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The next big threat to corporate diversity success is here

July 26, 2022, 9:15 PM UTC

It seems that all the cool kids are talking about ESG, the environmental, social, and corporate governance goals that are increasingly being used to measure a company’s alignment with and progress on pressing social issues—everything from decarbonization to reducing waste to addressing the racial wealth gap.

And by cool kids, I mean the people who control the money.

According to PwC’s 2021 Annual Corporate Directors Survey, ESG is the number one topic investors most want to discuss with board members during shareholder meetings. Further, 64% of directors now say ESG metrics are linked to company strategy—a 15-point increase from the year before. Ninety-five percent of S&P 500 companies now publish some sort of ESG data, and nearly 60% use ESG metrics as part of their executive compensation plans in 2022, primarily tied to bonuses.

And the big winner in the governance category is diversity and inclusion. Now one of the most commonly focused-on metrics, it appears to be emerging as a proxy measure to fast-track ESG progress.

This all sounds like good news…until you think about it.

Alison Taylor, an adjunct professor at NYU Stern School of Business and executive director of its Ethical Systems research platform, and Brian Harward, a lead research scientist at Ethical Systems, are skeptical. “The current state of ESG efforts by corporations is disappointing but understandable,” they write in this opinion piece. “Investors pressurise them into what amounts to a box-ticking, virtue-signalling exercise – and it shows.” Most companies have it backward. “Declaring diversity an ESG target rather than a baseline expectation appears to be a self-serving strategy to generate positive PR.”

Taylor and Harward suggest that this is already leading to window-dressing behavior that ignores deep systemic issues that any responsible company should face.

They cite the “human capital” metrics that McDonald’s instituted last year, which tethered executive bonuses to increased representation of women and “minorities” in senior leadership. Laudable on its face, sure. “[U]ntil you read reports that the company had been practising a form of redlining with Black franchise owners” for many years, shunting Black operators into poorer Black and Hispanic neighborhoods and lower lifetime earnings. A lawsuit was settled last year, a necessary measure that describes the problem that these human capital metrics are too late to solve. “Was there any relationship between the lack of diversity in senior leadership and this litigation? More broadly, why should executives be given bonuses for meeting intrinsic goals that ought to be central to any company’s values and mission?”

Widespread adoption of ESG reporting is sure to increase the burden on already under-resourced diversity professionals, who are responsible for the kinds of breakthroughs that typically require a massive culture change to be successful. (Here’s my deep dive into the challenges currently faced by some 100 DEI practitioners I met with this spring. Spoiler alert: CEOs, the lack of progress will be on you.) And there are a lot of them now. Last year, Russell Reynolds Associates found that new chief diversity officers within the S&P 500 nearly tripled.

I expect it will also be a problem for exhausted employees who are pressed daily to explain inclusion to the dominant culture leaders who aren’t really on board—while not, you know, acting too “diverse.” A recent report from DEI consultancy Every Level Leadership found that 72% of Black women report having to code-switch at work to advance their careers, and more than half of respondents said they feel responsible for teaching their co-workers about diversity, equity, and inclusion.

With all eyes on the new ESG prize, what will it take for companies to make meaningful progress? Stop thinking short-term. When a company decides that diversity is essential to its core purpose, it’s a matter of “striv[ing] to meet customer, supplier and employee expectations over the long term,” say Taylor and Harward.

Well-compensated executives don’t need new bonuses to do their job, they argue. “Executives could then do what they were hired to do: bring new ideas to the table, assess the risks of their actions and lead others,” which means tapping relevant new perspectives. “They should be asked to create plans for how their division or function can address the diversity imperative, and encouraged to compete with each other and test micro innovations.”

Embedding diversity in every part of a business in this way minimizes the incentive to game the system.

“[T]here are many ways to hit a quantitative target that miss the point,” they write.

Ellen McGirt
@ellmcgirt
Ellen.McGirt@fortune.com

This edition of raceAhead was edited by Ashley Sylla.

On point

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On background: Take care of yourselves and each other

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Parting words

"A great example of colorism is to believe I can be compared to anyone. I’m the youngest talk show host ever. The first Black woman to star in her own show on Nickelodeon, & the youngest & first Black Cinderella on broadway. I’m an incomparable talent. Baby, THIS, is Keke Palmer."

—Keke Palmer, responding to charges of colorism affecting her career.

 

 

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