Pension funds probing deeper on pay, discrimination claims

A tougher line of questioning about money managers' pay practices and whether firms have faced harassment or discrimination claims is emerging among institutional investors. But industry sources question whether firms are willing, or even prepared, to supply that information.

The $55.8 billion Los Angeles County Employees Retirement Association, Pasadena, Calif., has added a diversity and inclusion questionnaire into its RFPs for new money managers and investment consultants, as well for existing managers, which breaks with standard investor requests.

LACERA now is asking firms to disclose whether they have been subject to any legal findings or claims related to sexual harassment, workplace discrimination or equal employment opportunity dating back 12 years, documents from the pension fund's March 13 board of investments meeting show.

The pension fund also is asking firms to report the number of confidential settlements and non-disclosure agreements they have entered into over the past 12 years related to workplace discrimination and sexual harassment and to describe "the nature of each settlement within the terms of the confidential settlement," the due diligence questionnaire, published online by LACERA, states.

The questionnaire, which has been incorporated into RFPs since August, also asks managers to detail the race and gender of their board of directors, CEO, chief financial officer, chief operations officer and investment professionals for U.S. operations.

Pay breakouts

Additionally, LACERA wants firms to break out the pay of their investment professionals, by reporting what percentage of total compensation each gender and racial demographic group represents.

LACERA CIO Jonathan Grabel wrote in a March 20 email that the pension fund "encourages managers to be forthcoming with all aspects of our due diligence, including questions about diversity and inclusion."

"LACERA takes into consideration the quality and depth of responses as we assess our confidence in a manager's ability to effectively access, manage and retain diverse talent," he wrote.

Mr. Grabel also added the fund is "not prescribing specific strategies but rather trying to get a sense of managers' commitment, track record and internal controls to access and retain diverse talent and mitigate workplace-related risks."

While Mr. Grabel wrote that LACERA was "pleased with managers' cooperation to date," he declined to elaborate on the response rate of existing managers to the new due diligence questions or whether RFP responses have resulted in any prospective managers not being hired by the pension plan. He declined to say whether the information will be published publicly.

Meredith Jones, a Nashville-based partner at Aon Hewitt Investment Consulting Inc. who is head of emerging manager research and global head of responsible investing, said that most due diligence questionnaires she has seen from institutional investors aren't as comprehensive as LACERA's, in regard to pay and misconduct, particularly the request for investment professionals' compensation by demographic groups.

"It's over and above what we normally see," she added of LACERA's due diligence questions. But she said she's not surprised to see an investor start to ask such questions. Institutional investor questions about asset manager diversity have become more popular in due diligence because of the growing interest in environmental, social and governance issues and research showing improved financial performance at diverse companies, she said.

But the institutional community has yet to determine what reporting best practices are, said Rian Akey, a Chicago-based partner and global head of operational due diligence at Aon Hewitt.

"As we're in the early stages of the market solving some of these challenges, you are always going to have some uncertainty. I don't think we've settled on what that best practice (is)," Mr. Akey said, adding that investors might need to come to a consensus on what data they expect from managers.

In addition to LACERA, other institutions confirmed last year that they had included specific requests for sexual misconduct information in their money manager due diligence process, including the $358.4 billion Sacramento-based California Public Employees' Retirement System and Austin-based University of Texas/Texas A&M Investment Management Co., which manages $44 billion in endowment and operating funds.

Investment consultant Cambridge Associates LLC, Boston, has noticed that U.S. public pension funds "have been one of the earlier investors in diverse asset managers through emerging manager programs. Their due diligence has included asking thorough questions on ownership and has now evolved to begin including factors such as compensation-weighted statistics," Jasmine Richards, senior investment director and head of diverse manager research, wrote in an email.

"RFPs that we've received from investors in California seem to include these questions more frequently. This is not surprising given the state's commitment to (diversity and inclusion) via recent legislation that requires female representation on public company boards," she added.

Catherine Verhoff, who retired in January as chief diversity officer at PGIM Inc., Newark, N.J., and had been its chief legal officer prior to that, said the trend of asking for more information about diversity and inclusion "will change the industry." But in the meantime, investors such as LACERA might face challenges in obtaining specific information about investment team compensation as companies often deem it proprietary data. Not only could divulging the data be seen as potentially causing "a lot of stress and strife within your own organization," but from a recruiting perspective, firms may worry that disclosure would make it easier for headhunters to poach their top female and/or minority talent, Ms. Verhoff added.

She does believe, however, that regulatory developments, such as the U.K.'s gender pay gap reporting requirement for companies with 250 or more employees, will become more widespread, which could affect the culture of remaining mum on pay details.

The U.K. requirement took effect in April 2017 and required firms to report the data by April 2018.

The U.K. government is now considering requiring companies to also report pay gaps by ethnicity, Bloomberg reported last month.

Regarding LACERA's push for reporting on sexual harassment claims dating back 12 years and compensation data on investment teams, Daniel Strachman, co-founder of the Coral Springs, Fla.-based Investment Management Due Diligence Association, whose members include investment professionals at pension funds, endowments and foundations, said that "understanding sexual harassment and diversity in the workplace is top of mind for, not just institutional investors, but sophisticated investors."

At LACERA, however, the public pension fund is going beyond the standard due diligence questions, he added. "They are digging pretty deep. They just don't have a shovel looking into this, they have a backhoe," Mr. Strachman added.

He is not aware of other investors requesting that level of detail from managers and also wondered if managers even collect certain data on compensation internally, for instance.

"I don't think (managers) are tracking (pay) in this way," he said, citing investment team compensation by race as an example.

Hurting some managers

The enhanced due diligence could also become difficult for money managers with limited resources, said Annie Seelaus, CEO of R. Seelaus & Co., a Summit, N.J.-based women-owned broker-dealer and asset manager. The firm manages about $337 million for institutions and individual investors.

"I do think the resource question becomes a little tricky, particularly for smaller managers (given) the amount of time and personnel required to do RFPs, or sometimes its consultant questionnaires as a prelude to RFPs," Ms. Seelaus said.

"A lot of investors say they want to reach out to emerging or smaller managers, but sometimes (the RFP) process becomes difficult," she added, noting that additional questions can be cumbersome, not necessarily those related to misconduct or pay.

In-depth queries from investors like LACERA, however, show that "investors are demanding more authenticity" related to diversity and inclusion efforts at firms.

"It can't just be a very high level, 'Yeah, we support diversity,' " she continued. "They need to understand that there's depth to that (claim)."