The DEI Pendulum: How Can CEOs and Boards Prepare For The Next Chapter?

To effectively govern DEI, organizations should proactively define the purpose of their DEI efforts, making investment and risk mitigation decisions consistent with their unique organizational values and business objectives. In our current climate, it will be hard to avoid difficult DEI issues. The boards and CEOs who are proactive, rather than reactive, will be best prepared to govern DEI successfully.

The evolving DEI landscape

At the beginning of the COVID-19 pandemic in 2020, the murder of George Floyd by police fueled widespread interest in the “Black Lives Matter” movement, including sweeping commitments to DEI by many corporate leaders. While DEI efforts were originally initiated to prevent or undo discrimination against under-represented groups, a rising tide of voices has gained considerable momentum. In June of 2023, the US Supreme Court declared that considering race in college admissions practices violates the US constitution. Bill Ackman’s January 2024 manifesto denounces DEI as “a political advocacy movement on behalf of certain groups that are deemed oppressed under DEI’s own methodology.”

Impacts on corporate DEI

Organizations and their leaders are not immune to the impacts of this debate. The number and composition of shareholder proposals related to DEI shifted in 2023, with pro-DEI proposals declining and anti-DEI proposals increasing. Institutional investor disclosure guidelines continue to influence levels of shareholder support for these proposals. After the Supreme Court decision on college admissions, 13 Republican Attorney Generals followed up with a warning letter to Fortune 100 CEOs demanding they comply with “race-neutral-principles” and 21 Democratic Attorney Generals responded. This month not only did former Harvard President Claudine Gay resign her post amidst stakeholder and political pressures, but Bill Ackman called for the resignation of Harvard’s board for hiring her.

Careful DEI governance by CEOs and their boards is key.

The current climate should be a wakeup call for leaders to clearly define why they created and wish to continue with DEI efforts, if they remain committed. For example, a clarification of DEI’s business purpose might read like this:

• Diversity includes the widest spectrum of individuals from varied demographic backgrounds to provide multiple perspectives, which leads to better business decisions and outcomes (rather than representation for its own sake).
• Equity steps, such as blind resume evaluation, can prevent bias from unintentionally causing discrimination against any particular group or persons (vs only protecting certain demographic groups).
• Inclusion creates an environment in which everyone feels they belong and can be heard (vs. remaining silent), thus enabling organizations to reap the benefits of diversity.

Effective Governance of DEI

In the current environment, CEOs, and directors, consistent with the business judgment rule, would be well advised to proactively govern DEI in line with their respective corporate values and business objectives for long-term value creation by taking the following steps:

• Specify the business benefits of DEI, including increased organizational adaptability, innovation, market growth, community engagement, and talent attraction and retention.
• Mitigate risk associated with DEI programs for employees by making them accessible to both minority and majority groups, avoiding representation targets or links to executive compensation, and systematically reviewing internal and external DEI communications including sustainability reports. Avoid excluding anyone from opportunities they deserve.
• Finally, identify and measure the right key performance indicators (KPIs) to measure not only diversity, equity, and inclusion but also business outcomes and return on investment.

Despite our current turmoil, DEI isn’t disappearing—it’s evolving. While we are at a crossroads between challenge and opportunity, now is the time to re-energize DEI as a force for social good and business success – the ultimate goal of CEOs and their boards.