Diversity, equity and inclusion (DEI) efforts look to ensure all employees, regardless of race or sex, get a fair shot. The recent Supreme Court decision to end affirmative action in college admissions does not affect companies’ abilities to run DEI programs – although it may impact their pipeline of incoming talent.

Companies have strong incentives to continue to strengthen their DEI programs and report on their effectiveness.

Capturing The Diversity Benefit, a report that Whistle Stop Capital published with As You Sow in November 2023, reviewed 1,641 companies’ demographic workforce data by sex, race and ethnicity from 2016 to 2021. The report shows that companies did respond to the change in consumer and employee sentiment during the summer of 2020, when Americans around the country protested the deeply ingrained racial inequities in our society. There was a clear increase in hiring Black employees, as well as in the percentage of Black managers.

More important for the tenure of these employees, however, is that the research also shows a statistically significant positive correlation exists between manager diversity and corporate financial performance.

Our research found that higher percentages of Black, Indigenous and People of Color (BIPOC) management are positively correlated with increases in enterprise value growth rate, free cash flow per share, income after tax, long-term growth mean, 10-year price change, mean return on equity (ROE), return on invested capital (ROIC) and 10-year total revenue compound annual growth rate (CAGR).

There were sectoral differences. Communication Services, Consumer Discretionary, Consumer Staples, Financials, Health Care and Information Technology sectors showed positive correlations across a number of financial indicators. Within the Energy, Real Estate, Materials and Utilities sectors, however, there was a negative association with diversity on some financial performance indicators. When we mapped these same sectors against their performance on As You Sow’s Racial Justice Scorecard, we found that those sectors not seeing a diversity benefit were the same ones poorly managing their racial equity programs across several indicators.

Companies are increasingly comfortable sharing their workplace diversity and inclusion data. They must report diversity data by job category, race, gender and ethnicity annually to the Equal Employment Opportunity Commission on EEO-1 forms, which companies increasingly are making public. Shareholder proposals also are asking that companies share EEO-1 form data for hiring, promotion and retention rates.

These inclusion factors paint a clear picture of what it is like to be an employee of a particular company and provide material datasets for investors to benchmark where their portfolio companies stand. During the 2023 proxy season, more than 20 companies agreed to report the more extensive data within two years, as they take establish strong data collection systems, ensure that they have confidence in the accuracy of the numbers and determine how to publicly communicate the data.

Jaylen Spann
Lead Research Associate, Whistle Stop Capital