Young business womanBy Kelly Tanner (New York City)

Would greater diversity in financial institutions strengthen or, as some have charged, destroy them? Next year, we may find out.

The recent financial reform legislation is making new waves recently due to a provision buried 454 pages in that requires 30 federal agencies to create an Office of Minority and Women Inclusion, in order to “take affirmative steps to seek diversity in its workforce at all levels of the agency consistent with the demographic diversity of the United States and the Federal Government.

Each office is required to appoint a Director, who must be at senior staff level and report regularly to the agency administrator, ensuring that this new office cannot be tucked safely away into some basement corner and ignored. The Director holds the power to cancel contracts with companies that do not show a good faith effort to actively promote diversity. The bill calls out the agencies in question, including the FDIC, Department of the Treasury, Federal Reserve banks, and the SEC.

The Opposition – Cost, Competition

Perhaps predictably, this mandate is causing some gnashing of teeth and rending of garments by those who view the effort as an expensive waste of time. Diana Furchtgott-Roth of the Hudson Institute, and former economic advisor in the second Bush administration, went so far as to declare, “This will destroy the financial industry. If the CEOs of American financial institutions have to be worried about the diversity regulations, whereas those in other countries are worrying about their profits, we are going to fall behind.”

This begs the question, can financial institutions promote diversity and better reflect the population at large and still “worry” about profits, or are these pursuits mutually exclusive?

In a recent Forbes article, Mallory Factor seems on the fence. While the former chair of the 2009 House Republican Economic Summit decries the financial regulatory reform as “brash…social engineering,” darkly warns that “the consequences will be enormous,” and suggests that costs of hiring and implementation may run to $58 million or even $4 billion dollars for reasons that are somewhat unclear, he also admits the “good intentions” behind the diversity provision, and suggests that if only companies were able to come up with their own policies, they could do so in a cost-effective way with better results.

Firm-Driven Initiatives Setting an Example

Mallory and others frequently cite such diversity initiatives as Deloitte and Touche’s Women’s Initiative and KPMG’s Women’s Advisory Board and Network of Women as examples of effective programs. Indeed both companies appear year on year in Fortune’s “100 Greatest Places to Work” listings, usually alongside the other two “Final Four” firms. KPMG’s own homepage states that “our aim is to make enhancements to the firm’s work environment by valuing our differences and including them in what we do. Our values support it. Our clients value it. And our success depends on it.” Far from causing the company’s destruction, KPMG and their competitors, all vying for a small pool of skilled and specialized workers, credit their cultures of inclusion as the reason for better employee retention and recruitment.

The wording of the financial regulatory reform bill seems to deliberately leave enough room for agencies to customize their Office of Women and Minority Inclusion so long as they can prove end results or even, at minimum, a good faith intention to do so.

Though its opponents brush off the wording as “vague” or “unclear,” such leeway would appear to leave room for creating cost-effective plans along the lines of those Factor finds preferable. The Bureau of Labor Statistics indicates that soon three out of four graduates from universities will be women and/or minorities, which implies that finding these candidates is going to become progressively easier, and therefore cheaper – in fact, it seems it would be costlier to attempt to avoid them.

Certainly if large accounting and auditing firms have seen success over almost 20 years of their formalized diversity initiative, other companies may soon find themselves left behind with a dated and homogenious workforce, with costly turnover and a lack of insight from varied perspectives. The bill attempts to bring the mountain to Mohammad, so to speak, creating a mandate that weaves diversity and inclusion considerations into the fabric of the business plan.

Agencies must have their Director in place for 2011, so we must wait and see. If the destruction of the American financial industry is nigh, we may choose to keep our Christmas bonus in our mattress this year. However, if rumors of its death have been greatly exaggerated, financial agencies and subcontractors may soon reflect the varied strengths and backgrounds of the American population, whether some are ready or not.