Asset owners starting to ask for any data on misconduct at money management firms
In the year since Harvey Weinstein's alleged sexual assaults came to light, institutional investors have begun to ask external money managers about their firms' histories on sexual misconduct.
The nascent trend to ask money managers to disclose sexual harassment and assault settlements was sparked by the #MeToo movement, which reignited last October after women all over the world shared their stories of sexual abuse in response to the Weinstein revelations, industry observers said.
"The financial industry hasn't found its Harvey Weinstein yet, but there's no reason why the money management industry should be exempt from sexual misconduct incidents, especially because it's such a macho industry," said Andrew Borowiec, executive director of the Investment Management Due Diligence Association, New York.
The $358.9 billion California Public Employees' Retirement System and University of Texas/Texas A&M Investment Management Co., which manages $44.9 billion in endowment and operating funds, are among the first asset owners to incorporate specific requests for sexual misconduct information in their money manager due diligence process.
Added due diligence
Momentum among pension funds, endowments, foundations and other asset owners to add specific reviews of sexual misconduct settlements to their standard operational due diligence of money managers is slowly growing from a low base, sources said.
Just 11% of asset owners asked money managers about the firm's sexual harassment history as part of routine due diligence, showed the results of an IMDDA survey conducted early this year.
But the association is getting a lot of questions from its 400 members — 87% of which are institutional investor operational due diligence officers — about how best to incorporate assessment of sexual misconduct during due diligence, Mr. Borowiec said.
An IMDDA webinar focused on the due diligence aspects of sexual misconduct has attracted 623 views since it was posted on the association's website in June, Mr. Borowiec said.
"Everyone is trying to figure out what to do about sexual harassment incidents, assessing what happened, the severity of the incident and what the reputational risk is to their fund" from investing with a firm affected by a sexual misconduct incident, he added.
Some asset owners are ahead of the curve and have added or intend to include specific questions about any history of money managers' sexual misconduct litigation and internal policies on due diligence questionnaires.
For example, after the Weinstein scandal, UTIMCO added a review of its external money managers' policies, procedures or training related to discrimination and harassment, including sexual harassment, said Karen E. Adler, a University of Texas system spokeswoman, in an email.
Austin-based UTIMCO managed a total of $44.9 billion for the UT system, of which $31 billion is from two endowment funds.
In June, CalPERS iterated its explicit support for "a workplace free of sexual harassment" in its best-practices principles regarding corporate governance of companies in which it invests.
Investment officers at the Sacramento-based fund are determining now "how best to apply that language to external managers and our investment process," said Beth Richtman, CalPERS' managing investment director, sustainable investments program, in an email.
Typical of large institutional investors, CalPERS' existing due diligence process asks existing and potential external managers generally about whether the firm, affiliate organizations and key personnel have been involved in any litigation or other legal proceedings relating to their business activities or professional conduct.
Ms. Richtman said sexual harassment and assault settlements are included — but not specifically requested — in the existing policy.
The Teacher Retirement System of Texas, Austin, doesn't specifically ask for information about an external manager's sexual harassment incidents, but the $151.3 billion fund's due diligence questionnaire requires prospective money managers to disclose their ethical and legal history such as any lawsuits or criminal investigations going back five years, said Robert Maxwell, a TRS spokesman in an email.
TRS relies on the questionnaire to reveal whether a money management firm has a record of sexual harassment, and fund officials also conduct several face-to-face meetings with the principals of prospective firms, Mr. Maxwell said. Existing TRS managers are required to complete an annual due diligence questionnaire.
"We are always looking at the culture of an organization, paying attention to possible flags such as turnover rates or other indications a firm is going through possible stability challenges, potentially affecting the ability of the firm to operate. Misconduct of any kind would fall under that," Mr. Maxwell said.
Sexual harassment isn't a specific due diligence criteria of the $228 billion California State Teachers' Retirement System, West Sacramento, either, said Michael Sicilia, a fund spokesman, in an email.
Instead, the expectation of CalSTRS' investment officers is that "investment managers and partners within our portfolio conduct all aspects of their business operations and practices ethically and responsibly and within the confines of state and federal law. We engage with our relationships regularly and monitor any allegations of questionable practices," Mr. Sicilia added.
ILPA adding questions
The Institutional Limited Partners Association, Washington, is about to make it easier for private equity investors to get information about managers' sexual harassment history and internal prevention policies.
After revelations last year about sexual harassment allegations involving venture capital investment managers, support was strong for developing specific due diligence questions about sexual harassment for private equity and venture capital managers from the 450 institutional investor members of the ILPA, said Emily Mendel, managing director-membership, events and communications, and head of the association's diversity and inclusion initiative.
In mid-September, the ILPA plans to add a section to its universal due diligence questionnaire asking private equity managers to provide information about their sexual harassment policies, investigative procedures and litigation, as well as information about company diversity and inclusion.
"Weinstein was the game changer," said Davia B. Temin, formerly a money management marketing executive who now is president and CEO of New York-based Temin and Co. Inc., a crisis and reputation management specialist.
"Pension funds and other institutional investors aren't going to invest — or remain invested — with money managers with reputational issues. Negative publicity is a huge deterrent," Ms. Temin said.
Headline and reputational risk is ever present on the radar screens of institutional chief investment officers regardless of whether trustees have formally approved sexual harassment due diligence practices or incorporated a zero-tolerance position in investment policy statements.
"I'm very keyed in on headline risk, and whenever we find out about an incidence of sexual harassment or any other infractions by a manager we're invested with, we immediately begin our own investigative due diligence in addition to what our investment consultant may be doing. We call the firm right away. We don't wait," said an asset owner who spoke on condition of anonymity.
"It's not just about headline risk. This is the right thing to do. Asset owners have zero tolerance for this kind of behavior by any manager," the source said.
Institutional investors so far have generally been "more reactive than proactive" regarding sexual harassment issues in the money management industry, the source said, noting that his/her fund will add specific questions about the issue to its annual money manager due diligence review.
When accusations of sexual assault began to emerge concerning entertainer Bill Cosby in December 2015, Ms. Temin devised what she calls the #MeToo index, which includes references to every high-profile, reported case of sexual misconduct.
To date, 653 persons are on the list — but only 13 people are from the asset management industry compared to 183 from the entertainment industry.
In the first six months of this year, Pensions & Investments reported on four instances where allegations of sexual misconduct were made against money management industry professionals.