White men run 98% of finance. Can philanthropy bring change?

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From as long ago as 1987, financial industry commentators have forecast a “tip of the iceberg” moment for investment firms owned by women and people of colour.

Three decades later and 98 per cent of the $69tn sector is still under the control of white men. Signs of real change are few and far between.

Our industry purports to be a meritocracy: companies that produce strong returns should attract additional capital. When it comes to diversity of executives, however, that façade crumbles.

Take hedge funds. Only one in eight are led by a woman or person of colour and those companies manage less than 5 per cent of assets in the hedge-fund space.

Insiders sold on the myth of meritocracy will say this is because bottom lines suffer with less-established funds but, as research from Barclays and the Knight Foundation shows, hedge funds with a diverse ownership perform as well as or better than non-diverse peers.

The private equity and real-estate sectors are no different. There is equal or better performance from groups that encourage diversity, despite the sticky status quo of vast underrepresentation.

The time could not be more ripe for change. The average private foundation in the US has not met its spending plus inflation goal for 20 years and future returns do not look much brighter. Still we allow exclusionary practices to contribute to the erosion of our corpuses, limiting our ability to support social change.

Systemic bias is unacceptable in any society that claims to value equal opportunity and moral decency but it is also hypocritical in an industry that prides itself on no-nonsense, results-driven efficiency.

A new vision is needed, which is why this spring the Kresge Foundation launched 25 per cent by ’25, a pledge to place a quarter of our $2bn US endowment assets in companies with diverse ownership by 2025.

The pledge is important as a symbolic gesture alone: it sets a public example and will mean that people can judge action against intention.

Students from Wayne University at the launch of the $2m student-managed investment fund (Kresge Foundation)
Students from Wayne University at the launch of the $2m student-managed investment fund (Kresge Foundation)

Delivering on this structural change calls for a model to address these issues from the bottom up.

At present, 13 per cent of Kresge’s US assets are managed by fund managers with diverse ownership. Doubling that in five years will require serious acceleration.

Too often, deals and contracts flow through networks that replicate privilege, which is why Kresge has picked out 230 firms under diverse management for targeted engagement.

That said, 25 per cent by ’25 can only do so much without going to the root of the problem. To address this, the foundation is helping build a recruitment pipeline, funnelling talented interns into an industry where access has been limited.

We must also support financial literacy and career preparation where they matter most. Kresge has created two student-managed portfolios at universities in metropolitan Detroit, each with a $2m budget, with funds sourced from our $3.6bn endowment. We will couple classroom opportunity with real-world investment experience, exposing undergraduates to potential careers at dozens of corporate, philanthropic and public institutions.

This is only the beginning. We hope other institutions will be inspired to start similar efforts, to broaden our local focus into nationwide initiatives. Our 25 per cent by ’25 is the floor, not a quota or ceiling.

It will not be easy. Five years is not much time for an organisation such as ours to reallocate roughly $250m in funds on top of the $250m invested already. Time wasted is time lost, however, and we owe it to ourselves and to a more equitable future to realise greater diversity in fund management as quickly as possible.

Rob Manilla is chief investment officer of the Kresge Foundation

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