Failing to Advance Diversity and Inclusion

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [June 9, 2015], the Securities and Exchange Commission failed to take meaningful steps to advance diversity and inclusion in the financial services industry, as required by Section 342 of the Dodd-Frank Act. Accordingly, I have no choice but to dissent from the Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies (the “Final Policy Statement”) that was issued today by the SEC and a number of other financial regulators.

The financial services industry has a long history of failing to promote diversity in its workforce. The industry has consistently failed to recruit and retain a diverse workforce over the years, and the need is particularly acute at the executive and senior management levels. This lack of diversity has persisted despite the mounting evidence that diversity makes the American workforce more creative, more diligent, and more productive—and, thus, makes U.S. companies more profitable.

The persistent lack of diversity prompted Congress to mandate that the federal government play a more active role in advancing the goals of diversity in the financial services industry. Specifically, Congress included Section 342 in the Dodd-Frank Act of 2010 to establish an Office of Minority and Women Inclusion (“OMWI”) at various federal financial regulators (the “Agencies”) and, among other things, required them to develop standards to assess the diversity policies and practices of entities that they regulate. As Members of Congress have made clear, the Agencies are required to implement Section 342 in a way that advances the Congressional goal of improving diversity and inclusion.

Let’s look at the facts. The most recent data from the U.S. Equal Employment Opportunity Commission (“EEOC”) shows a severe underrepresentation of minorities and women at the executive and senior level positions in the financial services industry. For example, although white men constitute only 31% of the total workforce, they account for 64% of the executive and senior level positions. In contrast, minorities and women constitute 30% and 59% of the total workforce, respectively, but account for only 10% and 29% of the executive and senior level positions, respectively. Significantly, African-Americans constitute 12% of the total workforce, but account for only 2.5% of the executive and senior level positions. Similarly, Hispanics constitute 8% of the total workforce, but account for only 3% of the executive and senior level positions. Moreover, while there is limited data on LGBT representation in executive and senior level positions, or even representation in the workforce generally, at least one report found that 74% of LGBT women that could potentially rise to executive leadership positions in many companies, including companies in the financial services industry, seemed to have experienced more discrimination because of the “double jeopardy” of gender and sexual orientation.

Clearly, there is much room for improvement, to say the least. Improving diversity in the financial services industry requires board members and senior corporate executives to demonstrate a strong commitment to diversity, something that the statistics show is not occurring.

Diversity and inclusion provide enormous benefits to the American workforce. Various studies show that businesses that promote diversity also realize significant increases in workforce productivity and job performance, which drives economic growth. In addition, promoting diversity enables businesses to tap into a growing workforce that is becoming more diverse.

Despite known benefits, however, we are still nowhere near where we need to be on diversity and inclusion. For example, let’s consider gender diversity. One research paper shows that the representation of women in top management led to an average increase of $42 million in firm value. Moreover, companies with women on their boards tend to deliver higher returns on equity (“ROE”) than all-male boards. Yet, we are still seeing obstacles to greater gender diversity persist, such as cultural biases, workplace-related biases, and structural or policy issues.

This brings us back to Section 342 of the Dodd-Frank Act. In 2013, in seeking comments on the implementation of Section 342, the Commission and the other Agencies issued a Proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies and Request for Comment (the “Proposed Policy Statement”). The Proposed Policy Statement asked a number of questions concerning the establishment of certain standards in the areas of organizational commitment to diversity, workforce profile, employment practices, procurement, business practices, and organizational transparency. The Proposed Policy Statement, however, proposed a purely volitional approach to assessing diversity policies and practices at regulated entities. At the time, I issued a public statement voicing my concerns about this approach. In particular, I was concerned that, under the proposed approach, the goal of increasing workforce diversity would rely solely on voluntary self-assessments and disclosures by regulated entities, and that, without a requirement to actually do anything, companies would not be incentivized to conduct assessments or otherwise address diversity-related issues.

During the two-year comment period, the Agencies received more than 200 comment letters from a wide variety of groups—including Members of Congress, civil rights organizations, community-based organizations, professional associations, consumer advocacy groups, banking organizations, employer associations, financial services trade organizations, banks, credit unions, and individuals. Many provided detailed comments and information on all aspects of the Proposed Policy Statement, including whether self-assessments are effective; whether self-assessments should be voluntary; whether assessments should be conducted by the Agencies; whether the standards would be effective; whether disclosure of data should be mandatory; whether data should be reported; and whether “diversity” should be defined.

The comments received reflect the complexity and importance of diversity and inclusion in the financial services industry, and it is telling that a large number of commenters, including Members of Congress who drafted Section 342, supported mandatory assessments and public disclosure.

Today, in issuing the Final Policy Statement, the Commission and the Agencies disregard and dismiss the vast majority of comments received from Members of Congress, civil rights organizations, community-based organizations, professional associations, and consumer advocacy groups. These groups included the Americans for Financial Reform, the National Urban League, the U.S. Hispanic Chamber of Commerce, the Martin Luther King Jr. Civic Council, The Greenlining Institute, Howard University School of Law, and, notably, Members of Congress, several of whom were the architects of Section 342 of the Dodd-Frank Act. For example, the Final Policy Statement fails to address the following concerns raised by commenters:

  • First, that allowing the voluntary disclosure of information by regulated entities is prohibited under Section 342 of the Dodd-Frank Act because it renders the statute ineffective and fails to achieve the Congressional intent of advancing diversity in the financial services industry.
  • Second, that voluntary self-assessments are ineffective because, without specific obligations and requirements, few regulated entities will conduct assessments or share assessment information.
  • Third, that failing to include standard criteria and uniform metrics for assessing the diversity and inclusion practices at regulated entities will make it very difficult, if not impossible, to assess diversity at different firms.
  • Fourth, that a purely voluntary requirement, and one without a reporting timeline, lacks transparency and accountability. Firms can therefore decide not to conduct any assessment and treat any OMWI oversight as optional or irrelevant.
  • Fifth, that OMWI would fail to satisfy its Congressional mandate under Section 342 by simply monitoring voluntary reports that may or may not be filed by regulated entities.
  • Finally, that a definition of “diversity” that is too narrow would fail to accomplish the goals of Section 342. In fact, the Final Policy Statement’s definition of “diversity” excludes people with disabilities and excludes the entire LGBT community.

These are all important concerns that should have been addressed. However, the Agencies largely ignored these concerns, failed to explain the rationale for the policy choices they made in the Final Policy Statement, and left too many questions unanswered.

In addition, the Final Policy Statement described statements made by certain commenters—presumably in an effort to justify its policy choices—but failed to identify those commenters. As such, the public is unable to ascertain the credibility of the commenters, the rationale of the policy choices being advanced, and the justification for the Agencies’ policy choices. This calls into question the reasons for soliciting public comments in the first place (i.e., what is the purpose of soliciting comments when they are not going to be acknowledged and addressed publicly?) and how the Agencies considered those comments. The public demands more accountability and transparency. Importantly, as a federal administrative agency that promotes “full and fair disclosure” in the capital market, the SEC has to uphold its public responsibility of making policy choices that are transparent, well-reasoned, fact-based, and not arbitrary.

Obviously, the SEC can, and must, do better. Nothing in Section 342 requires the SEC to act in tandem with other Agencies in adopting a weak Final Policy Statement. And nothing in Section 342 requires voluntary self-assessments. Simply issuing guidance that relies on a purely voluntary process and hoping that it will work over time will only cause further delay in advancing diversity and inclusion in the financial services industry.

Many financial service companies, as well as many publicly-owned companies, have long known about the lack of diversity in their companies, yet have not been proactive in addressing the obvious deficiency. For example, it’s long been acknowledged that women and minorities have been vastly underrepresented in corporate leadership and corporate boards, yet there has been little progress in increasing their numbers. Again, let’s look at the facts. While the representation of Caucasian men in corporate boardrooms remained unchanged at around 70% between 2004 and 2012, the number of women and minority board members increased only 3.3% during the same period—from 28.8% to 32.1%. Likewise, diversity and inclusion remains an issue at the senior executive levels. According to one research paper, for example, only 1% of our nation’s Fortune 500 CEOs were African-Americans and only 4% were women.

For these reasons, the “voluntary, and let’s hope for the best” approach taken by the Final Policy Statement is woefully inadequate and fails to meet Congressional mandate. Thus, a good opportunity to have real positive impact on diversity and inclusion has been squandered. As implemented, Section 342 will be reduced to a mere exhortation to regulated entities, many of which have not shown a commitment to achieve diversity in their companies.

While there are some who believe that Section 342 did not provide the Agencies with authority to require mandatory assessments by regulated entities, there are other more compelling arguments supporting those who take the opposite view. In fact, many commenters—including eight Members of Congress who drafted Section 342—have provided strong arguments that Section 342 requires mandatory assessments and disclosures. Commenters have argued that nothing in Section 342 precludes the Agencies from adopting robust and mandatory standards that require assessments and disclosures. Unfortunately, the Final Policy Statement does not shed light on why these views were dismissed, except to say that the Agencies “interpret the statutory language as ambiguous with respect to who should conduct the assessments or the form that assessments should take.” In this instance, even if one accepts the existence of the “ambiguity,” it is disappointing that it was used as an excuse to do as little as possible.

Clearly, the Agencies could have taken a different approach. For example, even if voluntary self-assessments were used, a mechanism could have been included in the standards that would provide for the identification of regulated entities that failed to conduct self-assessments. In this regard, the companies might have an incentive to actually undertake self-assessments, and the failure to do so could be viewed by the OMWI Directors and the public as a measure of the entities’ commitment to diversity and inclusion. In addition, the SEC could have gone its own way by engaging in rulemaking using its powers under the federal securities laws—in conjunction with Section 342—and issuing standards requiring assessments by regulated entities, requiring that the results of these assessments be disclosed to the SEC, and requiring that the results also be made public (either individually or as part of an aggregated report).

Given the approach taken by the Final Policy Statement in implementing Section 342, future policy change to the demographics in the financial services industry now relies on the mere hope that companies will act in good faith to use the standards outlined in the Final Policy Statement and conduct effective self-assessments, and to use the information derived from these self-assessments to promote diversity and inclusion. I hope that they do, but the track record of many companies in the financial services industry belies that hope.

In the end, the Agencies have chosen to do what is convenient for the companies, rather than doing the right thing for the long-term benefit of our country. When faced with a choice between doing what is convenient and doing what is right, we must choose to do what is right. As Dr. Martin Luther King, Jr., once said, “There comes a time when one must take the position that is neither safe nor politic nor popular, but he must do it because conscience tells him it is right.”

Unfortunately—and regrettably—the Final Policy Statement failed to meet the goals of Section 342, and, thus, missed an opportunity to advance the cause of diversity and inclusion.

Accordingly, I must respectfully dissent.

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