Within a heartbeat of Janet Yellen’s nomination to be the first woman to chair the Federal Reserve Board, on October 23, federal financial regulators coincidentally issued a draft statement on standards for and assessments of workplace and contracting diversity among the companies that they regulate. Comments are due Dec. 24. [Update: Regulators announced an extension, on Dec. 20, to Feb. 7. Read the announcement.]
• Each company’s organizational commitment to diversity and inclusion.
• Their workforce profile as well as employment practices.
• Their procurement and business practices and supplier diversity.
• Their efforts to promote “transparency”—public visibility—of their organization’s diversity and inclusion.
This action was mandated under Dodd-Frank Act, Section 342. Under the section, the federal banking agencies, including each Federal Reserve District Bank, the Consumer Financial Protection Bureau, the Securities and Exchange Commission, and other agencies had to establish an Office of Minority and Women Inclusion. These agency-level offices have been working together to devise a joint set of standards that would implement the Act’s intent of encouraging greater diversity among covered companies of all sizes. ABA has been involved throughout the process and encouraged the agencies’ use of roundtable discussions with representatives of all affected parties to air issues.
Looking into regulatory mindset
Traditional bank regulators and CFPB issued a straightforward announcement of the proposed statement. However, one of SEC’s commissioners, Luis Aguilar, a Bush appointee, issued a lengthy statement of interest. A key portion of Aguilar’s statement: “The standards set forth in the Proposed Policy Statement and the accompanying assessments are needed, and should be fully implemented to facilitate a diverse workforce. Based on available data, it is apparent that entities regulated by the SEC can do much more in this area. The issue of ensuring opportunity for all regardless of race, gender, ethnicity, or national origin is a goal that I have worked toward for my entire career and, as the statistics demonstrate, there is still much more to be done.”
Aguilar noted that figures from reports submitted by covered companies to the U.S. Equal Employment Opportunity Commission (EEOC) indicate an imbalance.
“Minorities and women continue to be underrepresented at the executive- and senior-level positions in the financial sector,” Aguilar said. “According to this data, although white men constitute only 31% of the total workforce, they account for 65% of the executive- and senior-level positions. By contrast, minorities and women constitute 29% and 59% of the total workforce, respectively, but minorities and women account for only 10% and 29% of the executive- and senior-level positions.”
Overview of statement
The general concern that minorities and women have equal opportunity, even the expanded opportunity of affirmative action, isn’t new to banking. Many banking organizations already file reports with EEOC, and many banks fall under the rules of the Office of Federal Contract Compliance Programs (OFCCP), which oversees affirmative action requirements. Indeed, under this section of Dodd-Frank, the agencies themselves are directed to examine and, where necessary, improve, their own policies, practices, and results.
The regulators’ draft is extensive in scope. As sketched out in the interagency statement, the regulators expect participation in diversity and inclusion efforts by the board, top management, and other management levels, and wish to promote further awareness of diversity in employment and contracting for goods and services throughout financial organizations. And they envision that banks’ policies, practices, and performance in these areas be open to the public for scrutiny.
In each area covered by the statement, the agencies discuss the point generally, and then set out a series of standards. These standards are general in nature and don’t set up any numerical goals or expectations. Responsibility for looking at a given institution’s efforts will lie with its traditional prudential regulator.
Dodd-Frank requires that the director of each agency’s Office of Minority and Women Inclusion must develop standards for “assessing the diversity policies and practices of entities regulated by the agency.”
However, the joint draft specifically says the following on how that assessment will be made:
“The Agencies believe that the term ‘assessment’ encompasses many different types of assessments, including self-assessment, and provides an opportunity for the Agencies and the public to understand the diversity policies and practices of regulated entities. The assessment envisioned by the Agencies is not one of a traditional examination or other supervisory assessment. Thus the Agencies will not use the examination or supervision process in connection with these proposed standards.” [Emphasis added.]
The agencies note that existing requirements, such as filing of EEO-1 reports for those banks that do so, should assist in performing self-assessments. Data used for these reports and for OFCCP reporting can be repurposed.
A glimpse of what they have in mind comes in reviewing the language in each of the four areas outlined earlier. Overall, they state that standards may be “tailored to take into consideration an individual entity’s size and other characteristics.” The latter could include asset size, employee base, governance structure, revenues, contract volume, number of members or customers representing given groups, geographic location, and community characteristics.
Commitment to diversity, inclusion
Here the agencies state: “The leadership of a successful organization demonstrates its commitment to diversity and inclusion. Leadership comes from the governing body, such as a board of directors, senior officials, and those managing the organization on a day-to-day basis. These standards inform how an entity promotes diversity and inclusion both in employment and contracting, and how an entity fosters a corporate culture that embraces diversity and inclusion.”
Standards mentioned here include the presence of a diversity and inclusion policy; incorporation of diversity and inclusion considerations in strategic plans, including hiring, recruiting, retention, and promotion; appointment of a senior officer to oversee these issues; and proactive steps to promote diversity and inclusion. Related to this are expectations that a bank will track its performance and provide diversity and inclusion education and training.
Work profile, employment practices
The agencies point out that banks not already required to report to EEOC and OFCCP can look to those procedures as a model for their own analysis.
Standards built on such tracking include the expectation that a bank will evaluate and assess diversity and inclusion in recruitment, applicant tracking, hiring, promotions, both voluntary and involuntary separation, career development, coaching, executive seminars, and retention efforts. Banks would be expected to ensure that these efforts cover the entire organization’s executive and managerial ranks. Outreach efforts also are covered.
And there is this standard: “The entity holds management accountable for diversity and inclusion efforts.” [Emphasis added.]
Supplier diversity for banks
This added supplier scrutiny comes at a time when regulators are already renewing their emphasis on banks’ vendor management practices.
To date, that emphasis has dwelled on vendor management with an eye to safety and soundness as well as compliance and risk management. Additionally, fair lending concerns have been raised in the vendor context—a bank is considered as responsible for any delegated lending activity as if the activity farmed out was performed by its own staff.
In addition to expecting that banks will pay attention to diversity and inclusion in contracting with outside providers, the regulators point out that outside contractors themselves use subcontractors. They suggest that banks can encourage use of minority and women-owned subcontractors.
In the standards in this section, it’s made clear that much more is covered than who handles maintenance services for the bank. “This includes contracts of all types,” the agencies write, “including contracts for the issuance or guarantee of any debt, equity, or security, the sale of assets, the management of assets of the entity, and the making of equity investments by the entity.”
The standards anticipate banks will track how much contracting goes to minority and women-owned providers. Outreach also is anticipated.
Practices to promote transparency
“Transparency” has become a standard watchword in corporate governance, and this part of the draft emphasizes making a bank’s practices and record known. The regulators mention publishing such information on bank websites, in promotional materials, and in annual reports to shareholders. “Publication of this information can open new markets to new communities and can illustrate the progress that has been made toward an important business goal,” the document states.
The standards section envisions that published information would cover employment and contracting.
The agencies sketch out a process of self-assessments that would be voluntarily provided to regulators. Agencies also would monitor information published by banks on these issues on websites.
This article originally appeared in the ABA Bank Directors Briefing newsletter, edited by Steve Cocheo. To obtain a free sample copy and order form, click here.