Should DEI Efforts Be Expected to Have a Financial Return?

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MIT SMR Strategy Forum

The MIT SMR Strategy Forum offers monthly insights from academic experts on pressing strategy issues related to business, management, technology, and public policy.
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Across the globe, many companies have recognized that building diverse, equitable, and inclusive workforces is a necessity in the 21st century. In reaction to the murders of Breonna Taylor, George Floyd, and many other Black Americans in 2020, the 50 biggest public companies in the U.S. collectively committed at least $50 billion to address racial inequality. Budgets for diversity, equity, and inclusion initiatives increased across industries, and many companies have scrambled to hire new roles focused on integrating DEI efforts within the business.

One common refrain in discussions of DEI efforts is the “business case for diversity,” or the justifications for DEI investments as they relate to a company’s bottom line. In June, professors Oriane Georgeac and Aneeta Rattan published an article in Harvard Business Review titled “Stop Making the Business Case for Diversity,” in which they shared research showing that when companies use the business case for diversity in outward messaging, it has a negative effect on attracting underrepresented candidates. As the authors put it, “The business case for diversity backfires because it sends a subtle yet impactful signal that organizations view employees from underrepresented groups as a means to an end.”

We wanted to examine the issue of DEI investment within companies from the perspective of strategy, and so this month we asked panelists on the MIT Sloan Management Review Strategy Forum to respond to the following statement: Corporate investments in diversity, equity, and inclusion should be expected to generate a monetary return on investment.

Agree

Just over 31% of panelists agree or strongly agree that corporate investments in DEI should be expected to have a financial return on investment. It’s important to note, however, that the consensus among this group of panelists is that there are many reasons companies should be motivated to invest in DEI — among them, morality and fairness — but studies have shown that such efforts do in fact lead to positive financial results in most cases.

London Business School’s Olenka Kacperczyk points to her research, published in 2009, which found that “corporate attention to diversity leads to long-term shareholder value, even if the market undervalues DEI investments in the short run.” She also notes that there is a strong case for investors, especially in the startup space, to integrate DEI into investment decisions.

Like others in the “agree” category, IE Business School’s Annamaria Conti notes that companies need to distinguish between the short- and long-term benefits. “While in the short run an inclusive policy may entail integrating costs,” Conti writes, “studies have shown that diversity produces several benefits in the long run, including conceiving a larger spectrum of products that better satisfy consumer needs.”

Jen Brown at the University of Utah notes that investing in DEI can lead to “higher employee satisfaction, a better ability to recruit, and a diversity of perspectives that promotes innovation or better decision-making” while reducing reputational risk for the company.

Strongly agree


DEI affects the bottom line by increasing employee morale, by increasing the available talent, and by increasing customer goodwill.
Timothy Simcoe
Preston McAfee
Economist

Disagree

On the other side, just over 47% of panelists disagree or strongly disagree that DEI efforts should have a financial return. Anita McGahan of the University of Toronto argues that equity and inclusion are nonnegotiable as “matters of fairness” within companies. While some DEI initiatives can be measured in terms of ROI, McGhan writes, “DEI initiatives are best assessed on criteria that reflect whether a corporation is operating in ways that will assure its continuing license to operate.”

Likewise, Melissa Schilling of New York University writes that “corporate investments in diversity, equity, and inclusion should be expected as table stakes for community membership” and that “like any long-term and qualitative benefits, analysis of monetary return will underestimate them and lead to underinvestment.”

Bocconi University’s Alfonso Gambardella notes that “if companies invest in DEI expecting economic returns, they will miss opportunities. DEI generates returns that cannot be quantified economically.” Among them are improved culture, teamwork, and standing among stakeholders and customers.

While there are often upfront costs and skills cliffs when building out DEI initiatives, Boston University’s Timothy Simcoe notes that “smart managers will recognize that investments in social justice typically serve shareholders’ long-term interests, even if the immediate financial ROI is negative.”

Disagree


Corporate investments in diversity, equity, and inclusion should be expected as table stakes for community membership.
Timothy Simcoe
Melissa Schilling
New York University

Disagree


While I do expect such investments to generate a monetary return in the long run, I do not think that one should expect and require them to generate a measurable monetary return in the short run.
Timothy Simcoe
Monika Schnitzer
Ludwig Maximilian University of Munich

Neither Agree nor Disagree

Twenty-one percent of panelists fall somewhere in the middle, with many noting similar points made by panelists in both the agree and disagree camps. As the Kellogg School of Management’s Meghan Busse writes, “There are two motivations for investments in DEI — motives that need not conflict with nor invalidate each other. One reason for investing in DEI is as an act of civic, social, or (some would say) moral values. A second reason for investing in DEI is to improve the monetary return of the company.”

Steve Tadelis of the University of California, Berkeley, notes that the issue often comes down to execution and level of commitment. “For some companies, the push for DEI hiring can result in new thinking and innovation,” he contends. “For others, it’s more about lip service and not looking at ways to add real value.”

Joshua Gans of the University of Toronto notes that eliminating bias and discrimination within companies requires long-term change, which for many companies can prove to be hard. “It requires management with a vision as to how a company ought to run, the building of relational contracts, and a broad strategy that integrates internal alignment with external positioning,” Gans writes. “As soon as these things get a name, like DEI, I worry that means that the hard work of change is being packaged into the lure of the easy out.”

While the wording of our poll statements can sometimes divide panelists, what unites the group this month is the consensus that companies seeking to deliver on DEI efforts purely out of financial motivation are missing the wider benefits and promise of a diverse and fair workplace.

Topics

MIT SMR Strategy Forum

The MIT SMR Strategy Forum offers monthly insights from academic experts on pressing strategy issues related to business, management, technology, and public policy.
More in this series

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