By John Manning, International Banker
While browsing through the websites of most major banks today, chances are that many people will encounter a section entitled “Diversity and Inclusion”. It has become standard for banks in virtually every region of the world to now highlight this relatively new policy, one that aims to ensure that people of all genders and backgrounds have an equal chance of being both employed and able to progress through their organisations fairly.
But although there is clear evidence that the global banking sector is taking such issues more seriously than it did, say, 10 years ago, how much progress has it realistically made in practice?
According to the British Bankers’ Association (BBA), diversity broadly refers to “the visible differences between employees in age, gender, race, religion, sexual orientation and disability. But it is also the variety of experiences and outlooks each individual employee will have. In this sense, diversity describes the recognition of these differences and, in doing so, celebrates them”. And increasingly, it is a concept that is perceived as not only providing fairness from an employment perspective but also offering a new way to boost returns and ensure future business success. Taking HSBC as just one example, the bank’s new Global Head of Diversity and Inclusion Birgit Neu explains on its website why diversity and inclusion are so important. “A successful working culture welcomes a wide range of views and opinions. It encourages diversity of thought. A company where people are confident to ask questions and raise ideas is more likely to try new things, find great solutions, adapt and innovate—and do better business as a result.”
But while that all sounds worthwhile to pursue, the evidence strongly suggests that not enough banks are fully achieving what their diversity policies set out on paper, especially with regards to gender. A study of 71 banks in 20 countries conducted last year by SKEMA Business School’s Observatory on the Feminisation of Companies found that despite women comprising on average 52 percent of the banking industry’s workforce—which, therefore, implies that a healthy gender balance exists—women also face a “double glass ceiling” further up the bank’s hierarchy. The first ceiling emerges at middle management, at which only 38 percent are women. And the second shows up at the executive level, at which the female contingent falls to just 16.5 percent. The board level shows modest improvement at 24 percent, with the study attributing much of this to “governmentally imposed quota policies for boards of directors in some countries, as well as shareholders’ sensitivity to diversity issues”.
And although overall female representation in the banking industry’s workforce may seem laudable on the surface, the study also reveals a wide disparity in the gender balance across countries. While the likes of Sweden (45 percent), France (35 percent) and Canada (34.5 percent) boast impressive rates of female representation on the boards of directors of banks, Japan (12 percent), China (14 percent) and Singapore (15 percent) leave a lot to be desired. There can be many explanations for such a large degree of variation. In the case of France, for example, the country passed a law back in 2011 that compelled large companies to reserve a minimum of 40 percent of its boardroom positions for women within five years. But at the other end of the scale, Japan’s poor gender balance can be explained by the lower cultural expectations for women and generally low female labour-participation rate. Japan is also currently placed at 110th position in the World Economic Forum’s (WEF’s) global gender-equality rankings for 2018.
In the United Kingdom, meanwhile, women make up only 28 percent of boards of directors. This mediocre figure may be partially explained by recent research from KPMG, which found that almost half of all employees in the country’s financial-services industry followed their parents into the sector—much higher than the national average of 12 percent. Tim Howarth, KPMG’s head of financial-services consulting, described this industry trend as “staggering” and stated that this lack of diversity in banking has caused “a narrow and narrowing talent pool and not enough social mobility”. Speaking to Reuters, Labour Member of Parliament John Mann, who is also part of the government committee responsible for overseeing the finance industry, described the banking industry’s lack of diversity as being a huge challenge. “Its biggest problem, by far, has been its cultural problem. That’s what’s led to the collapse of a number of financial institutions. The cultural problems are reinforced by not bringing in a wider array of people.”
This is clearly concerning—as asserted by Professor Michael Ferrary, who led the SKEMA study. “It is clear that women face discrimination throughout the entirety of their careers in banking.” This also appears to be the view of the International Monetary Fund (IMF); in his recent speech, “Boosting Growth through Diversity in Financial Leadership”, IMF First Deputy Managing Director David Lipton recently discussed the gender imbalance in finance and in particular the “conscious and unconscious bias” that women face that results in men being inclined to hire “people who are like themselves”. Lipton also highlighted studies that have found evidence of women being held to higher standards than their male colleagues, especially women of colour.
But banks should also be concerned that their gender imbalances are strategically self-defeating, as much of the evidence suggests that having such a lopsided gender mix further up the corporate ladder is against their best interests. Recent IMF research shows that increasing financial inclusion of both women and men lifts economic growth. And having more women in financial leadership positions leads to “greater financial stability, lower levels of non-performing loans, and higher profits”, according to Lipton, who also observed that banks with a higher share of women on their boards “were more stable in 2008, when the Global Financial Crisis hit”.
The IMF report is just one of many research pieces that supports the economic and business rationale for greater gender diversity. In 2012, Credit Suisse found that large-cap companies with at least one woman on the board outperformed those peers with no women on the board by 26 percent over the previous six years. A 2018 McKinsey report similarly found that companies in the top quartile for executive-team gender diversity were 21 percent more likely to experience above-average profitability than those in the bottom quartile. And most recently, a new March 2019 study by the International Finance Corporation (IFC) found that those private-equity and venture-capital funds with gender-balanced senior investment teams are realising returns 10 to 20 percent higher than those with a single-gender majority leadership.
As for the banking industry specifically, meanwhile, a comprehensive study, “The Performance Effects of Gender Diversity on Bank Boards” by Ann L. Owen of Hamilton College and Judit Temesvary of the Federal Reserve Board, found that for 90 US banks during the 1999-2015 period, a “non-linear, U-shaped relationship” emerged between bank boards’ gender diversity and banks’ performance. This means that performance actually declines with additional diversity at low levels of existing diversity, but that a positive impact is realised once a certain level of gender diversity is achieved. And this positive impact will also transpire only in cases in which the bank is well capitalised. As such, expanding gender diversity on bank boards will enhance value at sufficiently capitalised banks. The study also found that increasing gender diversity improves both decision-making and board oversight.
But why exactly does gender diversity boost bank performance? There are several reasons. According to Professor Ferrary, who led the SKEMA research, employing women on boards helps with the risk-management process. “Studies unanimously show that women are less likely to gamble with assets and were noticeably absent from the worst offending firms during the 2008 financial crash.” Ferrary believes that this is a significant reason why many countries impose gender quotas on the boards of their prominent banks.
Then there is the unique set of skills and expertise that women bring to the table. According to a 2016 study by Daehyun Kim and Laura T. Starks entitled “Gender Diversity on Corporate Boards: Do Women Contribute Unique Skills?”, the authors found evidence that women directors contribute to boards by offering specific functional expertise, often missing from corporate boards. “The additional expertise increases board heterogeneity which…can increase firm value.” As such, with women on the board, it is likely that the board will have the benefit of those “female” characteristics to make more informed decisions.
So what, then, does a sufficiently diverse bank look like? While there are no standard industry-wide criteria yet to answer such a question, there is certainly more recognition for those banks that have successfully implemented diversity drives. In winning the 2018 award for World’s Best Bank for Diversity and Inclusion from Euromoney, Bank of America is certainly among the global leaders in this area. In terms of sheer numbers, women comprise more than 50 percent of its global workforce, more than 40 percent of its global management team and more than 30 percent of its board of directors. What’s more, more than 40 percent of its US workforce are racially and ethnically diverse. Being one of the first banks to provide public disclosure on pay equity is important, while the fact that women and minority teammates earn 99 percent of what men and non-minority teammates earn has also garnered much praise for the bank. Finally, Bank of America will no longer ask new hires for their pay histories, which is aimed at ensuring that they are assessed based on individual qualifications, roles and performances as opposed to previous compensation.
But the likes of Bank of America remain the exception rather than the rule at this stage—much work still needs to be done to achieve a sufficient gender balance within banks and to ensure women don’t face discrimination at any stage of progression in their banking careers. Perhaps the problem stems from the very top. Central banks are usually considered as sacred guardians of their respective banking systems and therefore ought to set an example to all commercial lenders. But according to 2019 data from the Official Monetary and Financial Institutions Forum (OMFIF)—an independent think tank for central banking, economic policy and public investment—only 14 of the world’s 173 central banks are headed by women, while a startling one-fifth of central banks have no women in senior positions. The Bank of England’s Monetary Policy Committee (MPC), for example, has only one woman among its nine current members. And this woman is just one of eight to have been on the committee since it began life back in 1997. Indeed, although the OMFIF acknowledges that gender diversity in central banks has improved by six percentage points since 2018, “the overall picture remains heavily unbalanced, much more so than the equivalent in politics or the private side of the financial sector”.
But central banks can do a lot more to ensure that their respective financial-services industries are consistently improving their diversity figures. The Central Bank of Ireland is one such institution that is taking on a supervisory role for the industry in this regard. In a speech given last year to FuSIoN (the Financial Services Inclusion Network), the bank’s Deputy Governor of Prudential Regulation Ed Sibley identified several key ways in which the bank’s supervisory work could “meaningfully address diversity and inclusion in the boardroom, at the executive level and the pipeline of talent needed to run the organisation in the long-term”. They include assessing whether diversity and inclusion is being actively promoted at all levels of firms, and how this impacts behaviour and culture; reviewing the policies put in place to deliver this outcome by analysing data showing the outcomes from both the firm and the sector perspectives on an annual basis; and reviewing governance codes and requirements to be clear about expectations regarding diversity policies.
In many situations, however, the tide is moving in the direction of greater diversity. In January, the new chair of the US House Financial Services Committee, Maxine Waters, demonstrated her committee’s prioritisation of promoting diversity and inclusion in the financial-services sector by creating a new subcommittee to support this objective. A month later, the Subcommittee on Diversity and Inclusion held its first hearing entitled “An Overview of Diversity Trends in the Financial Services Industry”, which gave “an opportunity to explore trends in diversity in the financial services sector, as well as challenges that financial firms have identified in trying to increase workforce diversity and practices that firms have used to address such challenges”. The subcommittee’s chair, Congresswoman Joyce Beatty, recently observed that many studies “have proven empirically that diversity increases productivity and the bottom-line, but the data on diversity and inclusion efforts in our nation’s industries and government are not aligning. We need to find out why, and we need to fix it now”.
Europe, meanwhile, has been making its own efforts to improve gender diversity in banks. In September 2017, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published their joint guidelines to assess the suitability of members of management bodies and key-function holders, and thus aim to “harmonise and improve suitability assessments within EU financial sectors, and to ensure sound governance arrangements in financial institutions in line with the Capital Requirements Directive (CRD IV) and the Markets in Financial Instruments Directive (MiFID II)”. Diversity is considered one of the five key components of the guidelines with respect to gender, age, education, profession and geography. “The diversity policy for significant institutions should include a quantitative target for the representation of the underrepresented gender in the management body…. Significant institutions should quantify the targeted participation of the under-represented gender and specify an appropriate time-frame within which the target should be met and how it will be met.”
And when comparing the banking industry to other industries, it would appear that it holds up fairly well. The category Banking and Investment Services was found by Refinitiv, a global provider of financial-markets data and infrastructure, to be in the top five industries in terms of female employment. At 49 percent, the industry falls behind only Food and Drug Retailing (56.4 percent), Retailers (55.9 percent), Insurance (54.5 percent), and Healthcare Services and Equipment (51.5 percent).
Make no mistake, diversity matters; by embracing it, banks can more accurately reflect the customers and communities that they serve. And as the BBA has observed, the more opinions and experiences that can be considered for any scenario, “often the better (is) the final decision that is made”. With that in mind, it is becoming clear that those banks struggling to generate sufficient profit, and which continue to ignore the benefits to the bottom line that diversity brings, are missing an increasingly obvious trick.