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Focusing on diversity can deliver outperformance

Financial institutions seem to be getting better on gender inclusionbut still need to make improvements on racial diversity.

During the Securities Industry and Financial Markets Association'sannual meeting in Washington, D.C., this week, panelists said data collection isfundamental to ensuring proper diversity inclusion policies.

Suni Harford, managing director for Citigroup Inc., said the company's internal database hasbeen crucial in convincing management to prioritize retention of female employees.For example, Harford said the company knew 58 managing director-level women hadleft the bank in 2014 and familiar reasons were provided, such as poor performanceor staying home with kids. But when Harford responded that 57 of 58 women had leftfor a competitor, the conversation changed.

"Data is critical. It takes a long time, a lot of effortand a lot of money to build the databases and the infrastructure you need,"Harford said, adding that it took Citigroup five years to build its database.

Academic research has been building the case for gender inclusionfor a while, with evidence that companies with more women in leadership roles producebetter returns. Researchfrom Morgan Stanley showsthat companies with gender diversity posted return on equity 0.7% higher than regionalsector peers and 1.1% better than companies with a low portion of female employees.

"The scholarship in this area has gone from correlationbetween diversity and results towards causation," said Chris Lewis, principalgeneral counsel for Edward Jones.

But the panelists said improvements on inclusion were somewhatlimited to gender equality and that racial diversity continued to be a problem.Harford said Citigroup has done well on gender equality but still struggles withminority inclusion, especially in terms of talent retention.

Pete Rodriguez, a managing director for Bank of New York Mellon Corp., said a major hurdle at manyfirms is the "frozen middle." Panelists said diversity needs to be a priorityat the very top of organizations, and Rodriguez said progress has been made on thattack and that senior executives appear to "get it." As a result, managementhas implemented diversity outreach programs such that minorities are well-representedin the entry-level hiring process.

The biggest issue is in middle-level managers who are not asaware of the benefits of diversity and are prone to promote "people who looklike them, who went to school with them," Rodriguez said. Those promotionsto a deputy middle manager position are key in the move up the corporate ladder.

"Unlocking that frozen middle is really what's going tomove the needle on diversity inclusion," Rodriguez said.

Citigroup's Harford said the bank has had success combating the"frozen middle" problem by requiring all job openings be posted in a centralizeddatabase. And the bank conducts an interview process using a diverse panel of interviewers,nixing buddy-buddy deals that can exclude minorities.

Rep. Terri Sewell, D-Ala., was a panelist at the event and kickedoff the session with a story from her days as a Wall Street lawyer. Upon the closeof a deal, a company executive assumed the paralegal, a tall white man, was TerriSewell and thanked him for putting the deal together. Sewell said Congress shouldbetter incentivize inclusive policies and called upon financial institutions topay attention to both internal policies and those of their partners.

"It's not just in your immediate workforce, but also whoyou're hiring to buy your widgets from, to supply your various items," Sewellsaid. "I think that, across the board, it should be better."