16 Jul 2021

Diversity and inclusion policy gaps are increasing corporate compliance risks, study finds

Baker McKenzie and Howlett Brown survey shows two-thirds of companies just paying lip service to diversity

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Global corporations are failing to meet their diversity and inclusion goals due to a lack of collaboration, consistency and action across organisations, exposing them to potential compliance issues, according to a report by Baker McKenzie and Howlett Brown.

The study – Strengthening Corporate Compliance with Diversity and Inclusion – highlighted the key gaps that compliance leaders say are hindering corporate diversity and inclusion initiatives. Most notably, as many as two-thirds of respondents said their organisations are simply paying lip service to diversity and not taking meaningful action. 

Compliance leaders also said their organisations are struggling to apply consistent diversity and inclusion practices and often have inconsistencies in their public promises and actual results, with 67% of respondents flagging a lack of compliance with corporate diversity policies. 

At the same time, respondents say these gaps are increasing corporate risk, with 28% stating that their organisations are vulnerable to litigation over their diversity promises that can’t be measured or achieved and another 68% stating that a lack of diversity within their own compliance teams limits their ability to conduct fair and effective investigations.

Charlene Brown, co-founder and managing director of Howlett Brown, said: “The compliance function is well placed to support organisations and aid in mitigating D&I related risks such as managing mandatory and voluntary disclosures, setting and implementing culturally appropriate policies and expectations and providing training.”

In addition, many diversity programmes are still in their infancy and therefore lack the ‘sophistication and flexibility’ needed to address the issues that such policies can create. Some 71% of diversity and inclusion strategies are less than three years old, with 23% still in their first year, the survey found. Given that lack of maturity, fewer than a third of respondents said they regularly collaborate with counterparts in other departments to advance diversity and inclusion within their organisations.

Against that backdrop, stakeholders are increasing pressure on companies to accelerate their diversity initiatives, with more than three-quarters of respondents saying that investors and shareholders have been focusing more attention on diversity and inclusion over the past year. 

Yindi Gesinde, a compliance and investigations partner at Baker McKenzie, said: “Organisations that assemble diverse teams and create inclusive cultures reap the benefits in business performance. I believe that includes better management of possible compliance and litigation risk. As this connection becomes better understood, leaders recognise the need to be more organised and targeted in their efforts to accelerate progress, including by improving collaboration between functions.”

A number of large corporates are putting diversity measures in place for their panel law firms, with penalties if they are not met. Swiss pharmaceutical giant Novartis agreed diversity and inclusion targets with its new roster of preferred law firm advisers last year, including US giants Latham & Watkins and Kirkland & Ellis, saying it would withhold 15% of their fees if they are not met. In January Coca-Cola unveiled a series of diversity targets for its US advisers, with those failing to meet them facing a 30% reduction in their fees until they achieve compliance, while in May Nokia announced an equity, inclusion and diversity scorecard system to assess its six panel firms.

Chicago-based law firm Jenner & Block also announced earlier this month that it had launched a Culture Risk and Sensitive Investigations practice, focused on helping organisations to understand cultural and compliance issues, including gender and racial biases. New York-based practice co-chair Anne Cortina Perry emphasised that its goal is to enable companies ensure their corporate cultures are “not only ‘compliant’ but healthy, inclusive and productive.” 

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