The results indicate that companies identified as diversity washers often extend their misleading behaviors beyond financial disclosures; their emphasis on DEI extends to other communication platforms like corporate social responsibility reports and social media
By counting DEI-related terms in companies’ financial documents, the researchers found that discussions about diversity have become more frequent since 2020
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In 2023, shareholders sued Wells Fargo, alleging that the bank had conducted “sham” job interviews so it could claim that at least half of the candidates interviewed for high-paying jobs came from “diverse” backgrounds. That case was dismissed, but a new class action suit has picked up the complaint, arguing that the company misled investors with exaggerated diversity stats.
These claims highlight “diversity washing,” the practice of publicly overhyping or misrepresenting diversity initiatives to gloss over actual diversity data. It has become more common as corporate America has emphasized its commitment to diversity, equity, and inclusion (DEI) and efforts to increase racial and gender diversity in its workforce.
Beyond its PR value, diversity washing appears to pay off. In a recent paper in the Journal of Accounting Research, David Larcker, an emeritus professor of accounting at Stanford Graduate School of Business and distinguished visiting fellow at the Hoover Institution, and Edward Wattsopen in new window, PhD ’20, of the Yale School of Management, find that “diversity washers” often receive higher environmental, social, and governance (ESG) ratings and attract investment from socially responsible funds despite their poor performance on DEI measures.
“This misalignment between what is reported and what is practiced can mislead investors and stakeholders, causing the misallocation of capital,” Larcker says.
Despite accusations such as those leveled at Wells Fargo, there has been limited data on the scale of diversity washing, Larcker and Watts note in their paper, coauthored with Andrew Bakeropen in new window, PhD ’21, of University of California, Berkeley, law school Charles McClureopen in new window, PhD ’18, of the Booth School of Business at the University of Chicago; and independent scholar Durgesh Saraphopen in new window, PhD ’15. Yet their research suggests that many firms are paying lip service to DEI goals.
This piece originally appeared in Stanford Business Insights from Stanford Graduate School of Business. To receive business ideas and insights from Stanford GSB click here: (To sign up: https://www.gsb.stanford.edu/insights/about/emails)