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DIVERSITY IN THE FINANCIAL SERVICES
INDUSTRY AND ACCESS TO CAPITAL
FOR MINORITY-OWNED BUSINESSES:
CHALLENGES AND OPPORTUNITIES
Thursday, July 15, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
The subcommittee met, pursuant to call, at 10:08 a.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairwoman of the subcommittee] presiding.
Present: Representatives Kelly, Hensarling, Garrett, Brown-Waite, Gutierrez, Inslee, Davis and Frank (ex officio). Also present were Representatives Baca, Bell, Gonzalez, Napolitano, Scott and Waters.
Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order.
This morning, the Subcommittee on Oversight and Investigations will examine the state of diversity in financial services, including access to capital for all businesses and communities. These issues are critically important to achieving full growth in our financial services sector and our overall economy.
A simple snapshot of our country's current employment composition displays some disparities among certain populations, particularly with regard to women and minorities. As a society, it is our responsibility to encourage the diversity in financial services that reflects the makeup of our country. It is also our responsibility to ensure that a lack of diversity does not translate in to a lack of confidence in any individual's ability to succeed at all levels of the financial industry.
Page 2 PREV PAGE TOP OF DOC Today, we will investigate these issues and discuss ways to improve efforts to achieve a more diverse financial sector and to improve access to capital.
Over the past few decades, the visibility and involvement of women and minorities in social, economic and political circles has continued to increase. An important part of increasing opportunities for all individuals begins at an early age. This means ensuring that every child has access to a first class education and the opportunity to succeed.
A key component of this education includes financial literacy for individuals at all ages. However, a strong education alone will not help improve access to all sectors, which is evident by the fact that the financial sector continues to lag behind other industries in representation. We must have a continued commitment from the public and private sectors in order to break down some barriers that still exist.
While there are still considerable strides that need to be taken to increase opportunities for all individuals, the financial services industry appears to be moving in the right direction. Currently, there is promising representation in the lower and middle management ranks; however, senior management ranks continue to pose challenges. There are also signals that senior management is starting to become more aware and active in expanding opportunities to all qualified candidates, regardless of their race or sex.
Some companies continue to be more successful at promoting diversity in their workplace than others. In fact, some major corporations today have diversity programs, which encourage and recruit qualified individuals in under represented populations. And many firms are also utilizing employee networks and formal mentoring programs to facilitate a more diversified workforce and to help all employees achieve their full performance and career potential. Since it is the tone at the top of a company that sets a good example for opportunity at all ranks, we must continue to challenge our Nation's business leaders to encourage these efforts.
Better representation in financial services should also improve access to capital for all individuals. Earlier this year, the Minority Business Development Agency of the Department of Commerce released a report entitled, ''Expanding Financing Opportunities for Minority Businesses.'' This important study found that minority-owned businesses present an historic and dynamic growth opportunity for the U.S. economy.
Page 3 PREV PAGE TOP OF DOC The study also highlights the fact that, while minority-owned businesses are growing, they exist primarily in non-asset based industries rather than in capital intensive sectors. The subcommittee is very interested in the report's conclusion that the lack of access to financing impedes participation in certain sectors and that successful growth will require bringing minority entrepreneurial efforts into the economic mainstream.
We would like to hear more from our witnesses on how to improve access to capital and encourage this transition. I thank the witnesses for being here today, and I look forward to hearing your views on these issues.
With that, I turn to Mr. Gutierrez.
[The prepared statement of Hon. Sue W. Kelly can be found on page 40 in the appendix.]
Mr. GUTIERREZ. Good morning and thank you very much, Chairwoman Kelly, for calling this hearing, which Ranking Member Barney Frank and I spoke to you earlier this spring about calling, and I really want to thank you for this.
It is important that we attempt to understand why there remains a lack of diversity in the upper ranks of the financial services industry and explore options to alleviate this problem. I represent a very diverse congressional district in Illinois. The 4th District is mostly in the city of Chicago but encompasses part of the north side and parts of the south side, parts of Cicero, some very low-income neighborhoods, some working class and some somewhat prosperous neighborhoods.
Ethnically and racially, my district looks very much like a microcosm of America, and I don't see any reason why board rooms should not. All too often, we are exposed to executives in the financial services industries who are exclusively white and male. Sometimes it seems as though they all wear the same identical suits from Brooks Brothers.
However, today, we have before us a very different panel, not just in terms of their race, color, ethnicity or gender, but different in the sense of their recognition and belief that the board rooms of America's financial sector should reflect the strength and diversity of the American people. And each of the witnesses hear today has demonstrated a commitment to that cause.
Page 4 PREV PAGE TOP OF DOC My colleague and friend, chairman of the Congressional Hispanic Caucus, Ciro Rodriguez, from San Antonio once said growing up he never met a stockbroker. I know that sounds incredible to us on the Financial Services Committee where we probably talk to several of them every week, but as a young Latino, his neighbors and relatives were not accountants or bankers or stockbrokers, they were mechanics and teachers and cab drivers.
And there is nothing wrong with these honorable positions; I was a cab driver myself for four years. But my point is young people tend to strive for what they see as available goals. If no one they know is a banker or an accountant, it is less likely they will seek that out for themselves.
Today's witnesses will doubtless address the issue of reaching out to these young people who might otherwise be unaware of opportunities for success in the financial services industry. They will also provide valuable insight regarding recruiting, mentoring and retaining minority talent within the industry. And they will share personal stories of success and disappointment. I am looking forward to learning from their experiences and helping to implement their suggestions.
At a proper time, I would like to introduce Commissioner Padron from my one State of Illinois. With that, I yield back the balance of my time, and I thank the gentlelady for calling this hearing.
Chairwoman KELLY. I thank you, Mr. Gutierrez. You talk about having driven a cab. My first job was as a newspaper girl, and I picked berries in the fields and things like that. And the reason you do jobs like that when you are young is because you have hope that you can save a little money and get ahead. And that is what this hearing is all about.
I am going to do a little bit of bookkeeping here. Without objection, all members' opening statements will be made part of the record, and without objection, the gentleman from Texas, Mr. Gonzalez, the gentleman from Alabama, Mr. Scott, the gentleman from California, Mr. Baca, the gentleman from Texas, Mr. Hinojosa may participate in today's hearing. They may give opening statements and question witnesses under the five-minute rule. So ordered.
Page 5 PREV PAGE TOP OF DOC With that, I turn to Mr. Hensarling.
We are honored to have our ranking chairman, Mr. Frank.
Mr. FRANK. Thank you, Madam Chair. I appreciate very much your calling this hearing. As the Subcommittee's ranking member, Mr. Gutierrez mentioned, this was a subject that was important to us, and I just want to say that I am very pleased as the ranking member of the full committee. As you know, the chairman and I have been able to, I think, work very cooperatively and put differences in one place and work together, and this particular subcommittee, yourself and the gentleman from Illinois have been doing the same thing on a number of issues, like preemption and this, and I am very appreciative of that.
I also want to acknowledge that part of the impetus for this hearing on my part came from a visit to me from one of our witnesses. Professor Hammond, who teaches in my part of the country, approached me, wrote to me some time ago and pointed out this serious problem with regard to African-American representation in the accounting industry. We followed up. Ms. Jeffers on my staff talked with her, and I am very pleased that those conversations helped lead to this hearing.
The impetus also, of course, came from people in the New America Alliance and the Hispanic members of our committee, but I think this is a good sign that people aren't entirely wasting their time when they bring things to our attention. I am glad to be able to do that. And I am particularly pleased that we are having this hearing.
The financial services industry obviously has an extraordinary impact on the country. More and more of what we do in the country is part of the financial services industry. As we evolve, we know that manufacturing is less of a job source.
The financial services industry is a major part of our economy in two ways. First of all, of course, it performs this extraordinary mediating function. It helps the rest of the economy work.
Page 6 PREV PAGE TOP OF DOC But it is also a significant source of employment, and it is alsoI guess I should have said three thingsit is not only a significant source of employment, it is a significant source of wealth accumulation. People in the financial services industry get a chance not just to receive good salaries, but it is a very important way to build equity, and it is a very important way for them to help others build equity.
So having full representation of the various minority communities in the financial services industry is really absolutely essential if we are going to have the America we say we want to have and that I think we want to have. That is, unless we have good representation within our financial services industry of all of America, there will be segments of America that don't get the chance to be fully a part of this society that we want them to be. So I am very grateful.
And to the people in the private sectorand you say we obviously also have an obligation to talk about this in the public sector. We don't neglect that, we don't neglect our responsibility on our own committee, and it is one I take seriously to the extent that I have been able to select staff. And what we know is this: People who argue that we are in favor of some kind of tradeoff between diversity and quality are simply flatly wrong. That needs to be refuted.
We are not talking about making exceptions to the talent pool to accommodate minorities. We are talking about recognizing the fact that all of us, all of us have grown up with prejudices, all of us have grown up with a kind of tendency to prefer our own, even in ways that we are not fully conscious of. And what we are asking for is a conscious effort to recognize those facts.
No one denies that we have racism in the country, had bigotry, and we are making great progress, but you don't go from one point to another without passing through a phase in which you consciously counteract that.
Page 7 PREV PAGE TOP OF DOC That is what this is about, and I am very grateful to you, Madam Chair, and to the witnesses for their help in this, and I am delighted to see that our committee is able to be so well representative of these particular groups.
Chairwoman KELLY. Thank you very much, Mr. Frank.
We have been joined by the gentlelady from California, Ms. Napolitano, and without objection, she may also participate in today's hearing, give a five-minute opening statement and question witnesses under the five-minute rule. We welcome you.
We go now to Mr. Garrett.
Mr. Garrett has no opening statement, so we will move on to Mr. Scott.
Mr. SCOTT. Thank you very much, Madam Chair lady Kelly. I certainly want to thank you and Ranking Member Gutierrez and also our ranking member of our full Financial Services Committee, the gentleman from Massachusetts, Mr. Barney Frank, and the entire leadership of the Financial Services Committee for hosting this very important and very timely hearing. And thank you again, Ms. Kelly, for allowing me to speak and participate at this Oversight and Investigation Subcommittee hearing today.
The hearing's topic of diversity in the financial services industry is of particular interest to me for several reasons. The most important being the need to open access to capital to minority communities. Access to capital is important.
For the district that I represent around metro Atlanta where many financial firms are based, including SunTrust and Equifax. Wachovia and Sun SouthTrust, as we know, is just going through a merger procedure, and they will become the third largest financial institution in this country. And they are going to base their headquarters, their southern headquarters in Atlanta. And Bank of America, of course, has a strong presence in our city and in our region.
So most certainly, as the only member of Congress serving on the Financial Services Committee from Georgia and Georgia being certainly at the center of the financial services industry in this country, I am vitally interested in diversity in this area.
Page 8 PREV PAGE TOP OF DOC A recent article in the Wall Street Journal reported that minorities hold 12 percent of directorships in Standard and Poor's 500 countryup from 9 percent in 1999. That is very good to show that we are making progress, but not enough progress. While we must recognize the positive movement of these numbers, we can clearly see that much more is needed to diversify Wall Street.
Main Street is catching up much faster. For example, Atlanta was named the top city for African-Americans for 2004 by Black Enterprise. Atlanta earned that top ranking because of its entrepreneurial opportunities, its earning potential and its diverse cultural offerings and its rich history of committed black and white political and civic leadership doing its job.
And with that in mind, it is so good to have Michael Kennedy here, one of my constituents from Atlanta, Georgia, who is the manager of Diversity Program and financial services sector executive for Korn/Ferry International in Atlanta. And I want to give you a warm welcome and good to have you here before the committee.
I am an MBA graduate from the Wharton School of Finance. I am an entrepreneur, I own my own business. So I know firsthand what it means to struggle to build a business and the importance of diversity in the marketplace and the importance of access to capital. From the recent corporate scandals, we have learned that the more homogeneous a corporate board is or the more homogeneous its top executive ranks are, then the more likely the members of that firm will move in lockstep.
With so much discussion about the need for independent directors and diversity in top management, we should push for minority directors to join more corporate boards and executive ranks. Minority purchasing power in 2004, including African-Americans and Hispanics, is nearly 21 percent. The only way that financial institutions will find more future growth is by paying more attention to these trends. The marketing and earnings growth is growing from Asian, Hispanic, African-American and immigrant communities, and diversity in the top levels of management and its boards is critical to the future success of all of our financial service industries.
Page 9 PREV PAGE TOP OF DOC To tell you the truth, I was quite frankly disturbed last month by a story that I read in the Hill newspaper on June 23, which described the challenges faced by many talented minority lobbyists right here on Capitol Hill. And I recommend for those of you who have not read that story in the Hill to please read it. It will give you pause and give you reason to realize that while we have made some progress, there is much more progress we need to make.
Several of the lobbyists quoted are friends of mine who I highly respect. I understand that the majority leader has a K Street project which he is working to get more lobbyists hired, Republicans and hopefully Democrats. What would impress me is if there was a similar project with these high-profile lobbying firms which would hire more minorities and with their full value, for their full capabilities, who will serve both Republicans and Democrats.
Madam Chairwoman, I thank you for this opportunity. I do look forward to this distinguished panel, and thank you for having me here and presenting me with the opportunity. I look forward to asking questions from this panel's testimony. Thank you very much.
Chairwoman KELLY. You are very welcome.
Mr. BACA. Thank you very much, Madam Chairman and Ranking Member Gutierrez. I want to thank both of you for holding this important hearing on diversity in financial service institutions and access to capital for minority-owned business.
As you may know, I am Chair of the Congressional Hispanic Corporate Responsibility, and part of our goal is to make sure that when we look at diversity it is reflective of our community. When we look at the total population of the United States, we have 44 million Hispanics in the United States. We have approximately 16 percent, and by the year 2050 we will represent one in 4 Hispanics in the United States. We currently represent about 800 and some billion dollars purchasing power right now, and by the year 2010, purchasing power will reach $1 trillion.
Page 10 PREV PAGE TOP OF DOC What does this mean? I also want to thank faces like the American Alliance, Maria, for being here and talking about access, because what we want to talk about is access to capital. When we look at it, there is the ability for people to have the ability to borrow money on fair and equal basis, not discriminatory towards minorities, whether you are Hispanic or black or Asian or Indian, but the opportunity to advance. This is a time where we are seeing a lot of our growth, but yet it is a time when we are actually cutting back funding for small businesses and opportunities for capital investment in that area.
As Chair of Corporate Responsibility, it is our responsibility to make sure that it is reflective of our community, because some of us would like to make sure that when we walk into a room that we see people that look like us. And that is on our board of directors, and we look at executive managerial positions, we look at purchasing power, loaning as well and media and philanthropy as well.
As Chair of Corporate Responsibility, hopefully we can hold a lot of the companies accountable and that they start making the right moves for the right reasons, because it is healthy for our country and it is healthy for us. If we move in that direction, I believe we will have more responsibility to make sure that the face of corporate America looks like the faces of America.
Unfortunately, Hispanics and some blacks are severely underrepresented on corporate boards. Hispanics hold less than 2 percent of the Fortune 1000 board seats. We hold less than 3 percent of executive positions in the financial services industry. This is just not acceptable. We expect corporate America to be a good citizen when it comes to their hiring practices, their business practices and their outreach to our community, not only in looking at our dollars, but also looking at hiring individuals that can be reflective in making our country a lot better.
I hope that we will learn a lot today, and this is a first step in the struggle for better representation of financial service industries. I look forward to hearing from the panelists in finding out how to improve access to capital, what is it that we need to do, how do we do it, what are some of the changes that need to be done to assure us that we can be at the table as well as anyone else and have a fair level of playing field for all Americans, for all minorities who have been underrepresented in this area for generations and generations.
Page 11 PREV PAGE TOP OF DOC Thank you very much, Madam Chair.
Chairwoman KELLY. Thank you, Mr. Baca?
Members are reminded of the five-minute rule, and I would respectfully respect that you keep your remarks within the five minutes simply because we have a long panel, and these people have come a long way. We need to hear what they have to say.
Mr. Bell, do you have an opening statement?
Mrs. NAPOLITANO. Thank you, Madam Chairman. I will be very short and very brief. I am thankful for the opportunity to be here and glad that we have a hearing on such an important issue that deals with all minorities, women especially and minorities. We have been in small business thrusting for increasing funding to the women-owned SBDCs, to be able to do all the things that we have been fighting for years and continue to fight.
And when I see in your survey where it is a disagreement in the effectiveness of corporations achieving diversity goals, we begin to say, ''Why?'' People are there, and I know in some of my personal wanderings as a minority, sometimes they look at us and say, ''Well, we can't find qualified minorities,'' which is a lot of you know what.
I am looking forward to this, and I hope that together all minorities working together and others who believe in what we are trying to do and the effectiveness for the benefit of this country that we will move forward.
Thank you, Madam Chair.
Chairwoman KELLY. Thank you. We will turn now to our first panel.
Our first witness is Ms. Ana Maria Fernandez Haar, chair of the Board of the New America Alliance and founder and CEO of the IAC Group, a full service, multicultural marketing and advertising firm. We welcome you.
Page 12 PREV PAGE TOP OF DOC Ms. Fernandez Haar, lectures on the subjects of transcultural marketing, global branding, market entry strategies in the United States and Latin America. She also serves on many foundation and community boards and has received significant professional recognition for her work.
Our next witness is associate professor of accounting at Boston College, Ms. Theresa A. Hammond. Professor Hammond is the chairperson of the Accounting Department at the Wallace E. Carol School of Management at Boston College. She is also a member of the National Association of Black Accountants and a co-founder of the African-American Accounting Doctoral Students Association.
Next is Mr. Michael D. Kennedy, the managing director in the Atlanta office of Korn/Ferry International, a global executive search firm. Mr. Kennedy leads the company's diversity specialty team in the financial services area. Prior to joining Korn/Ferry, Mr. Kennedy headed a venture capital consulting firm and held the position of vice president in the Corporate Finance Group at GE Capital Corporation.
We also have Mr. Marc Lackritz, president of the Securities Industry Association. Mr. Lackritz has appeared before the committee many times during his 14-year tenure at the SIA. We welcome you, sir. Again, he serves on a number of boards and advisory groups, including the Financial Accounting Standards Advisory Council, the American Council on Capital Formation, the Foundation for Investor Education.
And our next witness is Ms. Joanne Hanley, the president of Women in Housing and Finance, Incorporated. Ms. Hanley is also the associate director for Congressional Affairs at the Office of Federal Housing Enterprise Oversight, the OFHEO. In her role at Women in Housing and Finance, she works to promote women in the fields of financial services and housing through the professional enrichment and leadership enhancement.
Our final witness this morning will be introduced by our ranking chairman, Mr. Gutierrez.
Page 13 PREV PAGE TOP OF DOC Mr. GUTIERREZ. Thank you very much, Chairwoman.
Well, members of the committee, I am pleased to introduce the Honorable D. Lorenzo Padron who has served as commissioner of the Illinois Office of Banks and Real Estate since May of 2003. I have known the commissioner for many years, and I am pleased that he is able to be here today to share his personal experience with the subcommittee.
Mr. Padron's a well-known Chicago banker, civic leader and entrepreneur. Mr. Padron came to the U.S. from Colombia, South America in 1968 to attend the University of Illinois in Chicago where he earned a bachelor's degree in business management, and he also attended the University of Chicago Graduate School of Business.
Commissioner Padron entered the banking industry in 1977 at the First National Bank of Chicago and worked in the Commercial and International Banking Department. He became assistant vice president in the Commercial Loan Department at Banco Popular and then a senior vice president of Lending at Metropolitan Bank and Trust where he also served as a member of the bank's board of directors.
Commissioner Padron is a founding member of the Latin American Chamber of Commerce where he served as chairman of the board for the past nine years, the largest Hispanic trade association in the Midwest and one of the largest minority consulting firms.
He is also owned his own business. Commissioner Padron is the first Hispanic to lead the Illinois agency responsible for regulating and supervising State-chartered banks.
I will conclude by saying that although the commissioner is not here representing the Conference of State Bank Supervisors, I am pleased to report they have considerable diversity in their ranks at the top level. There are currently 6 African-American commissioners on the 50 States, 8 female commissioners, 3 Hispanic commissioners and considerable diversity at the deputy level.
Page 14 PREV PAGE TOP OF DOC It is an excellent start, and I would hope that steps in the right direction by State would be followed by the Federal Government in this and other matters. And I look forward to hearing from the commissioner.
Chairwoman KELLY. Thank you, Mr. Gutierrez.
We welcome you, Mr. Padron. I know you had a hard time getting here, so we are delighted you were able to make it.
Without objection, all of the written statements and statements of everyone on the panel will be made part of the record. You will each be recognized for a five-minute summary of your testimony. The lights on the boxes at the ends of the table will indicatea green light means that you have five minutes, a yellow light means please summarize because the red light will come on, and that means that is time to stop. If you haven't summarized prior to then, please do so quickly and end your testimony.
And we begin with you, Ms. Haar. Welcome.
STATEMENT OF ANA MARIA FERNANDEZ HAAR, CHAIR, NEW AMERICA ALLIANCE
Ms. HAAR. Thank you. Good morning. U.S. House Committee on Financial Services Chairman Michael Oxley, Ranking Member Barney Frank, Subcommittee Chairwoman Sue Kelly, Subcommittee Ranking Member Luis Gutierrez and members of the committee, on behalf of the New America Alliance, I thank you and commend your leadership on the opportunity to appear before you today to discuss Latinos in the financial services industry and access to capital.
Latinos currently exceed 44 million people in the United States15 percent of the total, the largest minority in the country, the majority of the Western Hemisphere. Current purchasing power exceeds $700 billion, projected, as mentioned, to reach a trillion by 2010.
Indicators reveal increased participation of Latinos in all facets of American entrepreneurial activity and in the economy, except that they are very absent from leadership roles and executives roles on corporate boards, and in the finance industry they continue to lag. There are only 166 Fortune 1000 companies that include Latinos on their boards, and, furthermore, out of 10,314 positions, Latinos occupy only 202 seats1.97 percent.
Page 15 PREV PAGE TOP OF DOC Collectively, the 73 Fortune 100 companies classified as commercial banks, securities firms and savings institutions, have 936 director seats, 793 executive positions. American Latinos occupy 28 of these board seats, 2.9 percent, and of the total of 793 executive positions, they occupy 202.5 percent.
In anticipation of this hearing, we conducted an informal survey of six major Wall Street investment banking firms to determine the level of Latino participation at executive level, managing director or partner. At not one of these firms did the American Latino participation represent more than 1 percent, and these are the same Wall Street firms that earn millions of dollars, annually managing and handling the pension funds and retirement savings of tens of millions of American Latinos.
In the institutional investment arena, Latino majority-owned companies continue to struggle to find adequate access to public and private pension funds in minority procurement programs, and major corporations have not typically included financial services. The New America Alliance inspired a hearing, and I must tell you that the State of Illinois, and Chicago in particular, has been exceptional in this area.
In October of 2003, the NAA published a white paper on American Latinos in financial services. These are the highlights. We looked at management consulting, asset management, private equity, brokerage segment as follows: One Latino owned an investment management consulting firm in the entire country. Those are the gatekeepers. In the asset management field, less than one-half of one-percent, $28.8 billion of the $7.2 trillion in U.S. institutional tax-exempt assets is managed by American Latinos.
Latino and private equity firms have aggregate capital available for investment of less than $500 million, translating to control of less than 0.2 percent of the private equity funds overall. The $1.1 trillion public pension fund arena in the top 6 America-Latino states total brokerage fees are roughly $1.5 billion for the management of assets. Latino participation is 0.005 percent at $7.5 million.
Page 16 PREV PAGE TOP OF DOC The challenges and barriers that limit the size and competitive advantage of Latino financial services identified in the white paper are: Limited access to decision makers; misperception that Latinos do not have the ability to invest and manage funds, and we have data contrary to that assumption; companies lack capital for expansion as they face their financing barriers; small company size in terms of asset under management limiting companies' ability to secure contracts; and a small number of new American Latinos entering the industry.
The four financial services sectors shared one common conclusion: Public hearings such as this one at the local, State and congressional levels, we believe, will place the national attention on the subject.
Venture Capital Kauffman Foundation report found that minority enterprise venture capital investment if profitable with an internal rate of return median of 9.5 percent and a mean of 23.9 versus 20 percent return indicated for the comparable benchmark for the market as a whole. The Milken Institute indicates that less than 4 percent of small business investment company private equity funds were invested in minority deals, and focusing on minority investment, firms have less than 3 percent of all venture capital funds under management.
Reliable data is part of our significant problem. We respectfully suggest that the Congressional Budget Office look into the possibility of additional research.
I would like to provide some recommendations, as Sarbanes-Oxley reform provided historic opportunities to incorporate diversity on corporate boards. Corporate leaders need to guide board appointments and hiring initiatives. Elected and appointed officials can promote corporate diversity through public statements and simply starting a meeting by asking one simple question of your corporate callers: What are you doing in diversity? What does your board look like? What does your management look like?
We appreciate the opportunity. We also suggest that expansion of the current Community Reinvestment Act to include insurance companies as well as private sector pension funds. They have made a significant difference.
Page 17 PREV PAGE TOP OF DOC We appreciate this opportunity. We at the New America Alliance are committed to increasing access to capital markets and financing for Latino businesses. We stand ready to collaborate with the U.S. House Committee on Financial Services, other government leaders, corporate America and minority community leaders in advancing our common goals of prosperity for all in this country. Thank you for this opportunity.
[The prepared statement of Ana Maria Fernandez Haar can be found on page 43 in the appendix.]
Chairwoman KELLY. Thank you very much.
We would like to hear from you now, Dr. Hammond.
STATEMENT OF THERESA HAMMOND, ASSOCIATE PROFESSOR OF ACCOUNTING, BOSTON COLLEGE
Ms. HAMMOND. Chair Kelly, Ranking Member Gutierrez, Chairman Oxley, and Ranking Member Frank, thank you for the opportunity to address the committee on the critical matter of the dearth of African-Americans in the Certified Public Accountancy profession.
I am going to talk about four major points. One is the importance of the CPA profession; the second is that African-Americans are vastly underrepresented in the CPA profession; the third is the role that the experience requirement has played historically in excluding African-Americans from the profession; and the fourth is the lack of transparency in providing information on how many African-Americans there are at the various firms.
Before the Enron debacle of a couple years ago, very few people paid any attention whatsoever to the CPA profession, but now I think people understand that public accountants are supposed to represent the public. As Mr. Frank said earlier, how can the public accountancy profession represent the public when 12 percent of the public is African-American but fewer than 1 percent of CPAs are African-American? Ninety-eight point seven percent of partners in the major CPA firms are white.
Page 18 PREV PAGE TOP OF DOC In addition to not representing the public, also this is denying African-Americans well-paying jobs and also access to capital. Most black-owned firms work closely with African-American businesses and help them develop access to capital and manage their capital effectively. So the lack of African-American CPAs has a widespread effect on the economy.
As I said earlier, fewer than 1 percent of CPAs are African-American, only one in 1,000 partners in the major firms are African-American, and this is despite the fact that in the past 20 years 6 to 8 percent of accounting graduates have been African-American. There are plenty of accounting graduates who are black, and yet there are very few black accountants in the firms.
This contrasts poorly with the number of doctors who are black, which is 4.2 percent, and 2.7 percent of lawyers. Both of those professions require significant additional education above CPAs, and yet they both have much higher percentages of African-Americans than do CPAs.
I wrote a book on the history of African-American CPAs, because I was trying to understand why this underrepresentation was so severe, and I interviewed 40 of the first 100 CPAs in the country. It reminds me of Mr. Gutierrez saying that one of his friends had never met a stockbroker. Well, until the late 1960s no major white CPA firm would hire an African-American. Therefore, young African-Americans today are less likely to have an aunt or an uncle or grandparent or parents who are CPAs. And it has an effect on mentoring as well as on role modeling for young people today.
Two of the people I interviewed were Bernadine Gines and Tab Tillman. In 1947, Bernadine Gines graduated from NYU with an MBA, an exceptional accomplishment for any woman, and especially for an African-American woman. Still she lived in Harlem and she sent out job applications to every CPA firm she had heard of, and she didn't get any interviews.
Subsequently, she moved to Queens, and now that her neighborhood didn't betray her race, she got many, many interviews. But when she would show up for interviews, people would say, ''I am sorry, we cannot hire African-Americans.'' In fact, the first interview she applied to, on the first interview she went on, the interviewer said, ''I can't possibly hire you, but could you please help me find a maid?''
Page 19 PREV PAGE TOP OF DOC This woman went on to become the first African-American female CPA in the State of New York because a small Jewish-owned firm hired her, and she celebrates her 50th anniversary as a CPA this year.
Tab Tillman similarly moved from the South, he had been born in North Carolina, and moved to Los Angeles in the hope of getting more opportunity. He really wanted to become a CPA. He became the first black MBA graduate of Syracuse University in 1949 and still he couldn't get job interviews once people found out that he was African-American. He applied to every single CPA firm in the city of Los Angeles and finally found a small, again, Jewish-owned, firm to hire him.
He worked there for one year and in the time that he was working there the managing partner of the firm was away serving in the Korean War. When that managing partner came back to Los Angeles, to his firm, and found Tab working there, he fired him immediately because he said it wouldn't look good to have African-Americans work in the office.
To become a CPA, you have to work for a CPA. Both Tab Tillman and Bernadine Gines were denied that opportunity for, in Tab's case decades after he first attempted to become a CPA.
Fortunately, the conditions changed in the late 1960s. The National Association of Black Accountants was formed in 1969, and the AICPA began tracking data. That is the American Institute of the Certified Public Accountants. They began tracking data that showed that there was a big increase in the number of black CPAs. However, that number only increased from 1976 to 1981. During the 1980s, the number of African-Americans hired by the firms declined precipitously, and beginning in 1990, the AICPA discontinued the survey.
As Ms. Fernandez Haar pointed out, having this kind of information is critically important to understanding the diversity of the profession. And so we call for moreI would like to see Congress and the SEC call for more transparency on the part of the firms. Just as you said when you interview or when you speak with firms you should ask how many African-Americans or Latinos they have on their board of directors, it would be important to stress the importance of the diversity of the CPA profession as well, and ask them how many partners they have who are African-American and Latino.
Page 20 PREV PAGE TOP OF DOC The National Association
Chairwoman KELLY. Ms. Hammond, if you could summarize your testimony, please.
Ms. HAMMOND. Sure. The National Association of Black Accountants is currently embarking on a project to try to get firm-specific data so that we can track this better, but this is a significant first step just to have this hearing and to raise awareness and attention to this issue. So I thank you.
[The prepared statement of Theresa A. Hammond can be found on page 53 in the appendix.]
Chairwoman KELLY. Thank you very much for your testimony.
Let me explain what has just happened here, because it is rather interesting. When I went to Iraq, I met in Mosul with a group of women who were anxious to be part of the new democratic Iraq. One of the women that we met with is following Mrs. Brown-Waite today. They have come here. As a result of our meeting, four of the women that we met with have been elected as women participants. They are members of the city council of Iraq. For the first time, there are women on the city council in Iraq, and we are very
Chairwoman KELLY. Would you stand up? The woman with her is the interpreter.
Chairwoman KELLY. We turn now to you, Mr. Kennedy.
STATEMENT OF MICHAEL D. KENNEDY, MANAGER OF DIVERSITY PROGRAM AND FINANCIAL SERVICES SECTOR EXECUTIVE, KORN/FERRY INTERNATIONAL
Mr. KENNEDY. Chairwoman Kelly, Congressman Gutierrez, Ranking Member Frank, Congressman Scott, distinguished members of the Subcommittee on Oversight and Investigations, good morning. I have been invited today to discuss the status of diversity in the financial services industry. As Chairwoman Kelly has already indicated, I am a member of the financial services as well as the diversity practice at Korn/Ferry International based out of the Atlanta office.
Page 21 PREV PAGE TOP OF DOC Our diversity practice was started in 1998 to assist our clients in addressing their diversity recruiting needs. Today, I come before you to share with you from a recruiter's perspective what I see in the financial services world.
The story in financial services today is really a story of good news and not so good news. First and foremost, there has been considerable progress in the industry over the past 10 years. One of the major changes that we have seen has just been in the attitude. Historically, diversity was something that was just the right thing to do for corporate America, and many firms viewed it from an altruistic viewpoint. Today that view has changed. Senior management is looking at diversity from a business imperative and recognize the ability to see the bottom line benefiting from diversity.
Corporate diversity initiatives have become very significant as well. As you indicated in your opening statement, most major financial services firms today have developed extensive corporate diversity programs. In many cases, chief diversity officers have been appointed who report directly into the CEO's position. What this shows is that there is more or less of a commitment to financial services diversity by senior management.
Recruiting has been fairly substantial over the last 10 years in terms of identifying talented people of color and women and bringing them into the financial services industry. However, recently, corporations have decided that they need to focus more on the retention side. What is driving that is in the recent economic downturn we have seen a disproportionate number of talented women and people of color displaced from the workforce in middle management ranks.
As a result, this puts more pressure on corporations, financial services firms, to develop career development tracks for their employees to allow them to be promoted up through their organization. So although there is positive momentum in the financial services segment, there is still a great deal of work that needs to be done and significant challenges confronting the industry.
Page 22 PREV PAGE TOP OF DOC Women and people of color are not represented on a consistent basis throughout the financial services industry. For example, in looking at the asset management sector, what we see from a recruiting perspective is that there are still very few women and people of color in roles such as equity analysts and portfolio managers. And we also see that there tends to be more representation in the government and the municipal security segments as opposed to corporate, high-yield and other areas. In those latter areas, the compensation packages tend to be higher.
In looking at investment banking as another example, again, women and people of color tend to be in either the municipal finance or the public finance or similar kinds of areas and are underrepresented in mergers and acquisition, corporate finance, areas that again tend to have higher compensation attached to them.
Another example is private equity and venture capital, which is what we are here to discuss today. What we see is that minorities and women tend to be employed in minority-focused and female-focused private equity funds or are working with funds that are affiliated with banks, foundations or endowments. In looking at the private partnership structure, which is the vast bulk of the private equity community, we see scant representation of minorities and women.
Korn/Ferry recently developed a study that gauged the effectiveness of corporate diversity initiatives. You have a copy of it, and it is entitled, ''Best Practices for Diversity.'' In this study, we surveyed senior executives, corporate diversity heads and senior minority executives, and as you can imagine, there was a wide variance in discrepancies among the effectiveness with senior executives believing that these programs are very effective, where minority executives believe that these programs are not as successful as they should be.
One other example and trend in looking at the industry today is that most of the corporate diversity initiatives are in the larger global financial services firms. When you look at the regional firms, smaller financial services firms, what you typically see is that there is not as much diversity. It is being driven by the human resources area.
Page 23 PREV PAGE TOP OF DOC So with that said, the good news is that the industry has made some considerable progress, but the not so good news is that the financial services industry still has a long way to go before diversity is embraced consistently throughout.
[The prepared statement of Michael D. Kennedy can be found on page 71 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Kennedy.
STATEMENT OF MARC LACKRITZ, PRESIDENT, SECURITIES INDUSTRY ASSOCIATION
Mr. LACKRITZ. Thank you, Madam Chairwoman. Madam Chair and Ranking Member Gutierrez and members of the subcommittee, I am Marc Lackritz, president of the Securities Industry Association, and I appreciate very much the opportunity to testify today about SIA's and our member firms' efforts to encourage diversity within the securities industry and the U.S. capital markets. We commend the subcommittee for recognizing how important this topic is to the future of our economy, our markets, our industry and our investors.
SIA and the securities industry are fully committed to creating a non-discriminatory workplace and an industry where anyone and everyone can succeed on his or her merits. I am proud of the progress our firms have made over the last decade to develop diversity initiatives in the workplace and to improve their marketing to diverse customers. While our efforts are clearly beginning to pay off, we recognize that more work needs to be done.
The face of America is changing rapidly. By the middle of this century, about half of all Americans will be minorities. African-Americans, Asian-Americans, Hispanic-Americans and women are some of the groups that will make the market increasingly diverse. These changing demographic trends deliver a clear message: Securities firms must establish and support diversity programs in the workplace and in the marketplace if they are to succeed.
Page 24 PREV PAGE TOP OF DOC About 10 years ago, SIA formed a Diversity Committee of senior-level executives to increase industry understanding of the strong business case for building programs to develop multicultural workforces and client bases. The committee's objective is to help shape an industry that is open to everyone, where employees are limited only by their own potential, clients' unique needs are actively served, and shareholders receive value for their investment.
After first producing a business case for diversity and then creating a resource guide for identifying, recruiting, training and retaining a diverse workforce, the committee undertook a benchmarking survey tracking industry employment of minorities and women over time. The survey's purpose was to help our industry keep tabs on our progress over time in achieving an increasingly diverse workforce and customer base.
Importantly, our industry experienced one of its most significant recessions ever during the time period the survey covers. Given the difficult market conditions and severe cost-cutting measures that our firms undertook, our results are even more remarkable. For example, the percentage of women and minorities in key securities industry management positions is increasing, especially in large firms, which have all had diversity initiatives in place since at least 2001.
All of the large firms have diversity training included in their employee orientation programs, as compared with 89 percent in 2001. And 92 percent of all our large firms responding had formal mentoring programs in place, up from 78 percent in 2001. I might add that many of our large firms also have plans to add and expand their diversity efforts worldwide.
Similarly, all our mid-size firms have a diversity initiative as well, and many of them are engaged in as wide a range of diversity activities as the large firms. Four out of five mid-sized firms have a management-level person dedicated to diversity, and the percentage of mid-size firms incorporating diversity training, employee networks and formal mentoring programs more than doubled from 2001 to 2003. Almost all of our large member firms are dedicated to helping minority kids receive scholarships, summer internships and other opportunities for advancement.
Page 25 PREV PAGE TOP OF DOC Although our survey does not catalogue every initiative, we know that they are extensive and pervasive. The many positive changes that have occurred are a tribute to the efforts started more than a decade ago, and yet some of the trends indicated, and we have heard already this morning, show that we still need to make further inroads and improvements. We are firmly committed to ensuring that equal opportunity is a hallmark for all our firms' employment.
As we gain experience with diversity programs, we found that there are several elements in common that contribute to a firm's success. They include support, interest and active engagement from senior management; encouragement of a corporate culture that emphasizes diversity and provides training and education to employees to be sensitive and supportive of this goal; networking to identify, recruit, hire and retain women and people of color; and innovative programs that reach out to communities to hire people and provide support, including mentoring throughout a new employee's first few years.
Finally, targeting recruiting efforts and partnerships with established organizations that support women and minorities. Programs involving both mentoring and networking of new women or minority employees have been very successful in attracting, training and retaining more women and minority employees.
We have also made a lot of progress on the educational front with the development of a comprehensive web site, quarterly teleconference calls for human resources and diversity managers, inclusion of diversity in the core curriculum of our professional education programs and partnerships with organizations to support minorities and women.
As I noted earlier, but I want to reemphasize in conclusion, SIA and our member firms are fully committed to creating a non-discriminatory workplace where all employees can succeed on their merits. We have come far, but we still have a way to go. We welcome your subcommittee's support and input on how we can further improve our diversity efforts. Thank you very much.
Page 26 PREV PAGE TOP OF DOC [The prepared statement of Marc Lackritz can be found on page 75 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Lackritz.
STATEMENT OF JOANNE HANLEY, PRESIDENT, WOMEN IN HOUSING AND FINANCE, INC.
Ms. HANLEY. Thank you Chairwoman Kelly, Ranking Member Gutierrez and members of the subcommittee. I am Joanne Hanley, president of Women in Housing and Finance. We appreciate the opportunity to talk about this important topic today. I note for the record that I am testifying today solely in my capacity as president of Women in Housing and Finance.
Women in Housing and Finance is an example of an organization that was created because of a lack of diversity in the industry, principally, the lack of women. In 1979, the ''old boy network'' simply closed women out of important meetings. Therefore, a small nucleus of women in the housing field recognized the need for women to join forces, to share policy views as well as tips for boosting each other's career success.
This group was so small that they were able to meet for lunch around one table in a restaurant in Chinatown. They soon attracted women from financial services as well as housing and rapidly grew to almost 100 members.
We then struggled with 2 decisions: Whether to grow beyond 100 members and whether to include men. Both of these questions were answered in the affirmative, as Women in Housing and Finance elected to increase its strength by becoming more diverse. In the 25 years since those first lunches, we have grown to an organization of over 700 women and men, representing 260 organizations in both the public and private sectors. Current members include heads of financial regulatory agencies and the president of a major financial services trade association.
Page 27 PREV PAGE TOP OF DOC The organization has grown to be regarded as a premier forum for national policy leaders to address key policy issues. We carry out our mission by offering substantive educational programs on the current issues facing housing and financial services, usually around the lunch hour to address our busy schedules.
As Women in Housing and Finance celebrates our 25th anniversary this year, let me talk about two of our relatively new initiatives. Beginning in 2002, our Professional Development Committee created a leadership training program based on two principles: women learn differently, and women lead differently. We offer a range of programs designed to prepare our members for advancement into executive-level positions. Further details about our leadership programs are provided in my written statement.
Secondly, our members have proactively contributed to the Washington community, to our related entity, the Women in Housing and Finance Foundation. A centerpiece of these efforts is financial literacy programs that the foundation offers to low-income women and their families in the D.C. metropolitan area.
In addition to funding these activities, our members have actually taught some of the financial literacy classes. The foundation has also provided grants to 14 local groups, including Northwest Church Family Network, Hannah's House and the Women's Center.
With the success of both Women in Housing and Finance as an organization and of its members in their respective careers, the question remains as to whether there is still a place for an organization that focuses on the success of women in the fields of housing and finance. Our leadership met earlier this year in a series of strategic planning sessions and debated this issue. The result was a reaffirmation of the focus on women's success as a key element of our organization.
In summary, it is significant to note that the organization represents a solution designed by women, for women, based on our evolving needs. Some common themes emerge from a review of our 25 past years. Our members want the same access to policy makers as other groups have. Moreover, we don't just want to network with the policy makers, we want to create career paths that enable us to become those policy makers.
Page 28 PREV PAGE TOP OF DOC We saw the benefit in expanding our membership ranks to include men. We simply found that having a diverse membership furthered our individual goals of advancing in our profession. Currently, one-third of our membership is men, and one-third of our board is men.
Our members are willing to put in extra effort to acquire the skills needed in these executive-level positions, and hence our emphasis on leadership training. Finally, we want to use our personal and financial resources to give back to the community, especially to women needing assistance with housing and finance issues.
Much progress has been made; however, women continue to perceive the need for continued education and skill-building to ensure their inclusion at the highest levels in the industry.
[The prepared statement of Joanne Hanley can be found on page 63 in the appendix.]
Chairwoman KELLY. Ms. Hanley, could you please summarize?
Ms. HANLEY. Yes. This is why our mission statement emphasizes that Women in Housing and Finance promotes women through professional enrichment and leadership enhancement. Thank you.
Chairwoman KELLY. Thank you.
Mr. PADRON. Good morning, Chairwoman Kelly
Chairwoman KELLY. Mr. Padron, push the button in the front.
Mr. PADRON. Sorry.
Chairwoman KELLY. Yes. Thank you.
STATEMENT OF HON. LORENZO PADRON, COMMISSIONER, OFFICE OF BANKS AND REAL ESTATE, STATE OF ILLINOIS
Mr. PADRON. Good morning, Chairman Kelly, Congressman Luis Gutierrez and members of the committee. I am Lorenzo Padron, commissioner of the Illinois Office of Bank and Real Estate. I am here today as a witness at this hearing to present the committee a report on key experiences as an Hispanic professional banker who has spent 25 years in the banking industry. I would also like to present my personal perspective on the progress made by the banking industry in its efforts to promote racial, ethnic and gender diversity in senior management and board membership. We commend you on this very important hearing.
Page 29 PREV PAGE TOP OF DOC I established my banking career as a management trainee in 1977 at the First National Bank of Chicago. Before my appointment by Governor Blagojevich, I was the senior vice president and board member of Metropolitan Bank and Trust in Chicago. During my early years of employment at First Chicago, it became evident to me that I was just one of two Hispanics in the domestic lending area of the bank, and all the senior management positions were held by a single groupwhite males.
The 1982 outcome of the class action suit filed against Harris Bank by its female employees charged in discrimination in promotion and compensation woke up the First National Bank of Chicago's senior management. Management initiated an internal analysis of its labor force, developed affirmative action goals and plans and an education and sensitivity training program for its senior officers and managers. It also initiated a public relations strategy directed to enhance the bank's image in the marketplace.
As a result of these diversity initiatives, a few minority males were promoted, but the bulk of the beneficiaries of these efforts were white females. To this day, the bank lacks Hispanics in amongst its senior management in its lending area, in its board of directors and in other positions of leadership.
A comprehensive review of Chicago's banking industry reveals that the employment of Hispanic senior lenders by the five largest financial institutions have increased significantly during the past five years as compared to any other period in Illinois history. In fact, two of Chicago's largest banks have formed teams of lending officers dedicated almost exclusively to servicing the growing Hispanic business market. However, senior Hispanic officers in leading management positions, CEOs and senior executives, and board directorships are absent from these large Illinois banks.
The major gains in leading management positions for Hispanics employed by the top tier banks are in the areas of operations, business development and diversity recruitment rather than management, policy making and activities central to the banks' profitability, which have changed over time.
Page 30 PREV PAGE TOP OF DOC While the banking industry consolidation and competition from out-of-State banks have depleted the group of large banks headquartered in Illinois, so have these trends reduced the opportunities for minority participation in executive management in Illinois at these large banks, now based in other States. Non-Illinois large banks with significant operations in Illinois present the same characteristics as the Illinois-based large banks, except for Banco Popular whose CEO and a significant number of the leading management positions are held by Hispanics.
A somewhat different picture is observed in the community banking segment. These are banks with total assets between $500 million and $2 billion, where Hispanic senior lending officers occupy some leading management positions. Even in this sector there are no CEOs or Presidents, but there are approximately 12 Hispanic board members in the top 6 banks.
One of the variables explaining the absence of Hispanics in leading management positions in the banking industry in Illinois relates to demographics. It was only during the past 2 decades that the Hispanic population in Illinois has experienced significant growth, which is reflected in an increasing number of junior level managers and officers in the banking industry.
An analysis of minority-owned banks in Illinois, in the Illinois banking industry, shows that the group of banks owned by Hispanics and African-Americans remain in the category of endangered species. Increased competition from a greater number of out-of-State banks entering the Illinois market and the consolidation of the banking industry reduced the number of local Hispanic-owned financial institutions from three to one. Banco Popular with assets in Illinois exceeding $3.5 billion is considered an out-of-State bank.
There were three locally owned African-American financial institutions operating in Chicago, in Illinois at the beginning of this year. One of these three was sold in the first quarter of 2004 due to poor performance, one is currently in negotiations to be sold, and the third has been struggling to survive. The eight locally owned Asian-American banks operating in the State have been able to maintain their market share in spite of serious performance challenges. The stability of these banks has been supported by the strong loyalty of their core customer base.
Page 31 PREV PAGE TOP OF DOC In summary, the restrictive nature of Illinois banking laws produced a banking system that was unprepared to compete with banks operating in States with unrestricted bank branching, leading to the acquisition of the largest Chicago banks by out-of-State banks. The liberalization of the Illinois banking laws significantly reduced the number of banks operating in the State, and the consolidation of the banking industry is expected to further reduce the number of banks, including minority-owned financial institutions in Illinois.
The progress made by the banking industry in Illinois in its efforts to promote racial, ethnic and gender diversity in senior management and on Boards of Directors have been disappointingly slow.
Last week, headlines on Morgan Stanley's settlement agreement on Monday, and yesterday headlines on First American Bank in Chicago on its settlement agreement is really a sad reminder to us all that there is yet a great deal of work to do in this area.
Today's editorial page of Chicago Sun Times has an article under the heading, ''Time for the Wall Street to Get Bullish on Diversity.'' The article states that in terms of equality it has been a bear market, and Wall Street must come up with a better deal. The article starts with a quote from a former employee of Merrill Lynch quoted in the New York Times that reads, ''They have a specific view of what a successful banker or manager will look, and it is not usually women, blacks or Hispanics.
I am prepared to answer any questions you may have. Thank you.
[The prepared statement of Hon. Lorenzo Padron can be found on page 82 in the appendix.]
Chairwoman KELLY. Thank you very much, Mr. Padron.
Some of our panelists have noted that a lack of access to capital financing is the primary barrier to the growth of minority-owned enterprises outside of traditional service-oriented endeavors. What do you think can be done to improve access to capital to all individuals? And I am throwing this out to the entire panel. I would like your answers quickly, because I only have five minutes like everybody else to ask this question. So, please.
Page 32 PREV PAGE TOP OF DOC Ms. HAAR. Your greatest resources are in the pension funds and the pension plans and their gatekeepers. Asking who the gatekeepers are, when minorities may participate, who the board members are, who the investment committee decision makers are, because some of these funds, even those earmarked for minorities, are not getting funds that then are the engine for business. So just asking the question who is making the investment decision and how many minority funds you have invested. The return on investment, by the way, is excellent.
Chairwoman KELLY. Thank you. I am just going to skip down, Mr. Lackritz?
Mr. LACKRITZ. Thank you, Madam Chair. I think that most entrepreneurs go through a series ofthey go through a cycle where they get financing initially from their own savings and those of friends. They then get bigger and get bank financing. They get maybe a little bigger and get venture capital financing. And if they are very successful, they might get in the public capital markets. I think at every step along the way we need to pay attention to who is making those decisions and make a conscious effort to really expand those programs.
Chairwoman KELLY. Mr. Kennedy, do you have something you want to say on that?
Mr. KENNEDY. Yes, Madam Chairperson.
Chairwoman KELLY. Please push that button so we can hear you.
Mr. KENNEDY. Can you hear me now?
Chairwoman KELLY. Yes.
Mr. KENNEDY. Yes. What I was going to contribute is that I think we need to take a look at overhauling or at least revising some of the guidelines for the SBA, particularly pertaining to the small business investment company programs, because I am aware that historically that has been an avenue where minority funds have been started to get some equity capital out into the community. But I think more needs to be done there with that program, and I think it needs to be overhauled.
Page 33 PREV PAGE TOP OF DOC Chairwoman KELLY. Thank you. You and I should talk. I sit on the Small Business Committee as well, and we are trying to do something about that.
Ms. HANLEY. I agree with
Chairwoman KELLY. I am sorry, Ms. Hammond?
Ms. HAMMOND. I am sorry. I agree with Mr. Kennedy. It is a big issue among black CPAs who work closely with small black-owned businesses as the SBA program has experienced such severe cutbacks that it is very difficult to qualify for this type of financing. When this financing was more available in the late 70s and the 1980s, black businesses were growing much more quickly. Now they are shrinking, and this is an important area to be addressed.
Chairwoman KELLY. I think we may need to talk more about that.
Ms. HANLEY. I don't really think I have anything to add. I think we have probably touched on all the themes. We, as an organization, would be looking to do what we could do via our foundation as well.
Chairwoman KELLY. Thank you.
Mr. PADRON. Well, one of the problems that really limits our ability of capital to minority companies is the fact of employment of minority and women officers has been absent to the banking industry. And, consequently, either because of cultural conditioning or because of lack of interest, the capacity or the inclination of non-minority and women loan officers really limits their interest in this market.
I personally can tell you that I have spent a considerable amount of time lending to a great number of minority companies in Illinois, and the few minority and African-American and women loan officers in the lending area actually with authority to lend capital is where the deficit is. We have representation in operations, in diversity recruitment and so on and so forth, but in the critical area of lending, that is where we need to emphasize that is where the decision making is done.
Page 34 PREV PAGE TOP OF DOC Chairwoman KELLY. Thank you very much. Thank you.
The recent harassment scandals on Wall Street have been very publicized and Mr. Padron talked about that. There is still a lot of progress that needs to be made. In an article in the New York Times recently, one worker said, ''There are a lot of women I know who have left the Street with $4, $5, $6 million in their pockets who say, 'I am never going to reach the top, so I will go do something else.'''
As a matter of fact, a woman in my hometown started something called, ''85 Broads,'' because 85 Broads is the address of Goldman Sachs, and at that pointthis is quite a number of years agothe women could only reach a certain level. That corporate environment has now changed, but this is a brain drain. It is a brain drain when we don't use everyone in America who wants to be in on this and has something to give. Very clearly, these are successful women, but they are limited in terms of their advancement.
I want to know what you all thinkand let's just start down here with Mr. Padronwhat do you think it is going to take to break through these barriers?
Mr. PADRON. It is a real challenge to break through these barriers. Some people like in my capacity when I was at First National Bank of Chicago, I realized, and the rest of the minorities and women in the Commercial Loan Department realized, that the glass ceiling was just too thick to break, and some of us decided to go into the International Banking Department where promotion and the rate of promotions were faster. And from there I moved to Banco Popular where I knew that there was a great deal of sensitivity to promotion and compensation.
I think that it is a serious challenge. I think that we need to continue to regulate with stricter interpretation of the laws, and also I think that we need to review the legislation to see what additional areas we need to tighten up.
Chairwoman KELLY. Let's go on down the line.
Page 35 PREV PAGE TOP OF DOC Ms. HANLEY. I think this is a perfect question for our organization. It is why we continue to exist. We have internally debated as an organization, with an increase of men in our membership, the need for women's organizations. We absolutely believe the barriers continue to exist, and we are looking to enhance our professional development training, get more women on corporate boards with the appropriate training and get them to break through the upper ranks.
Chairwoman KELLY. Thank you.
Mr. Lackritz, I know that you at SIA have really tried to encourage these firms to move forward and become more diverse, and I am very happy to hear that. I would like to knowand I know that on Wall Street the woman that I spoke of is back on Wall Street, so that I know that the corporate climate there has changed a great deal. Are there specific things that you have actually workedspecific companies you have actually worked with to try to put in place some more sensitivity? Have you run courses or anything?
Mr. LACKRITZ. Yes, Madam Chair. Our committee basically exists not so much to work with companies but to share the best practices of what other firms are doing. And so it is a great information-sharing network that has evolved.
What we have also done is we have established a leadership within the association for the most innovative programs that firms are doing in this area, and the first two winners, number one, was Edward Jones a couple years ago, and then last year was Quick and Riley, and they have very unique programs that are both replicative and have been very successful.
In the case of Quick and Riley, for example, they had, I think it was called, a Financial Consultant Advisory Program where they went out specifically to minority areas and went after specific underrepresented groups and then provided specific training programs for them and have really focused on the retention.
The firms that are most successful have mentoring programs in place so that women and minorities have mentors within the firms as they start up, and they also create networking groups within the firms of these new employees so that they can get some reinforcement. And I think that combinationit is making a difference.
Page 36 PREV PAGE TOP OF DOC I also think the role model of women in the industry makes a difference. I can tell you my cousin, Mickey Siebert, had a big challenge to break through the glass ceiling back in 1954, 1953 when she became the first woman to own a seat on the New York Stock Exchange. Since then we have had other path-breaking women, such as, for example, Sallie Krawcheck is now the CEO of Smith Barney; Alicia Shallot is the CEO of Bernstein, she sits on our board; Ellyn McColgan is the head of the brokerage, Fidelity, she also sits on our board. And I think those kinds of role models will help to replicate that success as well.
Chairwoman KELLY. Thank you. I am out of time. If we have enough time, I am going to ask this question again at the end and ask the three of you to address that as an answer.
But in the meantime, I am turning to Mr. Gutierrez.
Mr. GUTIERREZ. Thank you very much. Well, first of all, I would like to welcome you all again for being here, and I would like to acknowledge the presence in the audience of a woman pioneer, Marita Perez who heads Porta Lesa Asset Management and who knows in her own right how difficult it is and she is an asset manager. But it is hard to get the big corporations to give Latinas or Latinos or African-Americans the right to manage. But she manages very well, and I am happy she is here. She has taught me a lot about the difficulties that minorities encounter.
And I have a question. I would like to ask starting with Mr. Padron. What was the most important ingredient in your success?
Mr. PADRON. I think that the realization that I had to work twice as hard as the rest of the individuals in my group to make it. Also the attitude that this was not fair, the attitude that I had to overcome this issue, this problem and the recognition that I had to be in a capacity to fight and to advocate to change the laws.
Mr. GUTIERREZ. Thank you.
Page 37 PREV PAGE TOP OF DOC Mr. Kennedy, a simple question but you have a wealth of experience. How have you been so successful? What single thing?
Mr. KENNEDY. I would have to go back to education, and I was fortunate to have grown up in a family with professional parents. So as a result, they always emphasized the importance of education, and I have been blessed to have been able to attend one of the better boarding schools, colleges and graduate schools here in the United States, which provided me with the confidence to be able to go out and really do some things that I have wanted to do. So I think ultimately it gets back to education.
Mr. GUTIERREZ. Dr. Hammond?
Ms. HAMMOND. I think the key for all the African-Americans whom I interviewed for my book and also the African-Americans in the profession today, is mostly African-Americans helping African-Americans. As Mr. Padron said earlier and implied earlier, the programs that have been developed to increase diversity have actually mostly benefited white women in public accounting as well as in a lot of other industries. A lot of times firms talk about diversity and they say, ''Well, 37 percent of our firm is diverse,'' and it turns out that 36 percent of that is white women and 1 percent is people of color.
And so there has been a real lacksubsequent to the push for African-American inclusion that occurred in the late 1960s, early 1970sthere has been really a lack of attention to that issue. So what has happened is the National Association of Black Accountants and African-American-owned firms have filled those gaps.
In 1965, there were 100 CPAs in the country; 27 of them were in Illinois. And the main reason for that was because of Mary Washington, who you may know, has a CPA firm, Washington, Pittman and McKeever, in Chicago. She trained African-American CPAs who came from all over the country to come and work with her because they needed to work for a CPA to get a CPA, and no white firms would hire them.
Page 38 PREV PAGE TOP OF DOC Subsequent to that, the National Association of Black Accountantsand I have some colleagues from NABA behind me here, including the president of NABAthe National Association of Black Accountants took that leadership from the 70s through the 80s and 90s and has conventions and organizes opportunities to make it easy for the firms to recruit African-Americans, for African-American professionals to meet each other and be supportive, for African-Americans to meet the few black partners there are in these firms. That has really been where the leadership has come. And that is wonderful, but it is not enough.
Mr. GUTIERREZ. Ms. Fernandez?
Ms. HAAR. Thank you. Twenty-five years ago, I retired as the vice president of Corporate Lending and Corporate Finance in a bank called Flagship Banks, now SunTrust. Having been through the executive training program, first Latino of any gender in charge of the Credit Department, first corporate lender, I want to answer that question. No one gives the opportunity unless there is a benefit, but it has to come from the top. And these diversity programs that have been cited here, sometimes the diversity officer is the diversity. That is it. That is the program. It is not on the money-making end of the business, it is not in line to be promoted.
If I can tell you what happened is that I found a chairman who wanted to do it as an experiment. It wasn't even social consciousness, he just said, ''I want to see if you can do it. You say you can do it. We will see.'' And handicapped by not having had the level of education, the MBA, I did have to acknowledge working twice as hard, but I said I am going to make it my business to make it work and not do the traditional route.
All these minority diversity programs, Madam Chairman, with all due respect, are put in areas, Human Resources, where they can trot them out, staff positions. The decision makers where the money flows are not people of color and are not usually women in commercial lending, because it makes us too uncomfortable. I left to start my own business because it got to be uncomfortable. I said I am not going toas much as I want to fight this battle for other women, I am going to do something that is my way.
Page 39 PREV PAGE TOP OF DOC So we need you to ask those questions and have those changes made at the top. Otherwise we are going to hear about great programs that keep making more and more diversity personnel type executives. Thank you.
Mr. GUTIERREZ. You know, I thank all of you for those answers, and I just want to answer quickly if I were asked that question, you know what was the most significant thing for me? I grew up in a very Puerto Rican neighborhood of Chicago, so my parents, all their friends were Puerto Rican, the family event. Over at the factory, they spoke Spanish among one another. I didn't have a Latino teacher, I never saw a Latino police officer, I never a LatinoI mean I saw Latino cab drivers and dishwashers and factory workers, like my mom and dad.
And then what helped me, I think, to be successful is that my parents went back to Puerto Rico, and we went to this little town, and when I got there the doctor was Puerto Rican, the architect, the mayor, the senator. I turned around and I saidthe principal of the schools, all the school teachers. And all of a suddenand I had great parents, but I never saw that I could be all of these things.
And so it was very lucky and fortunate for me to see people in all those positions, because it said to me, ''Look, you can do all of these things.'' Had I stayed in Chicagoand I just want to say to all the members of the committee, many young African-American, Latino youngsters it is all they see. They don't see it. They grow up with such a thirst and they don't see anything else other than the crime and the poverty that surrounds them each and every day.
And so you all are importantMr. Kennedy, Ms. Fernandez, Lorenzoall of you are very, very important, because you are all role models for the young people, and I thank you all for your wonderful testimony.
Chairwoman KELLY. I thank you.
Page 40 PREV PAGE TOP OF DOC We have been called for a series of votes, so we are going to take aoh, I am sorry, do we have enough timecan we pick up Mr. Hensarling? Okay.
Mr. Hensarling, if you can make this just roll, we will do that.
Mr. HENSARLING. Thank you, Madam Chair, and I will attempt to be brief. One, I applaud holding this hearing in the first place, because I have observed it is very difficult in America to have an intelligent conversation about race relations and hiring practices. Given the history of racial prejudice in our Nation, it is an important topic that we take up.
Perhaps contrary to some members of the panel, I, myself, do not have interest in diversity as a goal in and of itself. I have a great interest in diversity as a means towards a goal, and that goal is to move us to a freer, more colorblind society. So where I see diversity and it represents an absence of racial prejudice, I tend to celebrate it. Where I see the existence of diversity and I believe it represents the triumph of color consciousness over equality of opportunity, I tend to be critical of it.
I believe that a properly structured diversity program can be very good in helping those who suffer from a legacy of prejudice to reach greater heights of opportunity, but I also know that there is a very thin and gray line between diversity, color consciousness and de facto quotas.
So I guess my first question is, Mr. Lackritz, can you tell me, in your opinion, what does a properly structured diversity program look like in the securities industry?
Mr. LACKRITZ. Well, I wanted to give you a very thoughtful response, so I will try to be brief. The reality is that there are lots of different ways at this, and we have got a number of different programs that are finding success. I think the most important qualities are engagement of top management, and I can tell you that in our large firms now diversity and openness and equality of opportunity have become one of the top two or three goals of almost every CEO of all of our large firms. So you need top-down engagement by the CEO.
Page 41 PREV PAGE TOP OF DOC You need a commitment culturally within the firm to both recruit and try to track new types of employees, whether they are women or people of color and an active aggressive effort to go out and get that. You need to have a mentoring program internally in the firm to help people succeed, as all of us have been mentored along the way by older people, and you need to have a method for the new employees to network among one another and get to know one another a bit to give each other support in a new environment where they may find it unusual or new. I think all of those components add up to a good program.
I also think that the main reason for engaging this is because you are going to be more successful from a business standpoint, and that is the reason to go after it. But that is why you do this and a way to reach customers in new ways.
Our market, like every market, is evolving very dramatically. You can just look at the different ways people buy securities. It is dramatically different from the way it was 10 years ago. Look at the number of people that are buying securities, that has changed. So you need to have flexibility, but I think that is the main focus. Sorry for the long answer.
Mr. HENSARLING. No, no, no. It is an important question. Speaking of questions, instead of asking five questions, I think I will ask two questions.
The second question I had is I have heard a number of statistics relating to the discrepancy between an ethnic population, or a racial population, in America and their representation in the upper management at various financial services industries. I am curious if there are any studies that the panelists might be aware of as what the disparities look like, assuming you can hold constant certain variables like income and education and two-parented families and such.
So I know that, unfortunately, racial prejudice is alive and well in the USA, but I wonder how much of that relates to what might be viewed as an earlier pattern of prejudice with unequal educational opportunities, perhaps unequal family environments and other variables.
Page 42 PREV PAGE TOP OF DOC Maybe we can just go left to right, and if somebody's aware of the study, if you could just educate me or cite that study for me, I would be appreciative.
Ms. HAAR. Thank you. There is not such a study that I am aware of given the Hispanicone of the recommendations that we made was perhaps that we could look at such information. However, we do know from an anecdotal basis, just looking at the top Hispanic 500 firms, that it does not seem to be compatible that directors are not available simply because we already have people who have succeeded, who have achieved and who actually sit on their own boards. So just from observation, it would not be logical.
Mr. HENSARLING. Ms. Hammond, are you aware of any such study?
Ms. HAMMOND. Well, from my own research, it is obvious that for the past 20 years 6 to 8 percent of accounting graduates, that is people who graduate with degrees in accounting, have been African-American. And despite the fact that it only takes about five years after graduation, typically, to become a CPA, still less than 1 percent of CPAs are African-American. That is a huge disparity controlled for graduation rates in college.
There is a study specifically about minority group members. There was a study in 1990 of all the students who had gotten offers from major public accounting firms. So they first found the students who had gotten offers, and then they went back to their GPAs and how many offers they got, and they found that the white males had the lowest GPAs and the highest number of job offers. And the minority women had the opposite.
Mr. HENSARLING. Thank you. Unfortunately, my time has expired.
Chairwoman KELLY. Ms. Hammond, I have to stopI am sorry, I have to stop this. We have less than three minutes to make it to the floor to vote. We are going to take a recess. I would hope that we will be able to get back here by about ten after, quarter after 12. We have three votes and we have to get there now. Thank you.
Page 43 PREV PAGE TOP OF DOC [Recess.]
Chairwoman KELLY. [Presiding.] Thank you very much. Sorry we had the break but these things happen.
Now I am going to call on Mr. Davis.
Mr. DAVIS. Thank you, Madam Chairwoman. Let me welcome you all back. One of the reasons that I think you have a sense of this, after listening to comments from other members and the comments from yourselves earlier this morning, is that there are, I guess, two sets of concerns.
One of them is related to the absence of personnel, the absence of a larger presence and boards of directorate, that kind of thing, and the concern, as I would define it, is that we aren't making the most of the talent pool that we have in this country, that we have a talent pool that is dryer and shallower than it should be. And a lot of the other members have talked pretty eloquently about that.
The second set of concerns is that the absence of African-Americans or Latinos has had the effect of keeping a certain viewpoint or a certain perspective out of the board room, if you will.
Let me follow up, if I can, on the second set of concerns. While I know that it is not quite the scope of the panel, I want to talk for a minute about the CRA issue. I am not up to date on the national statistics, but I think we would all agree that for whatever reason there has been a lag in compliance with CRA and that we simply have not gotten what we wanted to out of CRA when it was passed. And I would surmise that that is one of the consequences of not having more minorities on board.
Do all of you agree with that, by the way, that the absence of minorities and minority representation in the hierarchy of banks has some spillover in CRA compliance? Is there agreement on that? Okay. All right. As we say in the courtroom, let the record reflect that all your heads are nodding.
Page 44 PREV PAGE TOP OF DOC What can this panel dowe haven't had a hearing on CRA this year. Hopefully we will have one in the next month or next session. What guidance would you give us as policy makers about two things. What can we do to make CRA more than just a promissory note, because right now it strikes me that it is a promissory note, and it is not a whole lot more binding or more powerful than that? What can we do to make CRA more powerful? And, secondwell, let me get your answer on that, first of all, from any combination of you all.
Ms. HAAR. I think it is really important to say that although it might have flaws in not living up to its total potential, that it has been extraordinary. I think that in this particular case doing a better job than what we have, but when you look at it, from 1997 to 2001, $1.5 trillion in loans investment and service to minority and low-moderate income communities went through CRA agreement. That is a lot of progress.
I would venture to say that tightening the compliance and perhaps expanding it to the areas that the chairwoman had already commented on earlier will perhaps be the best people, are not management, for example, are not so willing to change unless it is mandated in a way that becomes really measurable.
Mr. DAVIS. Any other perspectives on that?
Mr. KENNEDY. Yes. I have one perspective. I would suggest that it would be beneficial to expand or at least change CRA to an extent to incorporate incentives for private equity funds to be raised for minority firms, women-focused investment firms. I know that has been one of the aspects of it over the past years, but my sense is that I have seen qualified minorities and women who have tried to raise private equity or venture capital funds go to banks, and since it is included as part of CRA, CRA has not been allocated to get those equity funds raised. So I think if there is a way we could do a better job sort of utilizing CRA to get some funding out in the equity capital side, it will help small and female-owned businesses down the road.
Page 45 PREV PAGE TOP OF DOC Mr. DAVIS. Let me ask a related question. My understanding of CRA is that banks receive a rating. They receive a rating for whether they have an outstanding record. Is that right, the banks receive a rating on the CRA performance? What are the criteria? What are the categories or the delineations? That is just an informational question from any one of you.
Mr. KENNEDY. I am not sure.
Mr. DAVIS. Okay. Well
Mr. KENNEDY. They do see ratings, but I am not sure how it is structured.
Mr. DAVIS. All right. Right now what happens if a bank does not get an outstanding rating? Does anything happen?
Mr. PADRON. Well, one area which I think we have been lacking in enforcement of CRA, First American Bank of Chicago just announced yesterday in the Chicago newspapers that they have been found in non-compliance with the serious violation of CRA. I think that there have been a diversion in attention to CRA in the last couple of years, and I think that the issue comes to light mostly whenever a bank is in the process of acquiring another bank. And all of a sudden you see that they are starting to pay attention to it.
I have, as Congressman Gutierrez indicated, spent a great deal of time throughout my professional life working on a pro bono basis in the area of economic development and access to capita, and you see that my personal experience is that most of these banks, large banks, when you approach them to initiate or to join in special programs to facilitate access to capital to minority-and women-owned businesses, the attraction for them is just not there. But only at times when they are being bought or they are buying another institution, then they come around and invite you to participate in whatever programs they have.
So it is becoming an issue of enforcement, it is becoming an issue of having, as you indicated, the individuals from minority groups represented at a higher level of management, at the executive level of management or at the board level where they can influence these positions.
Page 46 PREV PAGE TOP OF DOC Mr. DAVIS. Madam Chairwoman, if I can just steal an additional 30 seconds just to make my point. What you have touched on is something I do think is fundamentally important, and it is something that I hope that this panel will examine. There is no question that CRA has been a positive event. It has expanded community development work on the part of our financial institutions.
But it is also very clear to me that exactly what this gentleman said is so, that if a bank chooses not to do its obligations under CRA, essentially the only thing that we do right now is to say, ''Oh, that is bad that they don't do more.'' And I think something that we need to look at is what can be done to incentivize compliance? On the flip side of it, what are the sticks if you don't get more proactively engaged in this area?
And the final point that I would make is I do believe that a poor CRA rate has something to do with the absence of minority executives in prominent positions in the hierarchy. Thank you.
Thank you, Madam Chairwoman.
Chairwoman KELLY. Thank you very much.
Mr. BACA. Thank you, Madam Chair. I appreciate the comments that were made by each of the panelists earlier when they were describing the need for minorities in diversity and having access. And we looked at access in terms of financing. We saw that yet there is a need for additional access, but at the same time it seems like we are cutting back the funding, and yet we have growth in minority, which also presents a problem in assuring that they do have.
And when we looked at and discussed the lack of diversity in each of the areas, not only from Hispanics, black CPAs or women in certain areas and then talked about the double standards that are applied there in terms of the numbers and statistics that are used, but as you look at and you talk about education as being one, you can have education and I believe that we do have educated Hispanics, we have educated, blacks, we have educated women.
Page 47 PREV PAGE TOP OF DOC And one of the things I was hoping that I would hear from you is that there needs to be sensitivity and there has to be a change, because without sensitivity and attitudes and behaviors, then you can draft a plan, any kind of a structure within any corporate America, but if that change and that sensitivity and that attitude and behavior isn't there, that is going to be hard to implement any kind of a plan that you have because you have the educational structure.
I want you to address that perspective, any one of the panelists, in terms of the need for the change in sensitivity, attitude and behavior in order to make sure that we do have people that have the ability to be not only on our corporate board but our executive board as well as to look at lending because, Kennedy, you talked about guidelines that needed to be done. Well, that is part of it too as well when you change those kind of guidelines. Can any of you then just sort of like touch base on it?
Ms. HAMMOND. I agree completely in the public accounting industry. I think that given the overwhelming white male dominance of the profession for so long, that even if the firms say that they would like to try to hire more African-Americans, they can't retain most African-Americans or Latinos who come to work for the firms.
And the main reason for that is the culture of the firms themselves. And the firms don't recognize the fact that they don't adapt to the culture of the people whothey are not making any adaptation whatsoever to anything but a white male culture. So they don't recognize that they are hanging out or taking staff members out golfing who are only other white males. They don't recognize that African-Americans may not know what certain terminology means because they don't have any familiarity with that from their family background.
And I think that one of the things thatbesides the diversity training, I think that if there is such a white dominance in the management of these firms, that just an awareness of the experiences of others makes a huge difference. A lot of white people don't even know that only 30 years ago the same firms that they are working for refused to hire African-Americans, and so I think just an increase in awareness will help change the culture, just to know more about the backgrounds of other people instead of assuming that everyone has the same background as they do.
Page 48 PREV PAGE TOP OF DOC Mr. BACA. Any one of you? Marc? Kennedy?
Mr. KENNEDY. Yes. I would like to piggyback on what Dr. Hammond had to say. Earlier, I talked a lot about the corporate diversity programs that many of the major financial services firms have initiated, and I think when you really look at the more successful programs, those are at institutions where you have a CEO who is passionately committed to making diversity happen throughout his or her organization.
Mr. BACA. He is leading by example.
Mr. KENNEDY. Leading by example. And my sense is, at least from the recruiting work that I do in large financial services firms, that number is a very, very small number of CEOs who are passionately committed to making that happen. When you look at the business objectives every year for most of the major financial services
Mr. BACA. So what I am hearing is he is got to change his attitude.
Mr. KENNEDY. Well, you are going to have to change the attitude of a lot of other CEOs and leaders in the financial services world to make sure that they are more sensitive before they can then drive diversity down through their organization.
Mr. BACA. Marc?
Mr. LACKRITZ. Yes. Thank you, Congressman. I guess I would just note that it is changing. Only yesterday the new management team at CS First Boston that just came into place, the new CEO sent out a memorandum to his entire staff saying that the objectives going forward for the firm were, first, to become a world class investment bank; secondly, to produce a talented, ethnically diverse workforce; and I forget what the third one was. But that objective coming from the new CEO of a major investment banking firm sets the tone and I think really places the importance upon driving that through the whole organization.
I can also tell you that all of our large firms have diversity sensitivity training as part of their employee orientation programs. That was not true 3 years ago, and it certainly wasn't true 10 or 15 years ago.
Page 49 PREV PAGE TOP OF DOC Mr. BACA. Right. But then the problem is the implementation process. You can have the training, but if you don't implement it, then it becomes difficult. And I think all of us have procedures, guidelines but the implementation process. Because there are qualified individuals. I am always tired of hearing people say that we don't have enough qualified individuals to be on the board of directors, we don't have enough CEOs, minorities or women to become the CEOs. But we do have them.
Mr. LACKRITZ. I think the point you are making is right. I think that procedures and processes and institutions are fine, but people do make the difference, and leadership really does matter.
Mr. BACA. Ms. Fernandez, were you going to
Ms. HAAR. Congressman Baca, thank you, members of the committee. I would like to make a point about the focus. We talk about diversity, and we talk about what is right, but there is a business reason here. We have for the first time in months where we will reduce our trade deficit. The president has trade promotion authority. We have before us by 2005 the discussion of free trade area of the Americas.
What we are talking about here is part of the United States maintaining some sort of global competitiveness. If we are going to continue as the leading economy in the world, we have to become more globally competitive in these markets, and part of that is dealing with our own resources. Our minority communities here are our linkages to the rest of the Western Hemisphere and in terms of FTAA and, in essence, to the rest of the world.
I think it is an extraordinary resource, and we sometimes have to look at it also as this is good business. You need to do this because this is good business. It makes you a better company and part of a global competitiveness initiative too.
Mr. BACA. Thank you. Ms. Fernandez, could you please describe the relationship between
Page 50 PREV PAGE TOP OF DOC Chairwoman KELLY. Mr. Baca? Mr. Baca? I am sorry, you are already two and a half minutes over your time. I will come back to you in a minute, but Mr. Scott has been waiting.
Mr. SCOTT. Thank you very much, Ms. Kelly. First question to whoever may want to take this: What percentage of chief diversity officers in these firms report directly to the CEO?
Mr. LACKRITZ. I don't have an exact percentage for you. I know in some firms they do, and in other firms they report to the head of Human Resources who reports to the CEO. It varies. I can try and get a more specific number.
Mr. SCOTT. I mean could we, just generally, from you all's experience, would you say half of them, 10 percent of them, 20 percent, most of them?
Ms. HAAR. Very few.
Mr. SCOTT. Very few. Good. That is
Mr. KENNEDY. I would probably estimate 20 to 25 percent, maybe one in 4, of the larger financial services firms.
Mr. SCOTT. And don't you think therein lies a part of the problem for the inaction in much of the things that you have said is the fact of that, and that that would be one recommendation and finding that we could come out of this hearing, that we find an inadequacy and so the record would reflect that this committee could be in the position of making that recommendation.
Certainly, as a member of this Financial Services Committee, I would certainly want to go on record as one of the areas in which we can improve in and should work towards is the fact that for diversity to be taken seriously, it has got to come from the top. And the person in charge of diversity should report directly to the CEO.
Page 51 PREV PAGE TOP OF DOC Now, with that in mind, Mr. Kennedy, without necessarily putting you on the spot, I would like to know do you report to the CEO at Korn/Ferry?
Mr. KENNEDY. Well, indirectly, I do. Obviously, we are a publicly traded company now. We went public in 1998. But prior to that we were a private partnership. So the way that we are structured, I report into a regional managing director who then in turn reports into the CEO of Korn/Ferry.
Mr. SCOTT. All right.
Mr. KENNEDY. But I am not head of our diversity practice. I am just one of the members of our diversity practice, but I tend to have a specialty within financial services.
Mr. SCOTT. Well, hopefully, after this hearing it gets to report back to C-SPAN and they might make that promotion for you.
I hope that positive comes out of this.
Now, Mr. Kennedy, you mentioned in your testimony you referred to scam representations, if I remember correctly, of minorities and women. Would you share with us what you mean by scam representations in diversity and describe one of those for us?
Mr. KENNEDY. Yes. What I meant was scant, S-C-A-N-T.
Mr. SCOTT. Oh, scant.
Mr. KENNEDY. Yes, scant.
Mr. SCOTT. Okay.
Mr. KENNEDY. Very little representation of minorities and women. And I think the point I was making there it gets to the private equity venture capital segment. When you look at the numbers of people of color and women who are in private partnership, private equity funds, there is scant representation. And the implications for that then are that since the majority of private equity funds are in this private partnership structure, then you have a whole group of people who, by and large, have been excluded from participating in the venture capital arena, at least most of the mid-size and larger funds.
Page 52 PREV PAGE TOP OF DOC Mr. SCOTT. Okay. This question: I would think a purpose, a part of our purpose as the Financial Services Committee in this hearing is to receive input from you. And a part of that is to determine what, if anything, we in Congress can do or act upon. And with that in mind, I would like to give you all, those of you who may wish to ponder this question, the opportunity of sharing with this committee what do you think we in Congress can do to improve the picture of diversity in corporate America, in the financial services industry particularly, and access to capital? And not only what we can do through our bully pulpit, through persuasion but also through specific legislation and through Federal agencies.
Ms. HAAR. Congressman Scott, you made an excellent point about reporting to the CEO. Although I am not an expert in Sarbanes-Oxley, it is my understanding that the CEO now has to sign off on the financials as part of that. If an expansion of that included that he would have to sign off on his diversity mission, that would be an extraordinary thing. If it is a wish list, an expansion of CRA to include the pension funds and other areas, insurance companies in the financial services industry, that would be extraordinary.
And perhaps researchwhat would be the arm of the Congress that funds the research?
Chairwoman KELLY. That would be somebody like GAO.
Mr. SCOTT. General Accounting Office.
Chairwoman KELLY. The General Accounting Office. There are several places for us to go to get research like that.
Ms. HAAR. Part of the reason that we are not moving forward is that everyone has proprietary data and it is not really being shared. So none of us are really getting a picture of how bad it is. We know in the areas that we look at, but if you actually investigated and looked at the total picture in the country, it would be incredible.
Chairwoman KELLY. If the gentleman will yield for a moment.
Page 53 PREV PAGE TOP OF DOC Mr. SCOTT. Yes, go ahead.
Chairwoman KELLY. That is probably a fairly good idea. What if we asked GAO to put together this information and report back to us?
Mr. SCOTT. I think that would be excellent.
Chairwoman KELLY. Okay. Then so moved.
Ms. Fernandez Haar, you have actually accomplished what you wanted here, I hope.
Ms. HAAR. Thank you very much.
Chairwoman KELLY. Thank you.
Ms. HAMMOND. I would like to include the CPA firms in that and not just the financial services industry.
Chairwoman KELLY. So moved.
Ms. HAMMOND. Historically, the CPA firms have only responded to pressure from two different groups: Their clients or the SEC through Congress. And because they are supposed to be accountable to the public, Congress, I think, plays an important role in encouraging them to share this kind of information so that we can track and see who is doing well and who isn't and how we can do better.
Mr. SCOTT. Thank you.
Mr. KENNEDY. And I actually have a couple of thoughts as well. First, as we may have talked about earlier, I think it would be beneficial to take another look at the SBA and the SBIC Program, specifically to revamp aspects of that to make it more attractive to place equity capital into minority and women-only businesses, and I think that would be one way.
The other thing would be to take a look at the public pension fund industry, and we didn't talk about it in my bio, but I am actually chairman of the board of the State of Georgia's Employees' Retirement Pension Fund. We have about $14 billion in assets under management, and partly what we do is that we actually work with some minority-owned asset management firms that do an outstanding job for us to help them grow.
Page 54 PREV PAGE TOP OF DOC So when I go to many of the national conferences of various public funds, there are very few people of color represented on boards there. We had the only African-American executive director running a public pension fund in the country in Georgia who just left a couple months ago.
So I think that would be one area that I would ask you to take another look at, because you are talking trillions and trillions of dollars, and, certainly, there must be a way to get some of the assets from the public pension fund into minority-owned and women-owned asset management firms, but it has to be done the right way. So it can't just be a handout, it has got to be done the right way.
Mr. SCOTT. Okay. Does anyone else want
Chairwoman KELLY. If the gentleman will yield.
Mr. Kennedy, we have just added that to our list.
Mr. LACKRITZ. I don't have any specific legislative suggestions. I think your bully pulpit, your shining a spotlight on the issue continues to push us as a group, as an industry to continue to do better. I don't think now we need that push, but I think it is important to keep the spotlight on. I think sunshine is the best disinfectant, and I think from the standpoint of transparency, it has remarkable effects. So I really commend the chair and the subcommittee for holding this hearing.
Mr. SCOTT. Thank you.
Chairwoman KELLY. Mr. Scott, thank you.
Mr. SCOTT. Thank you.
Chairwoman KELLY. Mr. Baca, let us go back with you. With the indulgence, I am going to ask the panel first, you have been here with us for some time. This constitutes a second round of questioning, so I want to make that very clear. If you have to catch a plane, if there are other things that you need to do right at this moment, if you could indulge us so that Mr. Baca could finish this with his final question, I would be very grateful. Is that acceptable to you? Let it be seen as they are all shaking their heads. Thank you.
Page 55 PREV PAGE TOP OF DOC Mr. Baca, please.
Mr. BACA. Thank you very much, Madam Chair. Just a couple of questions.
One, Ms. Fernandez, could you please describe the relationship between the lack of Hispanic leadership on corporate boards and executive management teams and the flow of capital into the Hispanic community throughout the United States?
Ms. HAAR. Yes. In terms of corporate America, one of the things that happens is that the initiatives have already improved at the consumer level, so they are more than willing to advertise that industry has grown $3 billion and Spanish advertising, this is just corporate, to deliver the consumer business to the bottom line.
In the absence of senior executives or members of the board, the relationship does not grow to the next level, which is wealth creation. That means that, for example, in procurement, we have made progress, we can sell office supplies, but the financial services of the private funds and other high-end services, including accountants fees, for example, are not available.
The minority communities are not taken into account when investments are going to be made into new distribution centers or plans. So the entire wealth creation machinery does not work in a fair and equitable way.
Mr. BACA. What specific recommendations do you propose to members of this committee to enact to ensure economic empowerment to the Hispanic community, and what should be the consequences of hearing focused on and what legislative steps can we take?
Ms. HAAR. The one thing I want to do is express our extreme appreciation because the gentleman was right, your shining light on it, in and of itself, puts everyone on notice that it is an issue that is important and it is not going to go away. That is number one.
Page 56 PREV PAGE TOP OF DOC The other areas that we talked about, getting credible numbers, because the excuse oftentimes is we don't have the numbers, prove it. That is why we as an industry could not even grow in the media until there was media measurement. And coming from Congress, I think it is the most important thing. The minority community has only been recognized really, really as of the last census, and that is because it was the official U.S. government numbers, credible numbers saying how many of us and how diverse we were. So that is critical.
CRA, I think, has incredible potential, as we have mentioned earlier. And, for sure, the pension fundwe at the New America Alliance have a pension fund initiative. We have gone into State pension funds training the legislators, asking them and teaching them to ask the questions that we shared with you today: What is the composition of your board, what does your Investment Committee look like, how many investments have you made to minority companies? Those three questions, Congressman Baca and members of the committee, will be critical.
Mr. BACA. Thank you. One other question. In your white paper released last year, you reviewed that the asset management industry you identified fewer than 20 Latino asset managers in your survey. Only one Latino firm was identified in the top 100 asset managers. You have also suggested that public funds should be given specific guidelines that should facilitate the inclusion of Latino firms and asset teams. Which pension funds have a model out there that other funds can emulate?
Ms. HAAR. That is a difficult question, because in absolute numbers we can see that Calperse, for example, has done more than anyone, as an example, but yet the percentage is dismal in its comparison. The white paper has it in great detail, those four areas that we studied, but I do believe that training other legislators with the State fund or taking examples from you that could be applied under perhaps more of an umbrella guideline will be really critical.
Now, we have legal counsel and experts from an organization here who have a more specific focus than I do, and I am sure that they would be available to answer any questions.
Page 57 PREV PAGE TOP OF DOC Chairwoman KELLY. Thank you very much.
Thank you, Mr. Baca.
Mr. BACA. Madam Chair, can I have unanimous consent to put the white paper on record?
Chairwoman KELLY. By all means. So moved.
Mr. BACA. Thank you.
[The following information can be found on page 87 in the appendix.]
Chairwoman KELLY. Thank you very much. The chair notes that some members may have additional questions for this panel, and they may wish to submit those in writing. So without objection, the hearing record will remain open for 30 days for members to submit written questions to these witnesses and place their responses in the record.
I want to thank this panel, the witnesses today. You have indulged us longer than we expected, and for that we are very grateful. Thank you so much for your appearance today.
This hearing is adjourned.
[Whereupon, at 12:49 p.m., the subcommittee was adjourned.]