The New York State Department of Financial Services (DFS) continues to establish itself as one of the state banking regulators committed to environmental, social, and governance (ESG) issues. Following guidance in March to New York insurers, both on managing climate risk and promoting diversity in their work forces, DFS recently announced its intent to begin collecting diversity data for boards and management.
Industry Letter on Diversity, Equity and Inclusion and Corporate Governance
On July 29, 2021, DFS expanded its efforts to collect diversity data from regulated financial institutions. In a March circular on “Diversity and Corporate Governance,” aimed at insurers, the agency announced it would begin to collect and publish data relating to diversity of insurers’ corporate boards and managers. In DFS’s July 29, 2021, industry letter, the agency reiterated many of the same arguments when it stated its expectation that “New York-regulated financial institutions make the diversity of their leadership a business priority and a fundamental component of their corporate governance.” DFS again noted the business case for diversity, citing data showing that more diverse companies benefit from increased profitability, a broader customer base, more innovation, better risk management, and a larger talent pool with higher employee satisfaction rates. The circular cited a number of statistics highlighting the lack of diversity in the financial services industry, including:
In the financial services industry, Black and Latino employees had a less than 25% chance of being promoted or hired for a senior management/executive position compared to their white peers.
Among banks reporting diversity data, women were less than one-third of the executive and senior-level workforce, despite representing 51% of the US population.
Of the 378 venture-backed cryptocurrency and blockchain companies founded between 2012 and 2018, 92% had all-male founding teams.
The agency also cited a number of actions being taken by governments and investors to strengthen the representation of women and minorities in senior positions in the financial industry.
Actions to Increase Board and Management Diversity
DFS had advice for financial institutions seeking to promote more diversity in their organizations to align with the agency’s expectations. It recommended New York-regulated institutions make diverse leadership a business priority and integrate it into corporate governance. It further advised that they pay closer attention to the diverse talent population and treat diversity as it would any other strategic priority, including “communicating its importance to stakeholders, providing a plan for how it will be achieved and explaining that plan, setting measurable goals, and tracking progress toward those goals.” Acknowledging that data collection is key to setting goals and measuring progress, DFS stated that it would begin collecting data related to board and management diversity for all New York-regulated institutions with more than $100 million in revenue, as well as from all entities authorized to engage in virtual currency business activity. It plans to publish the results in the first quarter of 2022.
As we have previously noted, while climate remains one of the hottest (no pun intended) topics in the ESG space, actions such as those taken by Nasdaq and the State of California, and now by DFS, to increase diversity on boards signal continued momentum around the “S” and, in particular, a focus on diversity, equity, and inclusion and a more diverse workforce, especially at the top. New York-regulated financial institutions should start now to assess their current board compositions and determine next steps to achieving a more diverse leadership.