Most LPs don’t ask about sexual harassment when assessing a manager: survey

It’s a common refrain when asking about sexual harassment in private equity that change needs to come from limited partners. The people controlling the money can put maximum pressure on managers to change their cultures, address sexual harassment and make sure these types of issues get some focus through the ranks.

The unfortunate fact is that LPs have not put much, if any, focus on digging out incidents of sexual harassment. This silence helps protect senior executives who should be brought to heel and potentially booted out of a firm for inappropriate behavior.

Possibly, though, that mindset is changing. A recent survey helps illustrate how institutional investors have been silent and how they can put more focus on uncovering sexual harassment at managers they’re considering investing in.

The survey was done in response to institutional investor questions about how they should approach questioning managers about sexual harassment, according to Andrew Borowiec, executive director of the Investment Management Due Diligence Association. These questions arose as the #metoo movement emerged and numerous high-profile men were drummed out of their positions amid allegations of sexual misbehavior.

“Like most people, [institutional investors] were caught off guard by the #metoo movement and they didn’t know if they should be asking about it,” Borowiec said. “They were asking about the culture of the fund but not specifically about harassment.”

“One of the reasons we created this survey — we were getting a lot of inbound questions,” he said. “They were asking, ‘I need to start looking into this, what questions should I be asking?’”

The survey, conducted earlier this year, included responses from 78 institutional investors representing endowments, pensions, insurance companies, private banks and fund-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 VCJ affiliate 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.

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.

Action Item: Read more about the IMDDA here:

Render illustration of Harassment title On legal documents. Photo courtesy of hafakot/iStock/Getty Images