Corporate diversity push: How it’s shaken as affirmative action ends

Now that the U.S. Supreme Court has struck down affirmative action at colleges and universities, conservatives are turning their fire on corporations. The struggle over companies’ diversity efforts has already begun.

Following the June 29 decision, the House of Representatives passed a defense policy bill with several social policy amendments tacked on, including the elimination of the Pentagon’s programs for diversity, equity, and inclusion (DEI). Republican attorneys general in 13 states sent a letter warning America’s largest corporations of “serious legal consequences” for their DEI initiatives. And on Friday, the president of Texas A&M University resigned because the hiring of a high-profile journalism professor came under fire for her past work on diversity.

Activists on both sides of the issue expect the fallout to spread. “It’s already happened in higher ed. It’s going to happen in the corporate space,” says Sy Stokes, vice president of research at Coqual, a New York think tank on DEI.

At issue: how best to promote fairness in a society that enshrines equality but whose economic realities continue to fall short of that ideal. 

“The fundamental problem is, when you cut through all the rhetoric, ... the idea of individual equality under the law as opposed to equity,” says Reed Rubinstein, director of oversight and investigations for America First Legal, a conservative nonprofit legal foundation challenging preferential hiring and other corporate diversity efforts. Conservatives support the idea of equality, meaning that everyone is treated equally under the law.

Proponents of DEI say that’s not enough. “Equity means actually doing things to correct the historical imbalance of racial justice or gender justice that we’ve seen,” says Dr. Stokes. “It won’t be corrected unless there are targeted efforts toward improving the lives of those who are the most marginalized in our society.”

Ever since 2020, when George Floyd, an African American, was murdered by police, corporate America has stepped up its focus on equity. The Business Roundtable, a group of CEOs of the nation’s leading corporations, formed a special committee to address racial equity and justice. Companies such as Walgreens Boots Alliance announced goals to increase the share of people of color in leadership positions. Macy’s, Nordstrom, and other retailers joined the Fifteen Percent Pledge, a movement to get products from Black-owned firms onto 15% of America’s store shelves.

“All of a sudden, you began seeing movement towards metrics,” says Mr. Rubinstein. It’s these racially based quotas that he views as unconstitutional. His foundation, started by former Trump administration senior adviser Stephen Miller, has filed complaints with the Equal Employment Opportunity Commission, charging that Starbucks, Morgan Stanley, McDonald’s, and others have violated the law with their hiring and diversity practices.

Another conservative group, the National Center for Public Policy Research, sued Starbucks executives and directors for setting diversity targets for hiring and promotion as well as in their supplier base, and linking executive pay to the achievement of these goals. 

The Supreme Court’s ruling late last month against affirmative action at universities puts new wind in their sails. After Texas A&M hired Kathleen McElroy in June to lead its journalism department, she came under fire from conservative groups for her previous work at The New York Times, where she researched the relationship between race and the news media. Ms. McElroy stepped down, and on Friday, so did the university’s president, Katherine Banks, citing “negative press.”

As a legal matter, affirmative action in university admissions and corporate DEI are separate, governed by different laws. It is already illegal to hire someone because of their race or ethnicity. But as a practical matter, the court’s ruling increases the legal jeopardy of corporations. For example, Chief Justice John Roberts’ “zero-sum” reasoning that a race-based benefit given to some applicants necessarily disadvantages others could also apply to corporate DEI practices, such as hiring and awarding contracts. 

“This very forceful statement from the chief justice about the ways in which race can and cannot be used in zero-sum decision-making is going to have an impact on corporate DEI,” says Ishan Bhabha, partner and co-chair of the DEI Protection Task Force at the Jenner & Block law firm in Washington, which represents universities and companies. Already, corporations are taking a closer look at their initiatives and how they can reduce their legal vulnerability.

Both sides expect a surge in anti-DEI suits, putting corporations between a rock and a hard place. Under pressure from many liberal shareholders and employees to increase their DEI efforts, corporations now face the prospect of conservatives filing suit to pare back those initiatives. These range from hiring and promotion to corporate board composition.

One challenge for diversity advocates is that in many cases, a more diverse workforce doesn’t appear to lead to a more profitable company or a more empowered workforce, researchers say. What’s needed, they add, are the other parts of the DEI equation: a workplace culture of (1) equity, in which all employees feel they are treated fairly and (2) inclusion, in which they feel empowered and free to express their ideas. It’s what Alex Edmans, professor of finance at London Business School, calls “true DEI.”

“You want the respondent people to say, ‘I’m treated well here’; ‘This is a psychologically safe place to work’; ‘People are treated the same regardless of their age, race, and sex’ – all of those things,” says Mr. Edmans, whose May 2023 study focused on Fortune magazine’s annual list of the 100 best companies to work for in America. “And we’re not seeing that’’ even among employers that have altered hiring to become more racially and ethnically diverse.

That leads to a deeper question: Is the hiring and promotion of a broad range of races and ethnic groups the best way to achieve the diversity of thought and outlook that corporations are looking for? Or do other factors, such as life experience, education, and income level, matter more? 

“I still have experienced discrimination on the basis of appearance,” says Mr. Edmans, who is of Asian descent. “And so if I was to serve in the board of directors – and I am on several boards – I would count as a minority. But maybe a white male who never went to university, he would add more to socioeconomic diversity than me.”

To minimize their legal exposure, corporations should broaden their diversity criteria beyond race to include such things as life experience, according to Mr. Bhabha of Jenner & Block.

Others counter that the disparities in racial and ethnic achievement in the workplace remain so large that they need to remain a focus for employers. For example, the typical Black worker earned 24% less than their white counterpart in 2019, according to a report by the Economic Policy Institute, a liberal think tank based in Washington. And that gap was larger than the 16% gap in 1979, even though African Americans have narrowed the Black-white gap in high school and college completion during that time. 

In light of the court’s action, defenders of affirmative action expect a retrenchment of corporate DEI programs but not their end.

“In this day and age in the 21st century, you can’t just say, ‘You know what, we’re kind of done with that DEI thing,’” says Mr. Bhabha. The advantages of being able to draw from a greater talent pool and to address an increasingly diverse customer base make diversity a corporate imperative, he adds. “Many companies completely, correctly recognize that from a business perspective, just from a business balance-sheet perspective ... DEI is actually critical to the success of that business.”