A 2023 note from Goldman Sachs said many of the biggest technology groups âexercise near-sovereign power and are increasingly challenging nation states as geopolitical actorsâ. Two years later, those companies have discovered just how potent one nation state remains: the US under President Donald Trump. Soon after taking office for the second time, Trump announced a clampdown on companiesâ diversity, equity, and inclusion (DE&I) policies.
In an executive order called âEnding illegal discrimination and restoring merit-based opportunityâ, Trump made it plain that he would no longer tolerate corporate policies that strove to increase the hiring and promotion of ethnic minorities, women, and other groups that had previously struggled to enter and climb corporate hierarchies. In the future, he said, companies must recruit and promote purely on merit.
Trumpâs move raised two questions: what right did the US government have to interfere in the affairs of private companies? And why didnât companies announce that, as it wasnât the administrationâs business, they would simply ignore the executive order?
The answer to the first is that the White House has long intervened to shape companiesâ policies. In 1965, President Lyndon Johnson gave a push to what would become known as DE&I with an executive order requiring all companies that were federal contractors to tackle the underrepresentation of ethnic minorities and women. This instruction answers the second question: tell Trump to get lost and kiss goodbye to any federal government contracts. Whatâs more, a federal contractor violating the new policies risks criminal action.
The US federal governmentâs contract-giving powers are vast and far-reaching. In March, the Financial Times reported that US embassies in Paris and other EU capitals had sent letters to large European companies warning them to comply with the DE&I ban if they did work for the US government.
Some business leaders remained defiant. Goldman Sachs told ABC News that it believed âorganizations benefit from diverse initiativesâ, and Jamie Dimon, CEO of JPMorgan Chase, told CNBC: âWe will continue to reach out to the Black community, the Hispanic community, the veteransâ community, and LGBTQ.â
However, others quickly folded. Meta said it would continue to look for diverse recruits but was scrapping its DE&I program because of the âshifting legal and policy landscapeâ. Amazon said it was âdedicated to delivering inclusive experiencesâ but was âwinding down outdated programs and materialsâ. McDonaldâs, Target, and Walmart also beat a retreat.
It’s easy to tell those abandoning DE&I policies to stick to their principles, but there could be a cost to the business that affects not just shareholders but employees.
So, what should leaders do? They should reassess what their DE&I policies were for, which they should retain (even if they think it politic to drop the label), and how to improve them. To do that, it is worth reviewing why DE&I programs were introduced in the first place.
The Johnson administrationâs aim in the 1960s was to break a pattern of entrenched racial and sexual discrimination. The Trump view is that DE&I brought in new discrimination in which people were hired and promoted for their race and gender rather than on merit. This may have been true in some cases, but DE&I policies also aimed to deal with the many instances where what looked like merit was really hiring people who looked like their bosses.
Take the five most prestigious orchestras in the US: the Boston Symphony, the Chicago Symphony, the Cleveland Symphony, the New York Philharmonic, and the Philadelphia Orchestra. They all select their musicians through auditions but, until around 1980, fewer than 12% of their players were women. The orchestras began experimenting with something different: the would-be orchestra members auditioned from behind a screen so that the selectors couldnât determine the candidatesâ gender. Some put down carpets so the sex of potential recruits couldnât be guessed by the sound of their footsteps. By 2000, the proportion of women in all the orchestras had increased markedly, and at the New York Philharmonic, it had risen to 35%. As Claudia Goldin and Cecilia Rouse wrote in a paper published in the American Economic Review, this was a remarkable increase given that the number of players in an orchestra is static and the turnover is low.
Many corporate leaders have become aware of the dangers of fooling themselves into thinking they are being meritocratic. We all have preferences weâre unaware of. Some companies have worked to eliminate these unspoken prejudices, such as through âname-blindâ hiring (not telling recruiters who the applicants are). The idea is to prevent them from making unconscious assumptions about whether people are suited to the job based on their ethnic backgrounds.
This followed research that found applicants with âwhite-soundingâ names were more likely to be called for interviews than others. However, name-blind applications have had mixed results. The FT reported in 2016 that while some studies found that more ethnic minority candidates were called for interviews, other name-blind exercises were less conclusive, possibly because recruiters had other clues on peopleâs backgrounds, such as their language skills. There were hopes that artificial intelligence would eliminate such discrimination until it emerged that AI recruitment programs were pulling in human biases.
The aim shouldnât be to resurrect DE&I in a new form, but rather to ensure the merit-based recruitment that the Trump administration claims to care about. If most of your recruits are white males, they probably arenât the best because talent doesnât reside in one group. True merit requires going beyond the usual recruiting grounds into areas and groups where organizations may have had little contact.
Leaders should hang on to another DE&I principle: having a diverse workforce means reaching a larger range of customers. If youâre a company in the Americas, having Spanish speakers to deal with Spanish-speaking clients is a good idea. A cosmetics company that employs people with different skin colors will better understand what products work on customers with varying skin tones.
Having a diverse workforce is not enough if those from different backgrounds are expected to conform to the prevailing culture or donât feel included.
Did DE&I policies boost the bottom line, as some diversity advocates claimed? The results arenât conclusive. In a 2020 study, its third on the subject, McKinsey said: âThe most diverse companies are now more likely than ever to outperform less diverse peers on profitability.â The consulting firm said its research into 1,000 large companies in 15 countries had found âthat companies in the top quartile for gender diversity on executive teams were 25% more likely to have above-average profitability than companies in the fourth quartile, up from 21% in 2017 and 15% in 2014.â
However, some were unconvinced. Jeremiah Green of the Mays School of Business at Texas A&M University and John Hand of the Kenan-Flagler Business School at the University of North Carolina said they were unable to replicate McKinseyâs findings and that âthey should not be relied on to support the view that US publicly traded firms can expect to deliver improved financial performance if they increase the racial/ethnic diversity of their executives.â
Having a diverse workforce is not enough if those from different backgrounds are expected to conform to the prevailing culture or donât feel included. âTaking an âadd diversity and stirâ approach while business continues as usual will not spur leaps in your firmâs effectiveness or financial performance,â Robin Ely of Harvard Business School and David Thomas of Morehouse College wrote in the Harvard Business Review in 2020.
Rather than trumpeting their DE&I metrics, leaders will have to work hard to extend their recruitment networks to get the best people, to have a range of employees to ensure a flow of new ideas, and to create a culture in which people feel they can speak up. What is required is smart management, whether we call it DE&I or not.
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