Racial Equity Audits: The New ESG Frontier
Investors and stakeholders are paying greater attention to the environmental, social and governance (ESG) impacts of public companies. Increasingly, they are also asking, if not demanding, that companies take into account issues of civil rights and social justice, often through racial equity audits.
Not only do these audits inform shareholders of their investments, but they can help companies measure performance in terms of achieving civil rights, social justice, or other goals related to diversity, equity, and inclusion ( DEI). Significantly, studies to have found that promoting such goals can increase profits and competitive advantage. Conducting racial equity audits can also have positive impact on reputation for companies.
At the request of a racial equity audit increase, companies will be required to critically examine the impacts of their current activities, policies and practices on communities of color. We encourage companies to seriously consider performing full, privileged or confidential internal assessments as soon as possible to identify areas of opportunity and ensure processes are working as intended.
Then, if a request or request to conduct a racial equity audit is subsequently filed by a shareholder group or other external stakeholder, the results of which will likely be made public, the company has visibility into the key issues and data gaps, as well as a promising head start on the path to a successful outcome.
Recent History of Racial Equity Audit Requests
Since 2016, several public companies have undertaken civil rights audits, including, for example, Airbnb (following allegations from guests who felt discriminated against by hosts), Facebook (at the request of civil rights leaders and politicians), and Starbucks (after an incident at a Starbucks in Philadelphia raised questions about implicit biases in retail).
In 2020 and 2021, at least 12 public companies received shareholder proposals to conduct a racial equity audit from pension funds and other shareholder supporters.
Citigroup Inc. (Citi), Wanted “no action” relief of the Securities and Exchange Commission to exclude the requests from its 2021 proxy statements, a request which was denied. Citi then asked shareholders to reject the resolution requesting such an audit. A significant number of shareholders, but not the majority (38%), voted in favor of conducting the audit. In October 2021, Citi then engaged in carrying out the audit.
As far as we know, CoreCivic Inc., the nation’s largest private owner of correctional, detention and residential rehabilitation facilities, was the only company to receive a request for a racial equity audit in 2020 and to accept without seeking regulatory intervention, attempting to mount a vote against the proposal or engage in lengthy negotiations with the sponsoring shareholder.
Our firm carried out the audit of CoreCivic, and the full report was posted on the CoreCivic website in March.
Also last month, shareholders of Apple Inc. approved a proposed civil rights audit to examine the company’s impacts on women and minority employees after Apple’s board opposed the proposal. The measure is not binding, so it remains to be seen whether the company will adopt the recommendation. And Amazon on April 14 said in a proxy statement that it would be subject to an independent racial equity audit.
The Racial Equity Audit Process
As the published reports clearly show, these audits are time-consuming and labor-intensive. No two companies or audits are the same. So, from the outset, companies need to consider the objective and determine the scope of the audit.
For example, does the company analyze the implications of a particular practice, address a specific incident or series of incidents, or conduct a comprehensive review of policies and practices in the whole company? Next, which operations and which stakeholders will the auditors consider? Will policies and practices be reviewed to ensure compliance with applicable local, state and federal laws and regulations? Companies also need to think about what internal and external information is available and should be taken into account?
The cost and duration of an audit will depend on the size of the business, the current state of its data management systems, and the answers to these and other guiding questions.
Take action on recommendations
At the end of an audit, a company may discover gaps in data collection or retention processes, that DEI or other values or commitments may not be intentionally or consistently incorporated into leadership priorities at the time. company-wide, or that external processes or procedures (for example, government contracts or requirements) impede initiatives or results. Such findings can have a negative impact on shareholder value.
Alternatively, a company may find that it meets or exceeds certain metrics and targets, which can have a positive impact on shareholder value. Management will need to address the operational implications of the work and recommendations from the auditors which could include, for example, periodically conducting a comprehensive culture survey, rolling out conscious inclusion training at all levels of ’employees ; modify complaint or problem resolution processes, perform pay equity analyses, etc.
While adopting and implementing some recommendations is not onerous, implementing others can be costly and time consuming. Some recommendations may exceed current industry practice. Management will need to weigh relevant considerations to determine the best ways to move forward.
Now more than ever, as investors and other stakeholders pay greater attention to ESG and DEI issues, companies should consider reassessing their current policies, practices, and impacts on communities of color.
While companies discounting fairness concerns may find themselves target by investors and proxy advisory firms, outside advocacy groups, or even federal or state government entities, those who take a proactive approach or otherwise agree to conduct such audits can help advance civil rights, justice social and DEI issues and see improved financial performance, increased shareholder value and positive reputational impacts.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Valecia M. McDowell is Co-Chair of White Collar Practice, Regulatory Defense and Investigations at Moore & Van Allen in Charlotte, North Carolina
Elena F.Mitchell is a senior partner at Moore & Van Allen.
Both were part of the team that conducted CoreCivic’s racial equity audit.