The SEC and organizations alike should look for every opportunity to reduce racial and gender bias throughout the investing field. The financial industry is losing out not only on major profits but on opportunities because of its blind spot on the impact of racism.
According to a study from Citigroup, systemic racism has cost our country more than $16 trillion. Black and Latinx businesses continue to be the hardest hit by the COVID-19 pandemic. The first piece of federal relief for businesses hit by this year’s economic downturn — the Paycheck Protection Plan — reached a lower proportion of Black-owned businesses. While the second stimulus package included funds specifically for underrepresented business owners, it was a small portion of the total aid for small businesses.
The lack of diversity on company boards and a lack of access to funding for Black and Latinx businesses are structural problems that require structural solutions. Research from Stanford SPARQ and my firm, Illumen Capital, suggests that race influences the investment decisions of asset allocators.
It’s not just a “pipeline problem” — equally qualified Black- and Latinx-owned businesses are more likely to get passed over for funding than white-owned businesses, creating disparities between which businesses succeed and which businesses fail. The consequences of a lack of diversity within asset management aren’t limited to this industry. This problem reinforces systemic inequality across systems: bias in loan mortgage lending, the education system, health care, and so much more.
It is no secret that diversity and inclusion can contribute to every company’s bottom line. A McKinsey study suggests organizations that prioritize slowing down to identify, evaluate and address racial and gender bias outperform their competitors who do not undergo that work. According to research from Catalyst, diversity and inclusion can “help to recruit and retain top talent; improve creativity, innovation, and performance; and boost a company’s brand among consumers.” When diversity and inclusion are baked into the business model of a company, there is literally no downside — it improves employees’ overall performance and boosts morale.
The SEC proposal is a small step forward in diversifying the industry, but more needs to be done. One underrepresented board member is not enough – boards need to have representation from multiple members who bring racial and gender diversity in order for those new members to be effective and have their voices heard.
As the gatekeepers to capital, fund managers play a crucial role in determining which companies get funded and which get left behind. Asset allocators must reckon with their own biases and how those biases influence their funding decisions. Reducing gender and racial bias will help investors expand their investable landscape and make better investment decisions, generating more impact and financial value in the process.
During the pandemic, the byproducts of racial inequity have been exacerbated, which is widening the racial wealth gap in America. As we seek to rebuild our economy, there is a heightened urgency to make capital available to businesses owned by women and underrepresented people of color, and we must remain committed to diversity and inclusion in our recovery. When people of color are seen and given opportunities to succeed, everyone benefits.
Investing in Black and Latinx businesses can help address a large part of the racial wealth gap. It will be prosperous for communities that have been oppressed and held back and for the country as a whole. In order to be set up for success, Black and Latinx businesses need investors who care about their growth and increasing their ability to take care of themselves and their families. Until the financial system is made equitable, other systems will never shift. An inclusive and optimal asset management industry will be the cornerstone of an equal and equitable future for the financial services industry.
Daryn Dodson is the managing director of Illumen Capital.
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