Editor’s Letter: LPs have to lead the charge against sexual harassment at firms

This was disheartening news: A recent survey revealed that institutional investors in the alternative-investment world don’t ask about sexual harassment when assessing a new manager for possible investment.

This is disheartening because LPs have the power to change a culture of harassment and sexism. They control the purse strings and can speak louder than anyone else when it comes to changing managers’ behavior.

By not even asking about incidents of sexual harassment, LPs are conveying that this is not a subject of enough importance to get in the way of the possibility of investing with the manager. That mindset will ensure that non-inclusive cultures that may exist at certain firms aren’t likely to change anytime soon.

The survey, conducted earlier this year by the Investment Management Due Diligence Association, included responses from 78 institutional investors representing endowments, pensions, insurers, private banks and funds-of-funds. They refer to assessments of alternative-asset managers, including private equity, venture capital, real estate and hedge funds.

The headline number here is that 89 percent of respondents do not inquire about sexual harassment in the workplace. Along those lines, 81 percent of respondents don’t ask if any executives have had complaints filed against them by the Equal Employment Opportunity Commission or the Human Rights Commission.

Many LPs have told Buyouts anecdotally they don’t ask specifically about sexual harassment.

“I’m a lot more focused on what’s the culture of the firm, what kind of practices do you have regardless of any one complaint or one issue. Is it an inclusive culture, a culture of respect, a culture where it’s OK to have differing opinions? Not just for sexual harassment but any sort of conduct you have in a firm,” a pension LP said in a recent interview.

Even when investors discover sexual harassment issues at a firm, that wouldn’t necessarily kill the investment, the survey found. Fifty-five percent of respondents said they would investigate further, while 17 percent said investing with the manager would depend on the level of harassment.

Twenty-four percent said they would decline to invest, while 4 percent said they would still invest assuming the operational due diligence checks out.

One thing LPs do ask about, according to 73 percent of respondents, is employee-related litigation and confidential settlements like non-disclosure agreements. The problem is that GPs can choose to reveal the nature of such settlements or not.

“GPs don’t have to, but they should characterize it,” Borowiec said.

This all comes at a time when the industry is thinking hard about how to recruit and retain women, including promoting them into positions of leadership. LPs also need to lead the way in general on making sure GPs are at the very least thinking about ways to increase diversity.

IMDDA made five recommendations for LPs to focus on when assessing managers: examine human resources processes, including whether the firm’s handbook includes procedures for sexual harassment reporting and prevention; asking why departures occurred, especially as concerns female employees; enhance background-check procedures; investigate NDAs and interview former employees.