The Samoan family of Efeso Collins were turned away from allocated VIP seating at an official ceremony on Tuesday by a staff member who did not believe they were entitled to it.
The councillor said the incident left him "infuriated [and] deeply embarrassed".
Dame Susan Devoy said she heard stories that often went unreported, but because this one happened to a councillor, people were hearing about it.
She said policies being discussed to deal with that diversity did not go far enough.
"We're a very enthnically diverse country now, and we're talking about diversity and inclusion strategies and policies, but we can't regulate, so how do we actually change the entreneched attitude of people who are behaving like this?"