In recent years, shareholders have made attempts in court to hold companies accountable for failing to uphold commitments to diversity within their workforce or leadership teams. So far, those efforts have fallen flat. Facebook’s board of directors, for instance, won dismissal of shareholder claims that it had breached its fiduciary duty by ignoring diversity concerns—a judge called some of the company’s claims about diversity “non-actionable puffery or aspirational.”
But a forthcoming paper co-authored by Yale SOM’s Edward Watts suggests that these ultimately unsuccessful litigants are on to something. According to the paper, which is based on data from more than 5,000 publicly traded companies, there are significant discrepancies between what firms say about their diversity, equity, and inclusion (DEI) efforts and what their hiring practices are. Perhaps even more significant, sharing inaccurate information about DEI hiring appears to be helping those companies attract capital from ESG investors.
“It does seem like what companies say doesn’t match up with what companies actually do,” Watts says.
The research is based in part on data about diversity from Revelio Labs, which compiles workplace analytics using public sources, including LinkedIn. After creating a dictionary of DEI-related words, Watts and his coauthors then compared that data to information about diversity that companies voluntarily disclose in three different types of financial documents filed with the U.S. Securities and Exchange Commission: annual reports (10-Ks), current reports (8-Ks), and proxy statements. Ultimately, the sample included information from nearly all U.S. public companies between 2008 and 2021.
The research team focused on the “disconnect” between DEI language and actual diversity—what they call the “diversity-washing level.”
One of the results that was most compelling, Watts says, was that statements about diversity seem to be almost completely untethered from actual diversity.
“The disclosure regime is very weakly correlated with actual actions,” he says. “They are almost two separate things, which is concerning.”
Diversity washing is associated with many other negative behaviors. The researchers found that diversity washers were more likely to have been penalized by the Equal Employment Opportunity Commission; to provide vague, difficult to measure, or forward-looking ESG policies; to highlight them via other communication platforms, including on X and in corporate sustainability reports; and to hire fewer diverse candidates in the future (despite those forward-looking policies).
More and more people are relying on these non-financial factors when making their investment decisions. If the veracity of statements about those factors is questionable, money might be going into the wrong places.
Meanwhile, diversity washers were more highly rated by two of the leading ESG rating providers—with scores that were 12% and between 1.5% and 1.9% higher than companies that do not engage in diversity washing. Those ratings, in turn, influence institutional investors who make decisions based on supposed ESG commitments. According to the paper, diversity washing firms have 10.4% more ownership by funds committed to sustainable and responsible investment.
“Trillions of dollars are tracking ESG factors at this point, and companies are responding to it,” Watts says. “More and more people are relying on these non-financial factors when making their decisions, and if the veracity of statements about those factors is questionable, money might be going into the wrong places.”
The authors write that their research supports calls for “standardized, mandatory disclosure requirements” about ESG-related issues, as well as regulation and enforcement of those requirements.
Watts says people who are focused on ESG efforts—including investors and academics—have not been surprised by the results.
“Everybody had a feeling some of this was going on,” he says. “The question in a lot of people’s minds was, ‘How much?’”
“The Yale School of Management is the graduate business school of Yale University, a private research university in New Haven, Connecticut.”