By Sheryl Estrada and Michael Nam
Scott M. Stringer
New York City Comptroller Scott M. Stringer began his position in January 2014 and has since created multiple diversity initiatives, including investing in Minority and Women Owned Business Enterprises (M/WBEs) and a Board Accountability Project, both spearheaded by the city’s first-ever Chief Diversity Officer Carra Wallace.
Stringer recently announced a new initiative: the New York City Pension Funds have taken steps to make diversity a formal criterion for evaluating and selecting external investment managers. This is the first initiative of its kind, and he intends to set a precedent for institutional investors around the country to follow.
“My job first and foremost is to protect the retirement security of 715,000 individuals who rely on pensions,” Stringer told Fair360, formerly DiversityInc.
The Comptroller’s Office will begin implementing a survey and response regimen, in which current and prospective money managers must participate.
Stringer said hiring firms, which are inclusive of women and nonwhite investment managers, would increase the value of New York City’s five pension funds, as diversity enhances a firm’s performance.
“Part of what we’re trying to do in the Comptroller’s Office is to make sure that we support diversity, for two reasons,” Stringer said. “One, of course, this is the next civil rights frontier corporate America. But just as important, as a fiduciary, diversity means greater returns.”
The pension funds invest almost $88 billion in domestic and international stocks, $60 billion spent on U.S. stocks alone.
Since 1998 Fair360, formerly DiversityInc has complied data on diversity management and outcome from hundreds of companies. Through benchmarking and computing abilities the company has projected potential returns, which according to Fair360, formerly DiversityInc’s CEO Luke Visconti has put an “actual dollar value on what success will look like.”
The 2015 Fair360, formerly DiversityInc Top 50 Companies for Diversity Stock Index outperforms DJIA, Nasdaq and the S&P 500. Fair360, formerly DiversityInc is a price-weighed index consisting of the Top 50 Companies (nonpublic companies are excluded). Returns were calculatedby CNBC Market Data Services Team based on daily data through March 31, 2015 . For the past two years, CNBC has covered Fair360, formerly DiversityInc’s Top 50 Companies for Diversity Announcement event in New York City.
Chief Investment Officer for New York City Retirement Systems Scott Evans explains that diversity allows for better decision-making, which may lead to a company’s high returns.
“One of the things that science tells us is when you have people from different perspectives, maybe they’re from a different ethnic group a different geography, it’s a woman amongst a decision group of men, they think differently, they come from a different perspective, they ask questions that the others are assuming away,” Evans said. “And this is why it’s been proven that diverse groups make better decisions.”
Eighty-three percent of portfolio managers in the U.S. are white, according to data calculated by the City Comptroller’s Bureau of Asset Management based on the U.S. Equal Employment Opportunity Commission 2013 National Aggregate Report.
“The truth is the finance industry hasn’t changed like other industries,” said Stringer. “Eighty-three percent of these companies are run and operated by Caucasian men. Ninety-six percent of Hedge Fund owners are Caucasian men. So we’re not really opening up the door of opportunity to people of diverse backgrounds. This is one industry that is operating in the ‘Mad Men’ era.”
Stringer’s initiative intends to provide an incentive, including public recognition, for enhancing the pipeline for diverse investment professionals and “advancing minorities and women to lead firms and possibly open firms of their own.”
Emerging Managers and Women and Minority-Owned Businesses
The New York City Pension Funds have invested in Emerging Managers and M/WBEs. Currently, $10.9 billion is invested with M/WBEs.
“We’ve always endeavored to find diverse firms and to make sure that we gave opportunities to diverse firms to manage our money, and we’ve taken this pretty far,” Evans said. “We have almost $11 billion today invested with minority and women-owned enterprises.”
Last year, Stringer announced a new $1 billion commitment to Emerging Managers, including M/WBE managers, of which $250 million has been committed with significant investments to come.
However, Stringer admits New York City has not done exceedingly well in procuring goods and services from M/WBEs, which is assessed through letter grades in his inaugural “Making the Grade” report released in October.
More than two-thirds of city agencies earned “D”s or “F”s. The letter grades are intended as a “diagnostic tool for agencies to improve performance and transparency in M/WBE spending, increase competition in city procurement and save taxpayer dollars.”
Only two agencies in the report received a “B” grade: Landmarks Preservation Commission and the Department of Cultural Affairs. The Comptroller’s Office was one of the nine agencies that received a “C.”
Stringer said the city spends $18 million dollars a year buying goods and services and “only four percent of that spend goes to minority and women-owned businesses.”
The Boardroom Accountability Project
The Boardroom Accountability Project is a national campaign for proxy access, which will give shareowners a voice in corporate board elections at every U.S. company. The project was launched by Stringer’s office and New York City’s pension funds in November 2014.
Currently, CEOs and/or directors handpick nominees for election to the board at most corporations.
Stringer said “allowing companies for the first time to support shareholders, having a right to run directors, right now that’s banned in corporate America.” He continued, “We want to improve our pension funds, we want diverse boards. These corporate boards are male, pale and stale. I hate to say that, but it’s true.”
Diverse boards can mean a greater payout for shareholders.
A team of university researchers published a study in 2014 titled, “Board Diversity and Corporate Risk Taking.” The researchers examined the performance of more than 2,000 companies from 1998 to 2011 and found diverse corporate board of directors were more likely to pay dividends to stockholders. They also found a diverse board is less prone to take risks than more homogenous boards.
Researchers utilized five variables to measure risk: capital expenditures, research and development expenses, acquisition spending, the volatility of stock returns and the volatility of accounting returns.
An earlier study highlights the value of women on boards. In 2012 a Credit Suisse Research Institute study found that companies with women on their boards delivered higher average returns on equity, lower leverage, better average growth and higher price/book value multiples.
Stringer submitted proxy access shareowner proposals to 75 companies chosen based on climate change, board diversity and CEO pay:
33 carbon-intensive coal, oil and gas, and utility companies;
24 companies with few or no women directors, and little or no apparent racial or ethnic diversity; and
25 companies that received significant opposition to their 2014 advisory vote on executive compensation (“say-on-pay”)
According to Stringer’s office, although a company is not obligated to amend its bylaws to allow proxy access, most do when the vote exceeds 50 percent. And votes that approach 50 percent can create a call to action as well.
“We’re making agreements with companies who’ve traditionally shied away from this, and yet now they recognize that shareholders have to now be included in terms of a corporate strategy,” said Stringer. “And that will mean more diversity around the country on these corporate boards.”
Click here to view more of Fair360, formerly DiversityInc’s interview with New York City Comptroller Scott M. Stringer where he discusses the city’s first Chief Diversity Officer, investment with Emerging Managers and The Boardroom Accountability Project.
