What Every Multinational Company Should Know About . . . Navigating Economic Downturns through Racial Equity Audits

27 July 2023 Manufacturing Industry Advisor Blog
Author(s): Byron J. McLain Alexis M. Jackson

A strong correlation exists between a multinational company’s Diversity, Equity & Inclusion (DEI) efforts and the company’s financial performance. Racial equity audits often are utilized to measure the precise quality and efficacy of these DEI initiatives. In light of these efforts, as well as increasing pressure from investors and stakeholders in multinational companies to prioritize DEI, now is a good time for these companies to assess whether their well-meaning initiatives are yielding the intended outcomes.

In recent years, companies have made a concerted effort to promote DEI in the workplace and the communities they serve. As examples, the Los Angeles Dodgers hired Courtney Moore as their first Vice President of Diversity, Equity & Inclusion; Nike committed to increasing the representation of women in leadership positions (vice president level and above) to 45%; and KPMG launched Accelerate 2025, a commitment to attract, retain, and advance underrepresented talent by the year 2025.

Economic experts have repeatedly warned of an economic slowdown within the next year. Despite the benefits of DEI efforts, in times of economic downturn, diverse employees at multinational companies are often disproportionately affected by layoffs, and DEI programs are scaled down to reduce costs. But what if retaining diverse employees and prioritizing DEI programs actually increases profitability? A study by McKinsey & Company found that companies with the highest percentage of gender diversity and racial and ethnic diversity were more likely to have financial returns above their national industry medians. In particular, “in the United States, there is a linear relationship between racial and ethnic diversity and better financial performance: for every 10 percent increase in racial and ethnic diversity on the senior-executive team, earnings before interest and taxes (EBIT) rise 0.8 percent.” In other words, diversity is good for business and, in times of financial uncertainty, any opportunity to maintain and increase financial performance at multinational companies is worth maintaining, including increasing DEI efforts (as opposed to deprioritizing them).

Even in times of economic downturn, multinational companies should commit to DEI by engaging in the following best practices:

  1. Retain and invest in employees from underrepresented backgrounds.
  2. Foster a workplace culture that values diversity and promotes inclusion.
  3. Implement and enforce anti-discrimination policies.

But how do companies know if their DEI programs are making an impact? By conducting a racial equity audit: an examination, often led by an independent party, into an organization’s policies, procedures, and practices to evaluate and monitor its performance concerning DEI. While the scope varies, racial equity audits typically involve a review of a company’s policies and interviews of company personnel, resulting in written findings and recommendations.

Through a racial equity audit, multinational companies also can detect and respond to wrongdoing, increase transparency, publicize their achievements, and assess the quality and efficacy of their DEI initiatives to determine which programs provide the greatest return on investment. Although companies may be hesitant to perform these audits, most likely out of fear that negative findings may present the company in a bad light, the benefits of performing these audits outweigh the potential risk of (i) future litigation, (ii) reduced financial performance, and (iii) sending the false message the company does not value DEI.

The value of racial equity audits is demonstrated by the major multinational companies that have already acknowledged the success resulting from these audits:

  • In 2022, Citigroup, Inc. announced it engaged a law firm to conduct a racial equity audit of its $1 billion initiative (Action for Racial Equity) to address the racial wealth gap in the United States. Citigroup published the findings and key recommendations, and noted the audit “provided insights that will inform [its] efforts and reminded [it] how much work we have to do as a society to make meaningful progress in closing the racial wealth gap.”
  • Following the arrest of two black men in a Starbucks located in Philadelphia, in 2018 Starbucks conducted a racial equity audit that ultimately led to the implementation of required implicit bias training for employees and repairing Starbucks’ public image.
  • In 2016, after receiving allegations of discrimination against guests, Airbnb, Inc. was one of the first companies to perform a racial equity audit to assess how people of color experience its platform. Since then, Airbnb has published two additional reports detailing how Airbnb addressed and implemented the racial equity audit’s findings and recommendations.

Given the above, and with experts predicting an economic slowdown, now is the perfect time for multinational companies to (i) leverage DEI initiatives to maintain and increase financial performance and (ii) perform racial equity audits to measure the quality and efficacy of their DEI initiatives.

Foley & Lardner LLP recently published its 2023 ESG Report and has an ESG team with extensive experience in counseling clients on racial equity audits. For questions or concerns about diversity, equity & inclusion initiatives and other ESG issues, contact the authors of this article or your Foley attorney.

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