On July 29, 2021, the Superintendent of the New York State Department of Financial Services (DFS) issued an Industry Letter (Industry Letter) announcing its new initiative to support diversity, equity and inclusion (DEI) efforts by collecting and publishing data on the diversity of corporate boards and management of its Regulated Banking Institutions and Regulated Non-Depository Financial Institutions (collectively, Regulated Institutions). The announcement of this initiative follows the establishment of a new Statewide Office of Financial Inclusion and Empowerment led by Tremaine Wright, and the initiative is similar to others that have been undertaken by federal and European bank regulators. While DEI efforts have been made by a number of Regulated Institutions, DFS expects these institutions to make DEI a business priority.
The Industry Letter references various studies and analyses which find that companies benefit in several ways when there is racial, cultural and gender diversity at the board and management levels through different ideas, innovation and profitability. At the management level, racial, cultural and gender diversity lead to different viewpoints and opinions based on different backgrounds and experiences, resulting in higher profit margins, increased innovation, the ability to better connect with a broader customer base and a better understanding of consumer interests and demands. The Industry Letter also cites studies which found that diverse teams manage risk better as they are more likely to remain objective, re-examine facts and are more aware of entrenched thinking. In addition, strategic decisions and overall performance have been found to improve when there is female representation on the board of directors.
The federal government also has taken action to advance and promote diversity. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) required each covered agency, including federal financial services regulators, to establish an Office of Minority and Women Inclusion (OMWI). The OMWI is responsible for agency matters “relating to diversity in management, employment, and business activities.” The director of each OMWI must develop and implement standards and procedures for the fair inclusion of minorities, women, and minority-owned and women-owned businesses in all business and activities of the agency. Federal financial services regulators issued their final interagency policy statement in 2015, establishing joint standards for assessing the diversity policies and practices of entities regulated by the agencies. In addition, the House Committee on Financial Services held a hearing last year on diversity and inclusion at the country’s largest banks, noting the lack of diversity at the board and senior management levels. The committee recommended that Congress consider legislative action to improve diversity and inclusion in banking organizations, including disclosing diversity data as well as board diversity data, to regulators and the public. On the state level, California was the first state to enact legislation requiring publicly held corporations with principal offices located in California to have at least one woman on their board by the end of 2019, and at least one director who is racially, ethnically or otherwise diverse by the end of this year.
DFS expects its Regulated Institutions to:
- Make diversity of their leadership a business priority and integrate diversity into their corporate governance.
- Pay attention to their talent pipeline of future diverse leaders, along with the diversity of their affiliates.
- View diversity similar to other strategic priorities, including communicating the importance of diversity to all stakeholders, providing a plan to achieve diversity in the organization, setting measurable goals and tracking the progress of meeting those goals.
- Have a diverse board and management team that has diverse skills, experiences and perspectives, including those based on gender, race or ethnicity.
- Conduct a self-assessment of where the institution currently stands and where it wants to be, and create a plan, taking its size and other factors into consideration.
DFS will send surveys to collect data regarding the gender, racial and ethnic makeup of its Regulated Institutions’ boards and management as of December 31, 2019 and 2020. The survey will collect information about board tenure and key board and senior management roles, from all Regulated Banking Institutions with more than $100 million in assets and all Regulated Non-Depository Financial Institutions with more than $100 million in gross revenue. DFS also intends to collect this data from all entities authorized to engage in virtual currency business activity.
DFS concluded that data collection is important in order to set goals and measure progress towards those goals, and that the publication of such data allows organizations to assess their standing relative to their peer organizations. Therefore, DFS intends to publish the results of the data on an aggregate basis in the first quarter of 2022.
The New York Banking Law authorizes the Superintendent to define what is an unsafe manner of conducting business. In light of the benefits diversity can bring to an institution, the lack of diversity at the board and management levels may be considered an unsafe manner of conducting business and could potentially be cited in a Report of Examination or affect the Management rating. While such action would be considered DFS asserting its supervisory function through enforcement, each Regulated Institution should prepare for this DFS initiative by conducting a self-assessment of where it stands regarding diversity and inclusion, determine where it would like to be and create a plan to reach its diversity and inclusion goal. Regulated Institutions can improve their diversity and inclusion efforts by developing a diverse talent pipeline, which can be done through recruitment, mentoring programs and partnering with organizations focused on corporate diversity and inclusion efforts.
This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “New York State Department of Financial Services to Begin Collecting Diversity, Equity and Inclusion Data,” dated August 31, 2021, and available here. Christopher Allen, Kevin Toomey, Charles Yi, and Erik Walsh also contributed to the memorandum.