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The Illusion of Inclusion

Why most corporate diversity efforts fail.
Roy Harris, CFO Magazine
May 1, 2001

When Fannie Mae decided to redesign its minority-employment efforts back in 1993, "the first thing we did was to benchmark best-in-class," says finance chief Tim Howard.

The results were surprising. "We found out," says Howard, "that even before we launched a diversity program, we were already best-in-class." Indeed, the companies that Fannie Mae assumed were far out front — "particularly the ones that were getting all the terrific media publicity" — were leading with their lips. "When you looked at what they were actually doing, the numbers weren't all that impressive," he adds, without mentioning any names. The ranks of African-American, Hispanic, Asian, and Native-American executives were extremely thin — especially within finance management, where "white guys in ties" prevailed.

So the shareholder-owned, publicly chartered mortgage-funding concern chose a new target: "to look like America," reflecting the country's minority-majority and male-female demographic mix. "It was a very ambitious goal," the CFO acknowledges. Today, Fannie Mae is nearly the demographic mirror it had sought to become, with minorities holding more than 24 percent of its 633 management-group jobs, up from just over 9 percent in 1994. Representation of female managers has jumped to 45 percent from 40 (According to the 2000 census, Caucasians now comprise 69 percent of the U.S. population.) The company's diversity push — initiated by former CEO James Johnson and sustained by current CEO Franklin Raines, an African-American — has led to a series of initiatives, including "networking groups" and mentoring programs. CFO Howard, who has assisted in these initiatives, says they have increased communication not only among minorities, but also among other interest groups, such as veterans and single parents.

And in finance? Progress there has been significant, though slower. Today, nearly 13 percent of Howard's 82 corporate-finance managers are minorities, triple the 1994 rate. "Our goal is clearly to get those numbers higher," says Howard. The task is complicated by the need to search among New York portfolio strategists and analysts for job candidates. "And diversity," he says wryly, "is not widely sought after on Wall Street."

If you judge strictly by the numbers, diversity doesn't seem to be much sought after in the rest of U.S. industry either. The Council on Economic Priorities, for example, reports that minorities hold only 15.7 percent of the management jobs at large companies. And while media outlets regularly examine the best workplaces for minorities, most coverage focuses on corporate missteps. Coca-Cola, Texaco, and Denny's all have made highly publicized efforts to redress offenses against minority managers.

And if Corporate America as a whole has little to trumpet regarding diversity, finance shouldn't make a sound. Eight years after Fannie Mae began its initiative, a CFO survey shows that only 14 of the finance chiefs in the Fortune 500 (year 2000), 10 of the treasurers, and five of the controllers are people of color. While comparative numbers for minorities are not available, the number of women in the top three finance posts at the same companies continues to grow, albeit incrementally, based on CFO's surveys. The 24 female CFOs in the Fortune 500, 14 more than in 1995, represent a 71 percent growth over six years, though still only a paltry 4.8 percent of the total. "Ethnically diverse candidates in finance are probably where women were 20 years ago — just beginning to emerge, and getting the experience and exposure they need to rise to the top," says E. Peter McLean, vice chairman of global search firm Spencer Stuart.

The truth, at least in finance, is that despite decades of trying to hire and promote minorities, success stories like Fannie Mae's — or those of Cummins Inc. and Medtronic Inc., two other companies we have chosen to highlight — are few and far between. Overall, says Marian Carrington, principal of Carrington & Carrington, in Chicago, one of about 30 recruitment firms specializing in finding minority job candidates, "we're absolutely amazed at the lack of change." And "unfortunately," she adds, "we're not sure things will look very different 5 or 10 years down the road."

Sense of a Ceiling
Why such sluggish progress? Some cite the slow trickle of African-Americans and Hispanics moving through the usual pipeline — MBA and CPA programs — to jobs in corporate finance. African-Americans accounted for only 6.4 percent of MBA degrees in 1998, Asians for 5.5 percent, and Hispanics for 3.2 percent, according to the International Association for Management Education.

Others blame CEO inertia. "There is too much [grandstanding] during Cinco de Mayo or Black History Month, and too little confronting what the calculus should be for diversity in a successful company," says David Thomas, a Harvard Business School professor and co-author of the book Breaking Through: The Making of Minority Executives in Corporate America. Even CEOs passionate about the subject sometimes back away after shaky early experiments, he suggests. "Once you have diversity, you must manage it, and companies have to concentrate on promotion and retention," according to Thomas. Some executives "wanted to create a pipeline of minority executives, but then didn't know what to do with it. The organization became content with the revolving door."


And always lurking in the corner is the specter of bigotry. According to a 1998 survey conducted by Korn/Ferry International and Columbia Business School, 59 percent of the 280 minority executives at large firms who responded said they had experienced racially motivated double standards in the delegation of assignments, while 45 percent had been a "personal target of racial or cultural jokes." Columbia adjunct research scholar Anna Duran, the principal researcher on the study, says that some rising finance stars in the study have since left the corporate world rather than face discrimination on the job, or "have to haggle politically" for fair treatment and promotions. Often the bias is subtle, says Duran. For instance, pressing your view in a group "is considered immature in some Asian cultures, but is seen as a barometer of leadership in American culture."

In Robert Ryan's case, when the Detroit native was about to become the first in his family to enter college, he was warned by his father to choose a career based on "what paid you the most, had job security, and had the least amount of racism." When Ryan later decided on finance and became one of 20 minority Harvard MBAs in 1970's 800-member class, his father opposed the decision. "I just thought you didn't have enough opportunity," he later explained. Even now, as Medtronic's finance chief, Ryan suggests that minority business students start as he did, in a more-supportive consulting environment, because big companies' many management layers can present "more roadblocks to advancement."

Even among corporations sophisticated about diversity, notes Harvard's Thomas, minority executives still may detect differences. He compares PepsiCo with General Electric, for example — both "very aware of the war for talent," and dedicated to bringing in top minority candidates. But GE hasn't done enough to support minorities in the rise toward high corporate positions, Thomas asserts. "For a person of color, there's a sense of a ceiling, and that you've got to get out while your stock is still high." By contrast, he cites PepsiCo's appointment of India-born CFO Indra Nooyi, who will also become president later this year.

If you buy the pipeline argument, the job of identifying diverse finance candidates should get easier very soon. Of about 5,000 African-Americans enrolled in MBA programs, roughly 40 percent have a finance specialty, says Antoinette Malveaux, president and CEO of the National Black MBA Association — a figure that is expected to grow. "Since the downturn of the dot-coms, individuals are shifting back to finance and consulting for security," she says. The National Society of Hispanic MBAs (NSHMBA) also says finance is its largest specialty, with 26 percent of its members in that field. And the Big Five accounting firms, an especially attractive pool for future finance executives, say their percentages of minority hires have surged.

On the demand side today, companies have developed compelling new rationales for increasing their diversity efforts — often, as at Fannie Mae, echoing strategic business initiatives. In a small, informal survey by CFO magazine, the top reason large-company CFOs gave for boosting diversity was to allow the company to benefit from the diverse viewpoints of a multicultural workforce. "At one time, diversity [initiatives were] driven by guilt; now they're a business imperative," says John Honaman, executive director of the 2,700-member NSHMBA. "This is about your ability to compete effectively in a global marketplace."

At Fannie Mae, Cummins, and Medtronic, CEOs and CFOs team up to make sure that diversity initiatives thrive — despite economic conditions that could severely test their commitment. The teamwork also leverages the finance department to improve minority participation. "Finance is responsible for the measuring systems at the company, whether for diversity or profitability," says Cummins chairman and CEO Tim Solso. "You are what you measure."

Fannie Mae: A Systematic Approach
Having an employee diversity program that tracks Fannie Mae's corporate strategy — building new business by encouraging minority lending — is logical, says CFO Tim Howard. Howard plays a major role with the company's diversity council, which oversees support groups and training and mentoring programs. He schedules monthly CFO breakfast meetings with 10 to 18 managers, where diversity issues are hashed out. And within finance, he sponsors focus groups that probe such sticky issues as allegations of unposted job openings and lower pay for minorities. Maria Johnson, the company's vice president for diversity and health and work-life initiatives, says that Howard monitors Fannie Mae's diversity results "with the same laser focus he uses to make sure our stock looks good."

Howard's most important contribution, however — one that is aided by a compensation plan that rewards diversity — is to continually encourage his troops to seek out minority candidates when they have openings. That encouragement over the past eight years has helped build a pipeline of high-potential staffers with diverse backgrounds. The company has strong ties with historically African-American universities, minority-MBA associations, and minority specialist recruitment firms to find candidates, and many minority finance directors are promoted from within.


Walter Hill, Fannie Mae's director of credit management in corporate finance and an African-American, is one of them. The 35-year-old, who holds an MBA from the University of Maryland, was recruited in 1998 from the U.S. Export-Import Bank, where he ran a credit administration program. Among his priorities in seeking a new job: "Is it a good place to work — that's where diversity comes in — and will I be fairly compensated?" In November 1999, Hill got the post he was after: head of the credit-counterparty risk function in the finance department. Financial-reporting manager Cheryl De Florimonte, a native of Guyana, who has been with Fannie Mae for 18 years, has also assembled a "good blend" of workers — representing four different races — in her seven-person unit. She credits HR and Fannie Mae's active internal employee-referral service, called Helpful Employees Referring Others, or HERO, for identifying diverse candidates for jobs. But "in all honesty, I don't allow diversity initiatives to determine my hiring," she says, holding up a coffee cup imprinted with the words: "I hire outstanding performers."

Howard admits that minority hiring is marginally more expensive, with costs incurred because managers must "take longer to find the right pool before they cut off the search." He notes, too, that some Caucasian workers have been put off by the diversity push, and have left. The payoff, though, is that "the company is better off when fairness is a core value."

Cummins: Measuring Up
Cummins's involvement with diversity was forged in the 1960s by then-CEO J. Irwin Miller, a civil-rights activist who translated his personal commitment into minority hiring policies at the Columbus, Indiana, engine and power-generation products and services company. In less than a year under current CFO Tom Linebarger, though, the 26,000-employee concern is breaking new ground with elaborate scorekeeping, which it uses to reward managers and identify areas of relative weakness in its diversity program.

"We do a full-scale diversity audit on a rotating basis at every unit," says Linebarger, so inspectors visit each unit at least every three years. The basic measure for managers — used in computing bonuses — is a detailed evaluation that includes not only the ratio of minorities hired and retained, but also employee feedback on how the boss handles diversity issues. And Cummins is even tough on the universities from which it recruits: the company actually reduced the number of schools it visits, from 54 to 27 this year, concentrating on those with the best minority ratios and records of supplying diverse employees to the company.

Linebarger, an eight-year Cummins veteran, was drawn to the company because he'd been moved by a Stanford Business School course in managing diversity, and saw Cummins as a chance to develop special skills in that area. Within finance, Linebarger is currently focused on moving qualified minority employees up to middle management, where his charts have detected a dip. About 20 percent of the 60 people in the finance and IT areas reporting to Linebarger are people of color, and the company has done well in identifying the top performers in the pipeline for such jobs as controller, treasurer, and CFO. As CFO, Linebarger replaced Kiran Patel, a native of India who had risen through the Cummins finance organization. Last fall, Patel took a job as CFO of iMotors, a San Francisco­based direct seller of used cars.

Today, Linebarger asks white executives looking for middle managers "to expand their comfort zones and find places within the organization where diverse talent resides." He still finds a few managers who don't get the message. "If they bring me five white males [in a candidate list], I tell them, 'Wrong answer, go back and put together a better candidate pool.' " Cummins's treasurer, Donald Trapp, an African-American who has had both operations and finance jobs since joining the company in the mid-1970s, points out that "the secret of retaining workers is to recognize their need to move more to advance their careers." It's something that he takes personal responsibility for. His 11-person treasury staff has four minority members.

Overall, Linebarger believes the company is up to the challenge of keeping diversity on the front burner during the current down cycle. In the last big dip for diesel engines just over a decade ago, the company tried to keep the issue of diversity a high priority, but lost focus in the battle to restore profits. That won't happen now, according to Linebarger, thanks to the measurement techniques, and the inclusion of a diversity commitment in each unit's business plan. "Everything I do takes diversity into consideration, just as it would take profit into consideration, because at some level, they're inseparable."

Medtronic: Tale of Two Generations
Medtronic started developing a formal diversity strategy much later than Cummins. Indeed, a diversity task force was established at the fast-growing Minneapolis medical-devices manufacturer only a few months ago, after chairman William George had visited some far-flung sales locations and determined that the talents of minority sales personnel could be developed better. "Medtronic has always been serious about diversity," says CFO Ryan, "but this is a way we've found to identify high-potential individuals" and prepare them for more-senior roles.


Previously, that identification was done on an individual basis and supplemented by mentoring. Case in point: the mentor relationship between Ryan and a Medtronic manager he hired two years ago, Rodney Williams, now vice president of finance for Asia Pacific.

The son of Florida educators, Williams had it "instilled in me very early on that I could accomplish anything with a lot of hard work." After receiving his undergraduate degree from Florida A&M University in 1983, he parlayed an internship with Price Waterhouse into a full-time job in Houston. Once there, he found "other African-Americans who helped make the experience very positive, though it wasn't in a formal organization." At Monsanto six years later, he found "a much broader support network and a lot of training in diversity," but also a situation in which minority advancement lagged.

After being hired at Medtronic in October 1996, and assigned to Ryan as a mentoring partner, Williams was able to outline the challenges he sought, which included heading finance within a business unit. Ryan kept his eyes open for such a job — leading to Williams's current position — and coached him through various smaller career issues, aiming to help him "improve his performance so he could get to where he wanted to get."

The mentoring relationship has thrived, says Williams, thanks to Ryan's straightforwardness and accessibility. For an African-American to be a good leader, he explains, "people have to become comfortable being around you, and Ryan is a person you get comfortable with very quickly."

For his part, Ryan never expected much guidance as a minority along his career path. He believes he benefited from the collegial atmosphere of his first stints, at McKinsey & Co. and Citicorp, and later at AlliedSignal. But at Medtronic, he has come to appreciate the value of support systems like mentoring, and brings his own perspective to it, including a belief that it should contain old-school elements of tough love. "You have to have someone who will give you good, honest feedback, and tell you what you need," he says. Early on, Ryan suggested to Williams that his image with employees needed work, because he was sometimes "perceived as not listening, and being very direct, wanting it his way from the start." Those rough edges, says Ryan, were polished before Williams was promoted.

Still, Ryan realizes that mentoring can't work well unless the right people are hired. "The pool of [minority] candidates is not tremendous," says the CFO. A pet recruiting project involves Medtronic's audit department, once all white and now half people of color. "When people enter the finance department through audit, you're able to assess their capabilities" and make decisions about advancement, says Ryan. "It's really about making a start."

Roy Harris is a senior editor at CFO. Also contributing to this article were Alix Nyberg, Tama Miyake, Crawford Coates, and Cody Yiu.


Moral Challenge
The top four reasons CFOs say their companies pursue diversity.

  1. A more multicultural workforce benefits the company by offering diverse opinions and views.
  2. Increasing diversity is simply the right thing to do.
  3. Increasing diversity helps to reflect the customer base.
  4. More diversity shows that our company is fair-minded.

Source for charts: CFO survey of Fortune 500 CFOs; 22 respondents.


A Big Five Drive

The big five accounting firms have gotten the diversity message. All say they have boosted their minority hiring, with minorities accounting for between 20 percent and 33 percent of new hires last year.

At Ernst & Young, the impetus was a 1994 survey by the American Institute of Certified Public Accountants showing that just 5 percent of all CPAs were minorities. "We wanted to increase that number at our firm, so we totally revised our recruiting strategies," says Allen Boston, national director of minority recruiting at Ernst & Young. Adds Kent Kirch, associate national director of recruiting for Deloitte & Touche, "If you don't emphasize diversity, it's very easy to not come in contact with it."

Much of the contact being made is at historically African-American colleges, and in regions with large African-American and Hispanic populations. To gain visibility, Big Five recruiters work with student chapters of the National Association of Black Accountants and the American Association of Hispanic CPAs.

Some work with Inroads, a St. Louis organization that places about 7,000 minority college students in corporate internships each year. "We hire virtually all of their interns, and usually get another 20 of their classmates who interned at other companies," says George Sill, director of diversity recruiting at Andersen. And competition is driving firms to become creative in their efforts. KPMG LLP, for example, offers to foot the bill (averaging $50,000 over two to five years) if a business school at an historically African-American college gains accreditation from the International Association for Management Education. "Instead of trying to outgun the other firms, we try to make systemic changes," says Bernie Milano, president of the KPMG Foundation.


The next challenge: moving more minorities into partner roles. In general, only about 5 percent of partners are minorities. A new PricewaterhouseCoopers program, for example, pairs current partners with promising female and minority managers to help accelerate their ascension. —Alix Nyberg


Dedicated to Diversity
Some firms specializing in minority recruitment.

RECRUITERCONTACTWEB SITE
Carrington & Carrington (Chicago) Marian Carrington 

www.cclltd.com

Richard Clarke & Associates (New York)Richard Clarkewww.diversityrecruiting.com
David Gomez & Associates (Chicago)David Gomezwww.dgai.com
Johnson Enterprises (New York)Howard Smithwww.johnsonenterprises.com
Minority Executive Search (Cincinnati)Eral Burkswww.minorityexecsearch.com
Bruce Robinson & Assoc. (Secaucus, N.J.)Bruce Robinsonwww.bra_search.com
Wesley, Brown & Bartle (New York)Wesley Poriotiswww.wbbusa.com

Shades of Gray

A more-diverse workforce benefits the bottom line.

Benefits of diversity are difficult to measure.

It's hard to identify qualified minorities.

It's hard to identify qualified women.


Minority Report
Fortune 500 CFOs with diverse ethnic backgrounds.

BRIAN ANDERSON
50; SVP, CFO — Baxter International; Race/Ethnicity: African-American; Appointed: February 1998; Previously: Corporate VP, Finance; Controller; Education: BS, Howard U.; MS Finance & Accounting, Indiana U.

VAUGHN CLARKE
47; EVP Finance, CFO — Freddie Mac; Race/Ethnicity: African-American; Appointed: November 2000; Previously: SVP, Finance; Treasurer — Viacom; Education: BA, Brown U.; MBA in Finance, Cornell U.

ROLANDO DE AGUIAR
52; SEVP, CFO, CAO — Ames Department Stores; Race/Ethnicity: Hispanic (Cuban); Appointed: April 1998; Previously: VP, Controller — Sears, Roebuck; Education: BS & MBA, Northeastern U.; CPA
"Early in my career, the standards were higher for me than for others. It wasn't discrimination, or an obstacle, but there was an attitude of 'prove it to me.' In the next 10 years, you'll see greater numbers of minorities rise to the top, based on what I see at the professional and industry association meetings."

CARLOS GARCIA
44; Sr. Managing Director, CFO — Countrywide Credit Industries; Race/Ethnicity: Hispanic (Cuban); Appointed: March 1995; Previously: SVP, CAO; Education: BS, California State U., Long Beach; CPA
After leaving Communist Cuba, "my family instilled in me the value of getting things that can't be taken away from you, like education." After graduation, he was rejected by the biggest accounting firms, but landed a job with Grant Thornton, where he met Stan Kurland. In 1984, Kurland, now Countrywide CEO, hired him into finance at Countrywide.


ROBERT M. HERNANDEZ
56; Vice Chairman, CFO — USX; Race/Ethnicity: Hispanic (Mexican); Appointed: 1991; Previously: Treasury and accounting positions; with USX since 1968; Education: BS, U. of Pittsburgh; MBA, The Wharton School (U. of Pennsylvania)

WILLIAM HERNANDEZ
53; SVP, Finance — PPG Industries; Race/Ethnicity: Hispanic (Mexican); Appointed: 1995; Previously: VP, Finance; Controller; Education: BS, Wharton; MBA, Harvard U.

INDRA NOOYI
45; SVP, CFO — PepsiCo; expected to also become president upon completion of Quaker Oats merger; Race/Ethnicity: Asian (Indian); Appointed: February 2000; Previously: SVP, Corporate Strategy & Dvlpmnt.; Education: BS, Madras Christian College; MBA, Indian Institute of Mgmnt.; Master of Public and Private Mgmnt., Yale U.

CLARENCE OTIS
45; SVP, CFO — Darden Restaurants; Race/Ethnicity: African- American; Appointed: December 1999; Previously: Treasurer & SVP, Finance Education: BA, Williams College; JD, Stanford U. Law
"I think race is a very important factor, something I've thought about all my professional life. And that, I've found, is useful when we as a company start to talk about the issue as an employer, and as a service provider to a broad customer base. Being from a different race means you've already thought about those issues a lot more than most other people at the company have."

RAMIRO PERU
45; SVP, CFO — Phelps Dodge; Race/Ethnicity: Hispanic (Mexican); Appointed: May 1999; Previously: SVP, Organization Dvlpmnt. & IT; Education: BS, U. of Arizona; advanced management program, Duke U.

J. PEDRO REINHARD
55; EVP, CFO — Dow Chemical; Race/Ethnicity: Hispanic (Brazilian); Appointed: October 1995; Previously: Financial VP, Treasurer; Education: Escola de Admini-straco de Empresas da Fundacao Gertulio Vargas, in Brazil; postgrad work at U. of Cologne (Germany) and Stanford

JOSUE "JOE" ROBLES JR.
55; SVP, CFO — USAA; Race/Ethnicity: Hispanic (Puerto Rican); Appointed: September 1994; Previously: Major General, U.S. Army; Education: BBA, Kent State U.; MBA, Indiana State U.

ROBERT L. RYAN
58; SVP, CFO — Medtronic; Race/Ethnicity: African-American; Appointed: April 1993; Previously: VP, CFO — Union Texas Petroleum; Education: BS, Wayne State U.; MS, Cornell; MBA, Harvard

KHANH T. TRAN
EVP, CFO — Pacific Life Insurance; Race/Ethnicity: Asian (Vietnamese); Appointed: 1995; Previously: Treasurer, SVP; Education: BA, Whittier College; MBA, UCLA

SUSAN S. WANG
49; SVP, CFO, Secretary—Solectron; Race/Ethnicity: Asian (Chinese); Appointed: 1986; Previously: Manager of Finance; finance positions at Xerox, Westvaco; Education: BS, U. of Texas; MBA, U. of Conn.


Lagging Indicators

How does finance compare with the rest of the company in minority hiring?

AFRICAN-AMERICANS

HISPANICS

ASIANS

WOMEN




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