Don’t CEOs Understand That Racial Inequality Is Bad for Business?
This is a new era for corporations in the United States: CEOs are speaking out on race—a topic with a deep history that continues to tear the nation apart.
Facebook (FB) CEO Mark Zuckerberg and Microsoft (MSFT) CEO Satya Nadella, among others, spoke against the Trump administration’s announcement to rescind Deferred Action for Childhood Arrivals (DACA), 84% of whose recipients identify as Latino. Merck (MRK) CEO Ken Frazier, Intel (INTC) CEO Brian Krzanich, and UnderArmour (UAA) CEO Kevin Plank, among others, resigned from the American Manufacturing Council over Trump’s initial failure to condemn white supremacists in Charlottesville, Va. More than 150 corporate leaders signed the CEO Action for Diversity & Inclusion, committing to advance diversity and inclusion at their organizations. Such efforts are noteworthy because it takes moral courage for CEOs to leverage their influence and address issues of racial inequity. Importantly, speaking up has the potential to influence policies that shape the racial culture of the nation.
But reversing the impacts of racial discrimination and inequality requires more than moral courage. People of color face obstacles in all aspects of life, be it education, income, wealth, health, employment, or access to justice.
Business leaders need to realize that racial inequity is bad for business—it keeps people of color from participating fully as employees, consumers, and suppliers. It results in greater costs in hiring and retention, smaller market segments, and fewer suppliers to choose from. Given the rapid demographic shifts, the corporate stakeholders of tomorrow will predominantly be people of color.
Recent research by FSG and PolicyLink shows that some companies are already demonstrating how to use core business products and practices to address racial inequity while creating a competitive edge for themselves.
For instance, when PayPal (PYPL) found that its small business customers were struggling to access finance from traditional banks, the company created PayPal Working Capital. This loan allows small business owners to get funding in minutes, without a credit check, and repay it using a percentage of their PayPal sales, with one affordable fixed fee. Although addressing racial inequity was not the starting point for PayPal, it eliminated factors traditionally influenced by race, as research shows that entrepreneurs of color are more likely to avoid applying for loans for fear of being denied. And those who are approved often pay higher interest rates. As a result, small businesses owned by people of color remain small in revenue and size.
Gap Inc. (GPS) started This Way Ahead—a paid store internship program—in 2007 as a small pilot in New York City with the intention of helping youth build skills and get critical first job experience. Today, the program is so successful in attracting and developing entry-level talent that in 2016, the company committed to hiring 5% of its new entry-level talent in stores from graduates of This Way Ahead by 2025. About 98% of participants self-identify as people of color.
FSG and PolicyLink research also found companies proactively designing such strategies. Prudential (PRU) realized that nearly two-thirds of households of color do not have retirement savings, due in part to the lack of workplace payroll savings plans for small businesses. Prudential is working with a coalition of organizations in more than 30 states to pass legislation that requires companies to enroll eligible workers in retirement plans and additional legislation that authorizes the creation of open multiple employer plans—which have the potential to disproportionately impact people of color positively since that’s who smaller employers predominantly hire—to ease the burden for small businesses. Given that employees are 16 times more likely to save for retirement if they have access to workplace-sponsored plans, Prudential is addressing racial inequity while creating an opportunity for its industry.
ShopRite operator Brown’s Super Stores, part of the $15.7 billion Wakefern Food Corporation, is another example. It has found market expansion opportunities by bringing grocery stores to food deserts, where predominantly low-income people of color live. The company worked with community leaders to understand their needs and now offers customized food items and complementary services that were lacking, such as health clinics. The company’s seven Brown’s Super Stores generate nearly $250 million in revenues by providing fresh food to 250,000 people.
There is a tremendous opportunity for CEOs to put racial equity at the center of their strategy. A nuanced understanding of the historical reasons why people of color have lacked opportunities combined with analytics can help business leaders see the race-related reasons for low adoption of products, or the unintended exclusion of certain market segments. It can also help businesses better understand low participation or retention of employees of color. This understanding can lead to greater innovation.
Advancing racial equity is a moral imperative for sure. It’s also an economic one.
Mark Kramer is a co-founder and managing director at FSG. Angela Glover Blackwell is CEO of PolicyLink. Lakshmi Iyer is an associate director at FSG.
FSG and PolicyLink are independent organizations working together on this research funded by the Ford Foundation and the W.K. Kellogg Foundation. Angela Glover Blackwell is a Board Member of FSG. PayPal and Prudential were some of the many companies interviewed by FSG and PolicyLink. PayPal recently became a member of the Shared Value Initiative, a global community of leaders supported in part by FSG. The Prudential Foundation funds several PolicyLink programs.