Costco’s DEI Challenge: Why It Should Concede Instead of Fight

Written by:

Share

Facebook
Twitter
LinkedIn
Pinterest
Email
Print

Editor’s Note: This is the first part of a two-article point-counterpoint series on recent retail decisions about DEI. We are presenting two different views to explore the many facets of this polarizing issue.

Costco finds itself embroiled in the diversity, equity and inclusion (DEI) controversy. Unlike so many other major corporations that have caved to the pressure including Walmart, Tractor Supply, Home Depot Lowe’s, McDonald’s and others, Costco’s board is standing firm behind its existing DEI position. It contends its current policies are working for the good of its 300,000+ employees, customers, suppliers and shareholders and has asked shareholders to reject activists’ demands. Costco has an admirable four-part code of ethics – “Obey the law. Take care of our members. Take care of our employees. Respect our suppliers.” as the underpinnings of its “People and Communities” DEI program.

The primary issue seems to be not with the proposal but with who’s doing the asking, i.e., the National Center for Public Policy Research and its Free Enterprise Project. “We believe that the proponent’s request for a study reflects a policy bias with which we disagree and that further study and reporting would not be an efficient use of Company resources,” the Board explained.

De-Risking DEI

The demand is presented in a proxy proposal by the conservative National Center for Public Policy Research (NCPPR) and is not a demand to dismantle Costco’s DEI program as has been widely reported, but simply to study and report its effectiveness and potential risks.

Specifically, NCPPR requests the Board “conduct an evaluation and publish a report, omitting proprietary and privileged information, on the risks of the Company its current DEI (including ‘People & Communities’) roles, policies and goals.” The upcoming shareholder meeting on January 23 will determine the fate of the proposal: “The report requested by this proposal would not provide meaningful additional information to our shareholders,” the Board stated.

On the face of it, NCPPR isn’t making an unreasonable request, especially since the business case for DEI has not panned out with many companies that are dialing back their initiatives in the face of legal challenges and lack of ROI.

Datapoints

To be clear, the proxy proposal recommends a study to evaluate the current DEI policy. What company the size and reach of a Costco (number one after Walmart and number two after Amazon) doesn’t need valuable information on which to base strategic business strategies such as employment and hiring policies?

An October Pew public opinion poll revealed, “Compared with February 2023, workers are now somewhat more likely to say: Focusing on increasing DEI at work is mainly a bad thing and their company or organization pays too much attention to increasing DEI.” Further, far more Americans say DEI hurts white men than say it helps them (36 percent versus. 14 percent).

Research can validate as well as disprove DEI assumptions. Amazon just completed a two-year study of its own DEI program conducted by the law firm Paul, Weiss, Rifkind, Wharton, and Garrison. The report identified areas of improvement and Amazon shifted the focus of its DEI program. McDonald’s just rolled back its DEI program after conducting a risk assessment similar to that requested of Costco.

And Meta is the latest major company to divest itself of DEI. In announcing its change in policy, an internal memo distributed to employees stated, “The term ‘DEI’ has become charged, in part because it is understood by some as a practice that suggests preferential treatment of some groups over others.” One could argue that DEI has become the latest politicized policy magnet with President-elect Trump’s desire to de-DEI the government workforce.

To follow the logic of NCPPR, a public Board responsible for a company with a market cap over $400 billion should study the financial risks it faces should a DEI-related suit be brought against it. Further, focusing on the need for Costco to evaluate the risks, NCPPR used Costco’s employment data to estimate there are at least 200,000 employees who might claim illegal discrimination because they are white, Asian, male or straight, resulting in similar costly judgments if only a fraction of those employees were to file suit.

“Where is the company-specific data supporting diversity-is-good-for-the-bottom-line platitudes? I would go so far as to say that it may well constitute a per se breach of duty if there is no relevant company-level data being sought or analyzed,” Padfield added. Cautionary note: Data is information, analysis is intelligence and you need both in a balanced study.

Balancing Bias

The primary issue seems to be not with the proposal but with who’s doing the asking, i.e., the National Center for Public Policy Research and its Free Enterprise Project. “We believe that the proponent’s request for a study reflects a policy bias with which we disagree and that further study and reporting would not be an efficient use of Company resources,” the Board explained.

NCPPR is transparent about its opposition to corporate DEI policies. “We oppose DEI because DEI institutionalizes racial discrimination. Among other risks, racial discrimination poses material risks to the company’s bottom line,” shared Stefan Padfield, a lawyer by trade and director of NCPPR’s Free Enterprise project. He cites a case against Starbucks brought by a white former Starbucks regional manager who claimed race discrimination played a part in her firing. A Federal Court agreed and leveled a $25.6 million judgment against Starbucks.

Growing Legal Risks

DEI is facing headwinds of late from customers as well as investors. The incentive is the Supreme Court’s decision to reverse affirmative action in higher education. For example, the attorney generals of 13 states sent a letter to Fortune 100 CEOs (including Costco’s Ron Vachris, along with CEOs of Walmart, Amazon, CVS, Home Depot, Kroger, Walgreens Boots Alliance, Target, Lowe’s, Albertsons, TJX and Nike)  shortly after the Supreme Court ruling against Harvard University that its race-based admissions policy violated the 14th Amendment. The AGs warned companies their corporate DEI programs could put them on the wrong side of federal and state law.

“Treating people differently because of the color of their skin, even for benign purposes, is unlawful and wrong. Companies that engage in racial discrimination should and will face serious legal consequences,” the letter stated.  “Such race-based employment and contracting violates both state and federal law, and as the chief law enforcement officers of our respective states, we intend to enforce the law vigorously,” the letter warned.

Is DEI Effective?

Corporate DEI programs under various names have been around since the mid-1960s but picked up steam over the last decade, giving academic researchers plenty of data to work with to evaluate the programs’ effectiveness.

  • McKinsey DEI Studies

Professors Jeremiah Green and John R.M. Hand tried to replicate numerous studies by McKinsey that served as a foundation for corporate DEI programs and found the McKinsey studies couldn’t be statistically verified. In a study published in the Econ Journal Watch, they concluded:“[O]ur results indicate that despite the imprimatur often given to McKinsey’s 2015, 2018, 2020, and 2023 studies, McKinsey’s studies neither conceptually — nor empirically — support the argument that large U.S. public firms can expect on average to deliver improved financial performance if they increase the racial/ethnic diversity of their executives,” they wrote.

  • DEI Training Can Divide

A recently published study from the Network Contagion Institutes (NCRI) at Rutgers University tested the effects on students of DEI training and concluded that DEI training programs can increase hostility and exacerbate inter-group conflicts or, as the researchers wrote, “Some DEI programs appear to backfire.”

Similar results were reported by Professor David Haskell in a paper entitled “What DEI Research concludes about diversity training. He cited over 40 academic studies that found DEI training “is divisive, counter-productive and unnecessary.” He concluded, “When it comes to harmony and tolerance, DEI does not make things better, but can make things worse.”

  • Corporate Board Diversity

In 2021, Nasdaq proposed a board diversity rule to the Securities and Exchange Commission (SEC), which it subsequently approved. The rule would have required Nasdaq-listed companies to have at least two directors who must be“diverse,” including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ.

In a position paper opposing that ruling, Harvard Law Professor Jesse Fried wrote, ”Nasdaq cannot cite any high-quality study showing that board gender or ethnic diversity boosts returns, because there has been none. In fact, there is a sizeable body of academic work reporting the opposite results: diversifying boards can harm financial performance.” In December, a Federal Court vacated the SEC approval of the Nasdaq rule. The SEC could appeal that decision, though with the Trump administration taking office later this month, it is unlikely to do so.

The ROI in DEI

We all agree that the objectives of DEI programs – to have workplaces reflect the diversity of our community, be fair and equitable in hiring, promotions and pay and be welcoming regardless of race, ethnicity, gender, sexual orientation or identity, religious affiliation and disabilities – is not only a good thing but still required under federal and state law.

But the implementation of corporate DEI programs may not be living up to those objectives, suggests Harvard professor of business Management Robin Ely and Morehouse College president David Thomas in a seminal Harvard Business Review article, “Getting Serious about Diversity: Enough Already with the Business Case.”

They affirm through research findings that greater workforce diversity doesn’t translate into better business results. “Leaders may mean well when they tout the economic payoffs of hiring more women and people of color, but there is no research support for the notion that diversifying the workforce automatically improves a company’s performance.”

They argue for business leaders to adopt a “learning orientation” to measure the real-world effectiveness of such programs. “To make real progress people – and the organizational cultures they inhabit – must change. But instead of doing the hard work involved, companies have generally stuck with easier, more limited approaches that don’t alter the status quo. Taking an ‘add diversity and stir’ approach will not spur leads in your firm’s effectiveness or financial performance.”

Ely and Thomas stress the moral imperative for diversity in the corporate culture, calling on leaders to “embrace a broader vision of success that encompasses learning, innovation, creativity, flexibility, equity and human dignity.”

In fact, they caution that too much emphasis on the financial case for diversity can send a wrong  message “to traditionally underrepresented employees that they are worth hiring and investing in only because having ‘their kind’ in the mix increases the firm’s profitability.”

They advise, “Companies will not reap benefits from diversity unless they build a culture that insists on equality.” To meet the goals and objectives of a corporate DEI program – and by no means are they all financial – the authors insist companies must continue to learn from their existing programs and adapt them as appropriate.

“The problem is that nearly 25 years later, organizations have largely failed to adopt a learning orientation toward diversity and are no closer to reaping its benefits. Instead, business leaders and diversity advocates alike are advancing a simplistic and empirically unsubstantiated version of the business case,” Ely and Thomas wrote.

Taking a Pause

In my opinion, conducting a full investigation of Costco’s DEI program as NCPPR proposes would be a great SWOT learning exercise to identify Costco’s strengths and weaknesses, opportunities and threats related to DEI.  “This is a rapidly changing landscape in terms of law, regulation and market sentiment, and shareholders accordingly have got reason to ask for a review,” Padfield states.

Costco disagrees and believes it is doing the right thing for all concerned. “Our focus on diversity, equity and inclusion is not, however, only for the sake of improved financial performance but to enhance our culture and well-being of people whose lives we influence,” it stated.

More Trouble Brewing

Anti-DEI crusader Robby Starbuck layers more complexity onto the Costco scenario. He states in a recent X post: “For now I suggest conservative consumers find other places to spend their money if Costco is so dedicated to doubling down on DEI. If they’re smart, Costco will do right by their shareholders and change before we turn our attention to them.”  Starbuck has been successful in flipping corporate policies to what he describes as a “culture of sanity and neutrality.” Tractor Supply, Lowe’s Harley Davidson, Ford, John Deere and Walmart are already on his scorecard. Will he make a dent with Costco?

Peter Drucker, the father of modern business management, famously said, “You can’t manage what you don’t measure.” The NCPPR proxy proposal is that Costco should measure the risks and rewards of its DEI program to manage it going forward. I believe the Board and executive leadership should jump at the chance rather than run from it.

Related

Articles

Scroll to Top
the Daily Report

Insights + Interviews right to your inbox.

Skip to content