Can Big Business fix racial injustice? It has to try. Here's how.

  • By Leslie P. Norton,
  • Barron's
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When the news of the protests broke, John Streur, CEO of Calvert Research & Management, the $20 billion, sustainable investment shop, knew that a real reaction was required from companies—not just the old playbook of photo-ops with African-American leaders, meetings with minority employees, and philanthropic donations.

So, he sat at his laptop and started banging out what he thought the role of companies ought to be: They should publicly disclose the racial makeup of their employees, publish pay differentials by race and gender, and state exactly what they are doing to combat racism and police brutality. “Ending racism in America is a responsibility of corporations,” Streur wrote in a widely read blog post and letter to clients.

Across the U.S., companies grappled with rage and grief after the death of George Floyd in police custody on Memorial Day. A Zoom roundtable with CEOs and government officials about the business impact of the coronavirus quickly changed into a rare conversation about race relations and social justice—and the public role of CEOs.

And once CEOs start talking about it, they can be held accountable.

“I do think this is a watershed,” says Camille Busette, director of the Brookings Institution’s Race, Prosperity, and Inclusion Initiative. “The confluence of Covid-19 [people of color accounted for a higher share of hospitalizations] and the murders of George Floyd and Ahmaud Arbery has really pulled the drapery off a really egregious web of neglect in this country. For that reason, we’re at an inflection point.”

Expect the new corporate playbook to refocus on diversity, and to allow, even encourage, CEOs to make pronouncements about social justice—and get hit with criticism if they don’t. In the past week, the NAACP has received a flood of calls from companies wanting to know what they can do.

“Writing a check is not going to be enough,” says Marvin Owens Jr., senior director of the NAACP Economic Department, who regards corporations and the markets as the next frontier for achieving racial, ethnic, and economic equality. “Companies need to show their commitment by tangible efforts and partnerships that are meaningful, and produce change.”

In the absence of leadership from Washington, D.C., companies have already been refocusing on so-called stakeholder capitalism—in which employees, suppliers, customers, and communities are given equal consideration to shareholders.

Brian Moynihan, CEO of Bank of America (BAC), a proponent of stakeholder capitalism, announced a $1 billion initiative to help tackle racial and economic inequality. It’s in the same spirit as a program to build about $300 million of affordable housing in the bank’s headquarters city of Charlotte, N.C., which followed Keith Scott’s fatal shooting by police in 2016. “At the end of the day, none of this will be cured unless capitalism drives the money,” Moynihan says. Such moves help protect image, too: “We’ll see companies step up to the plate because they want a good reputation with investors and other stakeholders,” says Jon Hale, head of sustainability research for Morningstar.

The same thinking suggests that lack of diversity in a company’s ranks could become more of an issue for the stock market. Diversity bolsters long-term competitiveness by leading to diverse thinking and better decision-making. Companies with more diversity have better returns.

There’s a lot of work ahead: According to McKinsey, U.S. and United Kingdom executive teams were 13% ethnic minorities in 2019, up from 7% in 2014, even though nearly 40% of the U.S. is nonwhite. Women accounted for 20% of executive teams in 2019, up from 15% in 2014.

“The pace of diversity on boards is glacial on gender, and beyond glacial for race,” says Julie Gorte, who oversees environmental, social, and corporate governance, or ESG, research as well as shareholder and public policy advocacy for Pax World Funds. One excuse is that there aren’t enough qualified applicants—yet overwhelmingly white workforces won’t generate enough employee referrals for people of color, who will steer clear of unconscious bias.

One answer: Set targets and achieve them. Pax World has a gender-lens fund, but also pushes companies on racial and ethnic diversity. It has asked companies to audit and publish their pay equity. According to JUST Capital, only 26% of companies report their workforce gender and racial makeup (One standout: Intel (INTC), which has published demographic data). Just 11% disclose actual measurable targets.

Having people of color in the CEO position sets the tone for corporations; that will be an uphill battle. Only four of the Fortune 500 CEOs are black. As of October, 37% of the S&P 500 index companies didn’t have a single black board member, according to Black Enterprise. “Boards are important, but not as important as management,” Gorte says. “A lot of what happens in corporations does flow from the CEO’s office.” And companies watch other companies. When Bank of America raised its minimum wage to $15 an hour in 2017, other banks followed.

It is critical for companies to report their race pay gap, or whether people are being paid the same for the same job, says Natasha Lamb, managing partner of Arjuna Capital, which has pushed companies to report gender and racial pay equity. Partly as a result, Citigroup (C) now reports its pay gap for women and minorities: Women earn 73% of the median for men, and minorities earn 94% of the median for white employees. Citi plans to increase representation at the levels of assistant vice president through managing director to at least 40% for women globally and 8% for black employees in the U.S. by the end of 2021.

“People won’t [disclose] because the numbers aren’t flattering—they reflect the reality of structural injustice across the companies,” Lamb says. “We don’t expect perfect numbers. What we want is transparency, a baseline for progress moving forward, and accountability toward progress.”

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