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TRANSPARENCY TROUBLES

More disclosure is not the answer to corporate diversity shortfalls

A stack of voter signature books
REUTERS/Daniel Acker
How much more disclosure do we really need?
  • Alison Taylor
By Alison Taylor

Executive director, Ethical Systems at NYU's Stern School of Business

Published

Listening to CEOs, investors, or the popular press, you would think the path to racial equity in the corporate world mainly involves disclosure, on the premise that actions speak louder than words and that “what gets measured gets managed.”

Not so fast. Fixating on the disclosure of diversity data, however well-intentioned, can perpetuate inequity rather than confront it.

The reason is simple: Making information available does not mean it will be used to change behavior. In fact, on everything from diversity to climate change and conflicts of interest, disclosure has become a substitute for action, not a driver of it. This is not just my opinion. A study from the University of Chicago Booth School of Business shows that getting a higher score on ESG issues is based on the number of metrics companies disclose, not even their quality.

With so much energy focused on gathering and reporting overwhelming amounts of data, people are too busy arguing over its accuracy and relevance, or manipulating it to get better ratings, and spending less time pressing for actual change.

Disclosure did not resolve runaway CEO pay

Diversity advocates would do well to draw lessons from other examples of disclosure traps. Consider Congress’s attempt in 2010, via the Dodd-Frank Act, to combat wage inequality by requiring companies to disclose the ratio of their CEO’s pay to that of their median worker. Reasons for optimism started to fade in 2013, when the US Securities and Exchange Commission embraced inaction by indicating it “would not prescribe a specific methodology for companies to use in calculating a ‘pay ratio.’” And executive pay has risen even further.

So disclosure happens, but useful information does not always result. Nor does activity that might actually close the wage gap. While Congress was debating the merits of the Dodd-Frank bill, companies were becoming increasingly reliant on contract workers, who typically are not counted in this median pay ratio at all.

More than a decade later, it’s clear that a once-in-a-generation opportunity to address this aspect of wage inequality was wasted, bad behavior has persisted, and the well-being of millions of people has suffered—despite the mandated disclosures.

What gets measured gets manipulated

Companies that disclose information open themselves up to judgment and criticism, which incentivizes them to juke the stats. And even when they’re not being deliberately craven, disclosure standards are often vague enough or narrow enough to leave room for plenty of questionable behavior not covered by the transparency rules.

Consider, for example, a company in the tobacco industry that employed predominantly Latino farm laborers who struggled mightily with something called “green tobacco sickness”—industry jargon for the nicotine poisoning that wet tobacco leaves inflict through the skin. The company disclosed, in audited statements, all its efforts to supply pickers with personal protective equipment. There was just one problem: the disclosure covered only corporate farms. Most tobacco is grown on contracted farms, whose laborers were unmentioned and likely unprotected.

Transparency, used unwisely, can be counterproductive

A frequent counterpoint is that the problem is not disclosure per se, just unreliable or invalid disclosure. Certainly, we want our data to be accurate and precise. But the bigger problem is that, while knowledge is power, that power can be left unused—or used in ways that make long-term improvement less likely.

Look at the present pressure on apparel retailers to oversee and manage the risk of forced Uighur labor in the cotton supply chain. I was recently approached by a law firm looking to build a class-action lawsuit to help advance the human rights agenda in China. The problem? The firm planned to target the companies that have actually disclosed some details about their supply chains; it is much easier to build a legal case against them than to muster evidence against the far more numerous brands that have opted to keep their heads down. Lawsuits bring negative attention and lower ESG ratings, not the “race to the top” that all this transparency is supposed to provide.

Disclosure is not the same as doing something

Instead of prompting action, disclosures might serve as an excuse for inaction, or help a company to spin a story of gradual, best-effort improvement that distracts us from desires for genuine, ambitious change. Investors, who regularly assess all sorts of corporate talk with a sharp eye toward what actions might follow, know the difference very well. Specifically with respect to race, they need to start repairing their impacts on the world’s Black and Brown communities rather than compounding inequity by setting conditions for others to meet before they will act.

The fact is, we already know more than enough to act to tackle the root causes of racism, and it’s not by pushing for incremental improvement in diversity metrics, or recruiting a powerless head of diversity tasked with monitoring completion rates on expensive unconscious-bias training. Investors might start by voting against governance committee chairs that sign off on tax avoidance. Companies might look at where they are recruiting, and whether there is bias in how they hire or measure performance—and next, they can stop donating to officials that support voter suppression.

Of course, disclosure matters, and transparency is helpful. But it is magical thinking to argue that more information will necessarily lead to more diverse or more ethical businesses. Focus on the outcomes you seek, and it’s usually quite clear what the actions should be. If you’re being honest about what’s at stake, more disclosure will not be the main answer.

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