Viewpoint: Racial Diversity Is a Bottom-Line Issue

In July 2006 the Government Accountability Office issued a scathing report on the lack of diversity at virtually every American financial institution.

What this report failed to discuss, however, is that lack of diversity is more than a social problem. Lack of diversity at the board, senior-management, and lending-officer levels hurts the bottom line. For example, an all-white senior management, even one that is highly motivated and capable, is unlikely to develop an effective, competitive, and highly profitable strategy that capitalizes on the 53 million unbanked Americans, most of whom are new immigrants and nonwhite.

President Bush has set an example through his Cabinet appointees that the financial industry should consider emulating. During most of the president's time in office, his Cabinet has consisted of 40% minorities (two African-Americans, two Latinos, and two Asian-Americans), and today it mirrors America's population by consisting of one-third minorities.

This is a goal that all banks should aspire to, both at their board and senior-management levels. Unfortunately, as of the beginning of this year, no bank had minorities in one-third of its board's seats. Across the industry, African-Americans, Latinos, and Asian-Americans hold an average of 2%, at the most, of the most senior management positions.

The Greenlining Institute's report as of the end of 2005 showed that 12 of the 20 largest banks had no Latinos on their board. Most surprising, only one had an Asian-American on its board, even though Asian-Americans represent over $500 billion a year of purchasing power and are one of the fastest-growing entrepreneurial markets in the country, owning almost 1.5 million businesses.

This lack of diversity partly explains why the banking industry, despite its apparent competitive advantages, is last in remittances, capturing less than 10% of America's market of $60 billion to $80 billion of transactions a year.

Today few banks are willing to be transparent regarding the lack of diversity in their senior management. Instead, giant banks lump thousands of employees under the EEO-I title of "Officials and Managers" and manipulate this classification into a sloppy and misleading proxy for their senior management diversity. Consequently, we have found that many chief executive officers are unaware of the dismally low number of minorities among their senior management.

Many members of the Congressional Black Caucus have raised concerns regarding the GAO report on the lack of racial diversity at banks. At a recent meeting we had with key leaders from the House Financial Services Committee, it appeared that a congressional hearing on the impact of this lack of diversity could occur this year. Similarly, in our post-election visits with key banking regulators, it appeared that all had a heightened interest in diversity, its impact on the bottom line, and reaching out effectively to the unbanked through increased diversity.

To their credit, the FDIC, under the leadership of Sheila Bair, and the OCC, under the leadership of John Dugan, have stepped up their internal efforts to hire and promote minorities, because of their belief that this will strengthen their agencies' supervisory effectiveness. At the FDIC, almost one-fourth of the top officials are minorities, and nearly half of the top officials are minorities, women, or both.

Perhaps it is time for the regulators to gather data on diversity by requesting that all financial institutions with $1 billion or more of assets report their diversity annually at every management level, including the board. In the interim, the regulators should consider conducting studies on the impact of diversity on the bottom line.

Federal Reserve Chairman Ben Bernanke has frequently stated his strong support not only for transparency, but also for gathering as much data as possible on all aspects of banking. Following this philosophy might well produce what every regulator has urged for many years — a major banking presence that would compete against predatory and unregulated services to attract the 53 million unbanked Americans. Because at least two-thirds of customers at unregulated subprime institutions are minorities, diversifying leadership would provide banks the capability to reach this untapped market.

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