In the Market: How to harness the benefits of corporate diversity

By Paritosh Bansal

(Reuters) -In the early 2000s, Maryann Bruce and other senior women executives at Wachovia bank formed an affinity group called the Women of Wachovia. Within three years, WOW went from having more than 100 women to far fewer as many left the bank.

The bank, now part of Wells Fargo (NYSE:), had hired women but did not know how to do things differently to retain them, said Bruce, who now serves on corporate boards.

“There’s a big difference between diversity and inclusion,” Bruce said. “Diversity is all about counting people; inclusion is about making people count.”

While U.S. companies have made progress in adding more gender, ethnic and other types of diversity to their ranks in recent years, some of the same problems that WOW faced persist.

A Russell Reynolds Associates global survey late last year, for example, of some 130 senior executives who had left their jobs showed the top reason women gave for leaving was that they felt undervalued.

Now increasingly, corporate directors, academics and other governance experts are calling for companies to focus more on retaining and nurturing the people they hire. Among the components of DEI – diversity, equity and inclusion – they argue a focus on the latter two themes is crucial to make diversity more than just a box-checking exercise and necessary to reap its benefits.

Much is at stake for companies. After years of academic debate, there is mounting evidence that companies that score high on DEI metrics also perform better financially, the governance experts said.

The costs of failing to do enough are getting clearer as well. Just last month, Goldman Sachs (NYSE:) paid $215 million to settle a gender discrimination case with female employees.

“Many companies took this on in a crisis management way, jumping on the bandwagon,” said Roberta Sydney, an independent director and entrepreneur, referring to the corporate diversity push in recent years. “That led to bursts of activities rather than a change-management culture.”

A long-time director who currently serves on three major company boards said more focus was being placed on equity — or fair treatment of employees to create a level playing field — and inclusion as some companies were finally embracing the idea that “you need D, E, I to work in tandem to truly get the advantages of having a diverse organization.” 

SLOW PROGRESS

Companies have been adding diverse talent, especially to boards, in recent years as environment, social and governance (ESG) investing became popular and was mandated in places like California by law.

Gender and ethnic diversity issues have also risen to the forefront in the aftermath of the #MeToo movement highlighting sexual harassment and the 2020 death of George Floyd, a Black man murdered by a white police officer who kneeled on his neck for over nine minutes.

John Rogers (NYSE:), chairman of asset management firm Ariel Investments and member of Nike (NYSE:) and other boards, said diversity was imperative for corporate success.

If a company has a “1940s board, with all white males,” it’s a problem, he said. “They’re not thinking about creating a climate to be successful in today’s world.”

Nike, for example, is among companies that understand its customers and employees care about ESG, Rogers said. “So if they don’t stay cutting edge, you could lose market share,” he said.

Progress, however, has been slow, and some data suggests it has decelerated over the past year. A Heidrick & Struggles (NASDAQ:) report on the boards of Fortune 500 companies, for example, shows appointments of women and ethnic minorities decreased in 2022 compared with the previous year.

Pressure has eased from investors, too, amid an anti-ESG backlash in the United States. Among Russell 3000 companies during the current proxy season, support for shareholder proposals on racial equity and civil rights audits declined by about half on average, a recent Conference Board report shows.

Projections for gender and racial parity in different corporate roles go out decades.

DIVERSITY PREMIUM

There has been debate in academia about whether diversity has any impact on the financial performance of a company, with some research showing only weak correlations and no study proving causation, according to experts.

A research paper published last month argues that’s because people have been doing it wrong: looking at diversity alone rather than DEI as a whole.

In the paper published by the European Corporate Governance Institute, researchers from the London Business School, Columbia University and the Federal Reserve Board created a qualitative DEI score based on employee survey responses to questions that captured how equitable and inclusive their workplace was, rather than basing it on just diversity numbers.

They found that higher DEI scores were correlated with better financial performance, while demographic diversity alone was not. “Companies can ‘hit the target, but miss the point’ – improve diversity statistics without improving DEI,” the paper said.

One of the authors, Alex Edmans, a finance professor at the London Business School, said in an interview he is helping some investors consider questions to ask management to understand how the company approaches equity and inclusion. These include asking for examples of suggestions by employees that were implemented or concrete steps taken to encourage inclusion.

The purpose is to understand whether companies are ticking the box or doing something more genuine, Edmans said, adding: “It’s much easier for companies to say, ‘Hey, we’ve now got a woman on the board.'”