Why the Racial Equity Battle Must Be Fought on Economic Grounds
By Eric Darrisaw
Why Social Activists Have Traditionally Questioned the Economic Argument
DEI Must Be Integrated Into Stakeholder Management Strategies
The Need for a Standardized, Auditable Approach to Reporting
It is time for organizations to stop segregating Diversity, Equity, and Inclusion (DEI) into departments with little impact and to start integrating its principles into their stakeholder management and disclosure practices. Social activists in the investment community can help by focusing on the powerful economic case that DEI is simply better business rather than pursuing an adversarial approach.
Ironically, a new law from the European Union known as the Corporate Sustainability Reporting Directive may provide the impetus for a more meaningful
approach to DEI: the standardized disclosure of the actual practices used by organizations to manage and encourage diversity among all stakeholders, the metrics used to measure progress, and the steps taken over time to improve outcomes—all available in reports on a free database in an easily comparable format. The law, which is expected to have far broader impact than the European Union GDPR (Global Data Privacy Regulation), will directly affect over 3,000 of the largest organizations in the US and up to 60,000 around the world starting in 2024. The final provisions, available for final public comment until July 7, 2023, known as the European Sustainability Reporting Standards, do just that: create a standardized approach to human capital reporting across the enterprise, including diversity. The law establishes a new level of standardized human capital and environmental disclosures on issues related to the treatment of workers, customers, supply chain and distribution partners, and communities across the globe. The stated purpose of the law is to discourage greenwashing and to encourage organizations with over 250 employees to implement sustainable stakeholder management practices by disclosing how their practices affect customers, workers, supply chain and distribution partners, communities, and the environment and how stakeholders and the environment affect the enterprise.
Why Social Activists Have Traditionally Questioned the Economic Argument
The traditional approach to DEI is to focus on redressing inequality and social injustice, and new research published in the National Library of Medicine provides a hint as to why. The authors Oriane A. M. Georgeac and Aneeta Rattan find that “The use of the business case to justify diversity can result in under-represented groups anticipating less belonging to organizations, which, in turn, makes them ultimately less likely to want to join the organization.” This may also explain why many social activists in the investment sector focus on the social and moral argument, rather than making the economic case.
Nonetheless, making the economic argument and baking DEI into all the processes of the organization is critical for success.
As a Black American who has spent almost my entire career balancing my social activism on such issues as apartheid and workers’ rights with my profession as an ESG (Environmental, Social, Governance)-oriented investment consultant, I have found that while the business case for DEI may not be the best recruiting tactic for under-represented communities, it is critical to convincing companies to bake DEI into their management practices. DEI is a business opportunity, not only a compliance issue.
DEI Must Be Integrated Into Stakeholder Management Strategies
DEI cannot be separated from human capital management and corporate governance; it is part of an overall investment in employees, customers, distribution and supply chain, and communities. Instead, DEI today often focuses on anti-bias training, employee resource groups, and other activities often unrelated to the organization's core purpose, when in fact DEI and philanthropy must be integrated into all organizational strategic engagement efforts with customers, supply chain and distribution partners, and communities. Chief diversity officers need more support from shareholders, boards of directors and senior executives in all areas of management to implement DEI as an economic priority and systematic part of human capital and stakeholder management, which may explain why turnover in these positions is so high.
As noted in the recent research paper, “Diversity, Equity, and Inclusion,” by Alex Edmans, Professor of Finance, London Business School; Caroline Flammer, Professor of International and Public affairs at Columbia University, and Simon Glossner, Federal Reserve Board, “companies can hit the target but miss the point – improve diversity statistics without improving DEI.”
Shareholder activists often compound the issue by siloing DEI as a social or moral imperative, without making an adequate investment case. This has only made matters worse by creating a backlash and accusations of social engineering. There is a growing cavalcade of DEI lawsuits and anti-ESG legislation on the basis that ESG in effect violates management’s fiduciary responsibility to increase profitability, shareholder value and investment returns when in fact it is specifically designed to do the opposite.
This is why the economic benefits of DEI and related human capital management practices are so important, even if not always palatable to some social activists. Ideas and opinions about diversity initiatives may vary but paying the bills doesn’t. At the end of the day, business will be driven ultimately by economics and opportunity. The economic argument is simple: DEI is better business. The study by Alex Edmans et al cited above and by others does find a link between financial results and DEI, but there are obviously other factors that can come into play related to profitability in any given year. It is just common sense that organizations with the broadest possible access to engaged customers, talent, supply chain and distribution partners, and supportive communities will perform better and be more resilient over the long term than those with a narrower community of less engaged stakeholders.
Seen in this light, racial equity audits ideally need not only experts in racial equity but the active participation of business experts to assess not only demographic representation and DEI initiatives, but to provide an auditable disclosure of an organization’s actual management practices utilizing uniform global reporting standards to enable benchmarking and competitive analysis. DEI return on investment and financial materiality are key for investors and shareholders.
The Need for a Standardized Approach to Reporting and Auditing
As with environmental issues, investors and other stakeholders need a measurable, standardized way of evaluating the impact of stakeholder capital management and diversity in public and private corporations; however, it must be in the context of overall good corporate governance, not only social equity but also financial equity for employees and stakeholders. Ideally, there should be one global standard, such as the standards in the accounting profession or total quality management, so that organizations do not have to contend with multiple reporting and auditing processes acround the world. A standardized reporting framework to complement US Securities and Exchange Commission human capital disclosures rules is required that looks at how organizations address DEI across the enterprise. Otherwise, we are limited to "diversity snapshots" in time, with no understanding of how DEI is woven into business processes, measured, and improved.
The world’s third largest economy has paved the way for such standards with a new international disclosure framework that includes concrete, audited information on diversity related to all stakeholders--not just employees but customers, distribution and supply chain partners, and communities. The European Union apparently understands the need for a standardized approach to stakeholder management disclosures. Backed by the force of law, the EU CSRD requires companies to provide detailed information on the practices and metrics related to workers, including metrics on turnover, pay equity, health, safety, discrimination claims, performance review practices, worker voice, work-life balance, and more. It also includes detailed disclosure on the treatment of workers in the organization's supply and distribution chain, customers, and communities, providing a 360-degree view.
Considered by many attorneys to be a game-changer in corporate disclosures, with far greater impact than the EU GDPR (General Data Protection Regulation), the CSRD requires disclosures on over 80 specific metrics.
Based on the impact of GDPR, this new law likely will become a legal standard for integrating DEI into business operating systems and disclosures and to help stop perpetuating a segregated approach that has produced unenviable results despite decades of well-intentioned efforts. As the legendary management consultant Peter Drucker famously said: you cannot manage what you don't measure.
For More Information
Eric Darrisaw, Principal
Lazarus Advisors LLC
Eric@Lazarusadvisorsllc.com
