Diversity Can Benefit Investment Committees

Plan investment committees could benefit from a greater diversity in membership, says a new paper from Vanguard.

“Unsticking the Status Quo: The Role of Diversity in Investment Committee Effectiveness” examines how investment committees define and value diversity, as well as the impact of diversity on the committee’s effectiveness. The paper notes that investment committee structures thus far have been oriented toward building a diverse committee on the basis of the members’ professional background experience, but cautions that this should not be the only diversity factor at play.

First, committees need to understand what diversity means, which can be challenging since there are different types of diversity. Catherine D. Gordon, author of the paper and principal for Vanguard’s Investment Strategy Group, tells PLANADVISER, “On the one hand, you have social diversity, which relates to age, gender, ethnicity and other such factors. You also have information-processing diversity, where you have people from different experiential backgrounds and who may offer more creative solutions.”

The key, says the Valley Forge, Pennsylvania-based Gordon, is to try and combine the best elements of each approach. Socially diverse committees may sometimes be able to work more quickly and efficiently. However, even though committees with information-processing diversity may take longer to reach a consensus, the multiple viewpoints can foster better decisionmaking skills and more creative solutions. The complexity of the tasks that need to be accomplished may dictate which elements of these approaches are the most useful.

The paper observes that for a committee to evolve positively, members must be willing to embrace change, including changes in membership and in the group’s makeup. Understanding the dynamics of an investment committee and the biases of individual members are important steps in advancing the diversity of such committees. Having a more diverse committee, with members possessing differing viewpoints, may also lead to the development of better conflict resolution skills.

Another reason diversity is important, says Gordon, is when too many people on a committee think alike, the ‘groupthink’ element may kick in, even in situations where a dissenting voice may be needed. “In terms of professional background, sometimes it’s just as important to have members that may not have as much investment experience and can look at things from a different perspective, playing a devil’s advocate role.”

Discussing the topic of diversity with committees can also prompt related changes. Gordon recalls how one client started to discuss diversity and, looking around the meeting room, realized that many of the committee members were within the same age range and that several were approaching retirement. “In this case, the discussion was fruitful in that it spurred the client into enacting some succession planning measures, which included mixing up the age range and bringing in some younger members.”

Gordon adds that a mix of age ranges can also be useful in bringing about a balance between the technological and skill sets of younger committee members and the experienced perspective of older committee members, who may possess a kind of institutional memory, having seen certain market trends unfold before.

In terms of how size affects an investment committee, Gordon says, “Six to 10 members is usually a good number. Beyond 10, things start to get a bit unruly.”

Gordon says, “Most organizations already address diversity in the work force, so the same standards should apply with committees.” Gordon recognizes that certain members of the organization’s management, such as the chief counsel or CEO, and certain skills sets may be required to be part of a committee. However, she advises that membership should not be excluded for individuals that fall outside of these required parameters.

Competition for talent is also a reason to maintain diversity within a committee and the organization in general, says Gordon. “You don’t want to exclude a huge talent pool by not being diverse enough. Just because someone doesn’t have the usual Treasury or finance background, it doesn’t mean that they can’t ask great and useful questions.”

The paper notes that to fully realize the benefits of a diverse group of individuals, committees must continually evaluate their team’s structure and incorporate mechanisms to avoid the pitfalls such as those previously discussed.

Data discussed in the paper came from a joint survey of plan sponsors and committee members done in 2013 by Vanguard and Market Strategies International. The full text of the paper can be downloaded here.