Q&A: CalSTRS' Chris Ailman

Q: Why is diversity important in investment teams?

A: What we all learned in 2007 was that groupthink can be a catastrophic failure. Think about the diversity just within the Asia region. It’s so big and complex. You are not going into Indonesia or the Philippines with just a Japanese team or a Korea team; you hire local people in those markets. That is accepted. You also want to mix up the team and gender is probably going to be the hardest aspect, given the different cultures within Asia. But women are half the population. You wouldn’t want to own a women’s cosmetics company and only have men on the board. What we’ve found in the US is that, as companies expand into Latino markets or inner-city markets, they need people who understand the environments and who can help them on the ground.

Q: What can private equity firms do to address this?

A: It’s a pipeline problem. There aren’t enough women taking economics or business and finance is even more male-dominated. Think of the big firms in New York – they all come out of ivy league schools and they are all recruiting from ivy league schools. But they need people from different backgrounds and with different languages. If you are only hiring one type of person you are not tapping into the variety of talent that is out there. Historically, they’ve done it through consultants, but now the teams are often so large they can do it themselves. GPs should also create internships and work with universities to open the door to more people. 

Q: Are they now doing more about it?

A: In the past, when you asked GPs about diversity – you would ask whether they are reaching out and making people aware of private equity as a career – there was some pushback. ILPA [Institutional Limited Partners Association] now tells us there is much more engagement, dialogue and discussion. If you are suffering from groupthink, you must solve that problem, and people in this industry are good at solving problems. You have discussions about it being a pipeline problem, whether it is recruitment or an image problem, and then you work on it.

Q: To what extent would California’s affirmative action legislation be an obstacle to efforts to proactively support diverse managers?

A: It’s been out there for a long time and it essentially means you can’t score people higher based on diversity. Like most other US pension plans, we have an emerging manager program that focuses on smaller firms raising Funds I, II and III. That doesn’t necessarily mean they are diverse; they just tend to be more diverse. We want to revisit this because the definition of diversity has expanded in California, which has become much more diverse than it was originally. Once we define it properly, then we can measure it – for public and private companies. Beyond that, we want to expand from diversity to diversity and inclusion (D&I). Again, we would have to think about how we define it and then go back to our GPs and ask them to respond. It’s going to be a challenge. Private equity firms are partnerships, which are by nature small. At the same time, when you look at some of the global firms now, they are not partnerships anymore; they are giant public companies.

Q: Can you see LPs declining to make commitments to certain firms on diversity grounds?

A: I don’t think people will ever get to that point, unless there were some rigid data to prove it one way or the other. I think it becomes another factor you look at. Private equity is so long term, you just push on an issue and hope things evolve over time. If a firm becomes so insular, if it is led by one person in their 90s, you would probably decline to invest because they haven’t broadened the reach. We look at things like carry, how it is awarded. It goes back to the point that if a GP is good at one industry, it needs to hire more people so it’s good at several industries, because you know it is going to be arbitraged away at some point. 

Q: How significant a problem is unconscious bias?

A: You’ve seen a pattern, you’ve had success, and so you just keep sticking to it. And you don’t realize there’s a bias because you aren’t willing to consider something else. Even in job descriptions, duty statements and evaluations, when you run it against language software you realize you are using masculine words and vice versa. At a workshop we host with Stanford University, examples were presented of male and female supervisors using very different language in their evaluations of men and women. They asked us to guess which evaluation was written about a man and which about a woman, and we were 95% right. Then they asked us to say whether the writer was a man or a woman, and no one got it right. Women use the same biased communal language as men. That’s why the dropout rate among women, when you get past undergraduate level and early hiring, is horrendous. There is a bias in appraisals and women are opting out. They say they aren’t seeing any women at the top, so they don’t want to try and break that ceiling. What we’ve often heard from women on Wall Street is that, if there’s only room for two women at the top, they are going to be the one that gets it. But we need them to be helping each other, not fighting each other.  

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• Topics
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• California State Teachers’ Retirement System (CalSTRS)
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