Economy

Companies are making bold promises about greater diversity, but there's a long way to go

Key Points
  • With women and minorities still underrepresented in leadership positions, companies have been announcing initiatives aimed at promoting diversity even before the protests that were ignited by the death of George Floyd.
  • Whether this brings meaningful change after protests remains to be seen.
  • Companies that fail to promote inclusive policies face a number of financial risks, including acquiring and retaining employee talent.
  • Additionally, as ESG investing becomes increasingly popular, companies that don't prioritize diversity could see investors ditch their stocks.

As protests sweep the nation, more and more companies are announcing initiatives aimed at promoting diversity and inclusion within their walls.

Whether these promises lead to tangible outcomes remains to be seen, especially since corporations are not required to disclose statistics on the composition of their workforce, which makes tracking broad progress difficult at best.

The data that has been collected through surveys paints a picture of just how far things need to change before companies are truly representative of the makeup of society at large, and before salaries are comparable across categories like gender, race, ethnicity and sexual orientation.

Much attention has been given in recent years to the lack of diversity on corporate boards, which has forced companies to act on that front. All S&P 500 companies now have at least one woman on the board, and executive search firm Spencer Stuart found that last year, of the 432 new independent directors added to S&P 500 boards, 59% were women and minority men.

But statistics also show the lack of progress among the corporate workforce. According to data from human resources consulting company Mercer, 64% of workers in entry level positions are white. In the top executive ranks, however, 85% of positions are held by whites, demonstrating the promotion gap that minorities face. And women and minorities continue to under-earn white male colleagues, according to the Economic Policy Institute.

Social values aside, there's a real financial risk for companies that fail to put their money where their mouth is. A lack of diversity in background and experience can stifle innovation and promote group think, while companies that don't prioritize inclusion may struggle to attract and retain top talent and younger workers. Additionally, ESG investing — when a company's environmental, social, and governance factors are considered alongside financial metrics — is growing in popularity. Experts say that following the coronavirus pandemic, the "S" element is set to become even more important, meaning that companies that don't prioritize diversity could see investors ditch their stock.

"Companies' consideration of diversity & inclusion is not only important on the basis of values; it also has a material impact on their long-term performance," Barclays analysts said in a research report.

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Tracking diversity in the boardroom

The pressure on corporations has built with widespread protests following the death of George Floyd at the hands of a white police officer in Minneapolis.

Andrew Behar, CEO of the shareholder advocacy group As You Sow, said we could be at a watershed moment that will ultimately force companies to begin disclosing more information. His group is among those pressuring companies to provide more transparency around issues including workforce composition, recruitment, retention, pay and promotion practices. He said that regulation could be next, including around CEO compensation, pointing to successful past campaigns by investors.

"We need information from companies about the outcomes they are achieving, not only the values they espouse, and it is our duty as shareholders to hold them accountable for inaction," said John Streur, CEO of Calvert Research and Management, the sustainable investing arm of Eaton Vance.

Companies are only as strong as their employees, and in the age of social media, one false step — or not stepping up to the plate, in this case — can wind up costing big. Or as Warren Buffett famously quipped: "It takes 20 years to build a reputation and five minutes to ruin it."

Minorities are underrepresented and earn less

While companies, at least outwardly, agree on the importance of diversity across organizations, the available data shows that women and minorities are drastically underrepresented when moving up the ranks.

A recent study from Mercer shows that the problem starts early, with minorities not advancing at the same rate as their white colleagues.

At the support staff and operations level, 64% of employees are white, 12% are Black, 10% are Hispanic, 8% are Asian or Pacific Islander, and 6% are other races. The share of positions held by Caucasians increases with each upward wrung of the ladder. By the executive level, 85% of positions are held by white employees. Black and Hispanic employees make up just 2% and 3% of these positions, respectively.

It's even more difficult for women minorities: 81% of women in executive roles are white, compared with 6% who are Black and 3% who are Hispanic. Asian or Pacific Islander women hold 8% of posts among women executives.

"Black/African American and Hispanic/Latino populations (overall and just for women as well) are underrepresented at every career level above the support staff level when compared to their representation in the general population," the report concluded.

The coronavirus outbreak has illustrated the hurdles for minority workers. More than 40 million Americans have filed for unemployment protection since the U.S. outbreak began in earnest in March, but numbers have started to improve for white workers. White unemployment fell to 12.4% from 14.2% in May, while Black unemployment rose to 16.8% from 16.7%. Women have also been disproportionately affected since they represent a larger share of workers in some of the hardest- hit industries, including hospitality.

Despite decades of pushing for wage equality, women and minorities still fall short of the pay of their white male colleagues, according to the Economic Policy Institute.

"The data show not only rising inequality through the 2000s, but also the persistence — and in some cases worsening — of wage gaps by gender and race," senior economist Elise Gould wrote in "State of Working America Wages 2019." "At every decile, wage growth since 2000 was faster for white and Hispanic workers than for Black workers."

Economic consequences

On the other side of the ledger, for companies that fail to diversify and promote an inclusive environment, the economic consequences are large — and growing.

"Incentives to close the gender gap are evident ... companies focused on gender diversity at a board, C-suite and firm level have consistently achieved higher ROE [return on earnings] and lower earnings risk," Bank of America analyst Haim Israel wrote in a recent note to clients. "Moreover, companies focused on diversity have generally traded at premia to more homogenous counterparts."

Consulting firm McKinsey put data behind the numbers and found that more diverse companies are positioned to meaningfully outperform their more homogeneous counterparts.

"Companies in the top quartile of gender diversity on executive teams were 25 percent more likely to experience above-average profitability than peer companies in the fourth quartile," the firm concluded in a 2019 study. "This is up from 21 percent in 2017 and 15 percent in 2014."

The findings were even more compelling for ethnic and cultural diversity, where companies in the top 25% outperformed those in the bottom quarter by 36% in terms of profitability.

Companies taking action

Inequality and a lack of diversity in the workplace are certainly not new topics, but the recent protests have prompted companies to speak out, condemning racism, and recommitting to doing better when it comes to fostering inclusive work environments.

"Let us be clear — we are watching, listening and want every single one of you to know we are committed to fighting against racism and discrimination wherever and however it exists," JPMorgan Chase Chairman and CEO Jamie Dimon said recently. 

"These events are symptoms of a deep and longstanding problem in our society and must be addressed on both a personal and systemic level," wrote Larry Fink, CEO of BlackRock, the world's largest asset management firm. "This situation also underscores the critical importance of diversity and inclusion within BlackRock and society at large. We will continue to push forward in our efforts as a leadership team to build a more inclusive and diverse firm."

In a series of Twitter posts, Ulta Beauty said it would amplify Black-owned brands, Black creators and black beauty and said it would "continue to facilitate and reinforce not only our unconscious bias trainings, but further our curriculum focusing on privilege and systemic racism."

These are just a few of the dozens of companies that responded to the protests and social unrest by condemning racism and pledging change. Experts say it's one thing to make promises, however, but quite another to enact meaningful change.

Lanaya Irvin, president at nonprofit Center for Talent Innovation, said corporate diversity has to go beyond just representation. "Companies need to commit to addressing bias and dismantling bias within their institutions, and really taking a hard look at what dynamics are at play that create barriers to advancement," she said.

She pointed to several areas where corporate policies should be reexamined, including recruiting practices, performance management systems, promotion panels and compensation.

"I do think that this has been a call to action, and the corporate community and CEOs have been visible and vocal and making statements denouncing racism and standing up to injustice," she said. "But I think the hard work happens when you do the work internally so that you have the right to make those statements."

"How we emerge from this crisis," Irvin added, "will largely be determined by ways the private and public sector take action, and I truly believe that in this case, the private sector has a significant role to play."

— CNBC's Nate Rattner and Michael Bloom contributed reporting.

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