(Bloomberg Businessweek) -- Your average hedge fund or venture capital shop might not care if it’s run like a boys’ club. But what if the funds’ biggest clients were to start paying attention?
Consider Verger Capital Management, which oversees $1.7 billion for nonprofit investors, most notably Wake Forest University’s endowment. It recently surveyed the 89 outside money managers it hires about their investment policies when it comes to environmental, social, and governance issues, or ESG. Think fracking or guns. Although Verger isn’t necessarily screening all such businesses out of its portfolio, it sees them as a potential source of risk. “We don’t want to be the moral police,” says Chief Executive Officer Jim Dunn. “We just want to understand what’s in the portfolio right now.’’
That’s not so unusual for an institutional investor—a small industry monitors companies on ESG criteria. But Verger wasn’t asking only about the companies it had stakes in. It also wanted to know some things about the money managers selecting those investments. In its survey, it quizzed the firms about their internal policies on sexual harassment, bullying, and pay disparity. “Money managers who undervalue gender equity could risk missing out on value through diversity of talent, thought, and experience—which could ultimately impact performance,” Dunn says. “At the end of the day, we do not believe there is a real trade-off between fairness and returns.”
Verger also turned the microscope back on itself, leading to an increase in pay for two women at the 15-person firm, which operates in the former university president’s residence on the Wake campus in Winston-Salem, N.C. Score one for progress. But for now, at least, it’s unlikely that many asset managers are feeling the heat from clients around these issues. The Investment Management Due Diligence Association (Imdda) took its own survey of 78 institutional investors—including pensions, endowments, and insurance companies—and found that almost 90 percent didn’t specifically inquire about sexual harassment when interviewing prospective managers.
Most of the investors said that if they did find out there was an issue with outside managers, they would still invest. “I suppose the alpha beats all contingents,’’ says Andrew Borowiec, executive director of Imdda. Alpha is Wall Street-speak for beating the market.
In reality, it can be difficult for investors to cut ties with a hedge fund or a private equity firm once they’ve put money in. Verger ended up frustrated by one private equity fund’s response to its survey. It took six months to respond and provided skimpy answers. Dunn says the fund, which he wouldn’t name, is unlikely to get another dime from Verger. “If you don’t respond to our request and don’t provide us transparency, that’s a lack of fiduciary responsibility to our clients,” says Dunn. “We take it very seriously.” But Verger’s initial $7 million investment is tied up for as long as a decade. Such lockup periods are common in the world of private investment funds.
Endowments and pensions don’t need to fire a manager to show they are serious about the issues, according to Cindy M. Lott, who directs the Nonprofit Management program at the School of Professional Studies at Columbia University. “Inquiring about these types of safeguards and considerations within the investment relationship is a serious signal in and of itself,’’ Lott says.
Verger is doubling its initial $12 million investment in another fund, Los Angeles-based Upfront Ventures. The venture capital fund has an inclusion clause: It asks that each portfolio company include a rule in its human resources policies to ensure that at least one woman or member of an underrepresented group will be formally interviewed for any open executive position. It’s modeled after the National Football League’s “Rooney Rule,” according to managing partner Mark Suster. That policy requires teams to interview at least one member of an ethnic minority for senior coaching positions.
Verger didn’t stop at sending its outside managers a survey. Emily Claire Mackey, who was an undergraduate intern during the last school year, was also assigned to research managers and follow up with them. In one case, she found something that should have been disclosed about an employee who no longer worked at the fund. “I found the issue from a simple Google search,” she says.
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