When companies face backlash over issues like workplace discrimination or racial bias, many respond quickly — announcing new hiring goals or issuing public statements about their commitment to diversity and inclusion.
But a new study by David Larcker, professor emeritus of accounting at Stanford Graduate School of Business and visiting scholar at the Hoover Institution, along with co-authors from the University of Chicago, Yale, and the University of Washington, challenges the assumption that these efforts lead to lasting internal change.
The researchers pored over nearly 1,300 diversity, equity, and inclusion-related controversies at 315 U.S. public companies from 2008 to 2022, tracking their hiring and retention data and market performance after each incident. Examples of DEI-related controversies include Wells Fargo conducting fake interviews with diverse candidates for roles that were already filled, and Google paying $118 million to settle a gender discrimination lawsuit involving 15,000 female employees.
The study finds that following a DEI controversy, companies increased their hiring of women and people of color by an extremely modest amount — 0.8% on top of a baseline hiring rate of 58%. Firms were somewhat more responsive when controversies received high-profile media attention or triggered negative stock reactions. These small increases occurred slowly, over a two-to-three-year period following the incident.
Moreover, most of the gains occurred in jobs that are typically lower paid: junior and “non-core” back-office positions. While diversity among junior hires rose by 0.9 percentage points, it declined by 1 percentage point among senior hires. Similarly, diverse hiring increased by 1.2 percentage points among “non-core” back-office positions, while it showed no statistically significant change among core business functions.
“Most companies respond at the surface level,” Larcker says. “They modestly increase hiring, but mainly in junior or non-core roles. And when you look at who’s leaving, it’s often the same demographic they just brought in. So, when you net it out, nothing really changes.”
The study also looks at who left companies struck by controversy. It finds that turnover increased among women and people of color, suggesting that even as companies hire more diverse talent, they’re not necessarily keeping them. In fact, netting new hires against departures, overall workforce diversity levels only increased by a modest amount (0.4 percentage points) after a DEI incident.
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The data shows that while companies bring in more diverse people at the bottom, they’re also the ones leaving. That’s a troubling statistic.
Author Name
— David Larcker
“It’s easy to hire at the staff level; it’s much harder higher up the organization,” Larcker says. “And the data shows that while companies bring in more diverse people at the bottom, they’re also the ones leaving. That’s a troubling statistic. It suggests there’s not a real career path — just churn at the bottom of the organization.”
While these internal shifts may seem small, the economic consequences for the sample firms are not.The study shows that stock prices fell by an average of 0.7% in the weeks following a public DEI-related controversy. Over the longer term, affected companies underperformed their industry peers at an annual rate of approximately 3.5% for up to four years. That underperformance could stem from multiple sources, including litigation costs, employee dissatisfaction, reputational damage, or customer backlash.
The consequences extend beyond investors. Following a DEI controversy, employee morale declined: Overall ratings fell and leadership approval dropped in Glassdoor reviews.
Talk Is Cheap
If real change is rare, public messaging is not. The study documents a sharp uptick in diversity-related language across multiple public channels after DEI controversies. Companies were nearly 18% more likely to reference DEI in proxy statements, 16% more likely in corporate social responsibility reports, and 11.5% more likely on social media platforms. They were also more likely to announce formal diversity hiring targets.
However, these disclosures did not correspond with real shifts in workforce composition. The study found no statistically significant relationship between increases in DEI messaging and changes in hiring. This suggests a gap between what companies say and what they do, a phenomenon the authors call “DEI washing.”
“There’s a lot of talk — ‘People are our greatest asset,’ ‘We value diversity’ — but the evidence is pretty thin,” Larcker says. Firms facing a DEI incident are more likely to face another one the following year, suggesting that many have not fully addressed the root cause of the issue.
The study also finds no consistent improvement in external ESG (environmental, social, and governance) ratings following a firm’s diversity remediation efforts. Social scores as measured by S&P, Sustainalytics, and Bloomberg remained largely unchanged, while Refinitiv ratings declined. The lack of improvement suggests there’s no clear sign that companies made any substantive change after a DEI controversy.
Still, a subset of companies did demonstrate real improvement over time. What set them apart? According to the researchers, companies that made meaningful DEI investments — like setting clear goals for representation in core business areas or linking executive pay to diversity outcomes — tended to avoid the sustained stock underperformance seen in peers that responded with little or no action.
Charles McClure, PhD ’18, associate professor of accounting at the University of Chicago Booth School of Business, suggests that gathering employee feedback helps companies understand which policies matter most to their workforce. “Executives want to have the best people working at their firms. If they can determine what truly matters in attracting and retaining high-performing staff, it will only help their bottom line,” he says.
The findings come at a time when DEI programs are facing greater political scrutiny and legal challenges. “Many of the same executives and boards that initially promoted DEI several years ago have recently reversed course and eliminated their DEI programs,” says Edward Watts, PhD ’20, an assistant professor of accounting at Yale School of Management. “Were these companies’ DEI policies beneficial to corporate performance or detrimental? At some level, it seems like companies must admit they were either wrong before or wrong now.”
The evidence suggests that companies might be more adept at promoting DEI initiatives than implementing and committing to them.