Racial Equity: Conversations About Inclusion and Diversity in Finance
If you are reading this article, you probably understand equity as an ownership stake in a company. Identifiable on a balance sheet, you likely know the formula to calculate the book value of equity by subtracting total liabilities from total assets.
I would be pleasantly surprised, however, if you could give me a straight and clear definition of racial equity. Much of this difficulty may stem from the unfortunate fact that racial equity is currently an ideal, not a reality even in the most developed societies – and it’s costing everyone money. A study published in 2020 by Citi estimated that not addressing racial gaps between black and white people alone has cost the US economy up to $16 trillion since 2000. 
As a guide, the Centre for Social Inclusion defines racial equity as both an outcome and a process: 
“As an outcome, we achieve racial equity when race no longer determines one’s socioeconomic outcomes; when everyone has what they need to thrive, no matter where they live. As a process, we apply racial equity when those most impacted by structural racial inequity **are meaningfully involved in the creation and implementation of **the institutional policies and practices that impact their lives.”
Research by McKinsey and the W.K. Kellogg Foundation has found that representation of people of colour in financial services is especially effective for achieving racial equity.  It is vital, therefore, that firms encourage more diversity and inclusion to tackle what a recent BofA poll called, “the biggest challenge communities across the country are facing today.” 
The purpose of this article is to briefly comment on the reality of inclusion and diversity (I&D) efforts in finance. Drawing upon the experiences of my close friends, I hope to highlight the positive impact of I&D on business performance and present the compelling case for ensuring more equitable access to industry resources and opportunities for all. I also hope to shed light on the infuriating practical challenges faced by the best people I know.
As a white man, I recognise that my lived experiences differ drastically from many others in finance. So, to better contribute to such an important topic, I did what most people do when they’re in need – I asked my friends for help.
My conversations with (Left-to-Right) Adam Araim, Alex Thompson, Nathan Thomas and Rahul Patel were not always comfortable, but they were constructive in normalising discussions surrounding race between us as all. The following excerpts aim to highlight some of their experiences and opinions gained by working at companies such as Deutsche Bank, BNY Mellon, PwC, Vanguard and Amplify Trading.
How do you consider your race when applying for jobs?
Adam: I wouldn’t say it’s massively a consideration, but if I had to say, it would probably be a disadvantage. The fact I even have to think about, ‘Do I really want to put my race on the application form?’ and even the fact that ‘prefer not to say’ options exist makes me wary of the process and potential negative subconscious biases in the industry.
As an Arab Muslim, I am also much more likely to feel comfortable expressing my race when applying to European bank, rather than American ones.
Alex: I can see it both ways. Confronting the associated challenges with being black has made me who I am. It has given me the qualities I know I need to succeed in interview settings.
There have been times where I have felt unsettled, however when I reach the in-person level I have had faith in the process.
Nathan: It’s an unavoidable consideration, especially when filling diversity statements at the end of the online application. It makes me think, “Am I just filling a quota?” Whilst positive discrimination can have a positive impact, it’s annoying to have your application put through based on fulfilling a requirement.
Sometimes I feel that I have better chances of a successful application at a larger, global institution than at a boutique firm – not just because of size, but because I simply don’t look like the people that work there.
In a couple of interviews, because my name is Nathan William Thomas, it has been noticeable that interviewers may have expected a white man to walk in the room. Studies support that my English-sounding name may give me an advantage compared to other candidates with more foreign names.
Rahul: I have no issues applying as an Indian man as I am aware that managers and directors want a diverse cohort.
Do you believe you have ever been treated differently/ in an insincere way because of your race when engaging with other professionals in the field whilst at work?
Adam: I haven’t been treated negatively by someone in person, however I do feel that recruiters can often treat me in an ‘over the top’ positive way.
These interactions, whilst not immediately harmful, signal to me an ignorance in training or policy which clearly doesn’t prepare professionals to engage with diverse candidates in a meaningful way. I would much prefer to just be treated normally.
Alex: Not necessarily at work, but rather at finance society events where people do not anticipate for you to be there. Often people may act surprised when I tell them about my strong educational background and how I measure success.
In finance, it’s easy for people to underestimate the achievements of diverse candidates, even though in order to get a foot through the door, I would expect everyone to have a high level of achievement regardless of race.
Nathan: I have always been treated normally. Working through the height of the BLM movement last summer, it was interesting to see how corporations reacted to the news and my UK colleagues were always supportive on a personal level.
Rahul: I have never felt excluded, but when working I have always tended to develop stronger relationships with people of colour – other Indians and Muslims mainly.
It was upsetting to hear that many of the experiences of my friends had been at best neutral and at worst condescending and demoralising in finance. Our conversations highlighted that there is still a lot to be done in the industry so that everyone can feel comfortable knowing that they are being treated equally based on race.
So, where is the industry going wrong?
According to PwC, 76% of financial services firms already have diversity and inclusion as a stated value or priority.  This statistic may lead some to believe that steady progress is already being made to challenge the status quo. Yet despite vocal condemnation of racism, and public commitments to do better after the killing of George Floyd, the financial services sector seems stuck when it comes to practically embracing inclusion and diversity.
The figures are alarming. According to a 2019 Knight Foundation analysis, firms owned by white men manage 98.7% of the $69 trillion managed by the U.S. asset management industry.  A Certified Financial Planners (CFP) Board Centre study found that less than 3.5% of all the 80,000 CFP’s in the United States are black or Latino.  To top it all off, when asked in 2019 whether their likely successor will be a woman or a person of colour, all of the CEOs from seven of the largest U.S. banks said no. 
Unfortunately, the problem of racial inequity is most acute at the top of the corporate ladder. According to McKinsey, the proportion of people of colour employed at the entry level of US financial services companies is in line with their representation in society – around 40%. However, this share falls steadily along the corporate pipeline until, by the C-suite, it has dropped by 75%. 
This historic lack of representation in senior roles has perpetuated failings of the industry to address racial inequity by ignoring the views of those most impacted when creating and implementing policies and practices that affect diverse communities. It can also offer an explanation as to why firms have been so slow to develop human capital policies that would allow more diverse talent to thrive and progress.
Despite outward support for I&D by the financial services industry, structural reluctance to address racial equity highlight the fact that, “you can’t be what you can’t see.”
Doing Better by Being Better – The Business Case
Even Milton Friedman, who infamously proposed that the only social responsibility of a business is to increase its profits, wouldn’t ignore the attractive case for a more diverse workforce.
The facts speak for themselves – According to recent Wall Street Journal analysis on the individual companies in the S&P 500 index, the 20 most diverse firms have an average operating profit margin of 12%, compared with 8% for the lowest-ranking companies.  Furthermore, there seems to be evidence of this gap in profitability widening over time. McKinsey analysis from 2019  has shown that in the case of ethnic and cultural diversity, top-quartile companies they surveyed outperformed those in the fourth one by 36 percent in profitability, up from 33 percent in 2017 and 35 percent in 2014.
So, aren’t the benefits obvious? It turns out they are:
Q: How can more I&D can have a positive impact on performance?
Adam: Just having people from different backgrounds brings different ways of thinking. Co-workers can also learn from each other, strengthening relationships while improving business outcomes.
Alex: Global upbringings and education instantly bring different thought-processes and perspectives. This allows broader contribution of different ideas and reduces the costs of groupthink.
Also, teammates from different backgrounds may have different emotional characteristics and ways of dealing with people in different situations.
Nathan: During my placement year, I benefitted from the different viewpoints my colleagues from various backgrounds offered, not to mention the great food they would bring into the office to share!
It’s easy to get imposter syndrome in large financial institutions which can lower performance, so seeing other people that look like you in senior roles in the office is motivational.
Rahul: Client interactions can become more meaningful and successful because diverse team members and clients may share similar backgrounds. This ‘cultural matching,’ can help build rapport and deepen business relationships.
These views are shared by many. Katherine Mohrig of Accenture asserts that  I&D is a key factor for winning the war on talent as more Millennials and Gen Z enter the workplace. She believes that successful financial services firms of the future will attract the best employees by cultivating inclusive corporate cultures that leverage diverse views effectively.
Deloitte has found that more diverse firms should achieve higher levels of talent retention and employee satisfaction: “Good pay and positive cultures are most likely to attract both millennials and Gen Z, but diversity/inclusion and flexibility are important keys to keeping them happy.” 
As employees demand more from their employers, firms must offer more than just better financial compensation to improve labour productivity. This means creating a sense of purpose in the workplace by focusing more on the social impact of policies and practices to satisfy the “stakeholder-conscious” demands of workers to address racial inequity.
What’s more, increased levels of I&D should complement current structural shifts within the financial services industry towards teams-based workplace models. According to the data provider Morningstar, in 2016 more than three-quarters of actively managed US mutual funds had at least two managers.  As more workplaces evolve to prioritise collaboration, the integration of diverse viewpoints should ensure that teams are less prone to groupthink and bias in their decision-making process, improving investment outcomes for clients.
Nobel Prize winner Harry Markowitz once described diversification as the only free lunch in investing. Financial Services companies, hungry for the best talent and highest returns, would be wise to leverage this tried and tested philosophy when acquiring and managing human capital.
A Work in Progress
Current trends suggest there will be greater representation of diverse talent in senior roles in the next 10 years. Remember those 7 Bank CEO’s who said they wouldn’t be succeeded by a woman or person of colour? Jane Fraser’s recent appointment as CEO of Citibank has already proven them wrong. Her appointment should hopefully accelerate efforts to create a more equitable society through finance and may encourage other institutions to increase diverse representation at C-suite level.
Our leaders must now continue talk the talk and walk the walk. Bold shareholder activism by firms such as Blackrock to explicitly direct portfolio companies to create a more diverse workforce  should become the norm and should make addressing racial inequity a key corporate priority for firms outside the industry.
However, despite the compelling arguments around efficiency and profitability, many firms are continuing to find the “idea-to-action gap” too awkward to cross. A recent CFA Institute report has found that overall, financial services firms tend to be in a reactive phase of diversity and inclusion,  meaning that corporate decisions are largely being to be taken to comply with local laws and social pressure, instead of proactively addressing causes “important to the mission of the firm”. This strategic focus on compliance must be challenged to better address racial inequity and to meet increasingly aligned shareholder and stakeholder demands regarding I&D.
At a grassroots level, we must broaden our perspectives and start better conversations about race in finance and in wider society. Governments and firms must continue work together to establish best practices and learn from past mistakes. Steps such as developing systematic frameworks, challenging organisations on progress and actively tackling identified barriers need to be taken in order to make a real difference.
Just as there are rewards for the right actions, there are risks involved in doing nothing. It’s time for our ‘forward looking’ industry to open its eyes and embrace positive change.
I’d like to thank Adam, Alex, Nathan and Rahul for contributing to this article – I couldn’t have done it without you. I have learned a lot by having better conversations with those closest to me and I would implore everyone reading to do the same.
I appreciate that the experiences covered, and views expressed in the article may not be representative of every person and I would invite any constructive feedback.