Cash News
Roy Swan leads the Ford Foundation’s Mission Investments team, advancing social justice and equality via impact investing.
We have evidence that bad company culture destroys business value while good company culture drives innovation, productivity, profitability and enterprise value. The latter requires employee engagement, which depends on management’s ability to inspire all employees of a company to perform at their best, but that I believe is impossible without incorporating the principles of diversity, equity and inclusion (DEI).
DEI Efforts Are Still Leaving Many Behind
Notwithstanding the advantages of good company culture achieved through DEI principles, I see two big problems with DEI: cynicism and its association with Black people.
Like when many Americans hear “affirmative action” and think “program to help Black people,” I’ve found that many hear “DEI” and think the same thing. That’s a huge problem. Because white people hold dominant power in corporate America and in the Wall Street investment world, their conscious and unconscious biases may prevent them from advancing DEI to all groups in an authentic and meaningful way. It doesn’t matter if a Black person is a company’s head of DEI because the ultimate authority is held by CEOs who are overwhelmingly white men.
For example, Black people represent a little over 14% of the U.S. population, but only 1.6% of Fortune 500 CEOs are Black. In the institutional investing world, a sampling of the $82 trillion in U.S. assets under management found that 1.4% was managed by diverse-owned firms.
While some believe that Black people are receiving enormous advantages from affirmative action and DEI, the data indicates otherwise. Research also shows that companies with racially diverse C-suites and boards are more likely to perform better than average. And in investment firms, “performance is empirically indistinguishable among minority-owned, women-owned and other firms.”
Ignoring DEI Is Costly
Ignoring DEI as the heart of good corporate culture is enormously expensive to America and investors. At the national level, the U.S. has lost an estimated $51 trillion in productivity because of race-based barriers to opportunity since 1990 alone. Other research estimates that, if race-based barriers were removed, U.S. GDP would enjoy a $5 trillion increase in just five years. It’s hard to imagine this would be the case if CEOs, asset owners and institutional investors were all fair, moral and interested in maximizing financial returns.
Nobel Prize-winning economist Gary Becker noted in his book The Economics of Discrimination that some white people are willing to suffer costs to deny economic opportunity for Black people. That finding explains why the intentional pursuit of inferior financial returns to maintain race-based barriers, while economically irrational, nonetheless persists. History is riddled with such self-inflicted wounds, which have even caused the fall of nations.
But there’s more, and it gets worse: Low worker engagement is not only toxic, it’s expensive. Current research indicates that nearly 80% of workers are disengaged from their employers, which generates an estimated annual cost of $8.8 trillion globally, and up to $605 billion annually in the U.S. alone.
Embracing DEI Supports Patriotic Capitalism
Business innovation, productivity and profitability are powered by engaged workers. Worker engagement depends on the quality of business culture.
Business culture is cultivated by a set of quality job characteristics, including collaborative employee/management relations, predictable schedules, on-the-job training across numerous dimensions, fair wages, good benefits, opportunities for upward mobility, worker voice and worker ownership throughout the company. These help workers feel more appreciated, a greater sense of ownership and the accountability and responsibility associated with ownership that powers a company’s success. Those characteristics fuel a healthy business culture that nourishes and grows employee engagement, which contributes to a stronger bottom line. Another word for all that is DEI.
The DEI status quo of most companies must change to become more economically rational and build better workplace environments. There’s a silver lining in the massive financial upside: Highly engaged business units experience 23% greater profitability.
Boards, CEOs and investors must embrace the fact that DEI is not just about Black people. It is about maximizing profits in a moral and sustainable way through quality jobs and good corporate culture. There’s low-hanging financial fruit to be had for enlightened boards, CEOs and investors willing to encourage companies to prioritize workers and shareholder returns. The result will be Patriotic Capitalism—a form of impact investing that prioritizes country, democracy, national security and the common good alongside risk-adjusted, market-rate financial returns. If the term “DEI” must die, it can be resurrected as “Fairness.”