Fund boards and culture risk: Tackling sexual harassment, discrimination

November 29, 2018

By Nicole M. Crum, Sullivan & Worcester

As part of their larger risk oversight role, mutual fund boards are increasingly considering their role in evaluating “culture risk” and how it relates to sexual harassment and discrimination at mutual fund service providers, particularly with respect to investment advisers and sub-advisers. Culture relates to the “system of values, beliefs and behaviors that shape how things get done within the organization.”[1] A strong, positive corporate culture creates value and reduces risk; whereas, a weak or toxic corporate culture can create risk to reputation, valuation, talent and organizational effectiveness. Unfortunately, boards of all types frequently focus on culture risk issues only after problems arise, as opposed to taking a proactive approach. This article provides a framework for fund boards seeking to establish a proactive approach to tackling these issues within existing corporate governance structures. The key to addressing the culture risk issues of sexual harassment and discrimination is for the board to have a robust process for evaluating a service provider’s corporate culture.


Despite the relatively few headlines concerning sexual harassment and discrimination in the financial services industry, there remains significant risk to fund complexes. These risks—which include, for example, reputational, operational, and investment risk—may adversely impact the nature and quality of services provided to funds. Some mutual fund directors struggle with how to approach these issues, especially given the newness of discussing sexual harassment and discrimination at service providers and the unique role that fund boards play with respect to the oversight of service providers.


Culture risk in the financial services industry is real, and mutual funds are not excepted.


Last year, the culture in the financial services industry hit the headlines when Fidelity fired two senior executives for sexual harassment, including a star portfolio manager. The firm faced allegations that it had a “men’s club” culture which created a hostile environment. For example, in one lawsuit, a female analyst asserts that she was required to report to a man junior to her. This man informed her that she wasn't advancing at the firm because she "didn't drink beer, watch football or eat meat." He advised her to adopt a more female posture and take a "back seat," such as by staying silent in response to managing director questions even if she knew the answers.[2] After receiving a large settlement from Fidelity over discrimination, she asserts that she was blacklisted by Fidelity and was unable to find a job for six years, despite stellar performance reviews.


Fidelity is not alone in grappling with these issues in an industry where some observe that a lack of women and diverse individuals in board and executive leadership have contributed to toxic corporate cultures and behaviors.


Recently, Senators Elizabeth Warren, Diane Feinstein, and Catherine Cortez-Masto requested information from FINRA and the SEC regarding sexual harassment on Wall Street. They sought data regarding the steps regulators may take to prevent sexual harassment, and encourage diversity and inclusion in workplace. The request noted that the financial sector has “had fewer public revelations of sexual harassment than other industries" due to “cultural and financial forces” that discourage speaking out.[3] FINRA and the SEC did not have much to say in response to the request, but the request itself places a spotlight on the financial services industry.


A mutual fund board’s oversight role differs from traditional corporate boards—so should the approach to culture risk.


Traditional corporate boards oversee all company operations and have insight into company operations, risk, and culture. In contrast, fund boards primarily oversee the performance of service providers relative to the requirements of their respective contracts and applicable law. While fund directors have insight into many aspects of the investment adviser’s business, their relationship with fund management and perspective on risk is different because fund boards do not typically receive all of the information that a corporate board receives due to fund boards’ traditional oversight role.


As a result, the perspective of fund boards is unique, and the advice provided to public and private company boards on how to prevent and address sexual harassment and discrimination is not tailored to the fund context. For example, advice to corporate boards often involves, among other things, adding diversity and inclusion and related oversight responsibilities to the job descriptions of existing executives or adding additional human resources personnel. Some sources have encouraged corporate boards to work with these individuals on company policies and to adjust executive compensation to reflect the level of engagement on these issues.[4] Under normal circumstances, these are not steps that would be appropriate for a fund board to take given their traditional oversight role.


Fund boards can approach culture risk oversight in few different ways.


Despite these differences, there is no need for a radical shift in conducting board business. Fund boards have the means to tackle these thorny issues through existing corporate governance structures.


Specifically, fund boards can leverage educational sessions and the annual 15(c) process to address these issues and learn how to evaluate a firm’s culture risk. However accomplished, the evaluation of culture risk should be fully integrated into a board’s risk oversight function and not regarded as a separate, intangible, or soft risk.


With respect to educational sessions, boards can initially request an educational session from the adviser on its policies, procedures, and processes relating to diversity and inclusion generally, and sexual harassment and discrimination in particular, to provide a baseline of understanding how these issues are prevented, addressed, and reported when they arise. In terms of learning how to discuss these issues generally, a board may wish to obtain its own diversity and inclusion training and consider strategies for board diversity as discussed below.


With respect to information requested from service providers, boards may find it helpful to update the information received in an education session and obtain information regarding other service providers as part of the annual 15(c) contract review process. For example, a question regarding these issues may be incorporated into the 15(c) request letter.


With respect to the educational session and 15(c) request materials provided regarding these matters, boards should be aware that some of the information may be sensitive because it relates to complaints, claims and settlements and, as a result, certain materials and discussions may be best handled in executive session. Boards may wish to engage in a dialogue with fund management regarding the process for receiving and reviewing these materials in light of these concerns.


Fund boards can structure educational sessions and 15(c) inquiries to evaluate culture risk.

Set forth below is a list of information items that a board may find helpful when requesting an educational session or 15(c) response on sexual harassment and discrimination issues. Below each item are sample questions that a board member may wish to ask fund management regarding the materials provided.


Sample Information Requests and Director Questions

  1. A presentation on the adviser’s policies and procedures relating to discrimination and sexual harassment, including the process of reporting and investigating claims, the resolution process, and when and how the board is informed about complaints.
    • Who is involved in the reporting of claims and when senior management is notified and involved?
    • How are accusers treated?
    • What are the considerations for board notification—monetary thresholds, litigation, etc.?
    • Are the policies, procedures, and processes regularly updated and evaluated?
  2. Information regarding complaints and resolutions over the past one to three years, including whether there are repeat offenders, problematic departments or discernible trends. This information may include disclosure regarding settlements, particularly those involving senior management, even if the settlement amounts are not material to the company’s balance sheet. This information also may address whether and how the firm maintains, tracks and analyzes data, as well as how trends and claims are evaluated in terms of risk to the firm.
    • Are repeat offenders still with the company? If so, what is the rationale?
    • Does the board receive representations regarding the consistency of the application of policies, procedures, and processes and consequences?
    • The fund board may consider requesting notification if complaints involve a member of senior management or a pattern of complaints with respect to an individual, group, or department.
  3. A discussion from management regarding how the company defines its corporate culture and how those values are communicated throughout the company.
    • Is the corporate culture considered an asset?
    • Is diversity and inclusion a key focus of company culture?
    • Is there evidence of a commitment on the part of senior management and others to diversity and inclusion (e.g., internal audit reports or other data)?
    • How is the success of the culture measured (e.g., employee data, surveys, focus groups, etc.)?
  4. Information regarding the steps taken to promote an inclusive, diverse and safe work environment. This information may include the existence, nature, and quality of diversity and inclusion training and programs; including whether all employees, including senior management, are required to attend, and whether the content is meaningful to those in the organization.
    • Boards may wish to request this training at the board level.

Boards can lead by example and set the tone at the top.


Boards can lead by example and set a tone at the top that fosters a positive corporate culture. Integrating the inquiry regarding culture, sexual harassment and discrimination into the board’s overall risk management oversight function communicates the importance a fund board places on these issues. Some boards also have adopted policies requiring that any search for an open board seat includes diverse candidates. Applying intentionality around the importance of higher levels of diversity in board and executive positions sends a powerful message regarding the role of women and diverse individuals in an organization.


While representation on boards and executive management is not enough to eliminate harassment and discrimination, greater numbers of women and diverse individuals are thought to reduce discrimination and harassment. For example, a Pew Research survey conducted in 2017 regarding harassment by men in prominent positions found that “women employed in majority-male workplaces are more likely to say their gender has made it harder for them to get ahead at work, they are less likely to say women are treated fairly in personnel matters, and they report experiencing gender discrimination at significantly higher rates.”[5] 


The proactive approach to culture risk issues discussed above will enable a board to consider the culture of service providers, as well as any significant issues relating to sexual harassment or discrimination. However, it is important that this inquiry is ongoing and integrated fully into the fund board’s risk oversight process. Directors and fund management may find discussions regarding these issues initially uncomfortable—and that is to be expected. An evaluation of sexual harassment and discrimination may be new to many directors. Independent directors may find it useful to request that independent counsel provide an overview of these issues and prepare the board to request and receive information.

Nicole M. Crum is chair of Sullivan & Worcester’s Corporate Governance & Board Advisory Practice Group and a partner in the Investment Management Group in Washington, D.C. Her practice focuses on the representation of boards and board committees, including independent directors, as well as mutual funds, investment advisers and broker-dealers. She regularly advises mutual fund and other boards, independent directors, board committees and executive leadership on all aspects of governance and compliance.

[2] A dark side at Fidelity: Women describe culture of bias and revenge, available at:


[3] Warren, Feinstein, Cortez Masto Seek Data on Prevalence of Sexual Harassment in Financial Sector, available at:


[4] How Corporate Boards Can Combat Sexual Harassment, Council of Institutional Investors, available at:


[5] Women in majority-male workplaces report higher rates of gender discrimination, available at:



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