What the U.S. Supreme Court’s Affirmative Action Ruling Means for Company Diversity Programs

The U.S. Supreme Court set limits on college affirmative action programs, deeming it unconstitutional to consider race in college admissions. The court voted 6-3 in the case of Students for Fair Admissions v. President and Fellows of Harvard College, a move expected to force American colleges to overhaul their admissions practices.

The decision also raises the likelihood that companies may rework their own diversity, equity, and inclusion policies that have grown popular since the coronavirus pandemic, putting them in a bind with employees.

The decision could affect “how courts analyze diversity, equity, and inclusion (DEI) and environmental, social, and governance (ESG) strategies well beyond education admissions, including in employment-related practices such as recruiting, hiring, and promotion; contracts with third-party suppliers and other vendors; corporate philanthropy and grantmaking; and financial investment strategies,” lawyers at Morgan Lewis wrote after the court decision.

It’s possible that companies may become more reluctant to use DEI strategies, because they will invite challenges from parties who want to stop them from considering race in hiring and promotions.

In turn, that could put companies in a bind, elevating their ESG risk, says Jackie Cook, director of stewardship at Morningstar Sustainalytics. Companies that fail to appeal to diverse candidates could face reputational risk, risk of access to talent, and problems with workforce morale, Cook says. Diversity programs “increase the pool of candidates, and increasing the pool of candidates is good for quality.”

Expect Challenges for Dozens of Companies

This could affect the large number of companies with diversity programs. The topic attracted widespread attention in the summer of 2020, when George Floyd died at the hands of Minneapolis police in the depths of the pandemic. Companies pledged $50 billion to advance racial justice. Diversity programs have been supported by employees: A majority of U.S. workers think focusing on DEI at work is a good thing.

Meanwhile, investors have pushed companies to report the racial makeup of their workforces and management. “The emphasis on diversity and decent work seems to have gone up in recent years,” says Cook. Such companies as Starbucks SBUX and Apple AAPL have committed to conducting so-called racial equity audits. Indeed, Cook says, demands for racial equity audits have dropped because “so many companies have agreed” to publish them.

“Now all of those [DEI programs] will need to be reviewed” by lawyers ahead of potential challenges, says Stephanie Creary, assistant professor of management and faculty fellow of the Coalition for Equity and Opportunity at the Wharton School of the University of Pennsylvania.

Creary expects “many more suits,” this time against companies. Beyond race, companies will also need to clarify how they appeal to veterans, people with disabilities, and female applicants. “They will need to audit their own hiring and promotion practices to ensure that they’re not just picking people because of race,” but rather how life experience suits them for a position.

Creary says such moves will force companies to strengthen their hiring rationales and to think of candidates more holistically. Companies are more likely to avoid tokenism, considering how candidates’ race has affected their life experiences and the skills they can offer a company. Adds Creary, “It will force companies to clean up the ways in which they talk about racial demographics.”

Is DEI Good for Business? A New Study Says Yes.

Depending on who you talk to, DEI is good for business. DEI initiatives are said to improve corporate performance, proponents say; opponents say that increased board diversity can lead to lower stock prices

According to a recent study by Alex Edmans, Caroline Flammer, and Simon Glossner, DEI initiatives are a positive thing. The authors looked at proprietary data from Great Place to Work, an authority on workplace culture that compiles the list of 100 Best Companies to Work For in America. Members of the Best Companies list posted superior long-term shareholder returns and earnings surprises over a 28-year period from 1984-2011, according to an earlier study by Edmans. In the most recent study, the authors found that DEI “is positively associated with one- and three-year sales growth, positively associated with three-year but not one-year stock returns, negatively associated with leverage, and positively associated with dividends. This suggests that a strong financial position frees a company from having to focus on short-term pressures and instead allows it to address longer-term challenges such as DEI.”

However, they also found that diversity alone doesn’t work. DEI is “only weakly correlated with traditional measures of demographic diversity, such as the percentages of women and ethnic minorities in the board, senior management, CEO position, and wider workforce.” How workers experience the workplace and feel embraced by a company are equally important. “Hiring minorities to tick a box, but failing to ensure that they can thrive and be themselves at work, will achieve neither the financial benefits of cognitive diversity nor the social outcomes of meaningful employment,” Edmans, Flammer, and Glossner wrote.