July 27, 2022
Fiduciary Focus
Shareholder Advocate Summer 2022
I recently had the pleasure of moderating a session at the legal education conference of the National Association of Public Pension Attorneys (NAPPA) titled “The ABC’s of DE&I: Public Pension Plans Spell It Out”. The program was specifically designed to assist public pension attorneys in thinking about how to advise their clients regarding diversity, equity and inclusion (DE&I) consistent with the exercise of their fiduciary duties, including the exclusive benefit rule and the duties of loyalty and prudence.
In brief, as readers of this column know, fiduciaries must carry out their functions acting solely in the interest of the members and beneficiaries and for the exclusive purpose of providing benefits and defraying reasonable expenses incurred in performing such duties. They must act with the care, skill, prudence and diligence in light of the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.
The discussion began by noting that there certainly is no shortage of attention to issues of diversity, equity and inclusion these days. For example, lawyers may have noticed that the topic of DE&I recently graced the covers of both the New York State Bar Journal and the Washington Lawyer publication of the DC Bar Association. Similarly, investment professionals are likely aware that the CFA Institute recently issued a Diversity, Equity & Inclusion Code— a voluntary code developed with the recognition, as articulated by the CFA Institute, that a diversity of perspectives leads to better investor outcomes, that an inclusive investment industry better serves our diverse society, and that an organization with an inclusive culture and effective working relationships is a better place to work.
NAPPA conference attendees were very fortunate to have panelist Kellie Sauls, Director of Diversity, Equity, and Inclusion for the Teacher Retirement System of Texas, to help them think about how to address DE&I in their work advising fiduciaries. Ms. Sauls displayed a wealth of knowledge, gained through not only many years of experience in the DE&I field but also practical, concrete experience in advising a public pension plan. She presented important information and tips relevant for a range of pension plans, from those organizations with established programs to those just beginning to focus on DE&I. Here are some of my key takeaways from her presentation.
One Size Doesn’t Fit All
What diversity looks like in one area of the country is not necessarily the same as what diversity is in another part of the country. For example, certain groups that may be underrepresented in a large California city may not be the same as those underrepresented in a small Midwestern town. Likewise, people who are members of an underrepresented group in one industry— nursing, for example—may not be underrepresented in another industry, such as information technology. This requires clarity in understanding existing circumstances and developing approaches in strategic planning around DE&I.
Take this quote about diversity: “The inability to envision a certain kind of person doing a certain kind of thing because you’ve never seen someone who looks like him do it before is not just a vice. It’s a luxury. What begins as a failure of imagination ends as a market inefficiency; when you rule out an entire class of people from doing a job simply by their appearance, you are less likely to find the best person for the job.” While a reader might think this was a 2022 quote talking about racial or gender diversity, equity and inclusion, it actually comes from Moneyball, the 2003 book by business writer Michael Lewis and concerns Oakland Athletics executive Billy Beane’s recruitment of baseball players.
It’s About Risk Mitigation and Compliance
DE&I belongs in the risk management and legal compliance program. In a 2021 survey, over 50% of employers reported lack of DE&I as an enterprise risk.
For example, Ms. Sauls noted that, for many employers, the so-called “Great Resignation” resulted in female employees leaving in greater numbers than men. The business risk created when talented individuals are leaving the workforce in large numbers is something every employer must pay attention to. DE&I can mitigate risk by helping an employer recruit and retain talent critical to the effective operation of the organization. DE&I, as an integral part of onboarding, employee development, performance management, career development, and succession planning, supports an organization in acquiring and retaining talent, as well as avoiding equal opportunity challenges, thus mitigating business risk, reputational risk, and legal compliance risk.
Reiterate the Business Case
Recognizing that commitment to DE&I is consistent with the strategic objectives of the organization means that every DE&I program must emanate from leadership as part of the institutional plan. Support from the top means communication to, from, and among the board and that senior staff leadership must reiterate the business case each and every time DE&I is discussed. Identifying and communicating appropriate metrics and benchmarks are crucial to developing a culture of continuous improvement, and support from the top cannot be overstated.
Everyone Has a Role to Play
Experience shows that about 10% of employees may be characterized as overly enthusiastic or energetic, passionate, and zealous with regard to DE&I. Another 10% or so likely will not be on board and may even try to sabotage DE&I efforts. The remaining 80% or so of the workforce is the so-called “sweet spot” open to growth and learning. But it is critical to note that everyone in an organization plays a part in DE&I and it is important that people see themselves as participants. Input should and can be obtained from all. It is important to invite people with contrary viewpoints into the discussion; even (and perhaps especially) individuals who are not “on board” can provide valuable feedback. Challenges are to be expected and addressing them can assist in formulating the role of DE&I in organizational culture and how it factors into the organization’s core values.
It is important that employees see themselves as a part of the DE&I work, and one tool for consideration is the creation of affinity or employee resource groups. Some organizations have a wide range of such groups, such as Black and Latinx, LBGTQA, women in investment, caregivers, and military families. It was also noted that many affinity and resource groups include allies within the group’s membership—for example, a women in investment group may include men who support DE&I efforts in this area.
Practical Applications Appreciated
Attendees reported that the panel was a relatable conversation, with a discussion of trends in the area as well as risk mitigation and the interplay with legal and compliance systems and processes. They appreciated the discussion of practical applications, quickly attainable successes, expected challenges, and motivating imperatives for those engaged in DE&I work, and they left the program better able to advise their clients regarding DE&I and the exercise of fiduciary duties.