Financial Services Industry: Overall Trends in Management-Level Diversity and Diversity Initiatives, 1993-2008
Published: 2010-05-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic recovery of the country. The recent financial crisis has renewed concerns about the financial services industry's commitment to workforce diversity. This testimony discusses findings from a June 2006 GAO report (GAO-06-617), February 2008 testimony (GAO-08-445T), and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2008 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. To the extent possible, key statistics have been updated.
section_title: What GAO Found
paragraphs: EEOC data indicate that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008, and diversity in senior positions remains limited. In general, EEOC data show that management-level representation by minority women and men increased from 11.1 percent to 17.4 percent during that period. However, these EEOC data overstated minority representation at senior management levels, because the category includes mid-level management positions, such as assistant branch manager, that may have greater minority representation. In 2008, EEOC reported revised data for senior-level positions only, which showed that minorities held 10 percent of such positions compared with 17.4 percent of all management positions. The revised data also indicate that white males held 64 percent of senior positions in 2008, African-Americans held 2.8 percent, Hispanics 3 percent, and Asians 3.5 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 faced were recruiting and retaining minority candidates, and gaining the "buy-in" of key employees such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to revisit our June 2006  report and subsequent 2008 testimony on diversity in the management  level in the financial services industry and to discuss more recent  information that we have gathered on this important topic. As you know,  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.  In a 2005 report on diversity management, we stated that workforce  diversity could benefit organizations in a variety of ways—for example, by  allowing them to better meet the needs of a diverse customer base, reduce  the costs associated with employee turnover, and increase staff morale.  However, some in the diversity management arena have raised concerns  about the impact of the recent financial crisis on diversity initiatives in the  financial services industry, which provides key services necessary to help  restore growth and economic prosperity to the country. In hearings held  by the Oversight and Investigations Subcommittee in 2004, 2006, and 2008,  some witnesses stated that financial services firms—banks and securities  firms, for example—had not made sufficient progress in recruiting and  retaining minorities and women at the management level.
My testimony summarizes the key findings from our past work, which has  sought to collect, analyze, and report data and information that provide  insights into diversity in the financial services industry, and to provide  updated data where available. Specifically, I will discuss (1) what the  available data show about diversity at the management level in the  financial services industry from 1993 through 2008, and (2) the types of  initiatives that the financial services industry and related organizations  have taken to promote workforce diversity and the challenges involved in  these efforts.
To prepare our June 2006 report, we used the Equal Employment  Opportunity Commission’s (EEOC) Employer Information Report (EEO-1)  data on financial services firms with 100 or more employees for the period  from 1993 through 2004. The EEO-1 data provide information on  racial/gender representation for various occupations, including “officials  and managers,” for a broad range of industries, including financial  services. In updating our work in preparation for this testimony, we  collected and analyzed EEO-1 data for financial services firms with 100 or  more employees for 2005 through 2008. However, because EEOC began  using an updated system for classifying industries, we cannot combine the  two data sets to conduct a direct and continuous trend analysis of changes  in the representation of minorities and women at the management level.  Nevertheless, the 2005 through 2008 EEO-1 representation data for the  financial services industry can generally be compared with the EEO-1 data  for 2004 and prior years. For this testimony, we also used more complete  EEO-1 data that EEOC began to collect in 2007 for senior management  positions. EEOC, as described in this testimony, began to report data  specifically for senior management positions rather than combining the  data with data for mid-level management positions as had been the  reporting practice prior to 2008. Our past work also involved reviewing  reports on the state of workforce diversity and initiatives to increase the  representation of minority and women in financial services firms and  interviewing academics and officials from a variety of financial services  firms and trade and professional groups.
We performed these performance audits during the periods previously  described and updated this work in May 2010, in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
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  and 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 that provide  protection against financial risks to policyholders in exchange for the  payment of premiums.
The financial services industry is a major source of employment in the  United States. EEO-1 data showed that financial services firms we  reviewed for this work, which have 100 or more staff, employed over 3  million people in 2008. Moreover, according to the U.S. Bureau of Labor  Statistics, employment in the financial services industry was expected to  grow by 5 percent from 2008 to 2018. Employment in the credit  intermediation and related activities industry, which includes banks, is  expected to account for 42 percent of all new jobs within the finance and  insurance sector.
section_title: Diversity in the Financial Services Industry at the Management Level Did Not Change Substantially from 1993 through 2008, and Diversity in Senior Management Positions Is Limited
paragraphs: As discussed in our 2006 report, overall diversity in management-level  positions did not change substantially from 1993 through 2004.  Specifically, figure 1 shows that diversity in senior positions increased  from 11.1 percent to 15.5 percent during that period. Regarding the change  within specific groups, 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.
Revised EEO-1 data for the period 2005 through 2008 show an increase in  minority representation in management positions from 15.5 percent to 17.4  percent (fig. 2). This increase was largely driven by the growing  representation of Asians in management positions—an increase of nearly a  full percentage point from 4.7 percent to 5.5 percent during the period.
Meanwhile, African-American representation remained stable at about 6.3  percent from 2005 through 2008, while Hispanic representation increased  by half of a percentage point from 4.3 to 4.8 percent. Management-level  representation by white women and white men both decreased by about  one percentage point from 2005 through 2008.
However, before 2008 EEO-1 data generally overstated 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 captured these positions—”officials and  managers”—covered all management positions. Thus, this category  included lower-level positions (e.g., assistant manager of a small bank  branch) that may have a higher representation of minorities and women.  Recognizing this limitation, starting in 2007 EEOC revised its data  collection form for employers to divide the “officials and managers”  category into two subcategories: “executive/senior-level officers and  managers” and “first/midlevel officials.”
EEOC’s revised data, as reported in 2008, indicate that minorities  accounted for 10 percent of senior positions in the financial services  industry. As I discussed previously, the percentage in the broader data  category was 17.4 percent. Moreover, as shown in figure 3, white men  accounted for approximately 64 percent of senior-level management  positions. In contrast, African Americans held 2.8 percent of such senior  management positions, while Hispanics held 3.0 percent and Asians 3.5  percent.
section_title: Initiatives to Promote Workforce Diversity in the Financial Services Industry Face Challenges
paragraphs: Officials from the firms that we contacted for our previous work said that  their top leadership was committed to implementing workforce diversity  initiatives but noted that making such initiatives work was challenging. In  particular, the officials cited ongoing difficulties in recruiting and retaining  minority candidates and in gaining employees’ “buy-in” for diversity  initiatives, especially at the middle management level. Some firms noted  that they had stepped up efforts to help ensure a diverse workforce.  However, the recent financial crisis has raised questions about their  ongoing commitment to initiatives and programs that are designed to  promote workforce diversity.
subsections: section_title: Financial Services Firms Implemented a Variety of Diversity Initiatives
paragraphs: Minorities’ rapid growth as a percentage of the overall U.S. population, as  well as increased global competition, convinced some financial services  firms that workforce diversity was a critical business strategy. 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 had 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.
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 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 2007 industry trade group  study and some officials also noted that some companies were linking  managers’ compensation to their progress in hiring, promoting, and  retaining minority and women employees. However, the study found that  most companies reported that they still did not offer managers financial  rewards for improving diversity performance.
This study also found that firms, overall, have significantly increased  accountability for driving diversity results. For example, more firms  reported that they were holding managers accountable for improving  diversity. Performance reviews and management-by-objectives were the  top two methods for measuring managers’ diversity performance. Finally,  firms whose representation of women and minorities was above the  median for the survey group were considerably more likely to use certain  diversity management strategies and practices.
A few firms had 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: While financial services firms and trade groups we contacted had  launched diversity initiatives, officials from these organizations and other  information suggested 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. 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 a  limiting factor. In 2000, minorities accounted for 19 percent of all students  enrolled in MBA programs in accredited U.S. schools; in 2006, that student  population had risen to 25 percent. Financial services firms compete for  minorities in this pool not only with one another but also with firms from  other industries.
Fully leveraging the “internal” pipeline of minority and women  employees for management-level positions. As shown in figure 4, there  are job categories within the financial services industry that generally have  more overall workforce diversity than the “Executive/Senior Level  Officials & Managers” category, particularly among minorities. For  example, minorities held almost 25 percent of “professional” positions in  the industry in 2008, compared with 10 percent of “executive/senior level  officials & managers” positions. According to a 2006 EEOC report, the  professional category represented a possible pipeline of available  management-level candidates. The EEOC report stated that the chances  of minorities and women (white and minority combined) advancing from  the professional category into management-level positions were lower  than they were for white males.
Retaining minority and women candidates that are hired for key  management positions. Many industry officials said that financial services  firms lack 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 might 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.
Achieving the “buy-in” of key employees, such as middle managers.
Middle managers are particularly important to the success of diversity  initiatives because they are often responsible for implementing key  aspects of such initiatives and for explaining them to other employees.  However, some financial services industry 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 represented 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 had been reaching out to middle managers who  oversaw minority and women employees by, for example, instituting an  “inclusive manager program.”
In closing, with the implementation of a variety of diversity initiatives over  the past 15 years, diversity at the management level in the financial  services industry has improved but not changed substantially. Further,  EEOC’s new EEO-1 data provide a clearer view of diversity within senior  executive ranks, showing that diversity is lower than the overall industry  management diversity statistics had indicated. Initiatives to promote  management diversity at all levels within financial services firms face  several key challenges, such as recruiting and retaining candidates and  achieving the “buy-in” of middle managers. The impact of the recent  financial crisis on diversity also warrants ongoing scrutiny. Without a  sustained commitment to overcoming these challenges, management  diversity in the financial services industry may continue to remain largely  unchanged over time.
Mr. Chairman and Madam Chairwoman, this concludes my prepared  statement. I would be pleased to respond to any questions you or other  members of the subcommittees may have.
section_title: Contact and Acknowledgments
paragraphs: For further information about this testimony, please contact Orice M.  Williams Brown 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; John Fisher; Simin Ho; Marc Molino; and Linda  Rego.
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