The Limited Corporate Response to DEI Controversies

Key Findings

• Despite the heightened scrutiny firms face following DEI controversies, firms make only modest and largely superficial changes in their hiring. We estimate only a 0.8 percentage-point increase in hiring diversity, with this effect concentrated in junior and non-core roles.
• Overall diversity is largely unchanged because the departures of diverse employees also rise.
• Firms experience a –0.7% announcement return when these controversies are reported. This underperformance persists for up to four years afterwards, as we observe a 2–3% annual underperformance in stock returns. Firms that improve their diversity following these controversies offset the adverse stock-price effects.
• Companies increase DEI-related disclosures and diversity targets, yet these signals are uncorrelated with real hiring, suggesting they engage in “diversity washing.”

Motivation

In recent years, one of the most contentious debates in corporate governance has been the advancement of firms’ diversity, equity, and inclusion (DEI) initiatives. Following the murder of George Floyd in 2020, firms dedicated considerable resources to this cause, with many of these investments intended to improve racial and gender issues. Almost as quickly, many of these same firms have scaled back or eliminated initiatives in response to anti-DEI backlash. Given the heightened focus and subsequent pullback, many have questioned whether DEI initiatives produce any tangible changes in firms.

To provide evidence for this debate, we examine DEI initiatives in arguably the most important group of firms—those with identified problems. These firms face public scrutiny, litigation, and stakeholder campaigns to redress their DEI issues and thus are under the most pressure to act.

Data and Sample

Using data from Reprisk, we identify approximately 1,300 DEI controversies among publicly traded U.S. companies from 2008 to 2022, and focus on issues related to workforce inequality and discrimination. Examples of these events include high-profile ones like Google’s $118 million settlement for a pay equity suit or less-covered ones like United Airlines employees in San Francisco Airport making racist and sexist comments to a business manager. We then track how these firms adjust their talent pipeline by analyzing the demographic composition of new hires. Leveraging detailed workforce data from Revelio Labs, which provides employees’ gender, ethnicity, positions, and credentials, allows us to trace not only whether firms hire more diverse employees but also where these changes occur within the organization.

How Firms Respond: Modest and Targeted Hiring Shifts

We find that following a DEI controversy, firms make only a modest increase in new-hire diversity of 0.8 percentage points. Much of this increase is concentrated among junior-level positions and back-office roles, suggesting that firms make low-cost, low-impact changes rather than implementing broader organizational changes.

Importantly, the modest hiring gains are largely offset by the increased attrition of diverse employees. In the 12 months following a controversy, the departure rate of diverse employees rises by 0.75 percentage points. As a result, overall diversity does not meaningfully change. Firms may be hiring more diverse employees at the margins, but they appear to do so largely to replace those who depart.

When Do Firms Respond More Aggressively?

Despite the modest response by the average firm facing a DEI controversy, there may be firm or event characteristics that induce firms to make stronger responses. Firms are more likely to increase their diverse hiring if the controversy receives high media attention or triggers a negative stock-market reaction. By contrast, there is no evidence that responses are stronger when the controversy is more severe. These findings suggest that firms are not investing in diversity where the need is greatest, but rather where the external pressure is highest.

Valuation Consequences

Is the tepid response by firms because there are no market consequences from these controversies? To the contrary, we find a –0.7% average cumulative abnormal return in the days following the controversy. This underperformance persists, as we observe a 2 to 3% annual underperformance in stock price up to four years after the event.

But this penalty is not uniform. Firms that make substantive diversity improvements, which increase overall firm diversity, experience no significant decline in stock price in the years following the controversies. In short, investors penalize firms for DEI controversies, but reward (or at least do not penalize) those that take credible actions.

Disclosure versus Action

Although many firms make few meaningful changes to improve diversity hiring, we see a dramatic increase with DEI messaging. There is a notable increase in DEI-related language in proxy statements, CSR reports, and corporate social media accounts. Firms are also more likely to disclose diversity targets.

Yet these disclosures are largely symbolic. There is no statistical relation between this external messaging and changes in diversity hiring or workforce composition. This disconnect raises concerns that many of these firms engage in “diversity washing,” where they appear to be reforming without taking substantive actions.

Conclusion

Firms facing DEI controversies mostly respond with superficial changes that do little to reshape corporate diversity. These limited efforts fail to prevent stock-price underperformance, and only those firms that make meaningful changes can avoid this decline. This evidence suggests a fundamental tension: although DEI investment can protect firm value following a controversy, its upfront costs, implementation challenges, and growing legal uncertainty may lead companies to take only superficial actions.

The full paper is available for download here.