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Firms embroiled in diversity, equity and inclusion (DEI) controversies appear to take visible steps to reassure stakeholders, but new research suggests those actions often stop at virue signalling rather than achieving meaningful change.
Accounting academics from Stanford, Yale, the University of Chicago and the University of Washington examined the corporate response to so-called DEI controversies to find that firms shift their hiring practices toward recruiting diverse employees to improve public perception of their DEI profiles, but the effects are economically small and largely superficial.
“We show that in the years following such controversies, firms hire more diverse employees. However, these effects are economically small, with an approximate 0.81% increase relative to the sample average of approximately 58.9% diverse new hires.”
These modest gains were “almost entirely concentrated among junior-level positions (e.g., interns or junior analysts) and ‘non-core’ (e.g., administrative, human resources) positions within the firm, which are less connected to the firm’s main business operations.”
The research found that “the diversity profile of outgoing employees increases by approximately 0.75% relative to the sample average of approximately 58.3% diverse departing employees.” As a result, the net diversity shift after a controversy is often negligible.
Stock drops follow DEI incidents
A more direct financial consequence emerges when controversy hits. “These events lead to both short- and long-term drops in stock prices,” with a “negative cumulative abnormal return in the days immediately surrounding the event (approximately 0.72%), and a longer-term annualized underperformance of approximately 3.5%.”
Firms that follow controversy with real change in hiring tend to fare better, says the paper.
“We also find sufficient investment in DEI, as evidenced by an increase in diverse hiring, largely offsets these adverse financial effects.”
The research also notes that “firms that take corrective action following a DEI controversy do not have long-run underperformance, possibly because they avoid the negative consequences of unaddressed controversies, such as lower employee morale or pushback from consumers.”
Still, such corrective behavior appears rare. In fact, firms that experience DEI issues are more likely to have further challenges, suggesting that companies often fail to resolve underlying problems.
‘DEI-washing’ dominates firm responses
Rather than reforming hiring practices or workplace culture, firms often engage in what the study refers to as “DEI-washing", when firms signal their commitments to DEI initiatives through visible yet shallow communications.
“DEI discussion increases in proxy statements by approximately 17.6%,” while “firms discuss DEI in CSR reports and Twitter 16.1% and 11.5% more frequently.” In addition, “firms, on average, increase the likelihood of having a diversity target by 3.0%.”
Yet none of those signals was found to correlate with actual hiring changes.
“Across all columns, we find no statistically significant relationship between the change in each signaling variable after a DEI controversy and a subsequent change in diversity hiring at the firm.”
The results show that firms’ signaling responses to such events may be little more than DEI washing.
Employee sentiment may also be a casualty of the mismatch between image and action. “The coefficient on DEI Event is negative and significant, suggesting DEI controversies adversely affect employee morale.”
Despite mounting shareholder and public pressure, the research concludes that “firms either dedicate limited resources to these issues or their efforts are largely ineffective.” When workforce diversity does shift, it typically occurs “where doing so is easiest and the least costly.”
For HR leaders, the findings reveal the difference between talk and action. Amid ongoing debates over corporate values, reputation, and performance, companies are still talking more about DEI than acting on it and improving outcomes.
