Before the collapse of 158-year old banker Lehman Brothers in 2008 and the subprime loans fiasco, diversity and inclusion wasn’t top of the agenda in financial services.

But the Lehman story has become something of a poster child for “groupthink” -- unchallenged, poor-quality decision-making.

The 17-strong senior management team at Lehman was entirely male, with a matching culture. Today the Bank of England and other UK regulators are on a mission to stamp out what is seen as entrenched homogeny in insurance and banking.

Introducing a new discussion paper outlining accountability for diversity and inclusion, Bank of England Deputy Governor for Financial Stability Jon Cunliffe says diversity is not just a nice-to-have – it’s important in promoting financial stability.

“Groupthink and overconfidence are often at the root of financial crises,” he says, perhaps with a nod to Lehman Brothers -- the largest bankruptcy filing in the US at more than $US600 billion ($800.7 billion) in assets.

Enabling a diversity of thought and allowing for an array of perspectives to coexist supports a resilient, safe and effective financial system, the Bank of England says.

Joined by Britain’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), the regulatory trio plan to walk the talk and create “meaningful” changes, setting out policy options to drive diversity and inclusion across financial services.

The changes include quotas, ruling that an organisation must put forward members of certain societal groups for a percentage of its positions as a way to fast-track better representation.

"We are seeking views on the merits, or otherwise, of setting regulatory requirements or expectations for firms to have targets for some or all of their boards, senior management population and the wider firm, including whether…there is any role for the regulators in overseeing target setting,” the discussion paper says.

Promoting diversity is intended to improve governance, decision-making and risk management within insurers and banks, with the discussion paper citing research showing positive outcomes in risk management, good conduct, healthy working cultures and innovation.

The UK proposals include disclosure rules, measures to make leaders accountable and stated targets. Feedback on the UK discussion paper is open until the end of September and a pilot survey later this year will help develop the proposals with a view to regular reporting.

Thirteen years on from the Global Financial Crisis and the collapse of Lehman, studies reveal 32% female representation in senior management -- an increase of less than 1 percentage point year on year from 2017 – while the situation for ethnic minorities “shows signs of going into reverse.”

Fewer than 1 in 10 management roles in financial services are held by black, Asian or other minority ethnic people, and there is evidence of a decline in the number of black leaders and the those in the pipeline to senior management for FTSE 100 companies.

Social mobility is also limited, with 89% of senior roles held by people from higher socio-economic backgrounds, according to a recent deep study of eight financial firms, including regulators.

To address this more quickly, the UK regulators are proposing linking executive remuneration to diversity and inclusion metrics. Controversially, they are exploring quotas as a way to promote diversity, and in turn, more innovative products and services better suited to the diverse needs of consumers.

“We are concerned that lack of diversity and inclusion within firms can weaken the quality of decision-making,” FCA CEO Nikhil Rathi said.  The proposals include disclosure rules, measures to make leaders accountable and stated targets for boards down to customer-facing roles.

Quotas in Australia are voluntary, though what some describe as a toxic workplace culture at Parliament House recently raised the possibility of introducing quotas in the Liberal Party.

The Reserve Bank says its longer-term objective is to achieve equal representation of women in management positions. In 2020 that metric stood at 34%.

Australia’s finance and insurance sector ranks highly on gender equality policies, but still has under-representation of women on boards. The sector has seen one of the biggest improvements in its gender pay gap over time, decreasing by almost 10 percentage points between 2014 and 2020, but it still tops other sectors with a 27.5% pay gap.

Canada’s central bank introduced measures a year ago to raise staffing targets for executives identifying as Black, Indigenous or people of colour to 30% from 20%, made anti-bias training mandatory, and diversity and inclusion objectives part of performance management goals for its leaders.

Lloyd’s has launched a “culture dashboard” to track gender, ethnicity, sexual orientation and disability, and a #SpeakUp campaign to address sexual harrassment. It has told insurers and brokers operating in the Lloyd’s market they must have at least 35% of leadership roles filled by females by the end of 2023.

It’s worth comparing the directions companies are now embarking on with the sort of monoculture that existed at Lehman Brothers. An April 2010 article by Vanity Fair magazine says CEO Dick Fuld expected his top executives to get married and stay married.

“For their wives, the firm was both fishbowl and shark tank, with unwritten rules about the clothes they wore, the charities they supported and the hikes they took at the company’s Sun Valley retreats.”

A decade later that sort of “like me” social conditioning is viewed as downright dangerous.

As Prudential Regulation Authority CEO Sam Woods notes in the discussion paper: “A lack of diversity of thought can lead to a lack of challenge to accepted views and ways of working, which risks compromising firms’ safety and soundness.”