Financial Services Industry: Overall Trends in Management-Level Diversity and Diversity Initiatives, 1993-2004
Published: 2006-07-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A July 2004 congressional hearing raised concerns about the lack of diversity in the financial services industry, particularly in key management positions. Some witnesses noted that these firms (e.g., banks and securities firms) had not made sufficient progress in recruiting minorities and women at the management level. Others raised concerns about the ability of minority-owned businesses to raise debt and equity capital. At the request of the House Financial Services Committee, GAO was asked to provide a report on overall trends in management-level diversity and diversity initiatives from 1993 through 2004. This testimony discusses that report and focuses on (1) what the available data show about diversity at the management level, (2) the types of initiatives that the financial services industry has taken to promote workforce diversity and the challenges involved, and (3) the ability of minority- and women-owned businesses to obtain capital and initiatives financial institutions have taken to make capital available to these businesses. For our analysis, we analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and federal agencies. GAO makes no recommendations at this time.
section_title: What GAO Found
paragraphs: 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 overall increased from 11.1 percent to 15.5 percent. 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 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives face are recruiting and retaining minority candidates, as well as gaining the "buy-in" of key employees, such as the middle managers who are often responsible for implementing such programs. Research reports suggest that minority- and women-owned businesses have difficulty obtaining access to capital for several reasons, such as that these businesses may be concentrated in service industries and lack assets to pledge as collateral. Some studies suggest that lenders may discriminate, but proving such an allegation is complicated by the lack of available data. However, some financial institutions, primarily commercial banks, said that they have developed strategies to serve minority- and women-owned businesses. These strategies include marketing existing financial products specifically to minority and women business owners.

section_title: Letter
paragraphs: I am pleased to be here today to discuss our work on two important  issues: workforce diversity in the financial services industry and access to  capital for minority- and women-owned businesses. Two years ago, this  subcommittee held a hearing that raised concerns about the lack of  diversity in the financial services industry, particularly in key management  positions. As you may recall, some witnesses noted that these firms— banks and securities firms, for example—had not made sufficient progress  in recruiting minorities and women at the management level. Others  expressed concerns about the ability of minority-owned businesses to  raise debt and equity capital.
My remarks are based on our report that is being released today, which we  prepared at the request of the Chairman and Ranking Minority Member of  the full committee, the Chairman and Ranking Minority Member of the  Subcommittee on Oversight and Investigations, and Representative David  Scott.  Specifically, I will discuss (1) what the available data show  about diversity at the management level in the financial services industry  from 1993 through 2004, (2) the types of initiatives that the financial  services industry and related organizations have taken to promote  workforce diversity and the challenges involved, and (3) the ability of  minority- and women-owned businesses to obtain capital and initiatives  financial institutions have taken to make capital available to these  businesses.
For our analysis, we used the Equal Employment Opportunity  Commission’s (EEOC) Employer Information Report (EEO-1) data on  financial services firms with 100 or more employees. We also reviewed  publicly available information, including reports, and interviewed officials  from a variety of financial services firms, including commercial banks,  securities firms, and private equity/venture capital organizations, as well  as representatives from industry trade organizations and federal agencies.
From 1993 through 2004, overall workforce 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. EEO-1 data show that management-level  representation by minority women and men overall increased from 11.1  percent to 15.5 percent. 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 4.0 percent, and American  Indians from 0.2 percent to 0.3 percent. Representation by white women  remained constant at slightly more than one-third during this period, while  representation by white men declined from 52.2 percent to 47.2 percent.  Depository institutions, such as commercial banks, and insurance  companies generally were more diverse at the management level than  securities firms. In addition, according to the 2004 EEO-1 data, minorities  held 13.5 percent and white women held 32.4 percent of all “officials and  managers” positions in the accounting industry.
Although financial services firms and trade groups have initiated programs  to increase workforce diversity, these initiatives face challenges that may  help explain why overall diversity at the management level has not  changed substantially. Officials at financial services firms said that  diversity was an important goal and that top leadership was committed to  recruiting and retaining minority and women candidates. Some financial  services firms have established scholarship and internship programs or  partnered with groups that represent minority professionals. Officials from  a few firms told us that they had begun linking managers’ compensation to  their performance in promoting workforce diversity, and some firms had  developed indicators (e.g. representation by minorities and women in key  positions) to measure progress in achieving workforce diversity. Industry  officials said that among the challenges these initiatives face are recruiting  and retaining minority candidates, as well as gaining the “buy-in” of key  employees, such as the middle managers who are often responsible for  implementing such programs.
Research reports and discussions with financial services firms and  relevant trade groups suggest that minority- and women-owned businesses  generally have difficulty obtaining access to capital in conventional  financial markets. A 2004 report by the U.S. Department of Commerce’s  Minority Business Development Agency (MBDA) stated that minority- owned businesses may have difficulty obtaining capital because they are  often concentrated in service industries and lack sufficient assets to  pledge as collateral. Some studies suggest that lenders may discriminate  in deciding whether to make loans to minority businesses, but proving  such an allegation is complicated by the lack of available data. In  particular, the Federal Reserve’s Regulation B prohibits financial  institutions from requiring information on race and gender from applicants  for nonmortage credit products. Some federal financial regulators have  stated that removing the prohibition would allow them to better monitor  and enforce laws prohibiting discrimination in lending. Some financial  institutions, primarily commercial banks, said that they have developed  strategies to serve minority- and women-owned businesses. These  strategies include marketing existing financial products specifically to  minority and women business owners.
subsections: section_title: Background
paragraphs: We defined the financial services industry to include the following sectors:    depository credit institutions, which include commercial banks, thrifts  (savings and loan associations and savings banks), and credit unions;   holdings and trusts, which include investment trusts, investment  companies, and holding companies;   nondepository credit institutions, which extend credit in the form of loans,  include federally sponsored credit agencies, personal credit institutions,  and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and  organizations (e.g., broker-dealers) that bring together buyers and sellers  of securities and commodities, manage investments, and offer financial  advice; and the insurance sector, including carriers and insurance agents, which  provides protection against financial risks to policyholders in exchange for  the payment of premiums.
Additionally, the financial services industry is a major source of  employment in the United States. According to the EEO-1 data, the  financial services firms we reviewed for this testimony, which have 100 or  more staff, employed nearly 3 million people in 2004.  Moreover, according  to the U.S. Bureau of Labor Statistics, employment in management and  professional positions in the financial services industry was expected to  grow at a rate of 1.2 percent annually through 2012. Finally, a recent U.S.  Census Bureau report based on data from the 2002 Economic Census  stated that, between 1997 and 2002, Hispanics in the United States opened  new businesses at a rate three times faster than the national average.
section_title: Diversity in the Financial Services Industry at the Management Level Did Not Change Substantially between 1993 and 2004
paragraphs: Overall EEO-1 data do not show substantial changes in diversity at the  management level and suggest that certain financial sectors are more  diverse at this level than others. Figure 1 shows that overall management- level representation by minorities increased from 11.1 percent to 15.5  percent from 1993 through 2004. 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 4.0 percent and  American Indians from 0.2 to 0.3 percent. Management-level  representation by white women was largely unchanged at slightly more  than one-third during the period, while representation by white men  declined from 52.2 percent to 47.2 percent.
EEO-1 data may actually overstate representation levels for minorities and  white women in the most senior-level positions, such as Chief Executive  Officers of large investment firms or commercial banks, because the  category that captures these positions—”officials and managers”—covers  all management positions. Thus, this category includes lower level  positions (e.g., assistant manager of a small bank branch) that may have a  higher representation of minorities and women.  In 2007, EEOC plans to  use a revised form for employers that divides this category into  “executive/senior-level officers and managers” and “first/mid-level  officials,” which could provide a more accurate picture of diversity among  senior managers.
As shown in figure 2, EEO-1 data also show that the depository and  nondepository credit sectors, as well as the insurance sector, were  somewhat more diverse at the management level than the securities and  holdings and trust sectors. In 2004, minorities held 19.9 percent of  management-level positions in nondepository credit institutions, such as  mortgage bankers and brokers, but 12.4 percent in holdings and trusts,  such as investment companies.
You also asked that we collect data on the accounting industry. According  to the 2004 EEO-1 data, minorities held 13.5 percent, and white women  held 32.4 percent of all “officials and managers” positions in the  accounting industry.
section_title: Initiatives to Promote Workforce Diversity in the Financial Services Industry Face Challenges
paragraphs: Minorities’ rapid growth as a percentage of the overall U.S. population and  increased global competition have convinced some financial services firms  that workforce diversity is a critical business strategy. Officials from the  firms with whom we spoke said that their top leadership was committed to  implementing workforce diversity initiatives, but noted that they faced  challenges in making such initiatives work. In particular, they cited  ongoing difficulties in recruiting and retaining minority candidates and in  gaining employees’ “buy-in” for diversity initiatives, especially at the  middle management level.
subsections: section_title: Financial Services Firms Have Implemented a Variety of Diversity Initiatives
paragraphs: Since the mid-1990s, some financial services firms have implemented a  variety of initiatives designed to recruit and retain minority and women  candidates to fill key positions. Officials from several banks said that they  had developed scholarship and internship programs to encourage minority  students to consider careers in banking. Some firms and trade  organizations have also developed partnerships with groups that represent  minority professionals and with local communities to recruit candidates  through events such as conferences and career fairs. To help retain  minorities and women, firms have established employee networks,  mentoring programs, diversity training, and leadership and career  development programs.
Officials from some financial services firms we contacted, as well as  industry studies, noted that that financial services firms’ senior managers  were involved in diversity initiatives. For example, according to an official  from an investment bank, the head of the firm meets with every minority  and female senior executive to discuss his or her 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.
A few firms have also developed performance indicators to measure  progress in achieving diversity goals. These indicators include workforce  representation, turnover, promotion of minority and women employees,  and employee satisfaction survey responses. 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.
section_title: Several Challenges May Have Affected the Success of Workforce Diversity Initiatives in the Financial Services Industry
paragraphs: The financial services firms and trade organizations we contacted that had  launched diversity initiatives cited a variety of challenges that may have  limited the success of their efforts. First, officials said that the industry  faced ongoing challenges in recruiting minority and women candidates.  According to industry officials, the industry lacks a critical mass of  minority employees, especially at the senior levels, to serve as role models  to attract and retain other minorities. Available data on minority students  enrolled in Master of Business Administration (MBA) programs suggest  that the pool of minorities, a source that may feed the “pipeline” for  management-level positions within the financial services industry and  other industries, is relatively small. In 2000, minorities accounted for 19  percent of all students enrolled in MBA programs in accredited U.S.  schools; in 2004, that student population had risen to 23 percent. Financial  services firms compete for this relatively small pool not only with one  another but also with firms from other industries.
Evidence suggests, however, that the financial services industry may not  be fully leveraging its “internal” pipeline of minority and women  employees for management-level positions. As shown in figure 3, there are  job categories within the financial services industry that generally have  more overall workforce diversity than the “official and managers”  category, particularly among minorities.  For example, minorities held 22  percent of “professional” positions in the industry in 2004 as compared  with 15 percent of “officials and managers” positions.  According to a  recent EEOC report, the professional category represented a possible  pipeline of available management-level candidates. The EEOC states that  the chances of minorities and women (white and minority combined)  advancing from the professional category into management-level positions  is lower when compared with white males.
Many officials from financial services firms and industry trade groups  agreed that retaining minority and women employees represented one of  the biggest challenges to promoting workforce diversity. One reason they  cited is that the industry, as described previously, lacks a critical mass of  minority men and women, particularly in senior-level positions, to serve as  role models. Without a critical mass, the officials said that minority or  women employees may lack the personal connections and access to  informal networks that are often necessary to navigate an organization’s  culture and advance their careers.  For example, an official from a  commercial bank we contacted said he learned from staff interviews that  African-Americans believed that they were not considered for promotion  as often as others partly because they were excluded from informal  employee networks needed for promotion or to promote advancement.
In addition, some industry officials said that achieving “buy-in” from key  employees such as middle managers could be challenging. Middle  managers are particularly important to diversify institutions because they  are often responsible for implementing key aspects of diversity initiatives  and for explaining them to other employees.  However, the officials said  that middle managers may be focused on other aspects of their  responsibilities, such as meeting financial performance targets, rather than  the importance of implementing the organization’s diversity initiatives.   Additionally, the officials said that implementing diversity initiatives  represents a considerable cultural and organizational change for many  middle managers and employees at all levels.  An official from an  investment bank told us that the bank has been reaching out to middle  managers who oversee minority and women employees by, for example,  instituting an “inclusive manager program.”
section_title: Minority- and Women- Owned Businesses Often Face Difficulties in Obtaining Capital
paragraphs: Studies and reports, as well as interviews we conducted, suggest that  minority- and women-owned businesses face challenges obtaining bank  credit in conventional financial markets for several reasons, including  business characteristics (e.g., small firm size) and the possibility that  lenders may discriminate. Some business characteristics may also limit the  ability of minority- and women-owned businesses to raise equity capital.  However, some financial institutions, primarily commercial banks, have  recently begun marketing their loan products and offering technical  assistance to minority- and women-owned businesses.
subsections: section_title: Business Characteristics May Affect Minority- and Women-Owned Businesses’ Access to Commercial Loans and Equity Capital
paragraphs: Reports and other research, as well as interviews we conducted with  commercial banks, including minority-owned banks and trade groups  representing minority- and women-owned businesses, highlight some of  the challenges these businesses may face in obtaining commercial bank  credit. For example, many minority-owned businesses are in the retail and  service sectors and may have few assets to offer as collateral. Further,  many of these businesses are relatively young and may not have an  established credit history. Many also are relatively small and often lack  technical expertise.
On the other hand, some studies suggest that lenders may discriminate  against minority-owned businesses. We reviewed one study that found  given comparable loan applications—by African-American and Hispanic- owned firms and white-owned firms—the applications by the African- American and Hispanic-owned firms were more likely to be denied.  However, assessing such alleged discrimination may be complicated by  limitations in data availability. The Federal Reserve’s Regulation B, which  implements the Equal Credit Opportunity Act, prohibits financial  institutions from requiring information on race and gender from applicants  for nonmortgage credit products. Although the regulation was initially  implemented to prevent such information from being used to discriminate  against certain groups, some federal financial regulators have stated that  removing the prohibition would allow them to better monitor and enforce  laws prohibiting discrimination in lending. Likewise, at least one bank  official noted that Regulation B limited the bank’s ability to measure the  success of its efforts to provide financial services to minority groups. We  note that under the Home Mortgage Disclosure Act (HMDA), lenders are  required to collect and report data on racial and gender characteristics of  applicants for mortgage loans. Researchers have used the HMDA data to  assess potential mortgage lending discrimination by financial institutions.
Research also suggests that some business characteristics (e.g., limited  technical expertise) that may affect the ability of many minority- and  women-owned businesses to obtain bank credit, as discussed earlier, may  also limit their capacity to raise equity capital.  Although venture capital  firms may not have traditionally invested in minority-owned businesses, a  recent study suggests that firms that do focus on such entities can earn  rates of return comparable to those earned on mainstream private equity  investments.
section_title: Some Commercial Banks Have Developed Programs for Minority- and Women- Owned Businesses
paragraphs: Officials from some financial institutions we contacted, primarily large  commercial banks, told us that they are reaching out to minority- and  women-owned businesses by marketing their financial products to them  (including in different languages), establishing partnerships with relevant  trade and community organizations, and providing technical assistance.  For example, officials from some banks said that they educate potential  business clients by providing technical assistance through financial  workshops and seminars on various issues, such as developing a business  plans and obtaining commercial bank loans. While these efforts take time  and resources, the officials we spoke with indicated that their institutions  recognize the benefits of tapping this growing segment of the market.
Madam Chairwoman, this concludes my prepared statement. I would be  pleased to respond to any questions you or other Members of the  Subcommittee may have.
section_title: Staff Contact and Acknowledgments
paragraphs: For further information about this testimony, please contact Orice M.  Williams on (202) 512-8678 or at williamso@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. Individuals making key contributions to  this testimony include Wesley M. Phillips, Assistant Director; Emily  Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino;  Robert Pollard; LaSonya Roberts; and Bethany Widick.
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