Diversity starts in the boardroom and the C-suite

Many companies will put diversity, equity, and inclusion (DEI) issues on their agendas for 2022. Increasingly, investors, lenders, customers, employees, and new recruits want to know the extent to which boards and management teams are diverse in terms of race, ethnicity, gender, and sexual identity. These groups increasingly recognize the quantitative and qualitative benefits that diversity offers.

In a corporate boardroom, diversity can enhance the audit committee’s ability to monitor financial reporting. Academic research has found that boards with diverse membership have better financial reporting quality and are more likely to hold management accountable after a poor financial performance. This concept also extends to private companies, where management teams with people from diverse backgrounds and/or functional areas expand their company’s abilities to respond to growth opportunities and potential threats.

On a broader level, getting input on major decisions from people from a wide variety of backgrounds and experience levels helps enhance corporate value. Plus, providing an equitable and inclusive workplace is good corporate citizenship.

How diverse, equitable, and inclusive is your workplace?

A company’s leadership sometimes perceives DEI issues differently than its frontline workers do. Assembling a formal DEI task force can help company leaders get a more objective picture of strengths and weaknesses in these areas.

One of the group’s first tasks should be creating a survey to distribute throughout your organization. Once the responses have been tallied, the task force should meet regularly to discuss the findings and, if necessary, take corrective actions.

Reporting hotlines can also provide insight into DEI issues. In some cases, management may be blind to harassment and discrimination that’s happening on the frontlines by co-workers, suppliers, and customers. Remember, some forms of harassment and discrimination can be subtle. Frank insights from rank-and-file employees, customers, and suppliers can be eye-opening — and discussions about real-life incidents can lead to awareness and change.

How effective is your DEI program?

Another critical task for the diversity-and-inclusion task force is developing a list of quantitative metrics — such as recruitment, retention, and pay rates for minorities and women — to help track progress over time. Historical results can be used to benchmark your company against competitors and establish goals for the future.

Your company can also make DEI surveys or focus groups part of its annual review process. To encourage participation in DEI initiatives, consider tying part of executive leadership bonuses to achieving quantifiable goals. Alternatively, if goals aren’t met, evaluate why and whether the program may need to be redesigned to be more effective.

Conducting DEI surveys creates an expectation that management intends to implement changes to become more diverse, equitable, and inclusive in its business practices. So, it’s important to communicate with employees about the company’s DEI initiatives. These communications should showcase the company’s strengths and the steps it has taken to improve weaknesses.

In addition to providing footnote disclosures in their financial statements, some companies issue separate DEI reports to highlight improvements made during the current year and other additional planned DEI initiatives.

The use of an outside consultant can make these reports more objective and professional. Plus, outsiders can conduct training programs for managers and employees, along with providing guidance on DEI best practices that have been successful at other companies.

Diversity counts

Building an effective DEI program doesn’t happen overnight. It takes time, attention, and a commitment from the company’s leadership. Contact me to discuss best practices and how your financial reporting process can be used to highlight your progress in these areas.

© 2021 Kraft CPAs PLLC