Costco Wholesale faces an upcoming proxy battle brought by the National Center for Public Policy Research (NCPPR), challenging its diversity, equity and inclusion (DEI) program.
The company board of directors announced it stands firm on the company’s DEI initiatives. “Our success at Costco Wholesale has been built on service to our critical stakeholders: employees, members and suppliers. Our efforts around diversity, equity and inclusion follow our code of ethics,” it stated and urged stockholders to vote against the NCPPR proposal. Voting will take place on January 23.
Now Costco, the nation’s third-largest retailer after number one Walmart and number two Amazon, is embroiled in the politically and emotionally-charged DEI controversy as calls for a Costco boycott are beginning to emerge, according to Newsweek.
Anti-DEI crusader Robby Starbuck, who claims victory in getting Walmart, not only the largest retailer but the nation’s largest private employer, to roll back its DEI initiatives, posted on X:
“For now I suggest conservative consumers find other places to spend their money if Costco is so dedicated to doubling down on DEI. If they’re smart, Costco will do right by their shareholders and change before we turn our attention to them.”
Risk Assessment Requested
NCPRR is making a simple and straightforward proposal: “to conduct research and publish a report on the risks to the Company maintaining its current DEI (including ‘People & Communities’) roles, policies and goals.”
This is hardly an unreasonable request following last year’s Supreme Court ruling that found Harvard University’s race-based admissions policies violated the 14th Amendment.
While that ruling didn’t specifically affect business employment and hiring practices, it raised the threat of future legal battles aimed at corporate DEI programs.
Dialing DEI Back
In addition to Walmart, other companies are reassessing their DEI programs. Ford Motor Company, Harley Davidson, Toyota, Boeing, Tractor Supply, Molson Coors, Brown Foreman, John Deere, Microsoft, Southwest Airlines, Home Depot, Lowe’s and Caterpillar are among the major corporations that have dialed back DEI initiatives.
Their prudence is warranted since the business case supporting DEI programs and their ideological underpinnings is losing ground as more research emerges.
Nasdaq Board Diversity Rule Vacated
For example, in early December, a Federal Court vacated the Securities and Exchange Commission’s (SEC) order that initially approved a proposed Nasdaq board diversity rule.
The rule, which was never implement due to legal challenges, would have required those listed on the exchange to include at least two directors who are “diverse,” including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ.
Harvard Law Professor Jesse Fried took issue with the basis of Nasdaq’s board diversity claims:
“Nasdaq cannot cite any high-quality study showing that board gender or ethnic diversity boosts returns, because there has been none. In fact, there is a sizeable body of academic work reporting the opposite results: diversifying boards can harm financial performance,” he posted on the Harvard Law School Forum on Corporate Governance.
The SEC could appeal that ruling, though with the Trump administration taking office later this month, it is unlikely to do so.
Business Or Belief?
Nonetheless, Costco opposes studying the company’s DEI program and accuses NCPRR of having a “broader agenda” to abolish its diversity initiatives rather than reducing risks to the company and its stockholders.
“We believe that the proponent’s request for a study reflects a policy bias with which we disagree and that further study and reporting would not be an efficient use of Company resources,” the board explained.
Stefan J. Padfield, JD, director of the Free Enterprise Project at the National Center for Public Policy Research, doesn’t deny his organization’s opposition to DEI.
“We oppose DEI because corporate diversity initiatives are race-discrimination initiatives and institutionalize, among other things, race discrimination,” he shared with me.
“They expose companies to legal and reputational risks. Thus, our broader goals are perfectly consistent with value-maximization goals of our fellow shareholders,” he continued.
Risks Real
Asking Costco to objectively and rigorously study the risks associated with its DEI policies and practices is compelling. NCPPR’s proposal cites the $25.6 million judgment against Starbucks after a Federal Court found race discrimination played a part in the firing of a white former Starbucks regional manager.
Given Costco’s reporting on the makeup of its 310,000 employee base, NCPPR figures it has at least 200,000 employees who might claim illegal discrimination because they are white, Asian, male or straight, resulting in similar costly judgments if “only a fraction of those employees were to file suit.”
“Simply asking shareholders to trust the status quo at Costco is insufficient,” Padfield said. “This is a rapidly changing landscape in terms of law, regulation and market sentiment and shareholders accordingly have good reason to ask for a review of practices, legal advice and managerial information gathering and processing.”
More Data, Not Less
Amazon recently completed such a two-year study conducted by the law firm Paul, Weiss, Rifkind, Wharton, and Garrison, which identified areas of improvement and gave Amazon confidence to continue its DEI program.
One suspects Costco’s board doesn’t believe its own program would bear such scrutiny. “The report requested by this proposal would not provide meaningful additional information to our shareholders and the Board unanimously recommends a vote AGAINST this proposal,” it stated.
Yet businesses, especially those of the size and reach of Costco, make decisions based on data. How can a responsible corporate board and executive leadership not want more information, rather than less, on which to make major strategic decisions related to far-reaching corporate employment practices?
What shareholder wouldn’t demand the company justify its position as recent research and rulings are turning against DEI orthodoxy and other companies are dialing back their previous initiatives?
As W. Edwards Deming famously said, “In God we trust. All others must bring data.”
Adopting A Learning Orientation
In a seminal Harvard Business Review article, “Getting Serious about Diversity: Enough Already with the Business Case,” Robin Ely, Harvard professor of business management, and Morehouse College president David Thomas stated:
“Leaders may mean well when they tout the economic payoffs of hiring more women and people of color, but there is no research support for the notion that diversifying the workforce automatically improves a company’s performance.”
They argue for business leaders to adopt a “learning-orientation” to measure the real-world effectiveness of such programs. “To make real progress, people – and the organizational cultures they inhabit – must change. But instead of doing the hard work involved, companies have generally stuck with easier, more limited approaches that don’t alter the status quo.”
It appears Costco is not ready to step up to Ely’s and Thomas’ “learning-and-effectiveness approach” to put its DEI program under the microscope, like Amazon, to find out where it’s working and where it’s not, so appropriate changes can be made.
Diversity’s Benefits Lacking
What’s to fear by Costco examining its DEI policies and practices? Significant good might come from it.
“The problem is that nearly 25 years later, organizations have largely failed to adopt a learning orientation toward diversity and are no closer to reaping its benefits. Instead, business leaders and diversity advocates alike are advancing a simplistic and empirically unsubstantiated version of the business case,” Ely and Thomas wrote.
“They misconstrue or ignore what abundant research has now made clear: Increasing the numbers of traditionally underrepresented people in your workforce does not automatically produce benefits. Taking an ‘add diversity and stir’ approach will not spur leads in your firm’s effectiveness or financial performance.”
Diversity Is A Moral Imperative
One can argue that if Costco were to adopt NCPPR’s proposal for a study and found significant benefits from its DEI policies, it would be a major step forward for the company and the business community at large.
Ely and Thomas stress the moral imperative for diversity in the corporate culture, calling on leaders to “embrace a broader vision of success that encompasses learning, innovation, creativity, flexibility, equity and human dignity.”
However, they find businesses by and large haven’t realized diversity’s full potential. If Costco believes in what it says and can prove it, it would be a case study in doing DEI right that other business leaders would gratefully follow.
Slim Chances Of Success
Costco is steadfastly holding to its current policies founded on its code of ethics. “Our focus on diversity, equity and inclusion is not, however, only for the sake of improved financial performance but to enhance our culture and well-being of people whose lives we influence,” it stated.
Yet it is unwilling to objectively measure if its admirable four-part code of ethics – Obey the law. Take care of our members. Take care of our employees. Respect our suppliers. – is fully realized through its current “People and Communities” program.
And for shareholders, the financial risks and rewards should be measured too, as the legal and regulatory environment is changing.
The Costco board opposes the proxy proposal not necessarily on the grounds of the request but on who’s making it: the National Center for Public Policy Research and its Free Enterprise Project.
Proxy Fight Looming
An analysis of the 2024 proxy season by the law firm Sullivan & Cromwell found that NCPPR was a top proponent last year, filing 54 proxy proposals with over half (31) aimed at social/political issues. BlackRock, Kohl’s, Home Depot and CVS were among its targets.
Overall, social/political proxy proposals garnered the most submissions, a total of 365, but only one such shareholder proposal passed. The average number of votes cast in favor was only 15%.
Live To Fight Another Day
That said, the chances of NCPPR prevailing in its proposal for Costco to conduct a study of its DEI program and give a report to shareholders is slim to none. But NCPPR intends to keep fighting.
Deputy director for NCPPR’s Free Enterprise Project, Ethan Peck shared, “DEI is the redistribution of opportunity – for employees, potential employees and suppliers – on the basis of race and sex. It is not only immoral; it’s illegal and runs the risks of future litigation.
“Adopting DEI under immense public pressure during the summer of 2020 was one thing, but doubling down on it after years of sunlight exposing what DEI entails, and multiple court decisions that increase the litigation risks of DEI, is much more radical,” he said.
To which, Costco seems to say, “Bring it on.”
Note: Costco did not respond to a request for comment.
See also:
Read the full article here