Diverse perspectives key as DEI reset deepens
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The opening months of 2025 have seen increased political and regulatory pressure for investors and issuers to back away from diversity equity & inclusion (DEI) programs and policies, hastening the pace of retreat.
Anti-DEI activism had already been gaining traction before the U.S. presidential election – with shareholder proposals on the topic followed by the more effective public pressure campaigns led by Robby Starbuck targeting consumer brands.
In 2023, the Supreme Court’s ruling concerning race-conscious college admissions programs at Harvard raised questions about the impact on the corporate sector, while a late-2024 decision by the United States Court of Appeals to strike down Nasdaq's board diversity rules was an early sign that board diversity might not be such a priority in the coming years.
However, DEI programs and policies faced a new and unprecedented level of scrutiny at the turn of the year when the new Trump administration issued an executive order (EO) and directed federal agencies to “relentlessly combat private sector discrimination.” Among other things, the EO directed the attorney general to target large companies and institutions with criminal and civil lawsuits to halt DEI programs banned by the administration.
That has unleashed new threats from multiple agencies. In March, the Federal Communication Commission opened an investigation into The Walt Disney Co., which has clashed with politicians over ESG issues in the past.
While the orders have driven many boards to audit the risk profile of corporate DEI programs, the targeting of DEI initiatives of government funding recipients is also considered significant. This means parties would be required to agree that a violation of a federal antidiscrimination law (such as maintaining a DEI program) is material to the government’s decision to pay under the FCA, as a recent report on the issue by Foley & Lardner, explains.
A ripple effect
Since the EO was unleashed, there has been a ripple effect in the stewardship community, with proxy advisory firms, large index funds and others scrambling to review or change their position on DEI. While not explicitly mentioned in the EO, it would not have been a large leap for regulators to target private sector asset managers.
Referencing the order in a February statement, proxy advisor Institutional Shareholder Services (ISS) said that it has put an “indefinite halt” on the consideration of diversity factors in making vote recommendations with respect to directors at U.S. companies and shifted its approach to issue verdicts based on other areas within its benchmark including independence, accountability and responsiveness.
The Big 5 paused to take stock, with BlackRock making changes to the use of DEI terminology in its 2024 annual report, removing mention of its “three pillar DEI strategy” and Vanguard removing a line from its policy which had stated that as well as having diversity of tenure and skills, boards should also, at a minimum, “represent diversity of personal characteristics, inclusive of at least diversity in gender, race and ethnicity.” Fidelity Investments followed suit removing mention of its diversity and inclusion focus in regard to its workforce from its 2024 annual report. State Street Global Advisors also altered it policy to remove a target of 30% female board members at key indices and wording that suggested it would vote against S&P 500 or FTSE 100 boards without at least one ethnic or racial minority director. Completing the Big Five reset, Morgan Stanley removed an entire section on diversity and inclusion from its 2024 annual report.
The fight moves to proxy season
Shareholder proposals seeking to overturn DEI programs from groups such as the National Center for Public Policy Research (NCPPR) and the National Legal and Policy Center (NLPC) have garnered very limited support from the wider investor base. Anti-DEI proposals that have gone to vote at the 2025 annual meetings of Costco Wholesale, Apple and Deere & Company have been met with between 97% and 99% opposition from the votes cast.
However, Stefan Padfield, executive director of NCPPR’s free enterprise project, told DMI that it was “incorrect” to characterize the votes on anti-DEI proposals as “being representative of an investor sentiment in favor of DEI,” claiming that large asset managers and proxy advisors are now opposed to all social-related proposals.
However, Padfield says the pursuit to dismantle DEI remains a challenge despite the changing environment with only a handful of targeted companies having backed away. “I tend to say we have taken Normandy beach, which is tremendous and should be celebrated, but the war is far from over.”
The list of companies to have rolled back initiatives includes the Ford Motor Company, Caterpillar, Deere, Harley-Davidson, Meta Platforms, Alphabet and Walmart, while big brands like Apple and Costco have stood behind their DEI policies.
Meanwhile, shareholder advocates for maintaining DEI programs have argued that there has been a broad misrepresentation of the intention of such programs.
“What we are looking for is to ensure that there is no bias or discrimination that would hold back a strong candidate,” Meredith Benton, who leads non-profit advocacy organization As You Sow's workplace equity program, told DMI.
As You Sow has advanced 11 DEI-related proposals so far this year which have either called for reporting on the effectiveness of DEI policies and practices or asked companies that have backed away from DEI to disclose the process they undertook before making that decision. It has said that four had been withdrawn following agreement with the target company.
CEO of the non-profit group Andrew Behar has insisted that opponents of corporate diversity programs were forcing companies to “underperform.”
In a 2023 study, the shareholder advocacy group analyzed 1.5 million data points measuring gender and race from 1,641 public companies over five years. "We found an undeniable statistically significant correlation across sectors that teams with more diverse management outperformed teams with less diversity on eight financial metrics," said Behar.
For now, setting specific targets for board diversity seems to be out of the question. But investors hope diversity of thought will remain a tenet of board composition. As State Street put it in a March policy update, "We believe effective board oversight of a company’s long-term business strategy necessitates that diversity of backgrounds, experiences, and perspectives, which may include a range of characteristics such as skills, gender, race, ethnicity and age.”
“By having a critical mass of diverse perspectives,” the asset manager continued, "boards can benefit from the potential for innovative ideas and more robust conversations about a company’s strategy.”
