Chris Walker: Black livelihoods matter

George Floyd will forever be a symbol of this moment in history. His appalling killing live on camera has electrified the debate about the underlying black American experience. The burden of this Covid-19 crisis has not been born equally, and, under the pressure it exerts, the consequences of years of neglect are playing out. Like so many others, Floyd had lost his job as a restaurant bouncer due to the ‘stay at home’ order in his state. There has been no shortage of worthy sounding corporate statements in recent weeks, mourning his loss, and calling for change. But how much of this is “diversity-washing?” Not all companies are doing well, and there has never been a better time for investors to tell them so.

Companies have rushed to outdo each other in recent weeks with their expressions of sudden solidarity with the ‘Black Lives Matter’ movement. The CEO at Alphabet (Google’s parent company) rightly stated “our black community is hurting, and many of us are searching for ways to stand up for what we believe,” while Facebook’s CEO Mark Zuckerberg pledged to “help in this fight.” Twitter and Square announced company-wide “racial diversity” holidays on June 19th (commemorating the day US slavery was belatedly abolished in 1865). Some companies have gone further, backing up the good words with dollars. Comcast, Nike and Warner Music all announced donations to advance racial justice, and Bank of America pledged $1 billion over four years.

Corporate America is responding to a real shift in popular attitudes. The percentage of the US population who consider race as “a big problem” has soared from 50% to 75% (according to a recent Monmouth University poll). Proctor & Gamble, with its finger on the pulse, has been running an advertising campaign “Embracing the moment.” This urges white people to action, stating “not being racist is not enough.”

Well how true that is.  

America has unfinished business. The evidence is overwhelming – statistics show an urgent need for change. The recent “overshooting” on Wall Street was sparked by a surprisingly good unemployment number. Instead of rising further in May, as expected, US unemployment fell – from 14.7% to 13.3%. Great news, but not for everyone. Unemployment for white workers fell to 12.4%, but for black workers it actually rose to 16.8%. Before Covid-19, black unemployment had been falling, but even then it was still markedly higher than white unemployment. 

Even those lucky enough to be in employment experience different outcomes. With classic timing, the Economic Policy Institute published analysis showing black men are paid only 71 cents on the white male dollar, and black women even less (64 cents). When it comes to savings and assets, the numbers are also shocking. In 1968, a typical middle class black household had $6,674 in wealth compared to $70,786 for the white equivalent (according to the historical Survey of Consumer Finances – inflation adjusted). In 2016, the latest year for which we have figures, the gap was even larger. $13, 024 for black households versus $149,703 on average for white.

America simply isn’t working for African Americans.

It is high time companies took action to address these inequalities. Many of those companies making the most carefully crafted sensitive statements have unresolved issues themselves. Whilst Facebook has donated $10 million to working on racial justice, at its May 27th AGM it faced a rebellion by 28% of shareholders demanding a breakdown of median pay gaps by race and gender. It is claimed Facebook has only 4% of employees who are African Americans, and that number reportedly falls to 3% amongst senior leadership (the number is 13% for the population as a whole). Other Silicon Valley companies allegedly have similarly low proportions (Google, Twitter, Intel, and Microsoft). The American Civil Liberties Union attorney called Amazon’s support for racial justice “utterly hypocritical” in the light of their facial ‘Rekognition’ technology. The ACLU tweeted that this “supercharges police abuse.”  

Of course, we cannot expect corporates to do all the heavy lifting on social justice without help from government. To be fair to Amazon they have now suspended “Rekognition” sales for one year arguing “government should put in place stronger regulations to govern the ethical use of facial recognition technology.” And it is for government, not business, to address the failure of the US education system. Business leaders can point the finger of blame at the racial differences that have become entrenched earlier in the US educational system. A think-tank I once sat on found that, with diversity, issues in education start very early, as young as three. But even adjusting for education there is a serious problem. The Economic Policy Institute paper shows a higher unemployment rate for blacks with a bachelor’s degree (3.4% versus 2.2% for whites) or even a higher degree (2.3% vs 1.7%).

Natasha Lamb, the managing partner at Arjuna (the Boston based shareholder advisor behind the Facebook resolution) summed up the situation well recently: “if you take an honest look at Corporate America, outside those glossy diversity reports, structural bias for women and people of color remains as entrenched as ever.”

So what can be done? Preaching won’t always get results. The Financial Times’s open letter to CEO’s published on June 9th scolded business leaders “you do not have much to show when it comes to ….your top leadership team,” and contained many worthy arguments for “doing more than taking a compliance approach to diversity.”  But it missed out the most important one. Diversity pays.

McKinsey has done a lot of work in this area. In their recently published paper “Diversity Wins,” they point out that companies in the top quartile of gender and ethnic diversity outperformed those in the bottom quartile by 36 % in terms of profitability. They did identify progress, driven by industry leaders. They found representation of ethnic minorities in US teams up from 7% in 2014 to 13% in 2019. But the experience varied widely. In the cohort of companies they term “fast movers” companies have increased their level of diversity from just 1 per cent in 2014 to 18% in 2019. At the other end of the scale are those termed “laggards,” where they fund no ethnic representation at all (and incidentally only 8 % female executives). McKinsey note that laggards underperform their industry median in profitability by some 40%.

This is the strong case which we as investors can make. We need to target those laggards. There is commercial benefit to be had in improving corporate diversity as well as social. More diverse management teams are less susceptible to ‘group-think,’ more open and more innovative.  

There is no need for sainthood. Different executives with different “compasses” is how businesses win.

Christopher Walker is a writer on business and politics. He sat for several years on the asset allocation committee of a major asset manager.