Risk mitigation amid shifting DEI priorities

June 2025  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

June 2025 Issue

Although diversity, equity and inclusion (DEI) policies have existed in some form since the 1960s, they have recently become a lightning rod for attention and controversy. Since the early 2020s, there has been a marked pushback and demonisation of DEI policies and many of the companies that implement them. The debate around DEI as a concept and its value to companies and societies has undoubtedly reached new heights since Donald Trump’s re-election in November 2024.

Gains from embracing DEI

While DEI policies have been portrayed in some circles as a largely negative and, in some cases, sinister force in modern corporate life, DEI initiatives are often cited as being at the heart of better financial performance by companies. The broader DEI business case is compelling: companies that embrace these values consistently outperform their peers, attract top talent, foster innovation and gain a competitive edge.

Indeed, research consistently shows that diversity at all levels of an organisation leads to better financial outcomes. According to McKinsey & Company, companies in the top quartile for gender diversity on executive teams are 21 percent more likely to outperform on profitability, and those in the top quartile for ethnic diversity are 33 percent more likely to have industry-leading profitability.

Such profitability directly results from diverse teams providing varied perspectives, which drives better decision making and more innovative solutions. According to Boston Consulting Group, firms with above-average diversity in their leadership teams generate 19 percent more innovation revenue, primarily because diverse teams are better equipped to understand and respond to the needs of a diverse customer base, which is increasingly important in a globalised market.

There are certainly significant advantages to be gained from having robust DEI policies when it comes to attracting and retaining employees. Employees who feel valued and included are likelier to be engaged, productive and committed to their organisation. Research shows that a sense of belonging can increase employee engagement. Additionally, DEI initiatives can reduce turnover rates; companies with strong DEI practices often see a reduction in turnover risk. This not only saves on recruitment and training costs but also ensures that companies retain their top talent.

Support for DEI amid political challenges

According to a Morning Consult survey released in January 2025, 82 percent of business executives think diversity initiatives are critical to their business strategies, and 67 percent of respondents said they expect these efforts to become more important in the coming years. The survey also showed nearly half of executives said their primary reason for implementing diversity initiatives is to “improve business performance”, acquire better talent (43 percent) and increase creativity (38 percent). Only 2 percent of business leaders surveyed said such initiatives are not important.

Although some firms have scaled back their DEI efforts, many companies do not plan to remove them entirely. A December 2023 survey of nearly 200 US chief human resources officers from The Conference Board showed none of the respondents planned to reduce their DEI initiatives, policies or programming. Nearly two-thirds expect to focus their efforts on attracting diverse employees.

Despite the prevailing political winds, there remains strong support for DEI policies. According to Pew Research, 56 percent of Americans say focusing on DEI is a good thing, with only 16 percent saying it is a bad thing. Women are more likely than men to value DEI at work – only 9 percent of women thought it was a bad thing. More than two-thirds of Black (78 percent), Asian (72 percent) and Hispanic (65 percent) workers say that focusing on DEI at work is a good thing.

Despite the growing opposition to the DEI industry, there are suggestions that it is still projected to experience significant growth in the coming years. According to Business Wire, prior to the election, the size of the global DEI market was estimated to reach around $24.4bn by 2030, growing at a compound annual growth rate of approximately 12.6 percent from its 2022 value of $9.4bn. This growth was expected to be driven by increasing awareness of the importance of diversity and inclusion in the workplace, growing regulatory pressures and stakeholder demands for more diverse representation, and burgeoning recognition of the business benefits linked to DEI practices, such as improved employee morale and innovation.

Future outlook for DEI under the Trump administration

Despite the financial, reputational and societal benefits of DEI, the tide has been turning, particularly in the US, where critics argue that DEI programmes are discriminatory and attempt to solve racial discrimination by disadvantaging other groups, particularly white Americans. The Trump administration has taken action to remove DEI programmes from the federal government and beyond.

The Trump administration has issued multiple directives targeting DEI activities both within and outside the federal government, with announcements coming in quick succession from various federal offices. Still in its early stages, the second Trump presidency has been notable for its frequent use of executive orders, which have sought to ban efforts such as ‘environmental justice programmes’, ‘equity initiatives’ and DEI considerations in federal hiring.

Even before the election, changes were underway in the US. Emboldened conservative organisations such as the American Alliance for Equal Rights (AAER) had begun initiating several legal challenges against certain corporate DEI practices, drawing on provisions of the Civil Rights Act. The direction under the second Trump administration is becoming clearer.

In a further demonstration of the Trump administration’s hostility to DEI practices, in early February, Pam Bondi, attorney general, issued a series of memos to various divisions of the Department of Justice (DOJ), noting that the DOJ will take action to enforce the Trump administration’s efforts to eliminate illegal DEI initiatives, as outlined in the Executive Order ‘Ending Illegal Discrimination and Restoring Merit-Based Opportunity’.

According to the memo, the DOJ’s Civil Rights Division will be tasked with investigating, eliminating and penalising illegal DEI “preferences, mandates, policies, programmes, and activities in the private sector and in educational institutions that receive federal funds”. By 1 March 2025, the Civil Rights Division and the Office of Legal Policy are to submit a report containing recommendations to “encourage the private sector to end illegal discrimination and preferences” related to DEI.

The report is also supposed to identify the most “egregious and discriminatory DEI and DEIA practitioners in each sector of concern”. The report must include a specific plan to deter DEIA programmes in the private sector, including proposals for both criminal investigations and up to nine potential civil compliance investigations of publicly traded corporations, large nonprofit corporations or associations, foundations with assets of $500m or more, state and local bar and medical associations, and institutions of higher education with endowments over $1bn.

Additionally, the memo signals that the DOJ’s Civil Rights Division will investigate and pursue enforcement actions against educational institutions with DEIA programmes that receive federal funds.

Perhaps the largest takeaway from this memo is the implication that some private companies may face criminal penalties for DEI initiatives. While the executive orders do not explicitly mandate changes in private industry, they encourage changes to DEI practices in the private sphere and suggest a renewed wave of lawsuits by groups that have already targeted DEI in the private sector. These EOs are anticipated to reshape DEI in the private sector in certain respects.

Undoubtedly, the direction of travel does not appear to be a positive one for DEI programmes in the US. The DOJ’s intensified scrutiny of DEI initiatives (both civil and criminal) indicates a significant shift in federal enforcement priorities, a shift which poses heightened legal risks for corporations, federal government contractors and grant recipients, and federally regulated industries, among others. There is an increasingly hostile outlook toward DEI initiatives across many facets of corporate life, and while some experts are confident DEI efforts will continue, they may be labelled differently or not articulated publicly at all.

Balancing DEI goals with political realities

In light of recent events, companies have already started reassessing the legality of their DEI programmes and hedging against potential lawsuits for so-called ‘reverse discrimination’. Furthermore, many companies have begun to scale back their DEI efforts and remove references to DEI targets and programmes in their annual reports, especially those related to race. Others have cited diversity initiatives as a risk factor in their recent 10-K filings, reflecting a broader trend of reevaluating the public presentation of these initiatives due to legal and political pressures.

Several prominent US businesses, including Major League Baseball (MLB), Paramount, Bank of America and Coca-Cola, among others, are rolling back their DEI policies, reflecting a new normal in American corporate life. Ultimately, the bottom line will do much of the talking for many organisations.

However, it is important to note that DEI programmes are not currently illegal. A coalition of 16 state attorneys general issued legal guidance on 13 February noting that DEI is lawful as long as it is done in a legally compliant, narrowly tailored manner. Furthermore, DEI is not affirmative action and is not illegal when federal laws, such as Title VII employment protections, are applied.

That said, it is important for organisations to reassess their programmes to ensure compliance when upholding inclusive workplace initiatives. Companies should take time to evaluate their existing DEI activities through a risk-based approach that considers various factors: continuing obligations under US federal and state anti-discrimination statutes and regulations, DEI-related legal obligations and stakeholder expectations in other jurisdictions that may apply to the organisation’s global operations, and the enforcement risks under the new directives.

Given that Ms Bondi is already considering potential criminal and civil enforcement actions related to DEI policies, companies must urgently begin reviewing their internal DEI policies and programmes to ensure they are consistent with federal law and DOJ guidance and that any certifications made to the government about their DEI policies are accurate. Hiring and employment policies and practices must also be examined to ensure compliance with all federal immigration laws and record-keeping policies.

Beyond these measures, private companies should engage outside counsel and consultants to conduct legal audits and legal risk assessments to determine if their policies and practices could be subject to legal risks in the new climate. They should also audit and assess any DEI commitments made to internal and external stakeholders.

Private companies that are federal contractors must take several steps amid these shifting DEI priorities. Not only must they eliminate DEI focus from their trainings or materials, they must also eliminate DEI-related offices and positions, terminate equity-related action plans, programmes, and contracts, and remove DEI-related performance requirements. Additionally, federal contractors and subcontractors must submit certifications ensuring they are not running DEI programmes that constitute illegal discrimination or preferential treatment. Companies that continue to engage in DEI practices in violation of the new rules could be exposed to significant legal risks, including False Claims Act liability.

Companies may wish to replace some DEI terminology with other phrases related to talent development and workplace culture. Scaling back commitments or shifting DEI efforts behind the scenes may also be attractive. Through careful strategising, more deliberate execution of DEI policies and a move toward less visible obligations, some organisations are preserving aspects of their DEI policies.

However, companies must also look beyond the short-term goals of the new administration. It may be unwise to abandon DEI initiatives entirely based purely on the four-year political cycle in the US. It is incumbent on companies and their leaders to take a longer and more balanced approach to DEI initiatives and their place within organisations.

That being said, it may be foolhardy for companies to fly too strongly in the face of prevailing political winds. With DEI attracting significant ire at present, companies must take steps to ensure they are protected against potential enforcement activity. While the case for DEI remains strong, political expediency must be a factor in approaches to company policy and risk appetites.

© Financier Worldwide

BY

Richard Summerfield