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Following George Floyd’s murder in May 2020, many U.S. corporations made public statements in support of the Black Lives Matter movement. But Professor Gina-Gail Fletcher, a scholar of complex financial instruments and market regulation, says some of those responses have amounted to little more than marketing campaigns.

In their essay “Equality Metrics,” published in June on Yale Law Journal Forum, Fletcher and co-author Veronica Root Martinez, professor of law and director of the Program on Ethics, Compliance & Inclusion at Notre Dame Law School, call on corporations to back their declarations of support with meaningful steps to identify and address racial bias and discrimination within their organizations. They highlight the need for systematized corporate disclosure of workforce and supply chain demographics and offer five specific, measurable steps firms can enact to identify and eliminate inequality. And they argue that large institutional investors, because of the financial leverage they hold, are ideally positioned to demand these changes from the companies they invest in. Fletcher recently discussed their paper with Duke Law Magazine.

What are the five steps you propose corporations adopt to address inequalities in their workforces?

We’re asking firms to measure the state of inequality in their organizations and in their supply chains – what does the composition of the firm look like at different levels within the organization, throughout employees, senior management, different branches, different regions? And within the supply chain, with whom are you contracting? Where are you getting your products from? We want that kind of whole firm approach to looking at what the state of inequality looks like in your corporation.

Building on that, we would like firms to identify a list of specific and accessible equality goals that can be tested and measured. And here we are expecting or hoping that the equality goals will be connected to the demographic measurements from step one of what this data of equality or inequality looks like in your corporation.

Once you have these goals, we’re asking firms to implement policies and procedures that you think will get you towards achieving those goals, and a way they can be tested and measured. We want there to be empirical backing to what is being done. So even as they implement these policies and procedures, we want firms to think about whether and how they can measure the impact. So it’s not just throwing things at the wall to see what will stick, but throwing things that you can measure to see how they stick and what impact they’re having.

In step four, we want firms to disclose not just the metrics that they’ve come up with but also what impact they’ve had. We think it’s important for firms to also disclose what kinds of policies and procedures they implemented.

The fifth part is that we want firms to look at what they and others have done, and what the measures have been from those performances, and think about whether and how they need to change what they’ve done before in order to achieve the goals they’ve set for themselves. So the disclosure piece isn’t just disclosing what the firm has accomplished, but what has been done to try and accomplish it. That creates a bank of information that other firms can learn from and think about whether this is something they can implement within their organizational structures to possibly see changes or improvements in how they’re operating as well.

Diversity, equity, and inclusion have been part of the corporate lexicon for decades, yet these initiatives don’t seem to have moved the needle very much on racial equity. Why not?

I think there’s a multi-pronged reason why there hasn’t been any kind of meaningful progress. For some firms it is ‘Check the box, we have a DEI policy in place,’ and that’s good enough for them.

For other firms, there might be what I would kindly say is a lack of imagination. They put something out there and then say, ‘This is what we’ve done and it’s not working so I don’t know what else to do.’ They’re not taking that next step to say, ‘Why isn’t it working, how can we make it work, and what should we be doing instead if we would like to achieve certain goals?’

And then maybe a third reason is that it’s easier to blame extrinsic factors, to say the reason it’s so hard to find good senior-level Black employees is because it’s a ‘pipeline problem.’ And really, that’s a bit of a cop-out. Yes, to some extent there might be a pipeline problem, but maybe what you do instead is go to the source and start thinking about it at different levels. When you consider that there are thousands of universities in this country, all of whom educate thousands and thousands of persons every single year, and some firms don’t want to hire someone if they’re not from Harvard, Yale, Stanford, or Duke ... why not? Are you just reifying a certain type of structural inequality? Great students go to UNC, great students go to N.C. State, great students are going to [N.C. Central University]. Why aren’t you willing to look beyond this very unequal college ranking system that we’ve now reified throughout many parts of society and our lives, and think about where else your potential employees can come from? That’s just playing into the problem.

Publicly-available data shows that corporations are making some improvements in diversifying their boards by race, gender, and ethnicity. In fact, Nasdaq just approved a rule requiring all its listed companies to have at least two diverse board members or explain why they don’t. Is this a sign of progress?

I think it’s a good first step but one of the things that we are arguing for in the paper is that it has to go beyond just the board of directors. It has to be a more meaningful and substantive change throughout the entire organizational structure of a corporation to really have the impact that they claim to want to have, to do the things that they say they want to do in terms of tackling certain types of inequities within their institutions.

In organizations, the composition of the board of directors is a good marker but it’s not necessarily the best marker. If you have to disclose information about what your employee workforce looks like, potentially that is going to show that you may have two or three people of color on your board, but what does it mean for your workforce and your supply chain and thinking more deeply about the problems? Do you have the same percentages reflected in the workforce? And if you do, what does it look like at each level? Are your workers of color just in the lowest category? What do they look like at senior levels, senior management? What does it look like throughout your structure? That’s the information that we are saying firms should gather and disclose. 

You argue that, because of their financial leverage, institutional investors should incentivize or demand this data from companies. What about the argument that it’s not within their fiduciary duty to influence companies they invest in on diversity and other environmental, social, and governance (ESG) issues?

The argument that ESG activism isn’t within the realm of institutional investors is one that I don’t agree with. It builds on this premise that institutional investors representing shareholders should only care about revenues and the balance sheet and what the company is doing from an economic standpoint, and that environmental and social issues have nothing to do with the economics of a firm or shareholder value and returns. I think if anything has been evident from the last couple of years, it’s that you can’t actually divorce these things.

When consumers get upset at a firm because they think that it’s engaged in terrible environmental or social practices, that it’s supporting politicians that support the gun lobby or certain types of voting rights restrictions, that actually does impact the bottom line of the firm because they’re going to have consumers who don’t want to shop there and employees who don’t want to work there. This is going to impact a company in the market for its goods, in the market for labor, and it’s probably going to also trickle into the price of the shares.

To say that institutional investors are violating or breaching their fiduciary obligations because they are thinking about things other than economics is to not recognize the impact that ESG has on the economics. So when institutional investors take this more holistic approach in terms of their engagement with corporations on ESG issues, I would say that this is completely in line with their fiduciary obligation to these firms and to the shareholders whose money they are managing.

What role should regulators have in requiring corporate disclosures related to this area of human capital management?

In our first best world it would be done through regulators because that would get us to standardization. It would make disclosures mandatory and it would really be a true part of the disclosure framework that we have now. But if we don’t get there just yet, this paper is saying we can use institutional investors. We don’t know what data is possible; we don’t know what policies are possible, what’s really achievable, and this gives us a chance to create this open sandbox in which people are putting their data out there, putting policies that they have done out there, seeing what works. It creates this environment in which firms can be a little bit more creative because they are not hemmed in by mandated disclosures as to exactly what they have to disclose.

And yes, it can lead to some cherry-picking but it can also lead to some really fruitful ways of thinking about how we disclose, what we disclose, how we use the data we have, and what kind of changes can we expect to come from it. So we think there’s a positive side to it being untethered to regulators, but regulators have an important role if we want this to be widely adapted and widely implemented across all public companies.