What Will It Take to Close the Wealth Gap?

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Wharton’s Katherine Klein talks to John W. Rogers Jr., founder of Ariel Investments, about what it will take to close the widening racial wealth gap in America.

John W. Rogers Jr. is chairman, co-CEO and chief investment officer of Ariel Investments, the country’s oldest Black-owned asset management firm. Throughout his career, Rogers has worked tirelessly to close the widening racial wealth gap in America through programs, education and investment vehicles that empower minority entrepreneurs. He recently joined Katherine Klein, vice dean for the Wharton Social Impact Initiative, for an episode of the Dollars and Change podcast to talk about the historic factors that created the racial wealth gap and the systemic barriers that sustain it.

An edited transcript of the conversation follows.

Katherine Klein: What is the racial wealth gap?

John Rogers: At Ariel, we are focused on closing the wealth gap between African Americans and white Americans. It’s something that we have been interested in for a long, long time. We first started with doing surveys with Charles Schwab & Associates, trying to determine whether Black Americans had as much saved in their 401(k) plans for retirement as white Americans. We came back with data that often showed that Black Americans had half as much saved for retirement as white Americans of the same education level and job description.

As the years have gone on, we have become accustomed to more and more data. Ray Boshara from the Federal Reserve Bank of St. Louis has the best data. One of my favorite anecdotes [from him] is that, between 1992 and 2016, college-educated Blacks saw their wealth decline 10%, while college-educated whites saw their wealth increase 96%. It’s just brutal.

Kerwin Charles, dean of the Yale School of Management, has data that shows that the wealth divide was getting better between 1940 and 1970. But since 1970, we’ve been on a steady decline, and it just gets worse and worse to the point now that, relative to white Americans, African Americans are worse off than our grandparents were. This wealth gap is a big, big deal in our country. We’re losing a lot of GDP growth and economic wealth creation for the entire country because we’re not fully [including] all of our citizens in our capitalist democracy.

Klein: Yes, these are stunning numbers, and I think numbers that more and more people are becoming aware of. We also see that the median white family has 10 times the wealth of the median Black family. The income gap, we may have known about; the wealth gap is even huger. How could we have stalled and even gotten worse in this racial wealth gap over the last 30, 40, 50 years?

Rogers: There are many reasons why the wealth gap is getting worse over these last 40 years or so. Black Americans started this race so far behind because we came here as slaves. We were supposed to get 40 acres and a mule after the Civil War ended, and that got taken away after Abraham Lincoln was assassinated. We had Jim Crow, we had lynchings in the South. Whenever there were economic businesses that were successful, often white resentment would come in and destroy those businesses. So, we’ve been behind for a very, very long time. Historic segregation has been a big deal. Even if we bought homes in our own communities, often they did not have the same price appreciation as homes built in white communities. We suffered from redlining, not being able to get loans, not being able to get fair interest rates on the loans and mortgages that we had on our home ownership.

“We’re losing a lot of GDP growth and economic wealth creation for the entire country because we’re not fully [including] all of our citizens in our capitalist democracy.”

We’ve also seen the systemic racism and unconscious or conscious bias that has not allowed African Americans to participate in the parts of the economy where the wealth is being created today — primarily financial services, professional services, and technology. It’s ironic that the fields that are growing the most, that have the highest profit margins, have the least African American representation. There are so many things, but it all comes back to the fact that we started so far behind. As you know, wealth accumulates over time, and the magic of compound interest is so powerful, and we haven’t been able to benefit from that. Very rarely do we have inheritances in our community. Multigenerational wealth is very scarce. When you’re behind, you have to help your kids get their first home or help your kids get through college without too many loans. You help extended family who are suffering, parents who are struggling. It is a lot that we face as African Americans today in our society when it comes to creating economic wealth.

The final thing I would add is that corporate America has promised to do business with minority companies in what they call “supplier diversity,” but these very progressive institutions don’t realize that by focusing on the supply chain, that’s the lowest margin part of their spend. African Americans get to do the construction and the catering and the janitorial services, and white Americans get to do the private equity, the hedge funds, the venture capital, the technology, the media — where the real wealth is created.

We have to get rid of the term “supplier diversity” and use the term “business diversity” to hopefully signal to corporate America that they can do business with African Americans everywhere, and similarly with nonprofit institutions in our local communities.

Klein: How do you overcome a problem that is as embedded as this? Is home ownership an important part of the path forward?

Rogers: Part of the problem is Black Americans are overly invested in real estate relative to white Americans. We’re comfortable with real estate. We trust real estate. It’s tangible. It’s right there in our communities. But when the financial crisis happened in 2008 and 2009, because we almost had all of our eggs in one basket, we were devastated by that housing-related recession that occurred. White Americans have more well-rounded portfolios, so they might be losing money on their real estate, but they’re bouncing back on their stock market investing. And white Americans are often going to have properties in the communities where they grew up. Here in Chicago, the North Shore and the Western suburbs are where so much of the wealth lives. Those homes bounced back from the recession much faster than housing that is closer to inner-city, poor neighborhoods, with all of the challenges that those poor neighborhoods [have] today.

Home ownership isn’t always the answer because of these challenges. Because our homes are not in the same communities as white Americans, we pay higher interest rates on our mortgages. Again, it’s the opposite of the benefit of compounding. It just gets you further and further into trouble when you have to pay higher interest rates than white Americans who are similarly situated. The remnants of segregation and the redlining in our cities are just absolutely brutal. My grandfather actually helped with the Hansberry v. Lee case in the Supreme Court, fighting against restrictive covenants here in Chicago. It was a groundbreaking case that helped to open up doors for Black home ownership in our community, but it was really too little, too late. We’re still suffering from all of the past discrimination and unfairness when it comes to housing. I just think it’s so critical that we get African Americans more involved in the equity markets, more comfortable in understanding how you can create real wealth over time in the stock market.

Klein: I’m struck by your use of the words “comfort” and “trust.” Do you observe a lack of comfort, a lack of trust among Black adults who could invest more in the stock market and different assets, and are not doing so?

Rogers: Anecdotally, I’ve observed it from when I got started in the financial services industry over 40 years ago now. There is a lack of trust in the markets. Some are just not familiar with it. It’s scary. The markets are so volatile. Up until the last several years with what’s happened on the internet, you had to have a financial adviser, you had to go into the office. Most brokerage firms and financial advisory firms have no African American brokers and advisers, so you’re going into a whole foreign community having a broker who doesn’t look like you. It’s really hard to establish that trust and confidence in the markets. If you didn’t have a father or a grandfather or an aunt or an uncle who talked to you about it over the dinner table and got you comfortable, it’s just really, really hard to overcome that barrier.

“It’s so critical that we get African Americans more involved in the equity markets, more comfortable in understanding how you can create real wealth over time in the stock market.”

In the work that we’ve done with Charles Schwab and Carrie Schwab, the data comes back consistently over the years. Ultimately, where it shows up is we put more of our money not only into real estate, but into insurance-related products. And when we do invest in our 401(k) plans, we’re often going to invest in the most conservative options and not really benefit from the power of the compounding of traditional equities.

Klein:  I know you’ve thought a lot about strategies to overcome the racial wealth gap. Is outreach and education to the Black community an important part of this puzzle?

Rogers: We do think that is an important part of solving this problem. At Ariel, we try not just to admire the problem but to think about solutions. My friend, Arne Duncan, who became secretary of education, started his career at Ariel and was in charge of all of our community affairs 25 years ago. He started a small public school called the Ariel Community Academy — it’s K through 8. After we had been up and running for a couple of years, we got the idea that we should be teaching kids about the stock market. We gave every first-grade class a $20,000 class gift. Over the first six years, Ariel Investments would invest the money and talk to the kids about how we were making investment decisions, have them work with our analysts and hear from them. We embedded financial concepts within the overarching curriculum of the school to teach the kids the importance and scarcity of compound interest and all the things you need to know. In sixth, seventh, and eighth grade, we turn over the portfolio to the kids, so they can start to pick real stocks with real money.

We try to bring in role models to the school. Over the years, we’ve had everyone from Joe Mansueto, who founded Morningstar, to Magic Johnson come down and visit the kids at the school. My favorite thing we used to do when Don Thompson was the CEO of McDonald’s — where I’ve been on the board for 18 years — was take 40 kids or so every year to McDonald’s annual meeting. One kid would get to ask one question, and after the meeting was over, they had to go spend an hour with Don Thompson and his wife, Liz, and Andy McKenna, the chairman of the board, and learn what it was like to be CEO of one of the largest public companies in the country.

Those are the kinds of things we wanted kids to get exposed to — careers in business and financial services. Because it’s not only about learning how to save and invest, but also to think about more lucrative career options and the bigger dreams if you’re getting exposed to folks in these parts of the economy where real wealth is created today.

Klein: As you think about the strategies to overcome the racial wealth gap, what do you regard as the most important?

Rogers: I think there are two broad areas. One is on the education side. I chaired President Obama’s Advisory Council on Financial Capability for Young Americans. The recommendation we gave the president was we wanted him to be able to encourage corporate America to partner with urban public schools — in particular, financial services companies to partner with urban public schools — and expose kids to this great industry. Just think about it: You’ll have more entrepreneurs, more kids who are more financially literate, more kids getting into financial services, becoming financial advisers, helping their parents and grandparents and extended family. It becomes a beautiful circle if you can do that through public education. We just think that’s sacrosanct.

The other area is where corporations and large organizations are spending their money. Let’s use a university as an example. It’s the right thing to have more minority students. It’s great to have more minority professors. But you can also use the money that you’re spending — because often the university is the largest employer, the largest entity spending money in a local community – and make sure that you’re getting out of your comfort zone and not only working with your traditional white male-owned firms, but using minority firms whenever you have a chance and in the parts of the economy where the wealth is created. So, if you’re a university, you should have Black law firms, accounting firms, consulting firms, advertising agencies, public relations firms, and money managers for the endowment. Everything you spend money on — not just the construction and the catering, which are the lowest margin parts of the spend. There’s data that supports that.

The second thing you want a corporation to do is have diverse teams with the professional services companies they work with. Exelon, which owns PECO Energy in Philadelphia and ComEd in Chicago, does this better than anyone. They keep track of all of the professional services companies that work with them and have to have diverse teams on those relationships. They hire Goldman Sachs or Morgan Stanley or JP Morgan or Deloitte or Accenture — whoever they’re hiring, they’re going to make sure there are women and people of color in the relationships, in senior positions. Otherwise, they won’t be able to do business with Exelon. And Exelon honors all the firms that have done the most to support minority leaders within their institutions by having a big dinner every year at the Art Institute, where they literally give out trophies to the companies that are doing the best job.

“People often talk about the importance of access to capital, but I often say, ‘Access to customers is just as important.’”

Those are the two areas that I think are critical. Spend money with minority businesses because as we grow, we’re going to hire hundreds of folks in our communities who are going to be role models for our communities. We’re going to create philanthropy and a platform of power in our communities, and then make sure that we’re developing minority leaders in majority companies that can do great things in the companies that they’re engaged with.

Klein: Can you talk about Project Black, a new project of Ariel Investments? It has some relationship to these strategies you’ve just been describing.

Rogers: It does have some relationship to what we’ve been spending a lot of time thinking about these last 25 or 30 years, but this actually is Mellody Hobson’s project. Mellody Hobson is our co-CEO of Ariel. She has been at our firm 30 years. She started out as a summer intern, and I met her as a 17-year-old prospective Princeton student. Mellody is this dynamic leader in financial services, and she’s on the board of JP Morgan and Chase. She and Jamie Dimon came up with this idea of Project Black, where we would, hopefully over time, raise a substantial private equity firm that would differentiate itself by primarily investing in African American and Latinx businesses, and trying to build those into businesses of scale. We think that it’s important to give microloans to small businesses. But if you really want to impact our society, we need to have minority businesses at a real scale. In Chicago right now, of the top 150 privately held companies, there are zero African American companies in the top 150. Twenty years ago, we had three of the top 150. We’re basically nowhere on the map of building businesses of scale.

The idea of Project Black would be we would do it two ways. One, if there’s a Black or Brown company that needs growth capital to get to scale, we would be there as a funder, hoping that that company would be able to get to hundreds of millions of dollars in sales and real EBITDA (earnings before interest, taxes, depreciation, and amortization) margins. The second thing we would do would be, if you find a majority [white-owned] company that’s going to spin off a subsidiary or sell a subsidiary, we would match them with successful African American or Latinx entrepreneurs who would use our capital to buy one of these businesses.

This actually is borrowed from the McDonald’s model. McDonald’s has had a great history over their 60 years or more of working with Black-owned franchisees. But what many people don’t know is that they have been extraordinarily successful in building out over 20 minority-owned real businesses of scale. They’ve done it primarily by finding one of their big suppliers that is going to sell a division, or maybe there’s a supplier who’s going to retire. They would match that person with an outstanding executive — sometimes someone who worked at McDonald’s — and help them find the capital to buy the business. They get trained and mentored as they take over the business, and then they would have a contract from McDonald’s to say they’re going to buy X number of sausages or croutons or whatever it happens to be from that company.

People often talk about the importance of access to capital, but I often say, “Access to customers is just as important.” Because again, if you’ve got McDonald’s as your anchor client, you’re not going to have trouble getting bank loans or raising capital from investors. So, that’s the second part of this. We build businesses by directly investing in current businesses that are helping an entrepreneur buy a business. And we also are going to be connecting these entrepreneurs to major corporations that are interested in doing business with minority-owned companies. Help these companies find customers. We’re building relationships there at the same time, which we think is really important.

“If we really want to impact our society, we need to have minority businesses at a real scale.”

Klein: How important is the diversity of boards of directors as a driver of change in the racial wealth gap? Is this an important strategy or window dressing?

Rogers: I would say that having more diverse boards is good. That’s a positive. We want to see more women and people of color in the corporate boardroom. I’ve been working with your colleague, [Wharton management professor] Stephanie Creary, around the idea that it’s just not good enough to have a Black or Brown director. You need to make sure that you’re putting a Black or Brown director in place who has shown a commitment to social and economic justice throughout their careers and a willingness to follow in the late Congressman John Lewis’ footsteps and “make good trouble” when they’re in these leadership roles. When they see things that are not fair and are unjust, they feel comfortable speaking out and pointing out these injustices. Otherwise, if you have diverse board members who are not willing to be outspoken, it actually gives cover for the white status quo to say, “Things must be A-OK because minority directors aren’t complaining. We must be terrific at this diversity and inclusion work that we’re doing.”

It’s really, really important to make sure you have the right diverse board members in place if you really want to drive change and make a dent in this wealth gap that we have in our country. Mellody Hobson has this history of speaking out everywhere. Sheryl Sandberg, who has just done extraordinary work in her leadership role at Facebook, has said that she started to understand the importance of writing her book Lean In after she saw Mellody lean in time and time again for women and people of color on a board that they were on together. I think this is so critical, that you get people who are willing to lean in and make a difference in the boardroom.

Klein: That’s a great segue to my last question for you, which is about the kinds of communication that create change. In this country, there is such a painful racial history. A lot of people are very uncomfortable talking about race, perhaps particularly white people. In this time, are there messages or frameworks that you see resonating with people?

Rogers: I think there are a couple of things happening in this current environment. No. 1 by far is the George Floyd assassination, which really did startle America and made a lot of white CEOs think for the first time that maybe this game is not as fair for African Americans than they had originally thought. And many of the CEOs were impacted by the children who were profoundly impacted by some of the tragedies that we faced in our country. I think there is a sense of real, true progress because of that.

The second thing is I think we have a very progressive Congress — one of the most progressive in history. We have a progressive White House right now, and there’s an opportunity where the civil rights leaders are having a real impact. We have leaders like Joyce Beatty, the chair of the Congressional Black Caucus [and U.S. Representatives] Maxine Waters, Greg Meeks, and Hakeem Jeffries — all these people who are now empowered to make change and make a difference. There’s an optimism that I haven’t seen in my 40 years of thinking about this issue. There are people really interested in fighting to make this wealth gap get smaller and smaller over time, and I think the stars are aligned to have the momentum where you can have the corporate community working with the political community and the nonprofit community to truly make systemic change and move us in the right direction.

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