BofA: Lack of diversity within companies is costing trillions

Diversity, equity, and inclusion (DEI) efforts have become crucial in shaping the cultures of companies around the world. With DEI considered to be a part of the broader environmental, social, and governance (ESG) criteria that a multitude of global firms now make an effort to adhere to, many job seekers today cite diversity as being critical in how and where they look for work.

According to a recent report published by Bank of America (BAC) Global Research, a lack of diversity within American companies comes with a hefty price tag.

“Is it $70 trillion in foregone economic output? Or $23 trillion in USD GDP? Or $172 trillion in lifetime earnings? No matter how you measure it, lack of diversity, equity and inclusion (DEI) limits national economies and reduces GDP,” the report reads.

For companies, BofA said that a lack of diversity leads to less innovation, weaker revenue and cash flows, and lower employee retention. As for individuals, a lack of diversity causes detriments to educational outcomes, physical and mental health, lifetime achievement and earnings, and wealth passed down across generations.

"DEI needs to be a strategic priority across a company, with leadership buy-in and participation," BofA Head of ESG for Global Fixed Income Kay C. Hope told Yahoo Finance. "There are a lot of things that U.S. companies can do to improve: recruiting from a wider range of institutions/sources, reviewing pay and promotion practices, and using mentoring initiatives."

FILE- The Fearless Girl bronze sculpture looks towards the New York Stock Exchange from its roadside perch in New York on Aug. 25, 2020. The days when only men sat on U.S. corporate boards are nearly extinct. But the pace at which boards are moving toward gender parity has slowed, and it'll likely be a decade before they’re evenly split (AP Photo/Bebeto Matthews, File) (ASSOCIATED PRESS)

Hope also cited more inclusive benefits such as parental leave policies, insurance coverage, and flexible working allowances as being steps towards more effective DEI in the workplace.

"And incorporating diversity into planning would help — don’t plan major events on key holidays (that includes Eid-al-Fitr, Rosh Hashanah, Yom Kippur and others — not just Christmas and Easter)," she added.

CFA Institute defines diversity as “the spectrum of human attributes, perspectives, identities, and backgrounds,” while inclusion is “a dynamic state of operating in which any individual or group can be and feel respected, valued, safe, and fully engaged.”

CFA Institute emphasized the importance of pursuing diversity in the workplace, pointing to a McKinsey & Co. study which also supported the business case for inclusive corporate cultures — McKinsey found that companies in the top quartile of ethnic and cultural diversity outperformed those in the fourth by 36% in terms of profitability in 2019, up from 33% in 2017 and 35% in 2014.

“Companies with higher ethnic diversity are more likely to beat industry average financial returns. Greater acceptance of LGBTQ+ individuals is linked to gains in national wealth. Underemployment of the disabled has a knock-on effect for families, society and GDP," BofA's report reads.

‘Box ticking doesn’t cut it’

Hope noted that just because a company touts its inclusive policies does not mean that its employees’ perceptions of the firm will reflect them. BofA stressed the importance of affecting corporate culture and values in companies’ DEI pursuits.

“Company culture and values are the biggest driver of overall employee satisfaction — more than compensation,” the report reads. “Box ticking alone doesn't create culture — our analysis shows that simply having DEI policies has no bearing on employees' perception of culture and values.”

In addition to diversity and inclusion efforts with regard to race and ethnicity, the report found that increased gender diversity also yielded similar business benefits. BofA observed a link between greater gender diversity and higher one-year forward return on equity. The S&P 500 (^GSPC), consumer discretionary, consumer staples, and technology sectors demonstrated some of the highest proportions of women in board positions, though the energy sector is lagging.

According to the report, the proportion of women on American executive boards is around 30% for the S&P 500 and 24% for small caps. The U.S. lags slightly behind Europe in this regard — women comprised 36% of the average European listed large-cap company executive board in 2021. BofA said that Europe, like the U.S., sees a link between improved gender diversity and higher future return on equity.

Hope also commented on other labor force dynamics seen in recent years that have affected women.

"Women have been more likely to hold frontline roles and more likely to see their roles disappear in restaurants, food service and hotels – where working from home isn’t an option," she said. "The pandemic is fueling even greater disparities between advance and developing countries as an additional 47 million women are expected to fall into extreme poverty."

Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV

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