Mellody Hobson: Incentivizing Better Racial Relationships

Mellody Hobson: That’s a really big question so I’m going to try and do my best to be as explicit and also simple in my response — because there’re a lot of places I could go with that. Let’s just look back to history and talk about where the biggest strides in diversity inclusion and race relations were first made politically. And that obviously has a lot to do with clearly the Emancipation Proclamation.

Then we took forever to get to the Civil Rights Act, but what came out of it is real diversity and inclusion. The first place where we saw strides made in diversity and inclusion was in government, because they had to uphold the law. If you look at government you see lots of black and brown people working in government. We see black mayors on TV right now, which I believe, they’re doing a great job given the circumstances, but government played a major, major role.

MH: As a result of the Civil Rights Act, right. I think that’s not enough, and I think the onus now is on corporations: Corporations have had to take on a lot of responsibilities in the last few years and I think this is one of them that we haven’t gotten right. And so, corporations are now having to look at themselves and their organizations and reflect on what they’ve tried to do and be very intentional about how their words reconcile with the reality.

There’s a lot of good intention from good people, but the reality is not changing and that’s now where we are. So, corporations, I think, [play a role] in looking at their executive suites, their boards of directors, who they do business with, are they inclusive in that regard, and where they give their money.

We call it people, purchasing, and philanthropy.

If you truly believe in diversity, it should line up behind all of those areas and you should be able to measure your progress. In everything else we do we set targets — if we get hired by a plan sponsor, they will ask us: “What are our performance expectations vs. our benchmark?” That doesn’t mean we know that we can hit the target but we know we have to expect to perform ‘x or y’ over the benchmark, over as we like to say at Ariel, a market cycle.

We set an expectation, and of course, the client decides if we meet that expectation or not. And when you don’t, if you don’t have a good reason, you lose the opportunity you have. And so, I think that’s a very basic example of what corporations have to move to. That very basic example illustrates the needs for metrics and for measurements. As I like to say, “Math has no opinion.” So, if you first measure, then you can get a sense of where you’re going.

One other thing that I think is very important is what we saw in the George Floyd murder is horrific, and I intentionally use the word murder. He was murdered over 8 ½ minutes. It’s horrifying to watch, horrifying, and the callousness of which the murder occurred with the hands in the pocket and the three other officers — you go to a place of disbelief, but yet, when you’re black, we know that happens every day. It’s just that most time there’s no camera. And so, while we’re horrified, we’re also not shocked, if that makes any sense. And I don’t think it’s about one moment that changes everything. We have real work to do.

MH: Well I think that’s one of the answers. You certainly have to very minimally ask the question. I talked about this yesterday on CNBC. In our industry we vote proxies. We have all the power. So, when we’re in situations where we don’t see diverse boards or diverse executive suites or diverse business practices, we can change that with a pen. And so, we need to understand that that power is real and we need to use it around these issues. Yes, there’s been this growth in the belief in ESG and we’re certainly one of those firms that has been practicing ESG from our inception, when we were “South Africa free” when Ariel was started in 1983, and I can go beyond that. But it’s interesting when you talk about ESG, and you push these points about diversity, people get less committed. And I don’t mean that in some kind of overt way. It’s just you see a lot more enthusiasm around the environment, around gender, less around race.

MH: Everything got lost during COVID. We’re in a global pandemic. The world stopped. We put the world in a medically induced coma on purpose in order to save lives. So it’s not surprising that that overwhelmed everything, but that would be to say COVID started, we shut down America in mid-March. So, to say in the last few weeks that has stopped diversity efforts, I think would be just a little too convenient.

I think what has happened is: COVID put half of black America out of work. That is the number that I heard exists right now. You have people who are dramatically underemployed. When you look out and see no prospects of how that’s going to change or be fixed, desperation sets in. And when desperation sets in, you get unrest. It is understandable that the pot came to a boil. I don’t agree with the tactics around the looting and rioting, and I 100% agree with the tactics around peaceful protests. It’s understandable. But when you start feeling you have nothing to lose, you will do anything.

I grew up the youngest of six kids. My mom was a single mom. She struggled a lot, but I said, “What would you do if your children were hungry?” Just ask yourself that. “What would you do?” Surely, my mom bounced checks for us to get food at the grocery store. I guess technically that’s theft, but we were hungry. I have a 6-year-old child and I get it. I wouldn’t kill someone, but you do a lot when you confront true desperation. And so, I have some capacity and empathy for that. It doesn’t excuse, again, looting and rioting and those things, but I do understand.

MH: I think there should be structural metrics for evaluating a process. So, one, is the Rooney Rule, but the Rooney Rule doesn’t work if you keep having a diverse slate and the minority doesn’t get hired. So you’ve got to look back at the results of that and say is it driving the results that we want? And then you have to understand what results you want, which is why you have to have some targets.

People associate targets with quotas, which can feel very negative, but to me, it’s very practical. We have targets for everything, earnings per share. We have targets for all sorts of things. And if it’s critical to the long-term success of the enterprise, I think it doesn’t make sense to operate without them.

MH: I think the representation should somehow square with our representation in the country and it is that simple.

MH: The reason I reject the pipeline argument is because, first of all, you can hire a black general counsel or a Hispanic general counsel. People need to see what they can be. You’re a CFO, you’re the general counsel, the head of marketing —I mean, there are a lot of roles there that exist in investment firms. I mean, let’s look at family offices, at endowments and foundations. There’s a lot of room there. There’s a lot of opportunity.

MH: It’s interesting because it is not an effort for us. It just is. I know that sounds really crazy, but we don’t have to work so hard at that, partially because people see people like me. I was an intern that became president, then become co-CEO, then became largest shareholder. They see that, and they see opportunity. So, we get the resumes. We get people coming to us. We have a reputation and a brand around this, and when you have that, it doesn’t have to be some kind of policy.

My world is diverse at every level, at every corner because I don’t look at people encumbered in any way. It’s not that I said I’m seeking this. My assistant is Hispanic. My chief of staff is mixed race, half black. Adam, [Ariel’s public relations representative] is black. My house assistant is Korean. I could just go on and on and on, but it wasn’t like “oh, I have an intent and I want to do this.” I don’t have any bias there that keeps me from considering all of those people when those resumes come to us. And I think that’s part of the issue. Subconscious bias leads you away from things.

I remember talking to a company once and they were in a major city, majority minority. They were hiring 600 people a month, and it was in that hyper-growth stage. They gave me a tour of their office and I literally saw maybe two black people, and they were very, very big. I said, “This makes no sense. You don’t have any black people.” And they’re like, “They just don’t apply,” this, that and the other. And I said, “No, when you hire 600 people a month, you’re kind of hiring anyone who walks through the door. So, something is happening where they’re getting filtered out, and you can’t even see it.”

MH: You know the thing is, if you think you’re going to make a whole bunch of people suddenly embrace all of these ideas, it’s not going to happen. So, what do you do? It’s super simple.

You get what you incent.

So, let’s just make it about cold, hard cash. I am not going to give you your whole bonus if your team is not diverse. You could be best in class in everything else, but if your team is not diverse, you’re hurting our company or our organization and we can’t be great. I don’t think this is about mentoring — that’s nice and wonderful — but those soft incentives will not work. People understand the bottom line for themselves and for the company.

MH: That’s right. Homogeneous organizations do not do as well. All the data shows more a diverse board, more diverse leadership leads to better outcomes. You have to believe that different perspectives lead to a better answer, and that might be understanding your customer, your potential customer, whatever it might be.

MH: I don’t think it’s about industries. I think it’s going to be about a holistic view of companies. So, we would not own a private prison at Ariel. We’ve never owned one and that’s on our no-go list, no fly zone. We just wouldn’t do it. And I remember John Rogers talking to us about this years and years ago. He said, “I don’t want to own anything where its business and its success is in direct conflict with our society.” So, for example, if they do better with more people in jail. He’d say, “That is not an equation that I like.” And he made it very clear to all of us, “You can take those off the list.” There’s never been another discussion about it. That was a fundamental, that was not about a return. That was about something that just didn’t make us comfortable. And John was very eloquent in saying that.

I don’t think you can be successful long-term when you have a business that runs counter to the success of society. We’ve obviously seen that in lots of ways and lots of places. I mean, look at the opioid companies. They have a problem. It worked for a while until it didn’t work, and now they’re in massive lawsuits and they’re looking at bankruptcy and all of these other things because they did something that was at odds with the health and livelihood of first, a human being, and then, a society. So as an investment manager, those are things that we consider, because you’re thinking about the long-term of the business. We’re long-term investors. So we say: that’s just not going to work out over the long-term.

We would challenge any business that we have in our portfolio around issues related to diversity inclusion by starting with their board. So, if a board is not diverse, it doesn’t mean we won’t buy it but we’re then going to push for change because oftentimes we become large shareholders, especially on the domestic equity side. So that would be a conversation that we would have with management, to try to move the needle there. And we can show over our history about 30 companies where we’ve actually convinced them, as a positive agitator for change, for them to diversify their board.

There have been companies that we don’t own because we worry about the risk of the business. Like we don’t own firearm companies in our domestic portfolios because lots of those businesses were sued by cities and states. The mayor of Chicago sued gun manufacturers and we said that litigation risk is not something we want to be a part of, as an example. So, when you think about issues related to diversity, I think what we would say is: it’s not about an industry in diversity. I think it’s about companies. You’ve seen some industries affected — look at Oscars So White in Hollywood. That’s something that has affected the whole industry and obviously the Academy Awards is a big part of Hollywood’s patina. And so they want to preserve that patina. So, when that hashtag really took form, that became a problem. And so those are the things we think companies really do have to think about, and there are going to be flip flops. I can tell you the question is: what do you do about them and what is your intentionality?

At Starbucks, we had the issue with the arrest in Philadelphia and to the credit of the leadership there —Howard Schultz and Kevin Johnson—they got all over that. They took a stand. They didn’t excuse any behavior. They owned the problem and said, “We are going to do everything conceivably possible to try and make sure this doesn’t happen again.” And they got a lot of credit and respect for that, from me and from others.

MH: So, I would say, first and foremost, you want to ask your management, the companies that you’re managing, or that are managing money for you, about the diversity of their organization. That one question can lead to dramatic change in our industry. And ask them to report that to you on a regular basis. Because the numbers are so bad, but when our customers want something, I know all of us do our very, very best to make them happy.

And one other thing, Christine, just make sure those CIOs consider diverse firms in their lineups. We hear a lot of excuses of why they can’t find them or they don’t exist. They do.

If you don’t have any diversity in your investment lineup, is that its own statement too?