Is this the end of Corporate DEI?
Diversity, Equity and Inclusion (DEI), also known as D&I, I&D, DEIB, IDEA or even JEDI – the acronyms are endless.
Even if you haven’t heard of them, you are likely to have a strong opinion on the topic itself. Having spent three years supporting both asset managers and corporates with their responsible investment and/or corporate sustainability approaches, I believe it is the most contentious topic within the ESG space. Although there has always been some form of resistance, or certainly apprehension, towards implementing DEI initiatives, the most recent wave of DEI pushback is visible and has become increasingly mainstream. I want to offer an overview of this pushback, why I actually understand where the pushback has come from, but also my belief as to why DEI remains relevant for businesses.
Funnily, a key reason behind the most recent wave of DEI pushback is something I agree with; when first starting as an ESG consultant, there were numerous studies which claimed to identify a correlation between increased diversity and company performance. The most famous of which are a series of studies, from the management consultancy McKinsey, which claimed to show that “the most diverse companies are now more likely than ever to outperform less diverse peers on profitability.” By propagating this message, these studies provided ample ammunition to DEI proponents and were treated like gospel.
DEI was now framed as a strategic imperative for businesses, and the message was clear: DEI equals financial outperformance. However, these studies have been under intense scrutiny within academic circles due to their lack of methodological rigour. For those interested, this piece provides an overview of these methodological concerns, whilst this academic paper was even unable to find “evidence of any statistically significant positive relations between the financial performance […] and McKinsey’s measures of the racial/ethnic diversity.” Please note that McKinsey is not the only firm to have published a DEI study criticised for its methodology.
With these DEI studies now considered by many, including myself, to be “debunked,” it has raised an interesting conversation within the ESG space around the future of DEI. In a similar vein to DEI proponents, some DEI sceptics have quickly concluded that DEI initiatives always lead to financial underperformance, the logic of which is inherently flawed as there is equally no evidence to suggest this causal relationship exists. Conspiracists have taken this one step further, even linking Boeing’s recent string of high-profile safety incidents to the implementation of their DEI initiatives. I will pay you the compliment by assuming you can also see how ludicrous this is.
Regardless, where does this leave me, someone who accepts that the academic evidence linking DEI to financial outperformance does not currently exist but still believes DEI can offer strategic value for businesses?
My view is that DEI sits as one of the many components which impact how businesses manage their human capital (employees). Therefore, when thinking about DEI, it is important to understand how your initiative fits into your wider goals around human capital management and development. For example, have you noticed higher turnover from a specific demographic within your workforce, and could this be impacting your business due to costs associated with hiring and training replacements? A focus on human capital management also makes it easier for those sitting on the fence to understand DEI’s relevancy. Therefore, even if the presence of increased gender or ethnic diversity itself does not correlate with financial outperformance, DEI can feed into many other intangibles which impact a company’s performance. DEI is much more than meeting arbitrary quotas, and implementing quotas for the sake of implementing something, without any thought as to its strategic relevance or impact, is simply bad business practice. However, this is the same with any other topic, and certainly not limited to DEI itself.
Realistically, DEI will continue being a contentious topic for many and I don’t see us reaching a consensus any time soon. Nonetheless, I hope you have gained some perspective on this debate, and can understand that even if there is a lack of concrete evidence linking DEI to financial outperformance, it is not something that can be dismissed entirely, much to the dismay of DEI sceptics.
