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House Financial Services Subcommittee Hearing on the Business Case for Diversity and Inclusion

House Financial Services Subcommittee on Diversity & Inclusion

“Good for the Bottom Line: A Review of the Business Case for Diversity and Inclusion”

Wednesday, May 1, 2019

Key Topics & Takeaways

  • Retention: Budson noted that often promotion decisions are based on conversations about “who’s ready” rather than an evidence-based framework that is transparent. Budson also said that often when diverse talent is recruited, they are not always given the same opportunities for assignments or pathways to promotion, saying an evidence-based system could help ensure new employees have opportunities for advancement. Budson explained that businesses need to create environments where all employees can meaningfully contribute, saying that women leave because they do not feel valued, and value is communicated though pay, status, flexibility, and who is hired and promoted.
  • Impact on Business Performance: Von Hoene said that his company realized that promoting diversity was not only the right thing to do, it was also the right business thing to do. He said they have seen the progress made, and it will be the thing to make a company more profitable, more successful, and the key is delivering that message “again and again.”
  • Measuring Success: Asked how success can be measured, Guzzo said measures of success have to do with two types of outcomes: workforce outcomes including who is advancing and their pay, and business outcomes including how diversity is affecting business results, customer retention, and customer service.

Witnesses

Opening Statements

Chairwoman Joyce Beatty (D-Ohio)

In her opening statement, Beatty said this “trailblazing hearing” speaks to the foundation of why the Subcommittee exists, because diversity and inclusion are a “business imperative” and that those who embrace it will be more likely to prosper. Beatty cited a study by McKinsey & Co. that found that companies in the top 25 percent for gender and ethnic diversity on executive teams were 21 percent and 33 percent more likely to outperform on profitability, while companies in the bottom 25 percent were 29 percent less likely to achieve “about average” profitability. Beatty noted it is important to remember that diversity and inclusion goes “far beyond” race and gender, and there are tangible ways that diversity leads to greater financial performance across corporate America.

Ranking Member Ann Wagner (R-Mo.)

In her opening statement, Wagner said there is a “direct correlation” between diversity and profitability, and that diversity can drive productivity, innovation, and good decision-making. Wagner added that increased diversity can also lead to a growth in profits, attracting a talented, diverse workforce, as well as attract more investment. Wagner said promoting diversity and inclusion is not just good for business, it is also “the right thing to do,” adding that it is right for businesses to reflect the diverse makeup of the country. Wagner said that companies must work to change their culture and environments from within, and that changing how a company treats and embraces women and minorities must be driven by active engagement by company leadership.

Testimony

Rick Guzzo, Senior Leader, Workforce Strategy, Mercer

In his testimony, Guzzo noted that Mercer has worked with hundreds of companies, both in the U.S. and globally, on enhancing their diversity initiatives and has seen the importance of diversity rise higher on the business agenda. Guzzo said the business value of diversity has many aspects, including the importance of reputation, the perspectives of investors who are increasingly focusing on environmental, social, and governance (ESG) matters, and that there is real, tangible evidence that well-managed diversity practices contribute to business success. Guzzo said the story is “not a simple one,” and that what types of diversity and what measures of performance are being examined. He added that what is a best practice for one employer may not work at another, and analytics can reveal what practices work best in what circumstances. Guzzo noted the financial services pipeline initiative, a Chicago-based collaboration working to increase the representation of African Americans and Latinos at all levels within the industry and increase cultural competence, adding that although there are many challenges on the road to greater diversity, progress is being made.

Victoria Budson, Co-Director, Women and Public Policy Program, Kennedy School, Harvard University

In her testimony, Budson said that for America to be most competitive in the global marketplace, we need to draw on our full talent pool, noting that by 2040, every major city in the U.S. is predicted to be majority minority. Budson said that American women today are more highly educated than their male counterparts, but the financial services industry has yet to fully leverage this talent, and while there may be many women in entry-level positions, their retention and promotion has not been maximized. Budson said that gender and other forms of diversity can benefit the financial services industry, noting that studies show heterogeneous teams solve problems and catch errors better than homogenous ones. She added that divergent views and life experiences mean diverse teams are more likely to review information more carefully, remain objective, and reexamine the facts, leading to the creation of novel solutions, greater innovation, and higher collective intelligence. She continued that in the financial services context specifically, diverse teams have been shown to price stocks more accurately, meaning they are less likely to create a false bubble. Budson noted that when women have a greater labor force attachment, the economy grows, and that with more women in the workforce, wage growth continues for both women and men.

Adrienne Trimble, President, National Minority Supplier Development Council

In her testimony, Trimble said diversity and inclusion already has a concrete, specific, and strategic meaning, and it would be a mistake to assume that it is today’s form of affirmative action, which it is “not at all.” Trimble said diversity and inclusion makes businesses more profitable and efficient and has a clear impact on a corporation’s bottom line. Trimble said that it is more important than ever that all Americans have a stake in the economy that will support them, for every race, ethnicity, and gender. Trimble noted that diversity and inclusion strategies also transform the approach to the consumer, offering best ways to develop products and create disposable and discretionary income in more communities. She noted that increased diversity in leadership teams leads to higher revenue, and the best diversity strategies take a holistic view of the business, adding that the CEOs have to drive these initiatives within their corporations. Trimble also noted it is urgently important to address challenges, such as access to capital for minority firms who struggle to get the capital needed to grow and sustain their businesses.

William Von Hoene, Jr., Chief Strategy Officer, Exelon

In his testimony, Von Hoene discussed the diversity and inclusion strategies Exelon has undertaken, saying their commitment to diversity and inclusion has been “invaluable” in achieving positive outcomes, including an increase in shareholder value of 120 percent. Von Hoene said their workforce possesses a wide array of valuable skills because their people possess a wide variety of perspectives, backgrounds, ideas and connections to the diverse world in which they operate. He added that their commitment to diversity and inclusion has included tracking their diversity internally against specific metrics; holding officers accountable for diversity; recognizing the importance of diversity in senior leadership; pursuing diverse suppliers of goods and services; and a “zealous” pursuit of diversity with professional services providers, including banks and money managers.

Rory Verrett, Founder and Managing Partner, Protégé Search

In his testimony, Verrett said diversity and inclusion are “vital” to the competitiveness of American companies. He said the reasons companies are more successful the more diverse and inclusive they are is because diversity helps companies become the fullest, most successful version of themselves, helps companies outperform their competitors, and allows companies to better solve the problems they face. He explained five core principles which should guide any diversity and inclusion strategy: the diversity strategy must have the support of the CEO and board, with the requisite budget and personnel necessary to execute an enterprise-wide strategy; the strategy must be linked to individual and group performance standards and be tied to executive compensation; companies have to move beyond diversity on candidate slates and mandate diversity on interview teams, and executive search firms must be held accountable for the diversity of candidate slates they submit to their corporate clients; companies must be transparent about hiring rates, promotion rates, compensation, and advancement to senior management by employees of color and women; and companies must harness the latent entrepreneurial talent of their diverse staff by unleashing these high potential professionals to help solve the enterprise’s toughest challenges and help seize the company’s greatest opportunities.

Question & Answer

Best Practices

Wagner asked the witnesses to discuss how businesses can actively implement diversity strategies, what best practices have worked for companies, and how the financial services industry compares to others. Guzzo explained that while financial services has more favorable diversity than some industries, it has less favorable diversity than others, and each industry faces unique challenges. Guzzo said hiring is not enough, and companies must look past hiring to determine whether the environment is one in which diverse talent can thrive. Von Hoene said that mentorship and sponsorship programs have been effective, as have flexible work schedules, paid family leave, and training programs as all levels.

Retention

Numerous members asked questions related to the retention and upward mobility of diverse talent. Verrett said that many companies underappreciate the difficult journey women and people of color have in corporate America, including that they are the least likely to be mentored, sponsored, or promoted, saying that having the right data on the engagement of those employees is important. Verrett said it is important to tie the promotion of women and people of color to executive compensation, saying that “what gets measured will get done.” Budson noted that often promotion decisions are based on conversations about “who’s ready” rather than an evidence-based framework that is transparent. Budson also said that often when diverse talent is recruited, they are not always given the same opportunities for assignments or pathways to promotion, saying an evidence-based system could help ensure new employees have opportunities for advancement.

Asked about areas where women are held back in the workplace, Budson replied that women do not opt out, as is the common narrative, but rather they “get fed up.” Budson explained that businesses need to create environments where all employees can meaningfully contribute, saying that women leave because they do not feel valued, and value is communicated though pay, status, flexibility, and who is hired and promoted.

Impact on Business Performance

Asked about the impact of diversity on business performance, Von Hoene said that his company realized that promoting diversity was not only the right thing to do, it was also the right business thing to do. He said they have seen the progress made, and it will be the thing to make a company more profitable, more successful, and the key is delivering that message “again and again.”

Measuring Success

Asked how success can be measured, Guzzo said that diversity has different meanings for different employers, but always refers to issues of representation, whether it be gender, ethnicity, age, or other metrics. Guzzo said measures of success have to do with two types of outcomes: workforce outcomes including who is advancing and their pay, and business outcomes including how diversity is affecting business results, customer retention, and customer service.

Small Businesses

Asked how diversity strategies can be tailored for small businesses, Von Hoene said one size does not fit all, and what can be implemented at a large company cannot always be replicated at a small one, but the same principles apply. He said in some ways, a smaller company devoted to this issue would have some advantages because they can devote personal attention and customize the work to make someone feel comfortable, allowing a sense of warmth and receptivity that would be valuable. Verrett added that it is easier to attract a broad array of talented individuals if you start at the beginning with a diverse workforce, saying that millennials are choosing to work for diverse companies over those that are not diverse. Trimble said there are opportunities for small businesses, as they have the flexibility to select their leadership team and can therefore hire more diverse leaders. Budson noted there are many tools small businesses can use, including building partnerships with student organizations and using talent management firms who specialize or are known to do a good job in this area. She said companies can also do things internally, such as covering the name or school on an application under consideration to remove bias in hiring. She also noted that small businesses can demonstrate their commitment by moving the interview site into the communities where they want to engage.

Importance of Leadership

Asked about the importance of leadership commitment to diversity, Budson said when looking at the issue of diversity, a “tremendous” amount of importance is about leadership. She said tying diversity goals to compensation is invaluable. Trimble said that scorecards for leaders, ties to compensation, has been very effective, because no leader wants to be at the bottom in performance measurement.

For more information on this hearing, please click here.