Big Diversity Talk Reaps Big Payoffs
Bloomberg Businessweek US|January 23, 2023
Diversity washing attracts investors to companies even if their results lag, study shows
Jeff Green
Big Diversity Talk Reaps Big Payoffs

Corporate leaders who talk the most about diversity may benefit from greater investment in their companies by socially conscious funds, even if hiring and promotion efforts are lackluster. The biggest braggarts may benefit the most from what researchers call "diversity washing."

Those are the conclusions of a study of almost all US public companies from 2008 to 2021 by researchers at Stanford and three other universities. "It's hard to have a real debate about this unless companies disclose what they really look like," says David Larcker, the director of the Corporate Governance Research Initiative at Stanford and one of the study's authors. "It seems like you want real numbers, real data, as opposed to kind of really loose discussion around it."

That opacity not only may be steering investors wrong but also could be allowing some chief executive officers to boost their compensation unfairly, according to separate research from Harvard University. Putting environmental, social and governance goals in executive compensation without clear standards for measuring whether claimed progress is real-and whether it benefits shareholders-makes it hard to determine whether CEOs deserve the added compensation.

The use of ESG metrics in pay packages "likely serves the interests of executives, not of stakeholders," conclude the authors, Lucian Bebchuk and Roberto Tallarita.

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