Weekend Reads | How 'Diversity Washing' Paints an Inaccurate Picture of DEI in Some Companies

by Kevin Schofield

This weekend's read is a "working paper" from a group of researchers looking at "diversity washing" by corporations. Much like "greenwashing," which is attempting to present an environmentally friendly public image by disseminating disinformation about an institution's environmental practices, the researchers define "diversity washing" as overstating a company's diversity, equity, and inclusion (DEI) commitments compared with their actual practices.

Since 2016, the number of DEI-related words that appear in public corporations' corporate financial statements has skyrocketed.

But what the researchers wanted to explore was whether it's just talk or whether the companies are actually improving their diversity practices — as well as their actual diversity. To conduct their study, they collected diversity ratings for public corporations from two benchmarking organizations and ranked them in five tiers from best-performing to worst. They then counted the number of DEI-related words appearing in each company's corporate disclosure documents filed with the Securities and Exchange Commission to see whether the amount they talk about diversity is proportional to their real-world commitments to it. They gathered data for multiple years and in total had 46,000 "observations," each of a company's diversity and DEI-related words for a given year.

They found that, overall, firms that were more diverse talked about diversity more. But the correlation was very weak, and within every tier was enormous variation in how much the companies discussed DEI; in fact, less than 1% of the variation in DEI discussion could be attributed to companies' actual diversity. Some firms understated what they were doing. Other companies dramatically overstated their DEI commitments, and those were identified by the researchers as the "diversity washers."

Looking at related data sources, the researchers were able to identify some other common characteristics of diversity-washing companies. They tend to be larger firms; they also tend to have worse financial performance (lower growth, less profitability) than similarly sized peers — which suggests they might be trying to use diversity washing to distract attention away from their poor business performance.

Diversity washers are more likely to have a questionable corporate diversity policy — one that is light on clear goals and specific targets. They are also more likely to have been fined for violations by the Equal Employment Opportunity Commission (EEOC) and to have received larger fines.

But wait — couldn't it just be that the increased use of DEI-related words is aspirational, that these companies are signaling their intent and commitment to improving their future performance? The researchers looked hard at that question and found that diversity washing was not, in fact, a leading indicator of future diversity improvements.

The researchers also found that diversity-washing companies showed similar communication patterns in their published Corporate Social Responsibility (CSR) reports and on social media channels, such as Twitter.

Sadly, it appears that diversity washing works: Those companies that embellished their DEI commitments had higher ratings by independent organizations that rank corporations on their Environmental, Social, and Governance (ESG) accomplishments, in part because those organizations rely heavily on voluntary disclosures as inputs to their scoring systems. Diversity washers also had higher levels of ownership in the portfolios of ESG-focused mutual funds and other investment tools. So misleading, diversity-washing communications effectively redirect dollars to the wrong places.

Unfortunately, the researchers do not disclose their rankings of companies by their level of diversity washing; it wouldn't surprise me if their lawyers discouraged them from doing so. Still, they pointed us at what to look for, and they are directing attention to a real problem as the social imperative to force companies to improve their diversity and address other social, environmental, and governance issues continues to grow.

Diversity Washing

Featured image by ESB Professional/Shutterstock.com; edits by Emerald team.