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House Subcommittee Addresses Diversity in Financial Institutions

On February 7, the House Financial Services Subcommittee on Oversight and Investigations held a hearing on the underrepresentation of minorities and women in the financial services industry.

Chair Melvin Watt (D-NC) said, “In June 2006, the United States Government Accountability Office [GAO] issued a report entitled, Overall Trends in Management-Level Diversity and Diversity Initiatives, 1993-2004, and the subcommittee held a hearing to review that report on July 12, 2006…Sadly, the GAO’s follow-up data for 2006 shows that diversity at the management level in the financial services industry has remained about the same as reflected in its 1993-2004 report. The GAO reports suggest that depository institutions, such as commercial banks and insurance companies, have generally been more diverse at the management level over the years than the securities sector and the holdings and trusts sector (which includes investment trusts, investment companies, and holding companies). There is some suggestion, as some witnesses testified at the subcommittee’s 2006 hearing, that even the modest growth reported in senior management-level diversity may have been overstated due to the fact that the ‘officials and managers’ category used in the Equal Employment Opportunity Commission’s [EEOC] EEO-1 form included lower and mid-level management positions that may have higher representations of minorities and white women.”

Ranking Member Gary Miller (R-CA) said, “The GAO reported that between 1993 and 2004, the representation of African Americans and Hispanics increased by a percentage, and Asian representation increased by two percentage points, in management-level positions across the financial services industry. Their report also showed that representation by white women remained constant and representation by white men declined five percent. While the stated percentages may not seem extremely significant, I think we need to take into consideration the overall growth of management level positions in the financial services industry. According to information that I received from the GAO this morning, there was about an 18 percent growth rate in total management-level positions in the industry from 1993 to 2004. The minority growth rate during this time period was about 65 percent, which is a much faster growth rate than the overall development of these positions. It also seems to me that we need to take into consideration the total population of the United States, and take into account that these numbers may actually reflect the minority and non-minority ratio of populations across the country.”

Orice M. Williams, director of Financial Markets and Community Investment at the Government Accountability Office, said, “GAO’s June 2006 report found that, from 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but some racial/ethnic minority groups experienced more change in representation than others. EEOC data show that management-level representation by minority women and men increased overall from 11.1 percent to 15.5 percent during the period. Specifically, African Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to four percent, and American Indians from 0.2 percent to 0.3 percent…The U.S. workforce has become increasingly diverse over the last several decades. As the composition of the workforce has changed, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions.”

Ms. Williams continued, “Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to the success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity ‘councils’ of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2005 industry trade group study and some officials also noted that some companies were linking managers’ compensation with their progress in hiring, promoting, and retaining minority and women employees…Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded…While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations, as well as other information, suggest that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs, fully leveraging the ‘internal’ pipeline of minority and women employees for management-level positions; retaining minority and women candidates that are hired for key management positions; and achieving the ‘buy-in’ of key employees, such as middle managers.”

Luke Visconti, partner and cofounder of Diversity Media LLC, challenged the findings of the GAO report. Mr. Visconti said, “There are two reasons for the discrepancy in the GAO findings and our data. First and foremost, the GAO data is too old to be valid, as it compares trends in the work force and management from 1993-2004. As the national experts in measuring diversity in corporate America, we know how quickly diversity management evolves and how rapidly human-capital demographics change once proven best practices are implemented. That can be demonstrated by the increased participation in the Top 50 list [open competition for any company with more than 1,000 employees] and the turnover of companies on the list over seven years as the questions and the responses have evolved. Therefore, for purposes of this testimony, we will present the most recent data we have on the financial services industry, which is from calendar year 2006. Secondly, the GAO report does not differentiate the types of financial institutions and we see a wide variation. Banks, especially consumer banks that have a long history of involvement with the Black and Latino communities since the implementation of the Community Reinvestment Act in 1977, have been leaders in the Top 50 since we implemented it in 2001. They have always had the greatest participation in the Top 50 and the largest industry representation on the list. Other financial institutions, notably brokerage firms, are certainly not diversity leaders and demonstrate strong evidence of discriminatory practices.”

Mr. Visconti continued, “Data collected by DiversityInc. on its Top 50 Banks far exceed the representation of people of color when compared with the EEOC data on the financial industry. There is a finite pool of talented people of color and the DiversityInc. Top 50, especially the DiversityInc. Top Banks, are scooping up the best and the brightest. Our research has found that especially with people of color and women, reputation is essential. Most people do not want to be the barrier breakers, the ’first’ of anything. They want to work in a place where they feel welcome and where their talents can flourish. The branding as a diversity-friendly company is critical and most of the big banks have that. The brokerage companies do not, and in our opinion, are perceived as impenetrable bastions reserved for the privileged few. It is our opinion that brokerage firms are not looking for people not already in ’the club.’…The brokerage industry has been the subject of repeated and massive discrimination lawsuits. We have been told by current and former employees who are women and people of color, especially Blacks, that they ’did not fit in’ and were excluded and made to feel uncomfortable.”

Marilyn F. Booker, managing director and global head of diversity at Morgan Stanley, said, “Today’s reality is that the financial services industry, as it was once understood, is no longer the only game in town. In addition to the limited pools of potential candidates, the competition now includes private equity firms, hedge funds, technology companies and consulting firms, and foundation and nonprofit organizations, among others. All of these industries, like the more diversified financial services industry, typically require a high degree of specialization; therefore, minority and women candidates with the best credentials and requisite skill sets are highly sought after and often receive multiple job offers…Second, the number of women and minorities who are seeking these specialized skill sets via advanced degrees has remained stagnant over the last five years.” In addition, “Investment banks or securities firms with both institutional and retail businesses tend to be more specialized and typically seek more defined skill sets. Combine this with the minorities and women who do have the skill set but opt for other careers and the number of experienced people in this group decreases even more.”

Ms. Booker continued, “Recruiting diverse candidates is a process that cannot be successfully managed in the same manner as general recruiting. Diversity recruiting is about relationships and trust and it takes time to build those relationships and develop that trust…the time investment is huge and firms that do not have the infrastructure to support this relationship building will not be as successful as those that do.” Ms. Booker also cited another concern, “Although there are women and minorities in senior level positions, relative to men and non-minorities, the critical mass is not as evident and many junior women and minorities feel challenged in finding role models who can encourage them to enter the industry…This creates a two-fold responsibility for organizations: it is incumbent upon companies to make the senior minorities and women visible support systems for those coming up the pipeline and ensure that they have the resources to mentor those junior people like them, [and] in an effort to ensure inclusion in formal and informal networks, it is also incumbent upon companies to also make available to junior minorities and women mentors who do not look like them, i.e., non-minorities and men.” To address the challenges of recruitment and retention, Morgan Stanley offers conferences for minority and women employees: a “very mature campus recruiting program in all of [their] business units that specially target women and minorities; employee networks that have been a great way of…building informal, networking relationships; and offerings of internal and external speakers that have focused on career and professional development and advancement.”

Zaid Abdul-Aleem, vice president of Piedmont Investment Advisers, on behalf of the National Association of Securities Professionals; Dr. Walter E. Corey, director of the Phoenix Foundation; Ronald Edwards, director of Program Research and Surveys Division, Office of Research, Information and Planning, U.S. Equal Employment Opportunity Commission; Don Graves, Jr., of Graves and Horton, LLC; Nancy Sims, president of the Robert Toigo Foundation; and Geri Thomas, vice president of Human Resources and Global Diversity and Inclusion Executive, Bank of America, also testified.

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