The other week we had a post on what companies are saying about ethics and corporate culture in the new human capital disclosures now required in annual reports. Today I want to circle back to another subset of that information: what companies are saying about their diversity and inclusion efforts.
Diversity disclosures have been on my mind for two reasons. First, diversity is one of the few issues where a respectable number of companies are disclosing actual numbers and metrics in their SEC filings. Second, diversity and inclusion (D&I) is clearly becoming a higher priority for corporate governance. So there’s good reason to look at what companies have been saying so far, either to benchmark your own D&I efforts or to anticipate even more scrutiny of D&I disclosures in the future.
I started by looking at D&I disclosures in the 2020 reports of 30 companies I selected at random from the S&P 500. My question: how many of those firms disclosed a percentage breakdown of diversity in their total workforce, and how many also disclosed the diversity of their management ranks in particular?
Answer: not many.
Figure 1, at right, shows the answer for diversity among the whole workforce: 33 percent of my (admittedly small) sample.
Figure 2, lower right, shows that even fewer firms reported diversity among their management ranks: only 13.3 percent.
The numbers also raise another interesting question: exactly how should we define “diversity,” anyway? For example, Las Vegas Sands Corp. did report the percentage of female employees among its whole workforce (roughly 50 percent), but it didn’t report any breakdown by race or ethnicity. So Las Vegas Sands is one of the companies in that 30 percent from Figure 1, but is diversity by gender as useful to know as diversity by race? You tell me.
Another quirk is that some firms do report D&I data, just not in their human capital disclosures in the annual reports. For example, Cummins doesn’t report any workforce breakdowns in the 10-K, so it’s in the negative slice of Figure 1 — but Cummins does report lots of diversity data in a separate sustainability report it publishes. Except, sustainability reports aren’t filed to the SEC and aren’t subject to the same standards of investor protection. So is that diversity disclosure as useful as one included in the 10-K? Again, you tell me.
Sources of Diversity Data
Several companies that reported diversity data explicitly said those numbers came from their EEO-1 reports, the annual filing that large firms and government contractors submit to the Equal Employment Opportunity Commission.
Dow is a good example here. In its 10-K, the company only reports diversity by gender for its global workforce and by ethnicity for its U.S. workforce. In the fine print, however, Dow says investors can find more detail in the sustainability report it posts to its corporate website — and tucked within that sustainability report, Dow includes a full copy of its EEO-1 filing. The EEO-1 provides a complete breakdown of ethnic diversity across 10 categories of workers.
This is interesting because individual EEO-1 filings aren’t publicly available from the EEOC. So any company that discloses those reports is doing so voluntarily, and that says something about management’s sincerity in promoting diversity.
So how many companies are publishing their EEO-1s for all to see? I went to Calcbench.com and searched the S&P 500 for any reference to “EEO-1” in their 2020 annual reports. In the nearly 300 reports filed so far, I found only 13 mentions of the filings at all.
Another impressive example among those 13 is Starbucks. The company offers a detailed analysis of its U.S. workforce by gender and race, based upon EEO-1 data. (See Figure 3, below.) The analysis is in the company’s proxy statement rather than the 10-K, which is unusual; but whatever. Starbucks also said it plans to start disclosing its full annual EEO-1 filing starting later this year.
As much as I applaud the disclosure of diversity data, one thought does come to mind: if companies start including EEO-1 data in their SEC filings, that can raise questions about disclosure controls. Who’s in charge of gathering EEO-1 data? How is that data captured, so you can assure the completeness and accuracy of information disclosed in the 10-K?
In fact, audit and compliance professionals might want to review their diversity disclosure processes now, because I suspect that sooner or later the Biden Administration will require more formal, expansive disclosure of D&I efforts. This could be a good opportunity for a trial run of your data capture and disclosure processes, in case the SEC adopts a more substantial disclosure requirement down the road.
D&I Disclosure Beyond the Numbers
OK, so most businesses aren’t yet disclosing precise workforce diversity in their human capital disclosures. In that case, what are they disclosing?
A lot of firms do talk about D&I activity: employee affinity groups, mentoring programs, and corporate sponsorship of larger diversity initiatives. For example, numerous firms said they support OneTen, a program that launched in December with the goal of hiring 1 million black Americans into stable, well-paying jobs over the next 10 years.
Others discussed D&I objectives, but didn’t say much about the metrics they might use to assess progress on those objectives. For example, building products giant Masco Corp. listed a perfectly reasonable D&I objective: “how we can help increase access, equity, and inclusion with our diverse community partners.” Then it had this to say about what comes next for the firm:
We are refining strategic objectives and expectations… We are also developing multiple internal channels to increase communication and opportunity for engagement among our employees. In 2020, we established a global, enterprise DE&I Council and several local councils and employee resource groups at our business units and our corporate headquarters to help implement action plans tailored to their specific needs and challenges.
Other businesses offered a bit more substance. Delta Airlines, for example, said it plans to double the number of black executives at the company by 2025. (Double from what original number of black executives? We don’t know.) Southwest Airlines also said it plans to “double the percentage of racial diversity and increase gender diversity” in its senior management committee by 2025. (Again, double from what original percentage? We don’t know.)
Which all brings me to one final question: Who’s overseeing these diversity & inclusion efforts?
Ideally, large companies will appoint a chief diversity officer, and give him or her sufficient resources and direct reporting to the CEO or the board. That’s how progress on corporate governance goals should work: you declare objectives, define metrics to measure progress on those objectives, and put someone in charge of implementing policies and procedures to achieve the objectives.
How far along are we on that maturity curve for D&I issues? Not far enough yet, but every step forward matters.