The ROI of DEI

Diversity, equity and inclusion is currently one of the hottest topics in the credit union system. Few would disagree that pursuing a strategy to increase diversity, equity and inclusion (DEI) is the right thing for credit unions to do. It follows the credit union philosophy of social responsibility and non-discrimination.

The question we should all be asking in running our cooperative businesses is, “How do we measure the value of DEI beyond our credit union system values?” Research shows that DEI increases profitability. Extending diversity and inclusion to the equity of credit union membership means that those diverse members benefit from the increasing returns following successful DEI initiatives.

There is, however, a difference in the return on investment of credit union efforts that chase the buzz word of “diversity” and the value created by those setting out to achieve measurable results that drive change in our credit unions and communities. Building a more diverse, equitable and inclusive credit union system, with membership, a volunteer board and executive team representative of the diversity of America, increases profits from innovation, reduces losses from staff turnover and mitigates the risk of extreme costs associated from reputation disrepair and litigation. Creating a system where diverse populations have equity in credit unions also stands in defense of banker efforts to tax credit unions. This political value extends even to preventing credit unions from being placed under Community Reinvestment Act requirements.

Unfortunately, credit union volunteers and professionals are not as diverse as our potential memberships. Now is a critical time to include DEI into board succession planning and to recruit the most talented people from diverse populations. Credit union policies, procedures, product specifications and marketing are derived from what we know. These building blocks of our business model don’t take into consideration what we don’t know that we don’t know. Unconscious bias, or assumptions about other people, distort our perspectives of what consumers actually need, and how they want to be reached and served. Think for a moment about left-handed people. Approximately 90% of the world’s population is right handed and the world is built for that majority; finding left-handed scissors or desks for school children or strategizing over where to sit at the dinner table so you’re not constantly bumping elbows is something most of us don’t consider in our everyday life. A commitment to DEI is a commitment to learning and embracing that a different reality exists outside of our own experiences. Creating a diverse, comfortable work environment boosts productivity followed by profitability. The same is true for loan growth following campaigns and products designed by and with the diverse populations our credit unions seek to serve.

The NCUA has been requesting credit unions submit voluntary data on credit unions’ DEI efforts, but only a relative handful have done so, despite the agency’s assurances that it will not be used in any punitive way. As a former credit union CEO, I understand the concerns, but it’s best we handle this now on our terms rather than be required by law, such as falling under CRA compliance or under new draft legislation, like the Promoting Diversity and Inclusion in Banking Act that proposes, among other things, requiring a diversity and inclusion officer reporting directly to the CEO and mandatory reporting. I strongly recommend completing the NCUA’s survey, or a self-assessment retained internally, as a benchmark to measure success and calculate the ROI of investments in DEI efforts.

McKinsey & Company found that the most diverse companies were 35% more likely to have above-average earnings in their industries. More specifically, companies in the top quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to generate superior value creation, while those in the top quartile for ethnic/cultural diversity on executive teams were 33% more likely to have industry-leading profitability, according to another McKinsey study. Results of these efforts are easily measured through trends in credit unions’ most basic KPIs.

Top young talent considers DEI in job searches or even remaining at a job; more than half of top younger talent have left for a more diverse organization, according to Deloitte. Turnover is incredibly expensive when considering loss of expertise, onboarding and training, plus lost efficiencies from bringing on someone new, and financial services companies have some of the highest turnover rates across all industries. Per LinkedIn, turnover costs employers 50% of an entry-level person’s salary and for more senior executives 50% to 250% of their salary, which for an executive making $125,000 would cost the company $312,500.

One Glassdoor survey found that 67% of job seekers evaluate a company’s diversity practices before accepting a job offer. Moreover, employees with the highest level of engagement perform 20% better and are 87% less likely to leave the organization, according to a survey by Towers Perrin. An employer’s DEI practices have even greater influence on women and people of color.

Numerous studies have reported that when employees feel valued for their uniqueness, they remain happier and more productive. On the flip side, when employees experience racism, sexism, homophobia or other derogatory treatment, they react negatively. Employee engagement equals productivity, yet, according to USA Today, the average American worker considers themselves a mere 50% engaged. On the other hand, it’s widely known that high-performing companies strive for 80% engagement. When the vast majority of business leaders (78%) rate retention and engagement as urgent or important, according to a recent Deloitte study, it’s astonishing only 15% believe they are ready to address it. Employees in diverse environments consistently outperform those in organizations with subpar diversity. DEI accountability through measurement is the key, so review for a reduction in tardiness, missed workdays and increases in transactions per employee.

Employing those with diverse backgrounds also gets the collective creative juices flowing, resulting in new innovation revenue. A Forbes survey revealed 56% of international business leaders strongly agreed diversity improved innovation at their companies. Companies reporting above-average diversity on their management teams also reported innovation revenue totaling 19 percentage points higher than that of companies with below-average leadership diversity – 45% of total revenue versus just 26%. A clear DEI strategy allows employees to focus their mental energies on creative thinking and problem solving for credit unions and consumers.

Because credit unions are all about serving their members, right? And the future of credit union membership is diverse. In 2012, the majority of babies born across the country were a race/ethnicity other than Caucasian. That means boards, management and personnel that understand their diverse communities, their product needs and behaviors are more likely to approve policies and strategic initiatives that support organic growth. The diversity and inclusion of boards and executive teams also creates equity in the outcomes from the diverse communities they serve, which is the intended purpose of CRA. But in this new reality, organizations will need diversity and cultural competence to compete, period.

And diversity in backgrounds also opens the organization’s eyes to new opportunities never considered before, which can be measured by the revenue from new lines of business. For example, PayPal’s Working Capital (PPWC) loan uses alternative forms of credit assessment and thus eliminates factors traditionally influenced by race. Between 2013 and 2018, PPWC disbursed $3 billion to 115,000 customers. Twenty-five percent of its loans were in credit-starved counties that are predominantly communities of color.

Beyond financial performance, consumers must first and foremost trust their financial institution. In an increasingly diverse America, companies that value diversity tell their members that they are valued, which enhances the brand. A 2019 Edelman Trust Barometer found that 64% of consumers are now belief-driven buyers who want brands to deliver on societal issues, as well as products. This is up by 13 points since 2017. Fully 81% of consumers say that the ability to trust a brand to do the right thing can be a deciding factor or deal-breaker.

Transparency is key; consumers have all the information they need in their pockets to determine whether a credit union’s commitment to DEI is deep in its roots or a thinly veiled marketing ploy. When credit unions live up to the promise of DEI, they improve internal operations, employee satisfaction, member service and loyalty, which can all be measured to produce a ROI. We achieve what we measure. It is time for credit unions to conduct self-assessments and build a DEI dashboard to measure results, including profitability and ROI resulting directly from an investment in DEI.

Ronaldo Hardy is Chief Diversity & Inclusion Officer/Owner for CU Strategic Planning in Baton Rouge,La.