Do DEI-inspired quotas lead to better business outcomes?
That’s the question probed by researchers from the University of Melbourne and Cornell University in a working paper recently highlighted by the Harvard Law School Forum on Corporate Governance.
The answer may surprise you—depending on how closely you’re paying attention, that is.
The study takes as its starting point a pair of 2020 policies, a California law that forced companies to seat a certain percentage of non-white, non-straight, and/or non-male members on their corporate boards and a Nasdaq policy requiring companies to report on the race, sex, nationality, and sexual orientation of their board members.
Curious whether the resulting uptick of racial diversity has actually contributed to shareholder value, Assistant Professor of Finance at the University of Melbourne Attila Balogh and Professor of Finance at the Cornell University SC Johnson College of Business Scott E. Yonker dug into the data.
Exploring a representative sample of 2,400 public corporations throughout the country, the researchers initially observed a correlative relationship between performance and “diversity” along racial lines. That lined up with what has become the entrenched narrative thanks to firms like McKinsey & Company and public proponents of DEI like Mark Cuban and unwitting co-star of Matt Walsh’s “Am I Racist” Robin DiAngelo.
However, after the professors controlled for other factors, they were unable to support claims that added racial diversity increases shareholder value.
“These findings challenge the notion that racial diversity alone can drive meaningful changes in board decisions,” the professors write. “It is possible that directors of different races who reach the board level share more similarities than differences, particularly in terms of their education, experience, and perspectives on key corporate issues. As a result, increasing racial diversity may not lead to the substantial changes in traditional firm policies or performance that some advocates might expect.”
Does that sound familiar? It should. That’s because it echoes findings from a 2024 scholarly report at Econ Journal Watch. Reviewing a series of highly relied-upon McKinsey studies dating back to 2015, the authors wrote that they were unable to “quasi-replicate” McKinsey’s conclusions—that racial diversity among executives led to higher company performance—and cautioned company leaders against further reliance on the studies.
The continued unraveling of the business case for DEI is only one reason corporate leaders should re-examine their company’s commitment to this divisive ideology.
Perhaps more pressingly, it’s increasingly clear that DEI policies represent an unjustifiable legal risk to companies. Most notably, the U.S. Supreme Court’s 2023 landmark ruling in Students for Fair Admission v. Harvard sent shockwaves throughout the DEI industry by striking down policies that relied on prospective students’ race to make college admissions decisions.
While that ruling was technically limited to college admissions, it also sent a clear message to corporate America that the same protections apply to other laws prohibiting discrimination as well.
Likewise, both the California law and Nasdaq policy highlighted by the working paper as major factors in the 2020 surge in DEI board membership have faced significant legal challenges.
In the 2022 ruling that halted California’s law, Los Angeles County Superior Court Judge Terry Green countered the credo popularized by Critical Race Theory proponent Ibram X Kendi by writing that, “[o]nly in very particular cases should discrimination be remedied by more discrimination.”
Meanwhile, 22 state attorneys general are publicly challenging the Nasdaq listing requirement. Led by Iowa Attorney General Brenna Bird, the group recently sent a letter to Nasdaq chair and CEO Adena Friedman calling on the corporation to comply with federal and state anti-discrimination laws by ditching its discriminatory policy. The SEC was also sued for approving the Nasdaq rule and is awaiting a decision from the U.S Court of Appeals for the 5th Circuit.
Whether due to the rise of Black Lives Matter or other ideological factors, many corporations have hastily adopted DEI policies—often to the detriment of a truly diverse workforce that generates dynamic collaboration and prizes individual contribution over differences that only run skin-deep.
In fact, the 2024 Viewpoint Diversity Score Business Index found that 91% of some of the largest companies in America promote divisive concepts associated with radical ideas like Critical Race Theory under the banner of DEI. This approach divides workforces by labeling people as “oppressed” or “oppressors” based on factors such as race, sex, or religious beliefs.
What functioned as a Gold Rush for activists like Kendi is proving out to be a costly, legally risky version of fool’s gold for c-suite leaders who buy into the grift.
Corporate executives and others in a position to influence high-level decision-making would do well to correct course before they realize these risks the hard—and costly—way.
