Wharton’s Katherine Klein talks with Roy Swan from the Ford Foundation about reducing racial disparities in investing.

The renewed attention to racial disparities in America has many investment firms scrambling to rewrite their mission statements to be more inclusionary, but there is one organization that has been committed to social justice for decades.

Diversity, equity and inclusion are in the DNA of the Ford Foundation. The philanthropy started in 1936 with a $25,000 gift by automaker Edsel Ford and has grown into a $12 billion endowment making $500 million in grants around the world each year. The New York-based foundation puts its money where others offer only lip service to changing the abysmal statistics on investment in women- and minority-owned firms. Market allocation is at 1% of roughly $70 trillion in total U.S. assets under management; the Ford Foundation’s Mission Investments endowment has allocated 57%.

“Tools are only powerful when you use them. The great thing about the Ford Foundation is that it has these tools, and it’s using the capital tools,” said Roy Swan, director of Mission Investments for Ford. “We hope to act as an example and to provide a road map of sorts for those like-minded people who want to help advance economic justice, social justice.”

Swan spoke with Wharton management professor Katherine Klein, who is vice dean for the Wharton Social Impact Initiative, during a recent episode of the Dollars and Change podcast. (Listen to the segment at the top of this page; find more episodes here.) Their conversation focused on the Mission Investments program, which commits $1 billion of Ford’s endowment over 10 years toward impact investments. Such programs are receiving increased attention because of the spotlight on racial inequality in the U.S. and around the world following the death of George Floyd in late May.

In the late 1960s, the Ford Foundation developed a program-related investment tool to stimulate what President Richard Nixon called “Black capitalism.” But, as Klein pointed out, a significant wealth gap still persists some 60 years later. The median household income for whites in 2018 was $70,642, compared with $41,361 for Blacks, according to Census data.

“We like when investment managers have some diverse ownership. We like when teams have diversity in the senior investment ranks and decision-making areas.” –Roy Swan

“You’re right, we haven’t come very far,” Swan said. “In fact, in certain ways, we’ve gone backwards — particularly in the status of African Americans. I think over the last 20 years or so, it’s the only demographic … whose wages have gone backwards. What we hope to do is to use our tools as examples and to use our voice for influence.”

Exerting that influence means speaking out and often, and foundation president Darren Walker does just that through the foundation’s Equals Change Blog, frequent public and television appearances, and as a member of several corporate boards. The organization also exerts influence in more subtle ways, which Swan referred to as a “honey, not vinegar” approach to getting firms to see the value of diversity.

“As a part of our due diligence process, we make it an important part of our discussions to talk about the importance of diversity in our selection process,” he said. “We like when investment managers have some diverse ownership. We like when teams have diversity in the senior investment ranks and decision-making areas.”

Providing Access and Real Solutions

In June, the Ford Foundation launched a $26 million Impact Developers Fund along with Morgan Stanley and TruFund Financial Services. The program will provide capital and technical assistance to minority- and women-owned real estate development companies that have faced institutional barriers to adequate and affordable capital. In addition, the fund will target companies that are building affordable, quality housing.

Swan said the program is important because there is a critical shortage of affordable housing, and much of it has been built by white male developers trying to create products for disadvantaged populations that they do not always understand.

“There are many reasons why there aren’t many Black or brown developers,” he said. “Much of it has to do with the same lack of access to capital that was demonstrated by that 1% statistic of assets under management [by minority-owned firms]. If you look at another simple gage … in SBA loan programs, African Americans are lucky if they get 2% of the total value of SBA programs.”

“If you actually want to make an investment and you don’t know what to do, you can call me.” –Roy Swan

Klein asked Swan to offer his best advice to investors who want to “move the needle” on systemic racism in the financial sector. The answer, Swan said, starts with acknowledging the problem and the fact that the wealth gap is widening, and then seeking out real solutions. “It’s also about getting beyond token gestures to substantive and meaningful commitments,” he said.

Perhaps the toughest part is getting consensus on the belief that helping those at the bottom of the pyramid helps an entire society reach a little bit higher. It’s a lift-all-boats argument that many people in power are not receptive to because they fear that enriching others will come at their own expense.

“From a policy perspective, we have other challenges because the concept of race-targeted assistance is so polarizing that it makes it very difficult to get traction,” Swan said. “People in power and people who have money don’t give up power or money easily. It’s sort of, what’s in it for them?”

Swan also said a lot of investors don’t know where to start on moving the needle because they don’t have a diverse network of people that they can seek advice from. They don’t have any close confidants who happen to be minorities, so they don’t know how to open the conversation.

“But guess what? The head of the Ford Foundation’s Mission Investment Programs is an African American male,” he said, referring to himself. “That’s relevant because a recent statistic showed that 75% of white people don’t have a single Black person in their friend network or in their social network. So, if you actually want to make an investment and you don’t know what to do, you can call me.”