Why Is Workplace Equality Good for Business?

A new study reveals that U.S. households spend more on products from firms that prioritise corporate workplace equality, especially after major social events

By Pan Jingyi, Principal Writer, China Business Knowledge@CUHK

Which would you choose: a bag produced by a firm known for its equal treatment of all staff or a bag produced by a company currently embroiled in a discrimination scandal? Conscious consumers, who prioritise ethical, social, and environmentally friendly products when making purchasing decisions, would likely choose the former.

A report indicates that 79 percent of respondents believe sustainability is either “somewhat important” or “very important” when making purchasing decisions. Additionally, 68 percent express a willingness to pay more for environmentally sustainable and socially responsible products.

“Our research delves deeper than merely looking at diversity and equality at the executive level. It gauges workplace equality practices for the broader workforce.”

Prof. Cen Ling

Given the rise of conscious consumers in recent years, companies should look beyond product quality and consider ESG (Environmental, Social, and Governance) or CSR (Corporate Social Responsibility) factors. While previous research has shown that strong ESG or CSR practices can decrease a firm’s risk exposure, the direct cash flow implications of such practices are still unclear.

Researchers from The Chinese University of Hong Kong (CUHK) recently aimed to understand how the purchasing decisions of conscious consumers who value ESG and CSR can directly impact a company’s cash flow.

The study, The Rise of Conscious Consumers: The Impact of Corporate Workplace Equality on Household Spending, was conducted by Cen Ling, Associate Professor of Finance, and Wu Jing, Associate Professor of Decisions, Operations, and Technology, both at CUHK Business School. They were joined by Prof. Han Yanru from Stevens Institute of Technology, and Liu Chang, a PhD candidate from City University of Hong Kong.

“The market harshly punishes discrepancies between a firm’s declared commitment to and actual practices of workplace equality.”

Prof. Wu Jing

“There’s a significant uptrend in ESG investment. Do investors like firms with good ESG practices purely based on their preferences? Or, a company’s ESG strategy truly benefit investors in generating higher returns? If so, does ESG contribute to higher returns by affecting the risk component or the cash-flow component, or both?” asks Prof. Cen. He expressed interest in exploring potential long-term economic incentives for companies to adopt ESG strategies.

Existing studies offer varied insights on the influence of ESG strategy on corporate operating performance. This research hones in on corporate workplace equality to gauge its effect on consumers’ buying habits. “This approach demystifies how specific ESG strategies can impact a company’s bottom line. Cash flow is a direct barometer of a company’s financial health,” notes Prof. Wu.

Measures to Evaluate Workplace Equality

To address these inquiries, the researchers developed a measure of corporate workplace equality, known as the EEO Score. This metric is based on the textual analysis of Equal Employment Opportunity statements found in millions of U.S. online job listings.

“Our EEO Score delves deeper than merely looking at diversity and equality at the executive level. It gauges workplace equality practices for the broader workforce,” Prof. Cen states, emphasising the public’s greater concern for the rights of everyday employees over board members.

Prof. Wu adds, “Our EEO Score zeroes in on workplace equality for the average worker, filling a gap left by prior studies that centered on upper-tier corporate roles.”

The researchers highlight that their algorithm assigns higher EEO Scores to companies that make detailed, genuine, and enthusiastic EEO pledges in their job listings. While skeptics might dismiss online job listings as mere corporate rhetoric, the researchers have undertaken multiple validation steps to alleviate such concerns.

They underscored the EEO Score’s accuracy by demonstrating its foresight in predicting future discrimination-related litigation and headlines. They also pointed out the inherent costs that discourage companies with low equality standings from merely parroting those with higher commitments.

“The market harshly punishes discrepancies between a firm’s declared commitment to and actual practices of workplace equality,” Prof. Wu observes, emphasising the gravity of making an EEO commitment.

Consumers Favour Companies that Champion Equality

The next phase involved correlating household buying decisions with the EEO Scores of product manufacturers. They tapped into Nielsen Consumer Panel data that capture consumer behaviour of individual household.

“Instead of crafting a simulated consumer behaviour test in laboratories, we turned to genuine data, revealing the authentic spending habits of Americans,” Prof. Cen explains.

Findings were consistent with their hypothesis: U.S. households tend to spend more on products from companies that score high on workplace equality. However, Professor Cen highlights the presence of potential confounding factors in the positive correlation between household purchase decisions and EEO Scores, such as product quality. In other words, consumers might choose products from companies with high EEO scores solely because firms with better workplace equality practices also offer better product quality.

He adds, “To mitigate the endogeneity in this positive correlation between corporate workplace equality and household consumption, we looked at whether minority consumers displayed a heightened sensitivity in their spending patterns toward producers that championed workplace equality.”

As hypothesised, the pro-equality spending trend was more pronounced among racial or gender minority consumers.

Prof. Wu posits, “If product attributes unrelated to workplace equality were driving the correlation between spending and EEO Scores, it’d be challenging to explain the heightened sensitivity exhibited by minority consumers.”

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To further solidify their findings, the researchers employed two methods based on exogenous social events. First, they observed a spending boost on products from California-based firms post the 2018 enactment of the California Gender Board Diversity Law. Next, they noticed that the linkage between household expenditure and a producer’s EEO Score generally strengthened post-societal events that heightened equality awareness, like the #MeToo movement in 2017 and the Black Lives Matter movement in 2020.

In summary, the research underscores the tangible cash flow benefits of corporate workplace equality. Prof. Cen admits that the current buying surge, led by racial and gender minority consumers, doesn’t ensure a direct short-term boost in spending as a result of improved workplace equality. However, he believes that as consumer consciousness around equality becomes more widespread, firms will invariably see the financial advantages of ESG strategy adoption.