Rethinking Diversity Measures in the Finance Industry

Although well intentioned, Nasdaq’s new diversity measures too narrowly define what constitutes a diverse company.

Reading Time: 3 min 

Topics


The financial industry is one of the least diverse industries in the United States. Recently, the Securities and Exchange Commission approved Nasdaq’s proposed diversity measures, which require companies on its exchanges to meet specific gender and racial ethnicity targets for their board membership. Although well intentioned, these measures provide a narrow definition of what constitutes a diverse company.

The financial industry defines diversity by concentrating on a business’s ownership and board membership, regardless of how it’s doing in regard to any other dimensions related to diversity, equity, and inclusion. Measuring the number of women on boards and women in top management positions, or identifying a business as woman-owned, for example, does not necessarily measure how female employees are treated, whether they receive the respect and credit they deserve, or whether their opinions are heard and taken into account. I call these measures insufficient statistics because they do not truly capture the ethical aspects of diversity that we would like to measure, such as treatment and inclusion.

An insufficient statistic is not only bad in providing information about the true situation within an organization; worse, these statistics can create a false sense of accomplishment. For example, instead of offering truly improved support to marginalized groups within the organization, most banks and financial institutions will shift their asset managers’ goals to hit minimum targets, resulting in minimal redistribution of power. Once the target is hit, most will feel as if their work is done: There’s no need for further internal education programs, supervision, or changes in corporate culture.

The fact that the statistics are imperfect, however, does not mean that we should stop computing them. Rather, it means that the emphasis on these numbers is oftentimes misplaced. How, then, should we measure diversity?

Measurements should account for a company’s efforts around inclusion, access, and treatment. We should ask: What are the organization’s intentions and goals? What is its process and progress toward diversity? What is it doing to hire, retain, and promote minorities and change its practices around all three? How is its culture shifting?

First, it depends on the degree of disclosure needed. If the assessment is meant to be confidential, a business can evaluate itself by understanding the outcomes of its hiring, promotion, and retention activities. At MIT, for example, we are developing technology that could be deployed to measure how people treat one another in meetings. Alternatively, codifying exit interviews by gender and ethnicity would certainly be helpful. In the end, the measurement of discrimination is hard to achieve because it relies on information from those who were left behind, resigned, or were unsuccessful within the organization. However, if the information is to remain within the organization, there are better methods than what the SEC is suggesting.

Second, if the disclosure is to be made public, the evaluation will depend on the transparency and enforcement of the organization’s procedures to be proactive in avoiding or curtailing discrimination and any form of mistreatment. Improvement in those procedures and in how they are enforced is the closest to intentionality that we might get.

Goldman Sachs’s recent investment of $10 billion in investment capital and $100 million in philanthropic capital in partnership with organizations led by Black women, with the goal of benefiting 1 million Black women, is a good example. By going beyond current diversity measures, it is instead creating a means to investment in housing, health care, education, job creation, workforce advancement, digital connectivity, and financial health, as well as access to capital — all tools of empowerment that also have the potential of creating broad-based welfare improvements. But these diversity-focused investments would not be taken into account under the current definition of diversity.

Quantifying empowerment tools tends to be an easy task, but by no means should quantification of existing measures be the ultimate or only objective. Diversity solely measured by ownership or board membership misses out on important social improvements, which require both the tools and the support system brought about by cultural change. Let us make sure the definition, regulation, and policies in the U.S. financial system are aimed at providing both access and opportunity.

Topics

More Like This

Add a comment

You must to post a comment.

First time here? Sign up for a free account: Comment on articles and get access to many more articles.