Jul. 7, 2020

Five Essential Articles for Private Fund Managers to Improve Diversity, Inclusion and Equality in Their Workforces

While navigating the shutdown caused by the global pandemic, the U.S. is simultaneously beginning to confront issues of systemic racism and inequitable treatment of minorities generally and the Black community specifically. That comes on the heels of the #MeToo movement against sexism and the mistreatment of women in the workforce. As the U.S. faces growing societal awareness of institutional racism and sexism – and as calls for reform grow – the private funds industry should not passively sit on the sidelines. Instead, fund managers and other industry participants must examine the racial and gender inequalities that have existed in the industry, while actively taking thoughtful steps to bridge those gaps going forward. To aid fund managers with improving in those areas and in light of the recent Independence Day holiday in the U.S., the Private Equity Law Report is highlighting five articles from its historical archives that provide guidance on ways private fund managers can improve the diversity and equality of their workforces and those of their respective portfolio companies. Next week (the week starting July 13, 2020), the Private Equity Law Report will resume its normal weekly publication.

Why Equal Representation and Treatment of Employees Is Essential, and Ways Fund Managers Can Overcome Implicit Biases to Promote Diversity and Inclusion

Women, Blacks and Latinos are proportionately underrepresented in ownership, management and rank-and-file positions in the private funds industry. Few fund managers currently have formal structures in place to correct underrepresentation despite evidence that diversity can provide a number of benefits, including stronger performance; fewer errors; increased creativity and cooperation; and greater empathy. Even among fund managers employing strategies to increase diversity, clumsy adoption may lead to unintended consequences such as backlash, greater hostility toward underrepresented groups and less diversity. Thus, fund managers must ensure they properly implement the diversity programs, starting with transparency, accountability and a firm-wide assessment. The first article in this four-part series discusses the lack of diversity within the financial services and alternative investment management industries, and it explains why fund managers should focus on increasing diversity. The second article analyzes diversity training; performance ratings and hiring tests; grievance procedures; and specific actions managers can take to promote diversity and inclusion. The third article explores implicit biases; their harms; and whether they can be reduced in both the short and long term. The fourth article evaluates methods for constraining decision making and examines the role that legal and compliance leaders can take to promote diversity and reduce implicit biases. See “How Compliance and HR Can Work Together” (Jun. 2, 2020); and “Recent Developments and Trends in Employment Law Relevant to Fund Managers” (Jul. 26, 2018).

FCA Executive Director Emphasizes Need for Fund Managers to Promote Diversity

Diversity is increasingly being recognized as commercially imperative for firms, including fund managers, according to Christopher Woolard, Executive Director of Strategy and Competition at the U.K. Financial Conduct Authority (FCA). In a speech, Woolard focused on the need for fund managers and other regulated entities to focus on diversity. He also explained that the FCA extrapolates its assessment of a firm’s culture from that firm’s approach to diversity and inclusion. In addition, the way a firm handles misconduct such as sexual harassment is potentially just as relevant to the regulator as the firm’s handling of insider trading or other misconduct. Woolard’s speech provides valuable insight to fund managers about the FCA’s expectations regarding diversity and sends a clear message to the industry: “non-financial misconduct is misconduct, plain and simple.” This article summarizes the key points from his remarks. For more on employment matters, see “Components of an Employee Discipline Framework to Foster Predictability Amidst Inconsistent Laws (Part One of Three)” (Mar. 17, 2020); and “Ways Fund Managers Can Compensate and Incentivize Partners and Top Performers” (Dec. 14, 2017).

#MeToo and the PE Industry: Ways to Mitigate Risk Through Portfolio Company Diligence and How to Avoid Common Mistakes Along the Way

As a much-needed driver of social change, the #MeToo movement has shed light upon a swath of legal risks PE sponsors are trying to identify and mitigate. It has also generated broad reforms to the PE industry’s customs, as well as the policies, procedures and culture at PE sponsors and their portfolio companies. In their haste to curb those risks at the portfolio company level, however, sponsors need to avoid becoming overinvolved in ways that inadvertently increase their liability. To better understand the #MeToo movement’s effect on the PE industry and deal process, the Private Equity Law Report interviewed Katten partners Kimberly T. Smith, co‑chair of the firm’s PE practice, and Michelle A. Gyves, a labor and employment specialist. The first article in this two-part series presents their thoughts on how the PE industry recognized and responded to the movement, as well as how it has incorporated #MeToo into the portfolio company and target company diligence processes. The second article examines how #MeToo is being addressed in PE acquisition documents, as well as risks sponsors face from being too active in their portfolio company responses to those matters. For coverage of sexual harassment claims involving fund managers, see “Point72 Complaint Ignites Discussion on Relevant Facts in ‘Hostile Environment’ Lawsuits” (Mar. 22, 2018); and “Portfolio Manager Accuses Former Employer and Supervisor of Retaliation for Reporting Sexual Harassment” (Feb. 15, 2018).

Key Elements of New York’s New Anti‑Sexual Harassment Policy and Training Requirements, and Ways Fund Managers Can Comply

New York City and New York State each recently passed laws that impose new anti-sexual harassment policy and training requirements on private employers. In order to comply with those laws, New York-based private fund advisers should review and modify their anti-sexual harassment policies to conform with the standards set forth in the new city and state laws; train all of their employees on sexual harassment prevention at least once a year; and take care when entering into separation and settlement agreements with current or former employees with regard to nondisclosure and mandatory arbitration provisions. To assist our readers with understanding the city and state laws and their potential impact, this two-part series analyzes the laws and their requirements and provides commentary from lawyers focused on employment-related matters. The first article explores the key elements of the new laws. The second article offers suggestions on what fund managers should do to comply with the laws’ requirements.  For additional commentary on employment issues, see “Four Steps NYC-Based Fund Managers Should Take in Light of Newly Enacted Law Prohibiting Compensation History Queries When Interviewing Prospective Employees” (May 11, 2017); and “Best Practices for Fund Managers to Mitigate Litigation and Regulatory Risk Before Terminating Employees” (Feb. 9, 2017).

A Checklist for Advisers to Comply With New York’s Anti‑Sexual Harassment Training Requirements

In 2018, New York State (NYS) and New York City (NYC) both enacted new laws imposing anti-sexual harassment requirements on private employers based in New York. The NYS and NYC laws have several common requirements, including that employers train their employees on preventing sexual harassment. NYS previously released final versions of model sexual harassment prevention materials that employers may adapt and use to comply with the new training requirements. See “New York State Releases Final Anti-Sexual Harassment Model Policy and Training Materials” (Nov. 15, 2018).  More recently, on the date the NYC anti-sexual harassment training requirements took effect, the NYC Commission on Human Rights issued updated frequently asked questions and an online training video. This article outlines the basic requirements of both the NYS and NYC sexual harassment laws; explains the training requirements under each law; and provides a checklist that investment advisers based in New York can use to ensure that their anti-sexual harassment training complies with both NYS and NYC requirements. For more information on the NYS and NYC sexual harassment requirements, see “What Fund Managers Need to Know About Recent Developments to the New Anti-Sexual Harassment Policy and Training Requirements in New York City and New York State” (Sep. 13, 2018).