Section 342 of the recently enacted Dodd-Frank Act requires nearly 30 agencies that oversee the financial system, including the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp., to establish offices of minority and women inclusion to monitor diversity within their ranks and the pool of contractors who provide goods and services to the government.
The Federal Reserve system and some of the agencies essentially were exempt from contract diversity efforts previously. The provision was introduced by Rep. Maxine Waters (D-Calif.), who argued that minority- and women-owned firms were largely shut out of getting a piece of the billions of dollars the government spent to bail out financial institutions. Now, though, every woman- and minority-owned firm in the Washington region has a chance to benefit, with the provision offering them an avenue to reap millions of dollars in new annual revenue.
One of the most important provisions requires the agencies to examine diversity efforts at the 27,000 financial institutions the 30 agencies regulate. Knowing that they are being watched will spur the financial institutions to hire more minority employees and spend more money with minority contractors.
The success or failure of this effort rests on the level of scrutiny the agencies will apply to the financial institutions. Part of the issue is the type of methodology they will use to determine which institutions are being good corporate citizens and which are not. It all will come down to how they evaluate the data and what type of statistical techniques they use.
As we saw in the economic collapse, financial institutions were adept at promoting themselves as socially responsible in devising products to help minority communities -- products such as subprime mortgages that turned out to hurt them more than help them.
The government has yet to determine what the penalties will be for financial institutions that fall short of diversity standards. I suspect it mostly will be shame. The bad list will get wide publicity. Financial institutions’ customer bases are more diverse than they were 20 or 30 years ago, and they don’t want to be seen as lacking a sufficient number of minority and women employees and contractors. Being on the bad list will cost them shareholder value and hurt their ability to recruit and retain employees. No one wants to work for a firm that doesn’t get it.
My opinion is that firms that fall short should be fined. I don’t think that will happen but a fine would impact their long-term behavior.
Section 342 simply aims to bring players with differing backgrounds into the government contracting marketplace. As businesses compete for contracts, they will provide better goods and services at lower cost.
The effort will be good for women and minority contractors and the government. More competition, ultimately, will save the government — and taxpayers — money.
William Michael Cunningham is a social investing adviser with Creative Investment Research Inc. in Washington.