Foundations argue that scrutiny of investment consultants and money managers lagging on the diversity front will only move the needle so far. For firms failing to meet diversity goals set by foundations, the best recourse is to fire them and reallocate capital elsewhere, sources say.
A recent article in the Stanford Social Innovation Review asserted: "It's time for foundations and other impact investors to face the truth" regarding how their investment process perpetuates inequality.
"No more navel-gazing, no more conferring, no more research," said the article, co-authored by Tracy Gray and Emilie Cortes, who both sit on the boards of foundations in California.
The article makes several recommendations, namely that foundations terminate money managers and investment consultants that are uncooperative on diversity goals — a move multiple executives at foundations say they support.
Shannon M. O'Leary, CIO of the Saint Paul & Minnesota Foundation, said her non-profit terminated three money managers over the past 12 to 18 months because of both underperformance and a lack of diversity on their investment teams.
When the non-profit switched investment consultants in late July, the foundation also decided to move its money manager diversity survey in-house instead of having its consultant conduct the survey, Ms. O'Leary said.
By bringing the annual survey in-house, "the amount of information we were able to generate by doing it on our own was much more meaningful than having the consultant do it," Ms. O'Leary said. "Managers were more forthcoming across all aspects of the survey with pleasant, persistent outreach from the investor as opposed to a third party."
The foundation collects information on firmwide gender, ethnic and racial diversity, from lower level staff to senior managers at investment firms. The survey focuses on diversity at the investment decision-making level in addition to diversity at the ownership level of firms, she added.
Ms. O'Leary declined to name the money managers and consultant the foundation terminated, as well as its current consultant.
The St. Paul, Minn.-based foundation had $1.6 billion in assets as of Dec. 31.
"As part of ongoing diligence with our managers, we let managers know how they scored (on the diversity survey) and we have an expectation of diversity on non-diverse teams. Among our liquid managers, we've already exited a few managers where clearly diversity was not a priority," she said.
Regarding the foundation's move to a new consultant, Ms. O'Leary said "we have had tough conversations with both our prior and current consultants," related to diversity goals.
"A lot of these consultants are really resistant to changing their process to actually recommend newer funds and newer managers. So, I do view them as a critical structural barrier in the process," she said.