Diversity washing

From Diversity Washing by Andrew C. Baker, et al.  From the Abstract.

We provide large-sample evidence on whether U.S. publicly traded corporations opportunistically use voluntary disclosures about their commitments to employee diversity. We document significant discrepancies between companies’ disclosed commitments and their hiring practices and classify firms that discuss diversity more than their actual employee gender and racial diversity warrants as “diversity washers.” We find diversity washing firms obtain superior scores from environmental, social, and governance (ESG) rating organizations and attract investment from institutional investors with an ESG focus. These outcomes occur even though diversity-washing firms are more likely to incur discrimination violations and pay larger fines for these actions. Our study highlights the consequences of selective ESG disclosures on an important social dimension of employee diversity, equity, and inclusion.

This is a play on Greenwashing where corporations claim to be more environmentally or climate progressive than they actually are.  What the researchers are investigating is whether there is a comparable issue in Diversity Washing, corporations claiming a greater commitment to diversity than they actually practice.  

In both instances, I think the corporations are breaking their fiduciary duty of earning their shareholders the maximum return within the law and constrained by risk management, forecasting and strategic decision-making.  In terms of diversity, there is the additional complication that much of the DEI ideology is explicitly racist so it presents additional moral issues for those of a Classical Liberal world view.

From the Conclusion:

We provide large-sample evidence showing many firms have significant discrepancies between their disclosed commitments to diversity and their actual hiring practices. Consistent with such firms making misleading commitments to DEI, we find diversity washers have less workplace diversity, experience future outflows of diverse employees, and are subject to higher diversity-related fines. Despite these negative DEI outcomes, we show diversity washers receive higher ESG scores from commercial rating organizations and attract more investment from ESG-focused institutional investors, suggesting these disclosures mislead outside stakeholders and investors.

This gets at what I see as the additional issue with DEI, ESG, and Climate Change committed corporations, wherever they are committing corresponding washing (Diversity washing, Greenwashing, Climate washing).  

One of the most important principles in organizational structure and any system of complex social interactions is the existence and maintenance of trust.  Losing trust is virtually always a harbinger of troubled times ahead.

DEI washing, Greenwashing, etc. independent of their fiduciary implications or ideological unsoundness are essentially corrosive destructors of trust.  They are lying to the public and to regulators in pursuit of rent seeking profits.  

This can continue for some period of time but eventually it becomes a hellish cycle of self-destruction.  Stakeholders and consumers no longer trust, therefore they no longer use.  The enterprise shrinks.  

And restoring trust is not a toggle switch where you switch back from being deceptive and manipulative.  There is a flywheel effect of significant magnitude such that recovery from a well-established reputation for deceit becomes almost impossible.