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Investors demand more corporations conduct ‘racial audits’

Last fall, Citigroup became the first big U.S. bank to agree to a racial audit

racial audits
Illustration by Gillian Wilson

Fasten your seat belt. Annual shareholder meeting season is coming up, and North America’s biggest companies can expect a bumpy ride.

Activist shareholders are gearing up to challenge more corporations on how they manage diversity, equity and inclusion. What used to be a box-checking exercise has gained real urgency after two social upheavals – the unequal impacts of COVID-19 and the death of George Floyd at the hands of Minneapolis police in the spring of 2020 – revealed the enduring hold of systemic racism in North America.

It’s no longer enough for companies to form diversity committees or hold inclusion workshops. Activist investors, mainly on the pension fund side, are demanding that big firms conduct intensive “racial equity audits” by outside experts to discover all the overt and hidden biases in their corporate culture, recruiting and compensation – not to mention their operations and products and services. Only with plans based on thorough, objective disclosure of their actual policies, practices and histories, activists say, can companies root out systemic racism.

Prodded by social critics, Facebook began a “civil rights” audit in 2018. The audit took two years to complete, and 18 months later the company (now renamed Meta) is still responding to the report’s recommendations. The same auditor, Laura Murphy, previously examined Airbnb, a process that resulted in the property-sharing platform adopting a strict non-discrimination policy and creating a dedicated anti-discrimination team.

Few companies like digging so deep. When U.S. institutional investors started pushing racial audits a year ago, Wall Street pushed back. Firms said they were already well engaged in diversity and anti-racism and didn’t need costly audits (or, presumably, the embarrassments that might emerge from them). Companies such as Citigroup, JPMorgan Chase and Amazon won heated proxy fights at their annual meetings. But activists gained one huge win last spring when BlackRock, the world’s biggest investor, with US$8 trillion under management, caved. It agreed to begin a racial audit in 2022.

It’s no longer enough for companies to form diversity committees or hold inclusion workshops.

But the activists kept pressing. In October – six months after asking regulators to block a racial audit resolution – Citigroup became the first big U.S. bank to agree to a racial audit. (Citi has published back-patting “diversity reports” since 1999, but recently it was fined US$25 million for failing to offer mortgage discounts equitably to all clients.)

Activist shareholders are expected to fight even harder this year. And companies that resist may be on the wrong side of history. A report from New York law firm Olshan Frome Wolosky says U.S. securities regulators generally support expanded reporting and disclosure on environmental, social and governance (ESG) issues.

The report included a sweetener for management: research indicates that “companies that affirmatively adopt meaningful approaches to these issues may not only help progress environmental and societal goals, but may also potentially see improved financial performance.”

In Canada, racial audits tend to be called “diversity audits,” or even “employee wellness” studies. So far, they have been more common in the public, education and not-for-profit sector than in business. But they’re coming, warns governance consultant Richard Leblanc, a professor at York University. He notes that new federal laws hold directors of Canadian companies responsible for more than just the health of their firms. They must also consider the short- and long-term impact of company operations on all stakeholders, including employees and communities. Forget proxy battles: Leblanc predicts activist shareholders will start suing companies that don’t provide full disclosure of their ESG impacts.

Rather than oppose social audits, Leblanc urges companies and boards to embrace and disclose them. Companies that take racial audits seriously will become employers of choice, he says. “You can’t fix what you can’t measure.”

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