Executive compensation should be tied to workplace diversity, not only because it is the right thing to do, but because it can also lead to sounder decision-making and a better investment outcome, argues Mellody Hobson of Ariel Investments.
Hobson, who co-runs the minority-owned equity boutique as president, visited Hong Kong to deliver the keynote address at AsianInvestor’s Diversity in Asset Management event last week.
Chicago-based Ariel's 89-strong team manages $10 billion in assets, including six no-load mutual funds. It opened a Sydney office last year under Ian Webber, head of Asia Pacific.
Describing herself as unapologetically black and female, Hobson joined Ariel as an intern 25 years ago and has worked her way up. She now oversees all operations outside of research and portfolio management.
She is also an advocate of financial literacy, arguing it should be taught in schools to demystify money management and embed a stronger social culture of saving for the future. She believes the great equaliser in society is financial security.
“It’s no accident that I work in the investment business because of the way I grew up,” Hobson said, highlighting her impoverished childhood. “I had this desperate need to understand money.”
A straight-A student and graduate of Princeton, Hobson says she fell in love with the stock market during internships with Ariel and Baltimore-based asset manager T. Rowe Price. “I did not grow up with any understanding of these concepts, but I had this desire to learn.”
She dedicated herself to working flat out during her 20s, saying she had no responsibilities such as children at that time. “It offered me a great deal of flexibility and freedom as I moved up the totem pole.”
She says she was always aware of diversity issues by virtue of who she is. “When you are black and a woman in America, diversity is front-and-centre on a day-to-day basis.”
Asked to give context to her views on diversity, Hobson turned to an anecdote that has stayed with her and which she believes asset management CEOs would do well to consider.
She explained how a friend and newspaper chief had called on two of his best reporters to write a pullout supplement to mark a US city’s anniversary.
As the pullout was being printed he picked up a proof and started to read. “He noticed it did not have one picture or story featuring a person of colour in the entire pullout, and this was a majority-minority city,” Hobson said. “In his career as a publisher it was the only time he stopped the presses.”
The newspaper chief subsequently asked himself what had gone wrong, and realised the reporters simply had a perspective unique to them on how they saw the city.
“It didn’t make them bad, just limited,” said Hobson. “So he started a saying at the organisation which was: ‘Is everyone in the room?’ He said that if everyone had been in the room [to decide on content] that supplement would never have happened [as it did].
“He did not think ill of the reporters. He just said he did not have all the right people involved. So ‘is everyone in the room’ has become shorthand for us for diversity and inclusion around the table in a way that will lead to a better outcome.”
Hobson went on to say that diversity meant inviting people into your life that don’t look like you, think like you or come from where you come from. She stressed it was not simply about race or gender, and referenced a book entitled The Difference by Scott Page, which notes how farmer Benjamin Jesty helped leading scientists find a vaccine for smallpox in 18th-century Europe.
“The person who led them to a bovine-based vaccination was a dairy farmer who noticed milk maids were not getting smallpox,” said Hobson. “It was his observation that led to this crucial discovery. It’s not always the smartest person who thinks of the best solution. It is about having lots of perspectives.”
She argued it was differences of opinion that often led to the best outcomes, saying Ariel tended to revisit its research if everyone held the same view on a particular stock. “If it’s that clear, something is wrong, we’re missing something,” she said.
Hobson stressed that while not creating barriers to success based on issues of ethnicity, race or gender was clearly the right thing to do, in a deeper sense the diversity issue was about enlightened self-interest. “If you want to do really well, you should have a diverse group of people in your life.”
Asked how staff at Ariel had contributed different perspectives, she pointed to a senior member of the team whom she described as a hardcore Republican.
“We could not be more different, and people ask why we would want an opinion so opposed to everything we think and believe,” she said. “It’s because it makes us smarter. How does he come to his point of view? If you can be curious about that, it leads to more understanding, more tolerance and a better world.”
Hobson half-joked she was trying hard to ask herself that same question about Republican candidate Donald Trump and was struggling to find an answer. She said it made her deeply sad to hear Trump’s views on areas such as immigration. “To have someone create that sense of otherness. This is dangerous rhetoric.”
At the same time, she added: “I don’t think there is anything wrong with someone bringing you back to your core beliefs.”
Asked how the asset management industry could encourage greater diversity, she pointed to company culture starting at the top. “To the extent that diversity is going to be an important outcome for a company, the person in charge should be measured in terms of success. So you should tie compensation in some way to a [diversity] outcome, just as we tie compensation to earnings or profitability or whatever it might be that is a measure of success.”
Addressing the industry decision-makers in the audience, she added: “Just ask yourself if everyone is in the room when you call a meeting. Do you have different points of view represented around the table? You can affect that.”
Asked what she looked for in a CV, Hobson highlighted “stick-to-it-ness”, saying she found it hard to attach any evidence of success to career job-hoppers. “When I see people who have had a lot of jobs, that resume is automatically put aside,” she said, explaining she tended to like non-traditional CVs.
She cited Ariel’s general counsel as an example. She grew up in Haiti, moved to the US at 17 and learned English in a year to attend university and law school.
“The person who initially reviewed her resume suggested she would not be successful because she did not have experience of the Investment Company Act of 1940. But this woman learned English in a year and went to college – she can learn 1940 Act law. Her resume suggested grit, and grit is something I like. I want to see that people can finish what they start. I want to see stick-to-it-ness.”
Asked by Rachel Farrell, head of sovereign and institutional business for Asia Pacific ex-Japan at JP Morgan Asset Management, whether Ariel as a firm took diversity into account in the companies it invested in, Hobson said it did.
She noted that while Ariel would not eliminate portfolio holdings due to a lack of diversity, “once we have made the investment we are going to push them on it," she said.
“The one thing about the many asset managers in this room, they can ask the question [about diversity in a portfolio holding]. If they all ask, I feel like there will be a bit of a tsunami around this issue.”