In the face of vacillating political pressure, corporate America is walking a tightrope when it comes to diversity, equity, and inclusion (DEI). Republican attorneys general from 13 states recently issued the management teams of all Fortune 100 companies with a cease-and-desist letter telling the companies to comply with "race-neutral principles" in their employment and contracting practices. In response, seven Democratic state attorneys general last week promised legal defense to companies whose DEI initiatives face challenges.
The back and forth follows the recent U.S. Supreme Court decision essentially banning race-conscious (or affirmative action) college admissions. While the ruling does not concern Title VII of the 1964 Civil Rights Act, which governs employment discrimination and DEI initiatives, some corporate leaders are concerned not only about the ruling’s direct implications for companies looking to recruit from institutions of higher education but also about the backlash against corporations’ DEI practices more broadly.
However, companies that may back down from their DEI efforts out of fear may be overlooking a core group: their shareholders.
JUST Capital’s analysis suggests that the investor case for corporate diversity, equity, and inclusion is strong. As of June 30, 2023, our DEI Leaders Index Concepts—which features an equally weighted basket of companies scoring in the top 20% of JUST’s Rankings on DEI Issues—has outperformed the Russell 1000 Cap Weighted benchmark by 0.19% and Russell 1000 Equal Weighted benchmark by 3.4% since its inception on Dec. 31, 2021. Companies are identified as DEI leaders based on their disclosures and performance related to workforce demographics, discrimination controversies, DEI policies, and more.
Investors have long advocated for strong stakeholder management, a key component of which includes planning for the long term with an eye on strategies to attract and retain an increasingly diverse labor force. The Human Capital Management Coalition, a group of 36 investors with over $9 trillion in assets, recognizes the correlation between workforce diversity and performance and includes workforce diversity data among the four foundational disclosures positioned to allow investors to fully evaluate human capital management skills and identify risks and opportunities. Shareholder proposals and institutional-investor-led campaigns have also pushed for these disclosures. JUST Capital’s analysis found that as a result, EEO-1 disclosures (and other similar intersectional workforce diversity reports) more than tripled between 2021 and 2022 among Russell 1000 companies.
Other researchers over the past few years have also found positive correlations between companies’ diversity and stock performance. A Wall Street Journal study found that the 20 most diverse companies saw an average annual stock return of 10% over five years, compared to a 4.2% return for the 20 least diverse companies.
And, in fact, overcorrecting and shirking away from DEI now could be seen as more risky than staying the course.
Major investors have signaled the importance of diversity to corporations, including emphasizing how material it is to companies. For example, global investment bank UBS released a diversity and equality report in March, noting, "We believe that diversity is material—it matters to corporations' ability to grow, and it helps investors identify opportunities. In addition, diversity is material to markets overall—a growing body of research points to the benefits to economic growth of closing wealth gaps based on gender, race, sexual orientation, etc.”
Many companies recognize the importance of diversity. A group of almost 80 anticipating the Supreme Court’s decision last year filed an amicus brief in support of collegiate affirmative action programs. The companies—including Accenture, Apple, and Cigna, among several other companies in the JUST 100—noted that corporate DEI programs depend on college and university admissions processes that “lead to graduates educated in racially and ethnically diverse environments.”
“Only in this way can America produce a pipeline of highly qualified future workers and business leaders prepared to meet the needs of the modern economy and workforce,” the companies stated, acknowledging that “the result is a business community more aligned with the public, increased profits, and business success.”
As companies face new headwinds relating to advancing DEI, the investor case for these policies and practices is clear. Shareholders are sure to be watching how companies navigate this moment and, ultimately, inform their long-term growth.
Ashley Marchand Orme is the director of equity initiatives and Tolu Lawrence is the managing director and head of corporate impact at JUST Capital, an independent nonprofit dedicated to measuring and improving corporate stakeholder performance.
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