Diversity, Equity, and Inclusion
Abstract
This paper measures diversity, equity, and inclusion (DEI) using survey responses used to compile the 100 Best Companies to Work For list. While only the overall ranking is public, we obtain confidential data on the 58 constituent questions, for all companies that applied to the list regardless of whether they eventually made the top 100. We identify 13 questions as being related to DEI, and aggregate the responses to form our DEI measure. This variable is a “grass-roots” indicator of actual DEI, as perceived by the responses of 250 employees in a company, in contrast to more superficial measures such as whether a company has a DEI policy. It has low correlation with gender and ethnic diversity in the boardroom, in senior management, and within the workforce. This suggests that that DEI captures additional dimensions missing from traditional measures of demographic diversity, and that an “add diversity and stir” approach to demographic diversity is unlikely to increase DEI.In multivariate regressions, the percentage of women in senior management is positively associated with DEI. However, general workplace practices (such as on-site childcare and flexible working schedules) and workplace outcomes (such as voluntary turnover) are unrelated to DEI, suggesting that DEI cannot be improved by generic initiatives to improve employee satisfaction; instead, it requires more targeted policies.
DEI is also higher in small growth firms, consistent with their greater incentives and ability to improve DEI, and firms with high financial strength. The relevance of the latter is unlikely to be because cash is needed to directly finance DEI, unlike for other intangible assets. Our DEI measure does not capture factors such as employee pay, working conditions, and amenities (which are represented by other survey questions) that require financial investment, but attitudes. Instead, strong financial performance frees a company from having to focus on short-term pressures and instead allows it to address longer-term challenges such as DEI.
DEI is positively associated with seven out of eight measures of financial performance, such as profitability, sales growth, and labor productivity, consistent with DEI increasing employee motivation and engagement. The stock market partially values DEI, as evidenced by its positive correlation with Tobin’s Q and other ratios; however, this incorporation is incomplete as documented by positive future earnings surprises. While DEI is uncorrelated with both the number of patents and future patent citations, our granular data allows us to disaggregate the responses by employee job category. We find that DEI perceptions among professional workers, such as R&D employees, are significantly correlated with both the quantity and quality of patents. However, we find no link between DEI and future stock returns.