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(mis)Conduct, Money & Reputation
A series by reputation specialist Lansons Team Farner and law firm Katten. Join asset management experts David Masters (Lansons), Neil Robson (Katten) and guests as they dissect the top stories and misconduct cases across the industry, impacting reputation, brand trust and integrity.
(mis)Conduct, Money & Reputation
Diversity, Financial Crises & Conformity
Building a business with a diversified employee base is no longer a nice to have, its necessary, both in terms of talent retention but client retention as well. The regulator is also insisting that financial services firms put in place evidence-based diversity and inclusion strategies that take into account the individual firm's progress on these efforts.
The reputational hazards are many. Reputation is mostly driven by behaviour and if you claim to building a diverse team when you aren’t, the regulatory and reputational fall out are clear. And in a world where the war for talent is raging harder than ever, firms that that fail to develop progressive employment strategies are likely to fall behind.
Furthermore, the evidence is stark. Diverse teams outperform.
In this episode, Neil Robson, partner with law firm Katten, and David Masters of reputation specialists Lansons/Team Farner delve into the increasingly knotty area of DEI, from the perils of over claiming and under delivering, to the increasing scrutiny around non-financial misconduct.
Disclaimer: The content in this podcast is for informational purposes only. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest standards of care applicable to attorneys in any given situation. This podcast is considered attorney advertising. Prior results do not guarantee a similar outcome. Any views, opinions or comments made by external guest speakers - are not to be attributed to Katten Muchin Rosenman LLP and/or Katten Muchin Rosenman UK LLP or their individual attorneys/lawyers. All rights reserved.
Recorded and produced at the Lansons Studios
This is Misconduct Money and Reputation. A podcast by reputation specialists Lansons and Law Firm Catton.
Speaker 2:Hello and welcome to the latest episode. This is our fourth episode in a new series for those working in financial services, particularly in and around asset and wealth management, where we seek to navigate a path through some of the more complex issues where regulation and reputation intersect. Today, we're tackling the issue of diversity and, in reality, often the lack of it, and the regulatory and reputational challenges this brings to the investment sector. My name is David Masters, director and Asset Management Lead at Reputation Consultancy Lansons.
Speaker 3:And I'm Neil Robson Financial Services, Regulatory Compliance Partner at International Law Firm Catton.
Speaker 2:Great. So I mean, diversity is not a small topic, you know, and I dare say we're not going to cover everything that we possibly could do in 25 minutes, so hopefully this is a topic we can revisit with some guests Now. The Diversity Project lists 15 different dimensions of DEI Diversity, equity and Inclusion. These are Gender, ethnicity, Neurodiversity, lgbtq+, disability, 50+ hashtag, talk About Black, early Careers, menopause, mental Health Returners, military Veterans, social Mobility, working Families and Smart Working. So there's a huge amount there. But to give us a little bit of context, neil, what's the regulatory take on this?
Speaker 3:The FCA has been a bit slow on the uptake. In reality, it's probably only the last five years that they've really focused on this. In fact, it was December 2018 that the director of the FCA's own executive diversity committee, christopher Woolard, gave a speech about opening up and speaking out diversity and financial services. That's five years ago. He recognized at that point in time that diversity is now not a nice to have, it's merely a necessity among modern financial services firms. So things are moving in the right direction but, as I say, progress has been pretty slow and what's really really interesting is it's only the last two years. Things have ramped up in a really big way. So back in 2021, july 21, the FCA put out a paper Diversity, inclusion in the Financial Sector Working Together to Drive Change A really positive, forward looking. How should we, as a sector, be regulating financial services to make sure it's truly inclusive?
Speaker 3:That took two years, until September this year when the FCA published its new consultation paper based on the feedback it got from the 2021 consultation or discussion paper, and they've now put out some proposals which I think are actually really positive and very forward thinking. So in terms of what does it mean? What are they proposing it really comes down to two things. One I'll skip over quite quickly. So what they've now done is propose that actually non-financial misconduct, which of course we discussed at length in the first episode of the series, following on the Crispinode allegations and morally reprehensible behavior, as the FCA refers to it, in the financial sector. That's now being baked into the FCA's conduct rules, being baked into the fitness and propriety assessments. It's going to be baked into regulatory references, so that conduct which is outside financial services. So again, if we focus on Crispinode allegations of an improper nature, sexual misconduct, that will be baked into the FCA's rules going forward.
Speaker 2:I think it's really interesting, isn't it? The non-financial misconduct, as you said? That's where we kicked off our series, because if you look at all the cases we discussed and obviously the OD stuff is allegations at this stage only but if you look at everything we discussed, all the individuals who have fallen foul of non-financial misconduct have been men, and in the vast majority of cases, what they have been disqualified for was behavior which could be at least described as misogynistic. That's not absolutely all of them, but the vast majority of them sexual violence, etc. But what are the FCA doing then? How is this going to pressurize businesses under their regulations? How are they going to need to create greater diversity, or what are they going to need to show to be doing?
Speaker 3:So the other half of the consultation paper, which is on the diversity initiatives, if one calls it that, is that actually they're now recognizing that although many firms actually have diversity and inclusion strategies in place and they have policies or mission statements, they're actually going to require all firms to do this because they say they recognize that there would be significant benefits to the financial services industry that flow from a strategic approach across the whole sector. So they're going to apply the rules in different ways to different sizes of firms, all large firms, who they refer to as those with 251 or more UK-based employees, and that threshold actually is basically set at the same level as the gender pay gap reporting requirements. So they've sort of aligned this new approach In the same way as some existing legislation. But what they're proposing is that if you're a large firm you must put in place evidence based diversity and inclusion strategies that take into account the individual firms progress In diversity and inclusion. So the strategy has to set objectives and must have a clear goals with a plan as to how the firm actually is going to meet those and actually how it's going to measure its own progress, positive sort of arrangements in place to identify the obstacles and also making sure that all staff in the firm 251 or more staff, say, across the UK all those firms have to understand what the strategy really means for each of them. So it's quite interesting that they're putting this into effectively mandatory disclosure rules. But actually, when you read the small print, it's not all going to be quite so mandatory, because they're actually giving a lot of flexibility to firms.
Speaker 3:Initially, because the way they the FCA and the PRA recognize this is that it's not one size fits all at all. You know, if we're looking across all financial services firms operating in the UK, if you just take the asset management sector, we're actually talking the biggest firms who are going to be required to do this. Smaller firms have the option to opt in or not. What's really interesting, as I say, in terms of this sort of proportionate approach, is that the FCA and the PRA are saying well, we recognize that targets play an important role, driving progress by encouraging a focus on each firm to reach diversity goals and enable progress to be measured. So that's, I think, very positive and that's something that has to be applauded, I think. But what they've done is they're saying OK, we want you to set diversity targets, particularly to address underrepresentation, both at board senior leadership and employee population level. But which demographic characteristics each firm should cover is going to be left down to each individual firm. They've got the option as to well, for you, for you firm A or you firm B, your demographic targets might be different from one another, so we're going to let each firm choose its own targets.
Speaker 3:Now, the interesting again thing here is that there's a public reporting element to it. There's a public reporting element to this so that the public, customers of these firms, can say OK, well, last year you said you wanted to get 50 percent of the board to be female, so there's gender equality at board level. You've reported your data this year and you've not achieved that. Why have you not achieved that? Okay, maybe they may have reasonable answers for that, but at least it means that there's going to be questions asked, presumably at AGMs, by shareholders and ultimately, shareholders care about this sort of thing because at the end of the day, customers, investors man in the street is voting with his feet or her feet.
Speaker 2:Yeah, absolutely, and this is the reputational challenge.
Speaker 2:It's really interesting. So, just before I jump back onto that, it's very interesting because both the diversity project and some recent investment association research has highlighted is that there are still a rump of firms who are not doing anything material to address diversity issues. But it is a major reputational challenge because I think we've seen with Odie, with CBI, with the FT, stuff about Leon Black at the moment in New York, you know, particularly in this sort of misogynistic area is you know, it's a major reputational challenge when these behaviors happen. But these behaviors happen, as we were saying, with things, like you know, with the allegations about Crispin Odie, because things have become normalized.
Speaker 2:If you're not seeing to be making the right moves in towards diversity, then it does hit the bottom line because it's something that your clients want, whether they're institutional investors or whether they're retail investors. They want to be associated with businesses that relate to them. Talent is the same thing. You know it hits you with talent in this battle for talent as well. You know these people, people want to work for a business which they can understand, which relates to them, which allows them to be themselves and to express themselves, and this has been a real challenge for the investment industry over the last few years. You know the investment industry looks like it does today because 40 to 50 years ago that's what its client base looked like Rather, you know, white, generally rather middle class men.
Speaker 2:And society has moved on tremendously from that and is continuing to move on and asset management industry hasn't really kept pace with that. So what you get are a number of challenges. So you know, if you think, if we think about how technology is impacting asset management at the moment, you know asset management has always struggled around technology. You know great investors in technology not necessarily great at applying technology or innovators.
Speaker 2:No, absolutely. And innovation within asset management has been very narrow. It's been great and you can see in some tech sectors, you know, if you think around systematic and quantitative investing you think of CTAs and things like that. There have been some, you know, tremendous progress made in the application of science but in terms of technology, very poor and losing that battle for talent. And if you think about it now, with the shakeout that we've had at all these big tech firms, what a great opportunity for the asset management industry to start to be able to attract some real big hitting talent in the tech world. Is it doing that? Is it doing that effectively? Do people?
Speaker 3:who work in tech.
Speaker 2:Yeah, I think they are to a degree. But do people who've worked for one of them, you know, for Google or for one of the big tech firms, do they look at the asset management industry and goes, oh, that looks like it's for me, that looks like it's relevant to me. I understand what that does? No, I don't think it does. I think also, you know, you've got this, you've got this issue around decision making as a business. So we've touched upon the idea of relevance relevance to talent, relevance to your clients. If you're not increasingly diverse, you're decreasingly relevant to your audiences. And I think the other point here is that as businesses, particularly as the asset management industry consolidates, particularly as asset management firms get bigger and the big firms are getting bigger, systemic risk is a major issue.
Speaker 2:Well, if we travel back in time 15 years to the global financial crisis, you know a lot of people saw this problem. Huge amounts of people now say, oh, we did see that there was a problem, but very, very few people made, you know, acted upon that. And why was that? Well, largely they were white men of similar educational and cultural backgrounds.
Speaker 2:If you look at the film the Big Short as a way of, or the read the book the Big Short, which is probably my recommendation, above the film, although the film is tremendous as well. You know who's the main protagonist of that, ultimately, is a hedge fund manager called Michael Burry, who is neurodiverse, but he was the only one, really, of all those people who said, well, there is something different, and I'm going to act upon that. Lots of people had seen what he'd seen, maybe not to the same level of detail, but they'd seen what he had seen and decided not to act. And I think, if we think about systemic risk going forward, we need we need to go away from this group thing which has affected the asset management industry.
Speaker 3:But no, what's interesting I mean I absolutely echo what you say there and what's fascinating about the FCA's consultation and its proposals for diversity and inclusion is that the FCA actually says that matters relating to diversity and inclusion should be considered looking forward as a non-financial risk, a risk that firms must address Absolutely, absolutely, spot on.
Speaker 3:It's a shame it's taken this long for them to address it, but it has to be seen as positive. And, going back to your comment earlier that you know there's perhaps lip service paid but actually not a lot of follow through. Things aren't as effective as it could have been. I've got some stats here from last year 2022, where Agility in Mind surveyed all FTSE 100 firms. So I know this is not all financial services and certainly not all asset management, but they focused on the FTSE 100. And they said that, despite all of them well, 99% of them having an inclusive mission statement, they found that actually 48% of them so very nearly half actually didn't have diversity and inclusion initiatives that really followed through and were really positive to the workforce. Now, obviously, that may have changed in the past 12 months, but nonetheless it's fascinating because, again to go back to your comment about neurodiversity, only 4% of the FTSE 100 actually had a neurodiversity initiative, based on the stats from last year.
Speaker 2:Neurodiversity obviously is one of those things that's really interesting in financial services because there is this stereotype of what neurodiversity is. Also, people seem to think of Rain man, that sort of highly high achieving maths brain, and the reality is so much different to that.
Speaker 3:Well, the old fashioned phrase, they're on the spectrum, which meant, of course it's a spectrum, you've got one end to the other and everyone sits on it somewhere. But I think neurodiversity is about celebrating people who perhaps think a little bit differently. And how can you make the most of?
Speaker 2:it Absolutely. I mean Michael Burry, but also a lot of people would say that some of the attributes of neurodiversity are almost like superpowers, particularly in financial services, not just because of the maths but because of the levels of focus, etc. But actually, though, it's a highly stereotype, because lots of people who are neurodiverse are highly empathetic, in fact extremely empathetic, rather than being lacking in empathy, which I think is sort of Because the opposite of the Rain man.
Speaker 2:Yes, so it's a really interesting one, and I have to put my hand up to the diversity project. I've done some really interesting and excellent work in here on neurodiversity, but it's something where clearly, I think what they came out with is that not only are some of the one in six people working in financial services neurodiverse, but less than half of that is disclosed. I think that's the correct analysis of those numbers, and it is the data around this which is going to be challenging. So you think about what the FCA's challenged to the industry. A lot of that is going to be around data, and then is how do you get that data? Because ultimately, what you're really asking is how do people self-identify?
Speaker 3:That's a really good point and actually it's something that the FCA and the PRA focus on in their diversity and inclusion consultation papers, because they say, well, there's going to be have to be a core reporting requirement. So these proposed rules would basically say OK, you've got to report how many employees you have, that's across the board, Doesn't matter what size firm you are. Obviously, if you've got 251 or more, then you've got to do all these additional disclosures. Larger firms, those over the threshold 251 plus, have to report annually to the regulator on all sorts of matters, so data on age, ethnicity, sex, gender, religion, sexual orientation, disability or long-term health conditions.
Speaker 3:The world has moved on, but the FCA and the PRA are playing catch up. As I say, I think it's going to be seen as a positive because ultimately, when we're focused on risk, this is a non-financial risk. This is something that all firms should be really focused on and concerned about, Because if the risk of getting it wrong certainly if you're a big listed company, if you're an asset manager listed on the FTSE 100 or elsewhere, your shareholders could flee if you do something really bad.
Speaker 2:It is interesting as well because what, ultimately, when we're talking about data, really what we're talking about is aggregate data across a business, but that doesn't tell you where diversity is in that business and where diversity isn't. So if you think about most asset management businesses, the major cost centre of most fund management businesses, most wealth management businesses, is around portfolio management, whether that's running funds or running client portfolios. Business development is another huge one because, as we've talked about in the past, this is an industry where products are sold and not bought, so there's a lot of emphasis on direct selling, on interpersonal relationships, etc. So a lot of resource goes into those sort of sales teams, business development teams, etc. Much less into the rest of marketing, I should point out. And then obviously you have the leadership team as well, and if you strip out the portfolio management from most asset managers, you will find that the rest of the business fund admin, back office marketing, etc. Is much more diverse than those core business areas. So that particularly the portfolio management.
Speaker 3:Well, I think that follows through as well to lots of other sectors. I mean, if you take legal, you know, just taking my firm, I mean the partnership team is mostly white, mostly male, not all but mostly. But then if you look at all the support stuff, the support professionals who work with us to make sure that we can actually do our jobs, they're far more diverse than we are, people from all over the world, people from different perspectives of the universe, but they help us do our work. So they're critical to the business. But the challenge in the legal profession, of course, is how do we get more people of colour, how do we get more people who have other sort of ethnicity or diversity sort of factors that they might self identify with? How do we get them up into the partnership level? How do we make them part of the leaders of the business? They've got to start all the way through, I guess at school level. They've got to want to study law or study something else and then transition into law.
Speaker 2:I mean, I could say the same about the reputation management industry. So gender is probably less of an issue and Lansons Team Farner is by far a female dominated organization and the split between male and female, men and women on the board and the split between men and women throughout the company is relatively the same. It's not like, say, nursing, particularly nursing 20 years ago, where at entry level it was mostly women, but at the senior level in nursing, particularly on the board of things like the RCN, it was male dominated for years.
Speaker 2:But obviously it's a bit white middle class. The reputation management industry. I think I can say that it's getting better. All the businesses I see out there are making progress. But I think there is a challenge where the investment management industry needs to address these sort of core areas quite directly, because we know, for example I mean there's plenty of academic research out there now that says that diverse investment teams perform better, and there have been asset management businesses in the US which have had that as actually a sort of focal point of what they've been doing. They have had more diverse teams. But it's also about bringing in people again we're back to this group think issue who look at things a bit differently, who think about it differently.
Speaker 3:Who approach a problem in a different way, to perhaps come up with a solution that the traditional portfolio management sector might not have thought about.
Speaker 2:Absolutely, and that gender isn't, and we shouldn't think about gender as being the primary driver of that, because you could have a female leader, team leader, ceo, whatever, but if the rest of the business doesn't really reflect that level of diversity, then it starts to look like it's not quite a sincere or it's a tokenistic move, and there are plenty of businesses where the makeup of the board or the makeup of the senior team does not reflect the business overall, and I think that's quite a common challenge.
Speaker 2:So it is about getting these teams within the businesses to be much more reflective of society and to be much more reflective of a different approach and different ways of thinking, and there have been some great initiatives over the years. Investment 2020 is now part of the diversity project, but those sort of initiatives over the years have been really important and, in fact, on the subject of the diversity project, their current one brings us back almost full circle to what we started talking about, which was Non-Fundational Wisconsin. So they've got a safe space initiative, which is allowing people the opportunity to talk freely about bad experiences and poor behavior within the businesses they work for, and that's very, very much driven by CBI and OD and all these other cases that are coming to light. So there are all these catalysts for change, but it is going to take time and I think just coming back to reputation again, it's important to have. We're talking about the data. We're talking about the regulator requirements. It's not just about numbers, it's how. What story are those numbers telling?
Speaker 2:That's really important.
Speaker 2:That's why disclosure and actually explaining what the data means to that firm at that point in time and then acting on it and following upon it going forward and that journey that you're on, because I remember when gender pay gap data started coming out and you know firms asset management firms looked terrible. Even those that were disclosing, that didn't need to disclose it did not look great for the industry and everyone was saying, oh, you know, obviously we're looking to make improvements, but it's difficult. Blah, blah, blah. We're trying to do things and there is a requirement to sort of be able to manage expectations a little bit, because the reality is, when you're making these changes, not everything is going to move in a smooth straight line. There are going to be periods where progress is much better and they're going to be periods where progress is much harder and you know, from a statistical or data point of view, it may even appear not just to be not moving, but maybe moving in the wrong direction. And again, there's some IA research which shows that there's been very little movement over the last couple of years in terms of hiring of women into senior positions, etc. So it's about how you tell your story and it's about how you use those numbers and make those stories, because ultimately, what we've got to think about here is what's the purpose of the asset management industry?
Speaker 2:The asset management industry here is about the future prosperity of the planet really, whether that's from a climate change perspective or whether that's just simply, you know, people being able to have a secure, long-term financial future. So ultimately, that's the heart of it, and if you can't deliver that on a diversity basis, then you're not really delivering it at all. I think is part of the problem. So I think there are, you know, from a reputational point of view, and I think also the idea that we move away from where the asset management industry has got to today, that actually things might start to change.
Speaker 2:I mean, they may sound like small things, but it's not that long ago that you went on to a fund management website and the imagery was vintage cars and you know sailing boats and those sort of things. And just think about how many asset managers have some sort of sailing imagery in their logo or something like that, the amount of boats, sails, etc. And the language that we talk about. You know the language that's commonplace to asset management, which is very, you know again, headwinds, tailwinds. It's very elitist, ultimately, and very male-centric in its origins and I think if we think about where the asset management industry needs to go, it needs to tell its story in a different way. It's not just about numbers. It's got to be about how you tell that story to different audiences in a way which is going to resonate with them.
Speaker 3:And actually that concept of a story, telling a story. But to bring it back to what's the risk to the business? Well, the risk is, of course, you tell a story that's not true. You know, when we talked in the greenwashing episode about the risk of saying things you were doing that actually weren't the full story Scenarios where a particular bank got slapped down by the Advertising Standards Authority because it said it was planting millions of trees, but yeah, but you also invest in oil and gas, so CO2 emitting businesses. That was bad. The prime scenario, prime case I can think of here for diversity, greenwashing is not the right word but saying you got great diversity initiatives, but actually it wasn't true.
Speaker 3:Over the last couple of years there's a particular US bank, one of the top five banks in the States, who have been under fire by the US regulators for a whole spate of different scandals, and what's happened is actually it's various shareholders have sued the bank's board. So one scenario, one of the cases, is that, according to the bank, the board acted on a whole range of diversity, equality and inclusion issues, but only after media coverage forced them to do so. So one of the Philadelphia workers' pension funds was suing the bank because it was conducting quote sham interviews to normally fulfill the diversity-enhancing policy. So they were. The particular bank was interviewing candidates for mortgages, said that it was actually interviewing lots of African Americans and that it was committed to equality across the board. What actually happened was is that it turned out that in fact, they were rejecting African American applicants at a significantly higher rate than white Americans who were applying for mortgages. When that became public, the share price dropped 10% in a day.
Speaker 3:All these pension funds who have fiduciary duties to their investors, to their pensioners, to maintain pension values, they all sued the board because the board was saying one thing and yet doing something entirely different, and the fact that it was referred to as a sham, nominally fulfilling a policy only after media coverage. That is telling. If you're telling a story, it needs to be both true but also the right story. And again, I can't think of a specific example with an asset manager right now, but if you imagined an asset manager doing something along those lines, that would be pretty devastating both for the business, because significant portfolio managers would probably leave and go to another business where they were considered to be more welcome.
Speaker 2:And investors would leave Absolutely the big institutional investors who are all looking at diversity, culture etc. As part of the RFP. So part of you know the criteria which they take on a manager is yes, that would be potentially fairly fatal in terms of the business outlook for any firm company but, without wanting to sound too negative, you can almost see it happening. The fact that the regulations are now being put in place we talked about that with some of those banks in the greenwashing episode, as you mentioned, whereby they were saying one thing but they weren't doing it. People saying that they're making efforts to increase diversity, increase inclusion within the business and not doing it.
Speaker 3:Well, the stats are going to start reflecting that because these are going to be mandatory disclosures under the proposals from the FCA and the PRA. So actually, year on year, if you're a big institutional investor, you'll be able to look at the asset managers you put your money with and say well, hold on a minute. You say you're making efforts to do this, that and the other. The numbers don't reflect that. So why haven't you hired more neurodiverse people? Why haven't you hired more people who are LGBT identifying? Why haven't you hired more women at board level? If you said you were going to and actually I think that that means that people will vote with their feet Investors will start putting pressure on asset managers to make sure that they follow through.
Speaker 2:Yeah, absolutely so. That's all we have time for today. Thank you very much, Neil. We will be back in a few weeks time with more interesting areas to discuss about the overlap between regulation and reputation.
Speaker 3:Thank you, I've been Neil Robson and I'm David Masters.
Speaker 1:You've been listening to Misconduct, Money and Reputation. Please do stay tuned for further episodes by subscribing on your favourite podcast app. You can find us by searching Lansons or Catten. This episode was recorded in the Lansons studios and brought to you by reputation specialists Lansons and Lawfone Catten. The content in this podcast is for informational purposes only. It does not constitute legal advice and does not intend to establish an attorney-client relationship, nor is it intended to suggest standards of care applicable to attorneys in any given situation. This podcast is considered attorney advertising. Prior results do not guarantee a similar outcome. Any views, opinions or comments made by external guest speakers are not to be attributed to Katten Mutchen-Rosemann LLP and or Katten Mutchen-Rosemann UK LLP or their individual attorneys lawyers. All rights reserved.