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. 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. 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. 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. 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.” 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. 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. 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. 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. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Summary: 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. 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.