Can Voluntary Standards Diversify the Financial Sector?

The banks might be upping their diversity game when it comes to tellers and branch managers, but financial executives are still mostly white and male. (Photo by Carlos Delgado, courtesy of Wikimedia Commons)

Diversity leaders better hope Wall Street feels like volunteering.

On June 10, the diversity and inclusion standards outlined in Section 342 of the Dodd Frank Act went into place at six federal agencies. Because the section includes no enforcement mechanism, the evaluation and reporting processes it calls for are interpreted as voluntary rather than mandatory.

The standards aim to set guidelines in four areas: commitment to diversity, employment practices, supplier diversity and practices to promote transparency. Offices of Women and Minority Inclusion also formed within the six agencies involved, including the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Bureau of Consumer Financial Protection and the Securities and Exchange Commission.

The standards also affect the organizations they work with — in this case, the notoriously homogenous public financial sector’s employee base and suppliers.

Although banks have improved diversity in customer-facing employees, such as tellers and bank managers, their efforts lag at the top of the ladder, said Danielle Beavers, economic equality senior project manager at the Greenlining Institute, a research and policy organization.

“It’s so important to have diversity in decision-makers who are creating products, looking at policies and deciding where the organization is going to go as a whole,” she said.

As the United States becomes more diverse — the U.S. Census predicts that the majority of the U.S. population will be minorities by 2050 — financial organizations need to prepare to meet a diverse client base. To Beavers, leaving it up to the banks to decide if they want to participate won’t do enough to get them to recognize this fact.

“Having diverse practices and submitting that information has always been voluntary, and we’ve seen where that’s gotten us in a sector that’s still largely nondiverse,” she said, referring to how the Federal Reserve’s Office of Diversity and Inclusion reported in 2012 that only about 12 percent of economic industry executives are people of color.

But not everyone is skeptical at the voluntary approach. Brian Pedrow, partner at law firm Ballard Spahr, said organizations have started recognizing the affects diversity and inclusion have on innovation. More minority clients in the future also means more importance placed on seeing diverse leadership in the financial sector.

“When I’m asked by a client whether they should worry about this, I ask ‘Do you want to skip out on it when the rest of the industry doesn’t?’” Pedrow said. “‘We opted to ignore that’ won’t look good.”

A problem he does see, however, is in the way Section 342 encourages organizations to do self-assessments and submit the results yearly to the federal agencies. This could make public entities skittish because the reports could be made public knowledge through the Freedom of Information Act — a question not yet answered by the policy.

Because many of these organizations are traded on the stock market, they could see not just their reputations but also their bottom line hurt by fully disclosed diversity numbers, which is a risk they won’t want to take.

All of these unanswered questions and frustrations with the standards link to the concept’s newness.

“Diversity and inclusion has typically not been legally mandated, so this is really brand new,” Pedrow said, adding that the few times it has been mandated has been through transaction reviews to approve media company mergers. “Dodd Frank is a major foray into it — the dipping of the toe into the water.”