Fri, Feb 07, 2025 page7

• DEI can be justified, but not by better profits

  • By Allison Schrager / Bloomberg Opinion
  • • 
    • 
    • 

  The practical justification for corporate diversity, equity and inclusion programs — as opposed to the more idealistic one — has always been pretty straightforward: Hiring for diversity is just good business. However, it is now clear that this is not the case. Diversity, equity and inclusion (DEI) might not be bad for business, but it is not good, either.

  DEI can mean many different things, but the most controversial aspect of it entails companies going out of their way to hire women, and members of ethnic and racial minorities for board positions and in senior roles. The rationale is that increasing gender and ethnic diversity brings in a wider range of points of view and personal experiences, which leads to better decisionmaking, as more aspects of a problem are considered. Therefore, more diverse hiring increases profits and benefits shareholders. There is a small library of studies from consulting firms, the financial industry and academic centers showing that more diverse leadership improves performance and profitability.

  However, there are reasons to be skeptical of that evidence and the argument it supports. Very few of those studies have been subject to peer review, and few could be replicated. Besides which, many are published by businesses that also make money from DEI initiatives.

  More rigorous research from academia does not find any correlation, or even a negative one, between profitability/share price and more diverse boards or workforces. The academics behind that research do not mince words: As one Harvard professor said: “These reports are not academic studies; rather, they are marketing materials crafted to attract paying clients.”

  Among the criticisms are that the industry studies lack rigor, use poorly specified models, make elementary errors (such as not measuring profitability or stock returns properly) or infer causation when even correlation is thin or nonexistent.

  That does not mean all DEI initiatives should be scrapped. One of the biggest critics of the DEI-is-good-for-business literature is London Business School finance professor Alex Edmans — and he supports some aspects of DEI.

  The problem is that diversity of race and gender might not be a good proxy for diversity of thought, he said.

  DEI can also be associated with sales growth and profitability as long as it is defined not in a narrow demographic sense, but as a way to make employees feel welcome, included and heard, he added.

  Yes, those things are also an indication of a well-run company. And the perception of quota-based hiring can undermine the perception of fairness, which Edmans’ work shows employees also value. Still, his and others’ research shows that simply hiring a more diverse staff, or putting more women or members of minorities in leadership roles, does not by itself make a company more profitable.

  Now that DEI is under more scrutiny, preserving what was well-intentioned about it requires an honest assessment of its purpose and its results. US President Donald Trump is trying to end DEI not only in the US government, but also in the private sector, which is divided on whether to continue its efforts.

  The business case for DEI is weak, so the question of what companies should do is one of values. For some, diversity in hiring is an important way to right past wrongs, while others point out that white men still dominate key roles. The counterargument is that DEI hiring practices are another form of discrimination.

  Both sides have a point and it is hard to be agnostic on the issue. The best we can hope for is that any company which continues its DEI efforts — as well as any company that abandons them — be clear-eyed about what it hopes to achieve.

  Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.
• Most Popular

  • 1

    Police identify man who engaged in indecency at park

  • 2

    Taiwan’s GDP per capita lead fuels South Korean unease

  • 3

    McDonald’s to raise prices on select items from May 27

  • 4

    TSMC expects global chip revenue to hit US$1.5tn

  • 5

    Wildlife cam sex scene drawing copycats, visitors