Equality Metrics

Veronica Root Martinez is Professor of Law at the University of Notre Dame Law School; and Gina-Gail S. Fletcher is Professor of Law at Duke Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

In the wake of the deaths of George Floyd and Breonna Taylor, protests engulfed U.S. cities during the summer of 2020 as activists, politicians, and everyday citizens demanded changes to the system of policing that has repeatedly resulted in the death of Black citizens at the hands of White police officers. Notably, these demands extended beyond the criminal justice system and led to an examination of the myriad of ways systemic racism and racial inequities pervade daily life in America—from education, to health care, to corporate America. Conversations that initially focused on the role of police within American society turned into larger debates about how to create an America that values Black lives; and these discussion spilled into living rooms, permeated workplaces, and ultimately infiltrated boardrooms across the U.S.

For the first time, since the founding of the Black Lives Matter (BLM) movement in 2013, many large, well-known corporations publicly aligned themselves with the growing social movement. Corporations’ responses ranged from a lack of support, on one end of the spectrum, to detailed statements in support of BLM, coupled with significant outlays of resources to address systemic inequality both internally and externally. The majority of corporations fell somewhere between these two extremes—that is, most corporations made statements broadly in support of the social movement, but committed to limited or no tangible actions to improve demographic diversity and enhance racial equality within their own corporate structures or their contracting partners’. Our Essay focuses on these corporations in the middle—corporations for which support of BLM has been little more than a marketing campaign. We examine how to incentivize corporations to move away from mere statements and towards the types of actions more likely to tackle systemic racism and racial inequalities in a sustained, meaningful manner. To achieve this goal, we suggest harnessing the power and influence of institutional investors to encourage firms to implement strategies crafted to address discrimination, bias, and racism within firms’ own organizational structures and supply chains.

In our Essay, we argue that institutional investors should require the corporations in which they invest to adopt “equality metrics.” Equality metrics refer to systematized corporate disclosure of the current demographic diversity of the workforce and supply chain, as well as measurable, specific plans to improve racial equity. Our Essay relies on institutional investors as the vehicle through which to engage corporations to disclose equality metrics because of the influence institutional investors wield in the capital markets. Institutional investors include pension funds, mutual funds, and endowments, among others, and are among the largest actors in the global capital markets today, owning approximately eighty percent of the outstanding equity in the top 500 companies. Recently, institutional investors have pushed for corporate engagement on environmental, social, and governance issues, with a particular emphasis on climate change and the environment, resulting in these issues becoming mainstream considerations for most companies today. Similarly, many institutional investors have issued statements in support of BLM—committing to internally improving their own diversity internally and expressing their expectations that corporations in which they invest will do the same.

Institutional investors’ backing of the current social movement for racial equity is powerful. In fact, it is likely one of the best options to incentivize firms to take meaningful action by demanding they adopt equality metrics. Equality metrics embraces the principle that “what gets measured, gets managed.” With equality metrics, we aim to change how corporations think about and address demographic diversity which may, in turn, result in firms adopting more impactful and innovative strategies to address racial equality.  Implementation of equality metrics would involve the following steps.

First, institutional investors should encourage firms to measure the current state of (in)equality within their ranks.  Specifically, institutional investors should ask firms to provide data regarding the demographic breakdown across various segments of its workforce on at least an annual basis, starting as soon as possible. Second, institutional investors should ask firms to provide information about their goals and objectives aimed at improving demographic diversity within their workforces. To avoid indeterminacy, corporate goals should be specified in a manner consistent with how demographic data disclosures are provided. Third, firms should disclose the strategies they have employed to meet their diversity targets. Fourth, institutional investors should explicitly ask firms what their own assessment is of whether they are meeting their stated objectives. Institutional investors should encourage firms to engage in root-cause analyses to determine why they are or are not meeting certain goals and to share their own assessments of that information. Finally, institutional investors should encourage firms to use the information they have learned during their own assessment of their progress towards their goals, as well as the successful initiatives of other market participants, to direct future efforts targeted at creating a more equitable organization.

If institutional investors require the corporations in which they invest to provide the aforementioned equality metrics, corporations might finally address issues related to systemic racism, racial justice, and demographic diversity. In our Essay, we identify five benefits of equality metrics: creating a baseline against which to measure progress, influencing corporate behavior, providing data for further empirical analysis, addressing resistance to diversity efforts, and identification of mere performers. Despite these benefits, we readily admit that equality metrics is not able nor intended to address all aspects of the challenges that firms face in addressing racial inequities. For example, equality metrics say nothing of community investment, and they are focused on measuring quantity not quality.

Notwithstanding these and other limitations, equality metrics provide a necessary initial push for corporate America to adopt and implement effective policies that truly demonstrate its embrace of BLM. And we believe institutional investors are well-placed to apply the pressure needed to encourage corporations to enact just this sort of change.

The complete paper is available here.

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