Tackling the Pipeline Problem

Photo Credit: Christina @ wocintechchat.com
Sr. Lecturer Trevor Fetter
Shani Carter, Contributor

MBAs need to prepare to be held accountable for building a more diverse workforce.

In June 2020, while addressing his company’s response to the Black Lives Matter movement, Charles Scharf, the otherwise highly regarded CEO of Wells Fargo who was charged with turning around the bank after the scandals and missteps of his predecessors, asserted, “the unfortunate reality is that there is a very limited pool of Black talent to recruit from.” News about his remarks sparked widespread backlash. Many leaders countered that there are plenty of qualified Black candidates but a lack of commitment from senior leadership in sourcing and supporting them. Wayne Frederick, M.D., MBA, President of Howard University, wrote an op-ed stating, “[L]et me be clear: There is no shortage of Black talent in the United States.”

Had the CEO merely repeated excuses his subordinates had given him for failing to build a diverse workforce or did he believe the pool was the problem?  Could his statement have been a so-called Kinsley gaffe, which the journalist Michael Kinsley referred to as happening when “a politician tells the truth—some obvious truth he isn’t supposed to say”? The CEO quickly apologized and launched initiatives to build the bank’s diverse talent pipeline.

The backlash was not directed towards Wells Fargo alone, nor was it limited to race. Major tech companies like Facebook, Google, and Twitter faced similar criticism in the demographic composition of their workforce. In 2019, just 3.3% of the total workforce at Google was Black; at Twitter, the rate was 5%. Similarly, accounting for gender, women held just 21% of the technical roles at Twitter and 31.6% of all roles at Google. Workforce disparities along gender and racial lines reflected centuries of legal and social discrimination within the United States.

As future business leaders, you can embrace an opportunity and drive change, or have it driven around you.  In a year largely remembered for tragedy and cancellation, 2020 did bring a new sense of urgency for business to address historic failures in diversity, equity, and inclusion.

Certain industries and institutions are leading. Harvard’s endowment management staff are 50% women or minorities. Roughly a quarter of the endowment’s assets are managed by “majority diverse” external managers, meaning firms whose majority ownership are women or minorities. This compares, according to Harvard, to one percent of the asset management industry. Yale University notified its money managers that they will be evaluated not just on financial investment performance but on their progress towards hiring and retaining women and other underrepresented groups as part of the investment team. Nasdaq proposed new rules related to board diversity, potentially requiring listed companies “to have, or explain why they do not have, at least two diverse directors, including one who self-identifies as female and one who self-identifies as either an underrepresented minority or LGBTQ+.” In 2021, Goldman Sachs won’t underwrite a company’s IPO unless it has two diverse directors. One of us serves on the board of a company that has incorporated quantitative workforce diversity targets into its executive incentive compensation plans.  These examples of specific requirements will drive broader change.

Photo Credit: Christina @ wocintechchat.com

Local policies are forcing action on board diversity as well. California enacted a law in 2018 requiring public companies with headquarters in the state to have at least one woman on the board of directors by 2019. Following that, in 2020, the state enacted a new law adding requirements for boards to add members of underrepresented communities. The requirement begins in 2021 and increases in 2022.

We’ve already entered a new era of transparency on diversity and human capital management. US companies are required to file an annual form, EEO-1, with the Equal Employment Opportunity Commission, detailing the diversity of their workforce. This has the “Big 3” asset managers (BlackRock, State Street, and Vanguard) increasingly pushing for companies to disclose their EEO-1 data. Beginning in 2022, State Street will vote against companies that don’t. In addition, the US Securities and Exchange Commission has adopted new disclosure requirements that enhance public companies’ descriptions of their “human capital” strategies and policies, including areas of diversity, equity, and inclusion.  Of interest to the current RC class at this point in LCA, under “equity”, the guidance includes reporting on gender and racial pay equity: one company with which we’re involved adopted a framework of “fairness” to describe their policies and results.

The standards set by private and public stakeholders for workforce diversity build on the imperative to treat the subject as a business objective rather than a social cause. As with any strategic initiative, it requires evaluation of the systems, tools, and resources that define current outcomes. In this case, we as leaders must rethink and assume responsibility for the elements within the talent lifecycle that restrict hiring and maintaining diverse candidates at all levels within the organization. Robust metrics will help set the direction and gauge the effectiveness of your talent strategy, and implementation can be structured around consideration of the questions below:

  • Are we adequately planning for workforce needs on a regularly scheduled basis to allow for an objective recruitment cycle for open roles? The real or self-imposed need to fill a role quickly might lead to shortcuts (e.g. using personal networks or posting to an internal site) that exclude qualified applicants from the role. Using a standard approach to recruitment allows room for achieving greater candidate diversity by posting opportunities in more locations, bringing more objectivity into the interview process, interviewing more than one diverse candidate at a time (which is proven to increase the odds of hiring a diverse candidate), and building relationships with potential hires before needs are identified.
  • Are we intentionally building positive relationships with diverse populations and organizations that go beyond immediate recruitment needs? Brand equity plays a significant role in talent development at every stage, and impressions are likely to differ across cultures. In a strong talent market, these impressions often serve as a gateway to hiring.
  • Have we mitigated bias in our hiring and promotion processes? Recent research by Judd Kessler and Corinne Low highlighted “How Companies Committed to Diverse Hiring Still Fail.” Their findings showed how race, gender, and prestige (e.g. graduating from an elite university) still impact the hiring decisions of managers, even in firms that have stated commitments and initiatives around diversity and inclusion.
  • Do we have robust structures in place to develop and support our workforce? At the basic level, this might include formal mentorship and sponsorship opportunities for diverse talent. Today, many companies recognize the need to build an ecosystem that educates all employees on best practices for working and leading diverse teams as well as creating opportunities for building community and leadership pathways across silos within the organization. Successes in diversity recruiting at junior levels could be thwarted by a firm’s inability to retain professionals as they progressed to more senior positions. 

It’s easy to see the ethical case for diversity, equity, and inclusion, but does it deliver for shareholders? A study by McKinsey found that there is a strong financial case for diversity, but that progress is slow: companies in the top quartile for gender diversity on executive teams were 25 percent more likely to have above-average profitability than companies in the fourth quartile—up from 21 percent in 2017 and 15 percent in 2014. Similarly, companies in the top quartile for ethnic diversity were 36 percent more likely to have above average returns. Still, many observers question whether this is correlation or causation. We would like to believe it is the latter, and regardless, who among us wouldn’t prefer to lead an organization that values and promotes diversity, equity (fairness), and inclusion? Your stakeholders will demand it, and increasingly your shareholders will, too.

State Street Global Advisors, the asset manager that typically votes five to ten percent of the shares of the largest publicly traded companies, launched new policies in 2020 for engaging with companies on topics of board and workforce diversity. Last year, they told board chairs that going forward they expect companies to communicate specifically on 1) the role of diversity in the company’s human capital management practices and strategy; 2) the company’s goals regarding diversity; 3) measures of the diversity of the company’s board and global employee base; 4) goals for racial and ethnic representation at the board level; and 5) the board’s role in overseeing diversity and inclusion. Given that the voting power of the Big 3 asset managers often reaches a quarter of a company’s outstanding shares, CEOs and boards take these pronouncements seriously. They can make or break a contested vote on director reelections or the annual advisory vote on executive pay.

HBS graduates will soon be making decisions about how to best recruit and retain team members for their organizations. We have a few suggestions: gain awareness of your implicit biases, challenge your initial assumptions, and work hard to evaluate candidates objectively. Within your teams, advocate for and support diversity with the understanding that it will only make the collective stronger. When leading or working closely with organizational leadership on recruitment, ask the questions we raised above, share examples of other firms genuinely pushing toward similar goals, and engage with diverse organizations and institutions beyond just recruitment.

The past year added urgency for all of us involved as business leaders to hold ourselves and our organizations accountable to improve the environmental and social conditions that we perpetuate. Unfortunately, blaming a lack of diversity on the depth of the talent pool reflects a traditional institutional mindset that is out of touch with the needs and experiences of a contemporary workforce and the communities the organization serves. Let’s use this moment as a learning opportunity that will help us create the change we wish to see and make a positive difference in the world.

Trevor Fetter (MBA ’86) is a Sr. Lecturer in the Accounting and Management Unit at HBS.  He teaches the required courses Financial Reporting and Control and Leadership and Corporate Accountability, as well as the Short Intensive Program “The Life and Role of the CEO”. Before joining HBS, he was Chairman and CEO of Tenet Healthcare Corporation, a Fortune 150 company.

Shani A. Carter (MBA ’21, MUP ’16) avows her lifelong mission is to improve the environments that determine our health and wellbeing, which she’s currently advancing as the founder of RESET, a mental health, and wellness platform. Prior to HBS, Shani served as a Director at HR&A Advisors consulting with public and private clients on equitable real estate and economic development in American cities. Earlier in her career, she worked as a senior analyst at Goldman Sachs. Shani graduated from Howard University with a bachelor’s in finance and Harvard’s Graduate School of Design with a master’s in urban planning. She loves learning French, practicing yoga, and exploring public spaces and parks.