Diversity washing is increasingly a thing
In the UK, new diversity rules for the board of directors of listed companies will have to be reported for all annual reports published after 1 April 2023. These rules require main market listed companies to have at least 40% women on their board, at least one woman in a senior board position and at least one ethnic minority on their board. Companies that do not meet these criteria will have to show that they have a diversity and inclusion strategy in place that remedies the situation.
But just like greenwashing (presenting a company as greener than it really is), diversity rules have led to a trend of diversity washing. This is by no means a UK or a European thing, but something that happens in the US as well. This research examined the SEC filings, 10-K and 8-K reports of nearly all listed companies in the United States between 2008 and 2021. Throughout the entire period, diversity disclosures were voluntary, so the researchers analysed how much information on diversity was given by a company and then compared that to the gender and ethnic diversity of the company as measured by the share of women in the workforce and the share of ethnic minorities in the workforce.
They noticed that some companies spent significantly more space discussing diversity than would be warranted by their actual diversity metric. For example, within the middle bucket (of five) of average companies by diversity, the top 20% used 13-15 times more words to discuss diversity than the bottom 20%. Does that mean that the companies that provide a deeper discussion of diversity are better than the ones that don’t?
To examine that, the researchers split companies into five groups by level of diversity and by the depth and breadth of the diversity discussion. Companies that fall into a higher quintile in terms of diversity discussion than warranted by their diversity data are called ‘diversity washers.’ I know, it is a very crude measure and a pretty polemic label, but even with this crude measure (or maybe because of it?), there are significant differences in the data.
Most importantly, companies that discussed diversity in detail but didn’t follow through on actual diversity in hiring were more likely to be fined for violations of antidiscrimination rules and the fines of these diversity washers were higher than for the average company. And while the diversity washers were no less likely to have diversity policies in place, they more often than not had no target for diversity improvements in place.
But maybe the in-depth discussion of diversity issues in their reports is a signal of intent, rather than current practice. Maybe companies with a more in-depth discussion of diversity issues and policies aim to improve their diversity. Turns out that there is no evidence that companies with longer and more in-depth diversity discussions change their hiring policies in subsequent years. Quite the opposite, diversity among new hires tends to decline in the year after a diversity statement becomes longer and more in-depth. The same holds true for executive-level diversity. There is no correlation between more in-depth diversity discussions and a subsequent increase in executive-level diversity.
Yet, in-depth discussions of diversity do pay off for the companies. Diversity washers on average have better ESG ratings from commercial rating agencies and ESG funds invest more money with companies that have a more in-depth discussion of the topic. In other words, both ESG rating agencies and ESG fund managers don’t seem to do proper due diligence on the company’s statements and don’t check whether the data actually matches the statements.