Within the past decade, social movements like #MeToo and Black Lives Matter (BLM) have increased public awareness of the importance of diversity, equity, and inclusion initiatives in the workplace. Then, in 2023, the Supreme Court struck down affirmative action programs in college admissions, declaring that considering race as one factor with which to ensure a diverse student body violated the Constitution’s equal protection clause, which bars racial discrimination by government entities. Meanwhile, underrepresentation of minority groups and women persist in the workplace.
The question of how businesses promote diversity among their employees is one of ongoing conversation and debate. “Social equity — whether the gender issue, racial inequality — all these things are driving discussions related to how for-profit organizations need to deal with it,” says Wei Cai, assistant professor of business in the Accounting Division at Columbia Business School. That’s why Cai and a team of researchers chose to conduct a study on the disclosure of diversity targets by US companies, which has emerged as a focal point for investors, employees, and the public alike. “This is a very timely topic,” she says.
Getting the Full Picture
In the first comprehensive analysis of diversity target-setting practices across corporate America, the researchers aimed to explore not only which firms disclose diversity goals but also whether they deliver on these promises — and how this impacts investor confidence.
Using a data set from workforce data provider Revelio Labs, the researchers were able to analyze the demographic data — including gender and race — of employees of 1,203 S&P 1500 companies between 2008 and 2020. They then hand-collected diversity targets from the 108 companies that had released them. From there, they ran analyses to observe trends.
Identifying Motivations
First, researchers looked at why the 10 percent of companies that disclosed diversity targets might have done so. They found that firms more willing to diversify their workforce were more likely to disclose targets. Willingness, Cai says, was typically linked to a company’s reputation: Those that were motivated to boost or rebuild their image were more likely to disclose these goals. “If the firm recently experienced some environmental, social, and governance (ESG) penalties and their reputation declined, they're more likely to say, ‘Let me show you that we’re actually trying to be better,’” she says. Other factors impacting a firm’s willingness to disclose included the opportunity to receive increased media attention, as well as the social pressure from societal movements like BLM, oftentimes coming from within its own workforce.
Researchers found that firms with greater ability to meet diversity goals were also more likely to disclose them. Companies with a blue collar-intensive labor force, for example, were better able to make diverse hires. “If the business model requires a relatively larger blue-collar labor force, then the company is more likely to consider race and gender [when hiring], versus if it is just 10 high-skilled employees who are very hard to hire.”
Having women and ethnic minorities on boards also helps. “There’s a cascading effect,” Cai says. “If the leader actually values this, or if the leader is female or ethnic minority, then they’re also more likely to implement this.”
Putting Words into Action — Or, More Often, Action into Words
The next question researchers looked at was whether firms deliver on their disclosed targets. They found that those who disclosed targets did see diversity increase, but it wasn’t necessarily because they were motivated by the disclosure to act. Because the researchers used data from a range of several years, they could see what happened before diversity targets were disclosed, not just the successful results that followed. As it turns out, the targets were a bit more backward-looking than they might first appear.
“What we find is that they already started to increase their diversity performance before the target disclosure,” Cai says. “It may not be the disclosure triggering the performance but rather the firm already doing it for a period of time and then deciding to disclose its targets.”
Categorical Differences
Across the different firms, there’s not one common disclosure format or type. Some targets are numerical, some are forward-looking, some are for the board or C-suite managers, and others are for rank-and-file employees. This heterogeneity meant the researchers had to hand-collect the disclosures — but it also allowed them to analyze which types of disclosures were most “credible” or “sincere,” according to Cai.
The findings showed that targets that are numerical, such as a specific percentage, are more likely to be met than more vague targets, as are those targets that apply to the entire workforce rather than just management. Likewise, targets that apply to the future rather than ex-post disclosure of current year targets are more credible, Cai says.
“A firm could just make up a goal,” she says. “They could say, ‘We set this target five years ago but just didn’t disclose it.’ We, as investors, don't know whether you're just reporting your current situation or if this is actually a goal you have achieved.”
Finally, the researchers found that — contrary to some common concerns — diversifying a workforce did not come at the expense of the quality of hires, as measured by education and professional experience. They also found that ESG ratings did not shift and investors and shareholders did not significantly react to diversity target disclosures, as shown by ESG scores and voting outcomes.
The study not only offers insights into corporate America’s handling of diversity efforts but also highlights the challenges and opportunities in verifying and delivering on diversity commitments. Cai hopes her research will help inform investors and business leaders on which diversity targets are trustworthy and which are like a new iteration of greenwashing, the practice of paying lip service to an environmental cause without taking real action. “There's a huge discussion and debate on ‘ESG washing,’ in general, whether the firms walk the talk, whether this is genuine,” she says. “The findings would be useful for investors who want to know which targets are more genuine.”
Adapted from “Diversity Targets” by Wei Cai and Shivaram Rajgopal of Columbia Business School, Yue Chen of Chinese University of Hong Kong, and Li Azinovic‐Yang of the University of Chicago Booth School of Business.
