The Ripple Effect: How SCOTUS Decisions on Affirmative Action Might Impact Business Outcomes
Updated: Oct 3
The recent U.S. Supreme Court decisions on affirmative action in educational institutions have triggered a series of consequences that reach well beyond the academic sphere. For HR professionals, these rulings offer both challenges and opportunities in shaping workforce diversity and, consequently, business outcomes.
A Harvard study provides valuable historical context on the impact of the prohibition of affirmative action on minority and female employment. According to the study, the prohibition of affirmative actions led to a 5% and 4% decline in the share of state jobs held by black and Hispanic workers, respectively. This sets a precedent for what we might anticipate following the recent SCOTUS decisions.
Research consistently demonstrates a direct correlation between DE&I performance and market value.
JUST Capital's research indicates that companies focusing on stakeholders tend to outperform those that don't by up to 7%.
The Morningstar Minority Empowerment Index further substantiates the financial benefits of racial and ethnic diversification.
A McKinsey report shows that companies in the top quartile for racial and ethnic diversity are 35% more likely to have financial returns above their respective national industry medians.
Bloomberg reports that EEO data they collected from the S&P 100 showed that in 2020 (the first year after the BLM protests), 88 S&P 100 companies added more than 300,000 workers to their ranks and of those, 94% were people of color. The following year, the diversity of new hires in reporting companies was down to 50%.
The Conference Board Research shows that this topic is making its way into the consciousness of consumers as 68% report that they care about DE&I efforts and results. This information weighs heavily on their purchase intent.
Our research has shown that there is a positive correlation between diversity performance and HCROI (Human Capital Return on Investment). Based on the companies we have researched, when the Simpson Diversity Index increases, there is a corresponding increase in HCROI or the effectiveness and efficiency of human capital performance. HCROI is a precursor to profitability performance.
Early signs are already visible. This summer, companies like Discovery, Disney, and Netflix announced the departure of their Chief Diversity Officers (CDOs), and thousands of diversity-focused workers have been laid off. This retrenchment in racial justice commitments could have long-lasting implications for workforce diversity and inclusion which can include the following impact on the organization:
Reduced inclusivity and equity - which has an impact on employee experience as well as candidate experience. This could have a negative impact on employer brand, and in an environment where it is increasingly hard to find candidates, this can be very damaging to the company’s ability to generate revenue and profit;
Innovation capacity - an abundance of research shows that there is a link between diversity and innovation as diverse teams have been shown to foster creativity and innovation. Without a CDO to drive diversity and inclusion initiatives, a company may see a decline in the diversity of thought, which can impede innovation and ultimately affect competitive positioning;
Market responsiveness - a diverse leadership can improve a company’s understanding of and responsiveness to a global and diverse customer base, impacting the organization’s Net Promoter Score (NPS);
Investor relations - investors increasingly look at diversity and inclusion metrics as indicators of good corporate governance and long-term sustainability. At a minimum, declines in minority demographics have been associated with higher levels of attrition of diverse employees as a downward spiral. The costs associated with replacing minority attrition erodes profitability.
In contrast, despite the legal challenges posed by the rulings, many companies are doubling down on their DEI efforts, viewing them as essential for both ethical and business reasons. While the legal landscape may have changed, the moral and business imperatives for DEI have not, prompting employers to explore alternative strategies to maintain and even intensify their focus on creating diverse and inclusive workplaces. This is supported by the EEOC's strategic enforcement plan which is focused on ensuring that organizations demonstrate commitment and integrity related to "preventing and remedying unlawful employment discrimination and advancing equal employment opportunity for all."
According to David L. Gonzalez, President and CEO of David L. Gonzales & Associates formerly the CDO at Bristol-Myers Squibb and Merck: "In the face of rapid change and mounting political pressure, refocusing on an organization’s diversity, equity and inclusion strategy isn't just a matter of compliance; it's a strategic imperative that drives business performance, innovation and culture. Ultimately, it enhances agility and resilience, building a competitive advantage and an organization's relevance in this ever-evolving world."
The SCOTUS decisions are likely to result in fewer diverse students entering educational institutions. According to a report by the National Center for Education Statistics, minority students make up 45% of the public school enrollment. A decline in diverse student admissions could lead to a smaller diverse talent pool with higher education degrees (future workforce) and, consequently, less diverse organizations. This can have a negative impact on the future success of organizations because of the lack of qualified diverse candidates available to join organizations, and the increased “war for talent” of this diminishing demographic. According to the law of supply and demand, this can create pressure for higher wages (more dollars chasing fewer resources).
What HR practitioners can do
Keep tracking: Continue to monitor basic metrics such as gender, generation, and ethnicity. Also, consider diversity within different levels of management (e.g., women or minorities in senior leadership or on the board), divisions or functions (sales, administrative, technology, etc.), and segments of the workforce (disabled/abled, LGBTQ+, etc.).
Align DE&I strategy and initiative to your business strategy: ensure that initiatives are driving key human capital and business strategy to ensure your competitive advantage by being an employer of choice, reduce attrition due to bias, measure the return on investment in DE&I by understanding how this drives retention, develops your bench strength, enhances performance, and ultimately drives HCROI.
Stick to it for the long haul: Consider conducting what some institutional investors refer to as a "Racial Equity Audit." This audit should span a specific period (two or more years) and include metrics like the Simpson Diversity Index and a Gender Index calculation. You can use the Simpson Diversity Index algorithm to calculate Gender representation. Benchmark this information against databases like the EEO for your industry sector or Bureau of Labor Statistics to understand geographic trends by workplace location.
Diversity is integral to organizational success. Abandoning ongoing efforts could pose significant risks with material/financial impacts on business outcomes. The SCOTUS decisions have created a complex landscape that HR professionals must navigate cautiously. By understanding the implications of these rulings and taking proactive measures, organizations can mitigate risks and ensure sustainable business results. Use data analytics to prove out the correlation between diversity and HCROI performance as a way to rationalize and justify continued investments in DE&I initiatives. The proof will be in the numbers!
For more details on how to calculate some of these measurements and the link between DE&I performance and Human Capital Return on Investment (HCROI), which in turn drives profitability, read our previous blog. For support in understanding the material impact of DE&I on your organization, contact Solange at firstname.lastname@example.org.