Banks resist racial-equity audits, but they shouldn't

By lunchtime Tuesday we should know whether the Wells Fargo & Co. shareholders adopted a proposal to have the company conduct a racial-equity audit, an idea championed by a pension fund shareholder affiliated with the Service Employees International Union.

Wells Fargo and other big banks have recommended shareholders vote down these racial-equity audit proposals, a feature of this year's annual shareholder meeting season.

The banks are likely to have the votes, but hopefully they don't put the whole idea into a file and forget about it.

This is not a bad idea, and it would be better if they went ahead without being prodded.

Wells Fargo is based in San Francisco and might really be run out of New York. But it has local roots, a big market share in lots of lines of business and thousands of employees in and around the Twin Cities. What happens to it matters here.

The biggest banking companies all face this kind of request, including Goldman Sachs Group, JPMorgan Chase & Co. and Citigroup.

But one of the things that attracted the attention of SEIU to Wells Fargo was last year when it was reported that CEO Charlie Scharf attributed the bank's failure to meet employee diversity goals to "a very limited pool of Black talent to recruit from."

Scharf later apologized.

The big companies not only have pushed back on doing these audits, a couple tried to get the Securities and Exchange Commission to promise it won't take any action if didn't put it to a vote of shareholders, on grounds they have basically done these assessments already.

It's interesting that New York-based BlackRock Inc., more an asset manager than conventional financial-services firm, has embraced the idea and is going ahead with one.

Wells Fargo's board urged voting the proposal down, in part because it had a "human rights impact assessment" underway.

Wells Fargo did not respond to a request for a discussion, but the SEIU pension fund knew about that other project and still made its request for an audit.

The fund argued, in a statement included with the Wells Fargo annual-meeting materials, that a "racial equity audit would help WFC identify, prioritize, remedy and avoid adverse impacts on nonwhite stakeholders and communities of color."

This is not exactly unheard of in Corporate America, either, as Facebook has been among the companies that did a version of what the pension fund has asked of the big banks.

The SEIU fund staff declined to be interviewed but did provide a document that laid out its thinking.

It guessed at a budget of about $1 million for this project, with fully independent outsiders.

A law firm that approached this as another regulatory-compliance problem might not be the best choice.

That suggests that an auditor might find how the current rules need to be updated.

After all, banks already have a good record of compliance with what's called the Community Reinvestment Act, meant to make sure banks didn't fail to make loans to lower income customers in their communities.

Maybe nothing illustrates the problem more than the racial wealth gap, the chasm between the net worth of white families and Black or Hispanic families.

The median net worth for white families, the Federal Reserve found in 2019, was about $188,000, while it was only $24,000 for Black families.

The gap in the homeownership rate is huge, too. That's explained in part by how much family wealth moves from one generation to the next.

That family capital often funds the down payment on a house and only about a third as many Black families reported getting an inheritance compared to white families.

An outside firm doing a racial-equity audit of a big bank such as Wells Fargo would dig into its business to see how it contributes to this kind of persistent disparity.

When people hear "audit," they likely think the financial audits public accountants do every year for big public companies.

That's a very specific assignment to confirm that the financial statements can be relied on, largely by testing the processes that created them.

The term audit usually is confusing when applied to situations other than looking into the company's books. Yet anybody on the board and in the C-suite would know about auditors and audit committees.

Maybe calling a racial-equity assessment an audit does work as a way to make them think some more about racial equity.

Anything other than a "clean" audit opinion is exceedingly rare.

Yet any board member who decides the financial audit is a largely pro forma exercise they can safely ignore isn't thinking clearly.

Just sending someone to look for problems is an important step in uncovering them.

At a minimum the board members must remain open to the possibility that this time the auditors might actually catch something big.

The real problem uncovered by an auditor won't be an inflated asset value, improperly booked expense at one business unit or plain old theft, but the breakdown in processes or controls that allowed any of those things to happen.

The board won't let the CEO pin it on an individual manager or financial staffer and then move on. It's the system that failed.

That's one of the important lessons out of the last year, as a crisis ignited by the murder of George Floyd on Memorial Day forced many more people to realize racial injustice in America must be a far broader and deeper problem than individual bad acts by a relative handful of people.

The shareholders of Wells Fargo and Citigroup might handily defeat these resolutions demanding a racial-equity audit this week.

But hopefully some board members keep the conversation going, maybe just by asking a simple question:

Wouldn't we rather really know?