In a new book, I argue that the conversation about diversity in corporations (legal rules, policy discussions, academic writing, and media narratives) is missing some vital pieces. This means that we are making rules without understanding the full picture and thus are not able to assess the costs and benefits of those rules. With this premise, the book sets out to provide an analysis of some of the missing pieces of the diversity puzzle.

First, I argue that we should define diversity more broadly – it includes more than just gender and race. Factors like education, professional background, and age are also relevant. Further, we need to think about diversity not just on the board but at various levels of the corporation. In fact, diversity at the management level is as important as on the board, if not more so. Top management in charge of day-to-day operations and diversity in its perspectives will have a significant impact on how the company engages with external and internal stakeholders. However, while appointing a chief diversity officer may signal to the world that the company cares about diversity, it might not have substantive impact if the board and leadership team is not genuinely interested in addressing diversity issues.

As for diversity at other levels of the company – a topic that has gained particular prominence since the rise of social movements like #MeToo and Black Lives Matter –myopic responses to social media pressures can be counterproductive. Examples include firing an officer or employee who is the focus of a social media storm without addressing the underlying problems (if any), disclosing diversity metrics at the height of the Black Lives Matter movement without any sustained efforts to create a culture that values diversity. Companies like Netflix and Sephora that are aiming to promote Black suppliers (or content creators in the case of Netflix) might help empower Black artists and entrepreneurs, if these measures are not short-lived. The concern is when the corporate decision is aimed at signalling virtue to the online crowd without changing how the company works with stakeholders daily. For instance, an employee of a tech company was quoted saying that it was “ironic that senior leadership prioritized their public image when internally they dismissed or ignored the very Black voices that they claimed to care about.”

With respect to legal (mandatory quotas for women on boards, disclosure rules that require companies to disclose their diversity metrics) and market initiatives (institutional investors asking companies to disclose their diversity metrics) across different jurisdictions, I find that neither quotas nor quantitative disclosures provide the right incentives for corporations to make genuine efforts to improve diversity. Quotas do not address the problems that give rise to inequality in the workplace but instead make a cosmetic fix at the top of the corporation, giving rise to further problems like tokenism or resentment against the group that benefits from the quota. Disclosure rules that focus on numbers act as aspirational quotas and therefore carry most of the costs associated with quota measures. I use this phrase because the specified target then becomes the number that investors and activists will ask for while taking the focus from other innovative diversity-related measures.

Additionally, the option to explain rather than comply is illusory because firms will hesitate to signal a lack of interest in diversity. The problem with investor activism regarding diversity is that the focus is often limited to whatever has captured public sentiment – which was initially gender diversity and is now racial and ethnic diversity. Companies will often signal support for these campaigns merely because the public supports the campaigns and the reputational costs of not supporting them. However, this does not guarantee sustained change.

The alternative is not to simply leave matters as is, but rather for all those involved in the diversity project to steer the discourse towards long term and sustained change, taking all the pieces of the diversity jigsaw puzzle into consideration. One way to push corporations in this direction is to encourage qualitative disclosures that will provide incentives for innovative and firm-specific solutions. Company managers not only have firm-specific knowledge about the demographic that works for them, but also have the means to gather more information about the specific challenges faced by their employees, through surveys and other internal mechanisms. The company’s managers can fashion solutions that best address the twin goals of employee well-being and value maximization because they have (or can gather) firm-specific knowledge about employee information and firm performance. I further argue that culture at all levels of the company is crucial for attracting and retaining diverse talent. Examples of best-in-class companies include Illumina, which conducts regular internal surveys to understand employee issues and then addresses them. Lessons can also be drawn from how companies introduced flexible work, family-care leave, and other measures during the pandemic.

Finally, I attempt in the book to reconcile corporate law with diversity and other social issues. After surveying the basic theories underpinning the purpose of the corporation, I argue, first, that corporate law is in fact not averse to corporations addressing diversity and similar issues; it is rather the operation of the entire corporate governance ecosystem that needs to be reconciled with these issues. This can be done by finding a middle ground between the two competing theories – shareholder primacy and stakeholderism – informing ideas of corporate purpose and then ensuring that all actors within the corporate governance ecosystem are willing to allow this.

As for the future, corporate responses to the pandemic could be a catalyst for firms to constructively address diversity issues. Having thought about issues like flexible work hours and obligations of employees to care for, say, children when those were relevant to the entire workforce, company management should be more open to these types of measures in the longer term.

This post comes to us from Professor Akshaya Kamalnath at the Australian National University College of Law. It is based on her recent book, “The Corporate Diversity Jigsaw,” available here.