The U.S. Securities and Exchange Commission recently approved a new listing rule from the Nasdaq stock exchange, requiring that all companies trading on Nasdaq have at least two diverse directors (one woman, one minority) on the board or explain why the company doesn’t.
Critics of the new rule like to ask how regulating the diversity of a board is supposed to help a business solve its problems.
Ethics and compliance officers might want to take a different view. Look at the headlines these days, and you will see no shortage of corporate conduct scandals rooted in sexist, racist, or otherwise tone-deaf corporate culture. So, the better question to ask might be, “How could diversity not help?”
It’s an important point that often goes overlooked in debates about diversity requirements: Such rules are a preventive measure, meant to assure that senior executives don’t become blind to bad practices in their organizational culture. When organizations put diverse perspectives in the boardroom — or the C-suite, or the management ranks, or the shop floor — leaders are less likely to make those culturally tone-deaf decisions, because someone is more likely to say, “You may not realize this, but what you’re doing is not a good idea.”
Organizations have a compelling interest in taking diversity seriously, and in including diverse voices at every rung of the organizational ladder.
Frame the issue that way and almost no executive leader would disagree with it, because executives want to make good decisions. But if managers, executives, and board directors don’t understand the lived experience of employees and customers, then of course their perception of the organization can drift away from what everyone else experiences every day.
How big is that gap? According to one study of diversity on boards of S&P 500 firms, 82.5% of all board directors were white in 2020, and 73.5% were men. Meanwhile, a separate analysis of Generation Z — that is, the generation just entering the workforce, and either working for or buying from those S&P 500 firms — found that only 52% are white. And like every other generation, a bit more than half of Gen Z is female.
So organizations have a compelling interest in taking diversity seriously, and in including diverse voices at every rung of the organizational ladder.
That’s the argument in favor of diversity at an abstract level. Now let’s consider some of the practical challenges a compliance officer is likely to encounter.
Defining Diversity Objectives
One challenge is simply to define what your organization’s diversity and inclusion objectives are.
A business could take the easy route and do only the bare minimum of whatever regulatory obligations require. That would be a legally valid compliance strategy — But is it enough to support a strong, enthusiastic corporate culture? Probably not. Doing the bare minimum is simply going through the motions (critics would call it “performative” compliance), and plenty of employees will see such hollow gestures for what they are.
A better approach is to sit with board directors and senior executives and ask: What do we want to achieve for diversity, regulations aside? What objectives for diversity and inclusion make sense given our customer and employee base? How would our core ethical values shape what our diversity objectives should be?
From those objectives, you can derive policies and procedures. From policies and procedures, you can derive data to collect and report. From data and reports, you can chart future improvements.
Tracking and Reporting the Data
To a certain extent, tracking data about diversity in your workforce should not be that difficult, because most large U.S. businesses already track lots of that data for reporting to the Equal Employment Opportunity Commission. The EEO-1 form requires extensive disclosures about racial and gender diversity among senior executives, managers, sales teams, administrative support, and other employment categories.
People leading diversity and inclusion efforts still face two tricky questions.
First, EEO-1 reports aren’t publicly available from the EEOC. A company can disclose its EEO-1 report if it wants, and some do as part of their annual reports filed to the Securities and Exchange Commission — but releasing EEO-1 data isn’t required. Your company will need to decide whether it will disclose those reports voluntarily. Doing so might provoke some painful (although perhaps necessary) conversations with employees who don’t like the numbers they see.
Second, EEO-1 reports don’t track sexual orientation, and soliciting information about your employees’ LGTBQ status is highly invasive. If your organization does want to demonstrate its support for LGTBQ+ employees, you’ll need to do it through honest intentions, not data; it’s simply too personal and intrusive a question to ask and report on.
Fostering a Speak-Up Culture
Let’s remember the original point about why diversity matters: It can help us better understand other perspectives, and help management teams have an honest look into corporate culture and performance.
That’s great, but it still means employees need to feel comfortable enough to speak up about what they see going amiss at the business.
That will require trust and training, especially of middle managers who might receive complaints about employee behaviors. It will require reporting mechanisms such as whistleblower hotlines for those employees still uncomfortable with reporting a concern in person. It will require careful investigation protocols to assure a fair, objective investigation into the matter. It will require superb communication skills from leaders, to explain what happened and how that issue might lead to discipline, new policy — or no action at all, if the complaint is unfounded.
The good news is that compliance officers have had plenty of training on the skills that matter here: working with the board, defining objectives, building systems to collect and report data, fostering a speak-up and a listen-up culture. Now that diversity is making its way onto the corporate agenda (and deservedly so), that experience is going to be mighty useful.
