As the population of the United States becomes more diverse every year, a higher level of diversity is required of organizations to best serve the needs of their potential customers. However, as the racial makeup of the general population may be changing, the composition of employees, but particularly managers, is not changing at the same rate. This is common in many industries but one in particular is the financial sector, and more specifically brokerage firms. The finance industry is a fast growing sector of the economy and one that has traditionally been dominated by non-minorities, particularly white males. The purpose of this blog is to critically analyze the existing level of diversity in brokerage firms and how a lack of diversity may be negatively affecting measures of success like net income and customer satisfaction. A firm’s ability to best serve customers can be severely limited if they employ people not representative of the population they’re serving. If a firm can successfully foster a diverse working culture full of people from a wide variety of backgrounds, they will likely see subsequent improvement in a variety of measurements.
Making sure that your firm has diversity is essential for maximum performance and customer satisfaction. In fact, the effectiveness of how information itself spreads through your organization is directly tied to diversity. More diverse groups elicit information and emphasize learning throughout the decision making process. They focus on discovering new ideas and integrating them versus sticking with what is known. Diverse groups produce higher quality work and have higher levels of learning throughout their processes. (Collins, E Harvard Business Review) Not only is performance within your firm higher, but more outwardly customer satisfaction increases as well. Having your employees demographic cover a wider range of groups leads to customers feeling more represented, and more satisfied with your firm independent of performance itself. (P.F McKay Organization Science) With the benefits of diversity and its effects on performance and customer satisfaction, it begs the question how can my firm improve on our diversity? We will be highlighting three different approaches your firm can take to improve its diversity standing, and take advantage of the benefits that come with it.
Every manager wants their employees to be successful, as employee excellence is significant in boosting business performance. Employee excellence is an important part of organizational behavior, and that can’t happen without diversity in the workplace. Developing a diverse environment can create a more qualified workforce, reduce employee turnover costs, and capture a greater share of the consumer market. With all these benefits aside, opportunities from minority to non-minority groups differ tremendously, especially within the financial sector. The financial services industry provides employment for over 3 million persons, of which 84.5% are white, while minorities make up only 15.5% (U.S. Government Accountability Office, 2008). But how is the brokerage industry so lopsided? The dominance of whites (typically white men) in the brokerage industry creates a barrier for persons of color, that they must follow the organizational norms developed by white men if they want to be successful. This reality contradicts the social capital theory. The theory of social capital as described by sociologist Nan Lin, a professor of Sociology at Duke University, refers to the investment in social relations with expected returns in the marketplace. In other words, strong social relationships within a business can boost profitability. In an industry with little to no diversity, these social relations that could be beneficial, are instead controlled by one group. The solution to this problem starts at the recruiting phase for brokerage firms. According to the Bureau of Labor Statistics, the number of financial advisors’ and analysts is expected to rise from 223,400 in 2012 to 283,700 by 2022 (Bureau of Labor Statistics, 2016). With a different type of recruiting process that puts an emphasis on finding talent from a more diverse pool of workers, firms can utilize this increase to shift the diversity curve in the other direction. More diversity, more creativity. More creativity, more innovation.
As a subset of the recruiting process as a whole, focusing on the leadership of an organization and the diversity among upper management roles is a very effective avenue for tackling sector wide diversity issues. The basis for this proposal comes from the Upper Echelon theory and how increasing diversity within senior management positions of a firm would translate into positive diversification throughout the entire organization (Thomas, 2009) Through the development of diverse senior management staff, the firm is better equipped to adequately manage a diverse workforce and cater to the needs of their diverse consumer population.
The Similarity-Attraction theory states how as humans we are attracted to others who have similar attributes as ourselves (Thomas, 2009). Combining this theory with the plan to fix diversity from the top down, a diverse management staff will attract great diversity of workers and consumers who share similar diverse qualities.
Separate from the diversity of leadership positions themselves, it’s crucial that leaders within an organization manage the diversity related goals they set out in the same way that they manage the goals they set out for the business itself. Once levels of diversity begin to increase within an organization, monitoring the needs, values, and motivations of the diverse employees becomes the next step. Establishing clear channels of communication between leadership and employees will allow management to act in a proactive manner towards diversity related issues that could potentially arise and reduce any proceeding conflict. By holding diversification to an equal standard as organizational performance, firms will attract more customers, achieve better financial results, and foster a positive work atmosphere.
Another solution for retaining a diverse workforce in the financial services sector is establishing management-level accountability. Employee resistance, especially from middle-managers, poses as a challenge to diversity efforts. Unconscious bias continues to negatively affect women and minorities. For example, unconscious bias against women can result in a “reluctance to promote women in the expectation that they will eventually put family first.”(Garcia-Diaz, 2019) This same report also stated that this bias can trigger a self-fulfilling prophecy, as lack of promotion is one of the top reasons that women have said for leaving their job. In order to improve diversity and the retention of women and racial/ethnic minorities in the financial sector, management needs to be held accountable for workforce diversity goals. A way to do this is the use of a “diversity scorecard.” A diversity scorecard is “a set of objectives and measures derived from a firm’s overall business strategy and linked to its diversity strategy” (Garcia-Diaz, 2019, p.11). Measuring the progress and results of diversity initiatives is a key strategic requirement to demonstrate its contribution to organizational performance.
In short, there is no one specific way to combat lack of diversity within financial firms. A company can focus on hiring new employees of color or look to promote people of color already in the organization to positions of power. However, simply hiring minorities to fulfill a quota is not enough. Firms need to actively try and create an environment where everyone feels of equal importance and that their firm cares about their needs. Taking steps towards doing so is crucial to increasing performance, morale, and allowing your firm to reach its full potential.
References:
Article 1:Collins, E. (2018, May 28). How “Multicultural brokers” Can help Teams Perform. Harvard Business Review.
Article 2: Hibbler-Britt, Lillie M., Critical Success Factors of Black Financial Advisors in the Brokerage Industry (2016). Global Journal of Business Research, v. 10 (3) p. 57-68.
Article 3: Merkley, Kenneth J. and Michaely, Roni and Pacelli, Joseph, Cultural Diversity on Wall Street: Evidence from Sell-Side Analysts’ Forecasts (February 6, 2019). Swiss Finance Institute Research Paper No. 19-07.
Article 4: Thomas, G. (2009). Understanding the relationship between organizational attitudes about ethnic diversity, efforts to promote ethnic diversity, and organizational profit performance: Towards a predictive model (Order No. 3384629). Available from Ethnic NewsWatch. (305125930).
Article 5: Garcia-Diaz, Daniel, Representation of Minorities and Women in Management and Practices to Promote Diversity, 2007-2015 (February 27, 2019). GAO Reports p1-18.
Article 6: McKay, P. F., Avery, D. R., Liao, H., & Morris, M. A. (2011). Does Diversity Climate Lead to Customer Satisfaction? It Depends on the Service Climate and Business Unit Demography. Organization Science, 22(3), 788–803. https://doi.org/10.1287/orsc.1100.0550