Bloomberg Law
Nov. 30, 2022, 3:30 PM

How Proactive Racial Equity Audits Can Increase Company Profits

Johnjerica Hodge
Johnjerica Hodge
Katten Muchin Rosenman
Ally Jordan
Ally Jordan
Katten Muchin Rosenman

As more corporate shareholders demand that companies assess their progress in environmental, social, and governance, businesses are considering the proactive step of performing a racial equity audit. Here’s how some companies are targeting and measuring racial equity in the workplace, and the larger positive effects of these assessments.

Defining Racial Equity Audits

A proactive racial equity audit is an independent analysis by a law firm or other third party of a company’s policies, practices, and products or services with respect to racial equity.

Generally, these audits involve interviews of a representative sample of a company’s stakeholders, which could include its customers and business partners, company leadership, and the company’s team leading its racial equity efforts. Likewise, these audits will include, at minimum, a review of the company’s DEI policy and other policies or written documentation reflecting the company’s position on racial equity.

A quick glance at audits that have been performed highlights their varied nature. Whereas some audits may examine the company’s operations as a whole, some audits may focus on specific components of those operations. The duration of these audits can also vary—some may be completed in a few months and some may extend over a year.

Higher Profits, Competitive Advantage

Promoting racial justice is the right thing to do, and is also a good business practice that may lead to higher profits and a sharper competitive advantage. Racial equity audits are an excellent tool to ensure this is all happening. Fostering a culture that protects racial equity is critical to developing products and providing services for an increasingly diverse customer base and cultivating a diverse workforce.

Studies show that diverse demographics open new markets by providing significant consumer bases for existing businesses and new enterprises. In addition, implementing or improving racial justice policies can bolster a company’s bottom line.

Companies with the highest degrees of racial diversity have been shown to outperform their less-diverse peers, and companies with the most racially diverse boards of directors have been shown to experience higher profits than their less-diverse peers.

Increased Stakeholder Support

Racial equity audits can also bolster stakeholder interest in supporting the company undertaking the audit. These audits generally solicit input from a company’s various stakeholders, including, but not limited to, employees, customers, and business partners.

Some companies even negotiate with shareholders on the scope of their racial equity audit. By involving key stakeholders in the execution of the audit and addressing areas of concern, companies can strengthen their relationship with their stakeholders.

Starbucks provides an excellent example of this benefit. Following the 2018 arrest of two Black men who were waiting for a business meeting to begin at a Philadelphia Starbucks, the company voluntarily performed a racial equity audit. The audit found, among other things, that incorporating racial sensitivity and implicit bias training aligns with Starbucks’ core business plan of “creating an inclusive workplace” and a welcoming “third place” between home and work for customers.

As a result, the company required implicit bias training for employees, set public corporate diversity goals, and implemented other social initiatives.

The public announcement of the racial equity audit and related diversity, equity, and inclusion efforts appeared to, at least in part, rehabilitate Starbucks’ public image and contribute to the company’s rise in the S&P 500 among funds that focus on ESG investing.

As racial equity audits become more common, we expect an increasing number of companies to achieve similar benefits.

Strategic Planning

Conducting a voluntary racial equity audit helps companies develop a strategic plan to advance their racial equity goals through the audit in a way that aligns with other strategic goals. Many shareholder proposals that request racial equity audits do so within a short time frame—one that may not align with other equally important goals a company may have.

When a company can explore the many facets of its business without time pressure, it can more easily develop sustainable and realistic short- and long-term racial equity goals and execute its audits that facilitates and furthers those goals.

Racial equity initiatives are not one-size fits all, and require strategic efforts to effect meaningful progress. Companies will thus benefit from ample time to assess the reported findings and engage their various stakeholders on implementing the reported proposals.

Risk Mitigation

By voluntarily conducting a racial equity audit, companies may not have to incur the financial or reputational expense of attempting to thwart shareholder proposals requesting such audits. Additionally, companies may avoid costly shareholder litigation over inequitable practices or procedures that may exist under the radar of company leadership.

Put differently, any issues identified during the audit can be timely and appropriately remediated.

Several states have adopted anti-ESG measures. The US Supreme Court is also confronting the legality of affirmative action in college admissions, which has sparked significant discourse around, among other things, the benefits of racial diversity.

That said, racial equity audits have been investor-driven so far. Thus, even if the Supreme Court were to restrict the use of race in college admissions, that would not necessarily stymie the proliferation of racial equity audits.

Indeed, more than 20 companies have agreed to perform these audits thus far. Racial equity audits will likely continue to be a growing concern and opportunity for companies, which should consider the benefits of proactively undertaking them.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Johnjerica Hodge is a partner at Katten and ESG leader who provides counsel to companies across industries as they evaluate and incorporate ESG values into their internal and external operations.

Ally Jordan is an associate at Katten who helps companies evaluate and address risks and opportunities surrounding ESG strategies.