Executive order on diversity a predicament for banks

The recent executive order essentially banning diversity training in companies that have contracts with the federal government is forcing banks to wade into a highly partisan political debate.

Historically, most banks have adopted a strategy of strict political neutrality. However, over the past few years and increasingly over the past few months, that neutrality has become difficult to maintain. And in some cases, it’s been nearly impossible to remain neutral.

The executive order issued in September is a specific example where neutrality doesn’t work — it is a dangerous development that requires a specific and forceful response.

Let’s face it, with all that has gone on in 2020 this is a fight that nobody saw coming and few, if any, wanted. The country overall is still grappling with a pandemic that has enormous health and economic consequences, participating in passionate discussions on racial and social justice, and staggering through one of the ugliest and most divisive election cycles in recent memory.

Taken alone, each one of these issues would have significant implications for banks and their risk profiles. Together, they constitute an unprecedented trifecta of economic, operational and reputational risk that has challenged the resources and capabilities of many individual banks, as well as the entire industry.

For the most part, the industry has responded well. Banks have ignored the inexplicable political dimensions of the coronavirus pandemic and focused on doing the things necessary to accommodate their customers, protect employees and strengthen their balance sheets.

Many bankers have reaffirmed their commitment to diversity and inclusion, and have publicly supported the right to engage in peaceful protests. There have also been examples of banks using their codes of conduct appropriately to discipline employees who do something politically extreme that has the potential to blow back on the company’s reputation and brand.

Throughout banks have been able to navigate these troubled waters and focus on specific and tactical responses to individual challenges rather than become bogged down with the underlying political considerations.

This approach is not available to address the president’s executive order banning diversity training. The order is quite straightforward and unambiguous.

It states that diversity training is divisive and “un-American,” and prohibits any company doing business with the government from implementing diversity training programs that provide any context — historical or otherwise — to explain the need and rationale for creating expanded opportunities for minority employees and communities.

The program is administered by the Department of Labor and investigations are triggered by receiving a complaint from just about anybody — an employee, vendor, customer or even an unaffiliated third party.

Companies found in violation of the order can lose their government contracts. While not all banks have explicit federal “contracts,” virtually all have some relationship with the federal government. It’s unclear whether this order applies to those relationships as well.

Regardless, many banks have customers that conduct business with the federal government and significant penalties could impact the risk profiles of those customers. So, one way or another, many banks likely have some skin in this game.

Those who support this order and its goals will likely claim that this approach is not new, that it’s among a long line of legislative, regulatory and administrative actions designed to force banks to adopt policies and practices that further a particular political or social agenda.

They will point to various fair-lending and equal-credit laws as examples of socially driven regulations that banks have been complying with for years.

However, this is different. And it’s different fundamentally.

While many of these legislative and regulatory actions may have a social impact, for the most part, they were designed to level the playing field, provide financial access to a broader segment of the population and expand opportunity. These are all goals that most of the country has approved and supports.

But the latest executive order does just the opposite. It is restrictive rather than expansive; is out of step with the vast majority of public opinion; and carries no legislative weight.

The potential impact of this order is not theoretical. Recently, the Labor Department notified Wells Fargo of an impending investigation into its diversity program.

Wells may be the first bank to be targeted publicly, but it likely won’t be the only one, or the last.

Consequently, banks of all sizes, especially larger ones as well as the major industry trade associations, should formulate a strong and coordinated response now. There are at least three primary response options available.

The first is to wait for the results of the presidential election. There is no question that if the current president loses, the new incoming administration would quickly rescind this ban.

The second response is to mount a preemptive legal battle and ask the courts to overturn the directive. Many previous executive actions were overturned by this administration and others.

However, depending on an uncertain election result to resolve a single issue is risky and, if one supports this current administration on other issues, perhaps myopic.

Regardless, the damage may already have been done. The fact that the order contains the imprimatur of the country’s chief executive provides those who do not agree with the goals of diversity an excuse to oppose or ignore such programs and initiatives. This can undermine years of hard work to make diversity and inclusion core components of most banks’ mission statements, strategic plans and cultural values.

As a result, it is necessary to consider the third option: forceful and public opposition to the order, either proactively or in direct response to an investigation notice.

If this third option is chosen, it is probably prudent to focus messaging on the benefits of diversity programs overall. And messaging must be clear that the action being taken is in response to this specific order, not constituting a preference for one particular party or candidate.

There is no real way to finesse the response to this executive order. Either you’re committed to diversity or you’re not.

And, if you are, that commitment needs to be reinforced, validated and exhibited every day and in every way. Even if one does not believe that diversity has a significant social benefit, there is no question that it is a business imperative. The research is clear and the data is unassailable: Those companies that have an effective diversity program just perform better.

Taking a stand on controversial issues within this very partisan and divisive political environment may be uncomfortable and constitute potential risk. However, on some issues political neutrality is not an option. This is one of those issues.