6 STNJLBF 85

(Cite as: 6 Stan. J.L. Bus. & Fin. 85)

Stanford Journal of Law, Business and Finance

Fall, 2000

Feature

*85 DIVERSITY AND THE BOARDROOM

Steven A. Ramirez [FNa1]

University; Steven A. Ramirez

There is a nascent movement afoot in corporate America. It has profound implications for how society and the law should approach America's increasing diversity. This article focuses upon this movement. This movement requires that old assumptions about the word "diversity," including its meaning, and most importantly its effects, be reconsidered. This article will show that the leaders of corporate America, its CEOs and board directors, are beginning to learn how to use a diverse workforce to enhance productivity; and that our legal system should foster this process.

The American business community is increasingly recognizing what other elements of our society apparently reject: that embracing diversity [FN1] is a source of *86 strategic strength that can enhance competitiveness. [FN2] Simply stated, the American business community is discovering that pursuing the opportunities inherent in American diversity enhances workforce productivity and thus increases profitability. [FN3] While the empirical evidence in support of this intuitive conclusion is mounting, successful business leaders, having little patience for theoretical proof, are taking the initiative in seizing opportunities posed by diversity. [FN4] This article addresses why and how business is beginning to embrace diversity with enthusiasm. The article demonstrates the benefits that business is starting to reap from appropriate diversity policies. The ultimate benefit is increased productivity and profitability arising from the insights and other meritorious contributions offered by a properly managed diverse workforce.

Finally, this article will suggest three improvements to the law governing the diversity initiatives undertaken in the business community. First, this article posits that the Securities and Exchange Commission should issue interpretive guidance to clarify the obligation of publicly held companies to disclose material information regarding the business impact of increasing diversity. Second, this article argues in favor of heightening management and board responsibility for diversity management under existing common law duty of loyalty principles, as well as through legislative action restricting director insulation from duty of care liability. Third, this article *87 proposes that the Equal Employment Opportunity Commission exercise its power to create a safe-harbor for these diversity initiatives. Each of these proposals would allow the business community to continue to act to rationalize its response to an increasingly diverse business environment, while at the same time serving to help our society resolve the tensions remaining as a result of our collective hangover from our nation's racist and bigoted history. Although this article focuses upon diversity in the business context, at bottom the message the business community is beginning to send must resonate through all aspects of American society into the 21st Century: diversity is valuable. [FN5] Put bluntly, the law has thus far failed to comprehend that properly managed diversity can bring merit in a facially neutral fashion, not merely act as a justification for preferential admissions programs or other racial classifications. [FN6]

*88 The leading elements of the American business community are seizing the opportunities implicit in these changes. [FN7] Unfortunately, other parts of the business community (like many parts of our society in general) seem ill-prepared to deal with these emerging realities. For example, in a recent survey of Fortune 500 companies, the Society of Human Resources Management found that only 75 percent had diversity programs in place. [FN8] Moreover, these programs often fall short of sound *89 diversity policies; for example, few organizations link performance or compensation to diversity efforts. [FN9] Worse, smaller business firms were even further behind, with only 36 percent of firms responding having adopted diversity programs. [FN10] Moreover, important sectors of the economy, like the high tech industry associated with California's "Silicon Valley," seem to be badly lagging in managing diversity. [FN11] These results are even starker given that the evidence of the efficacy of such policies in helping firms achieve their objectives has been mounting. Moreover, the imposition and enforcement of appropriate policies can serve to greatly limit legal liability. In short, there are compelling business and legal reasons for implementing diversity policies, but it appears that large segments of corporate America have ignored the business case for embracing diversity.

This article will demonstrate that leading elements of corporate America are rapidly moving to embrace diversity. [FN12] Further, this article will articulate a number of *90 legal changes that would facilitate this process and also articulate the policy bases militating in favor of such changes. Part I summarizes the logic behind the business case for diversity and reviews the evidence showing the business benefits derived from the pursuit of diversity. Part II reviews the emerging best practices of corporate America regarding diversity management as a means of defining in detail what "embracing diversity" means. Part III will state the case for facilitating the business community's efforts to manage diversity obligations and suggest some means by which this can be achieved, with a focus on: clarifying disclosure obligations of public companies under the federal securities laws with respect to diversity risks and opportunities; expanding the duties of directors and officers to manage diversity proactively and with due care; and allowing companies sufficient latitude to pursue these initiatives within the security of a regulatory safe-harbor. The article concludes that the diversity practices of "leading edge" corporations are fundamentally appropriate. In all respects -- legal, economic, and in terms of the public's long term interest -- the business community is acting progressively here. Thus, the legal system should not act as a reactionary force to these developments but should instead facilitate the efforts of the business community to unlock the value inherent in America's diversity.

I. The Business Case for Diversity

Two critical economic trends form the linchpin for the business case for diversity: demographics and globalization. [FN13] First, the nation's population (and *91 hence its labor, investor and consumer pools) is undergoing an historic change whereby the nation's minority populations are increasing rapidly, while the labor pool as a whole is stagnating. [FN14] White males, therefore, constitute a decreasing percentage of key constituencies. [FN15] Second, the business of America is increasingly integrated into the world economic system, meaning that American business must now deal with important constituencies (labor, investor and consumer pools) that are as multi-cultural as the world. [FN16] By the year 2025, demographic experts project that the additional 72 million members of the U.S. population will include 32 million Latinos, 12 million African Americans and 7 million Asian Americans. [FN17] This more diverse population pool will necessarily lead to a more diverse marketplace of consumers. [FN18] Minority populations are growing in number, as well as in wealth. [FN19] *92 This wave of diverse market entrants will also be more highly educated than their parents. From 1973 to 1996, the percentage of Latinos awarded B.A. degrees grew from 6.1 to 13.4 percent for women, and from 6.6 to 12 percent for men. [FN20] For African Americans the increase was from approximately 7.2 to 17.7 percent. [FN21] Because these populations will expand most markedly in the key 18-24 year old range, college enrollment is expected to rise 23 percent for African Americans and 73 percent for Latinos from 1995 to 2015. [FN22] Gender diversity is also on the upswing: by the year 2005 women will constitute 48 percent of the nation's workforce. [FN23] Women too are attending and graduating college at dramatically higher rates. [FN24] This increased population diversity will have an enormous impact upon the business environment: for example, people of color now constitute 25 percent of the nation's consumer base. [FN25]

While the size and wealth of minority populations are increasing, the population as a whole, on a global basis, is rapidly aging. [FN26] This global aging will test the developed economies of the world in many ways -- including creating unprecedented labor shortages and diminishing labor pools. [FN27] America's increasing diversity will save it from many of the economic disruptions implicit in global aging. Non-Hispanic whites will contribute only one-quarter of the nation's population growth over the next decade. [FN28] From 2030 to 2050, the non-Hispanic white population will be contracting, and all population growth will be occurring in non-white *93 populations. [FN29] This creates a business imperative: corporations that can tap an expanded labor pool, in the coming tight labor markets, will have an advantage over those that have limited access to diverse workers. [FN30]

At the same time, world trade is booming. International trade grew about 10 percent in 1994, the highest level of trade growth in over two decades, far outpacing economic growth generally. [FN31] Such astounding trade growth has continued since 1994, peaking in 1997 at 10.5%. [FN32] International trade accounts for a higher percentage of total economic activity each year. [FN33] The United States is the world trade leader. It accounts for one-sixth of the world's imports and one-eighth of the world's exports. [FN34] These trends crystalize the business imperatives to eliminate unfair discrimination and to tap all the talent available in the nation's labor pool. [FN35] Corporate America is responding to these trends, increasingly, with a variety of diversity initiatives. [FN36] These programs include diversity training, creation of affinity groups, mentoring *94 programs, and assistance with career development. [FN37] These programs most often target women, African Americans, and Hispanics, although many companies also target Native Americans, disabled Americans and Asian Americans. [FN38] Many organizations with diversity programs have staff dedicated to such initiatives. [FN39] The most progressive companies now recognize that embracing diversity goes beyond (but no doubt includes) bringing increased numbers of women and minorities into an organization; it requires fostering an environment of sensitivity and tolerance for differences. [FN40] Under such circumstances diversity can be a powerful way to increase organizational effectiveness. [FN41] On a very pragmatic level, globalization and demographic developments create a compelling justification for corporate America to embrace diversity. [FN42] Business can use diversity initiatives to eliminate racial hostility and to ensure that all workers enjoy an environment that is conducive to maximizing employee potential. [FN43] This will give companies embracing diversity a competitive advantage in the escalating "war for talent." [FN44] This kind of environment will attract *95 all members of the contracting labor pool. [FN45] Diversity initiatives will provide corporate America with the insights needed to achieve maximum market penetration in more diverse domestic and inherently diverse global markets. [FN46] Diversity sparks productivity gains by fostering innovation and catalytic thinking about ways to do business in a more diverse business environment. [FN47] Finally, embracing diversity will insulate companies from potential legal quagmires. [FN48] Increasingly, this is the most progressive and sophisticated thinking in leading edge firms and influential business *96 organizations. [FN49] In short, those firms that excel at managing diversity will outperform diversity laggards. [FN50]

Leading professional business associations have studied diversity management in great detail. For example, the Society for Human Resource Management ("SHRM") [FN51] conducted one of the most far ranging surveys on the state of diversity initiatives in corporate America in 1998. According to this survey top executives at 8 of 10 Fortune 500 companies found diversity management to be an important part of business. [FN52] The SHRM has shown that embracing diversity can help firms create an attractive place for talented employees of all backgrounds to work. [FN53] This will assist companies in recruiting efforts and help companies avoid unnecessarily high, and costly, turnover rates. [FN54] The Society has concluded that *97 companies that foster a diverse workforce enjoy a competitive advantage that has a direct, positive impact on a business organization's bottom line. [FN55] Consequently, the "most enlightened companies" are seeking to exploit opportunities presented by the new workforce, to increase productivity, creativity, and innovation, as a means of attaining a competitive advantage in the 21st Century. [FN56] Human resource professionals and top executives at America's most successful corporations are therefore convinced that diversity adds value to their business.

The Conference Board [FN57] has sponsored a series of reports exploring the utility of diversity in achieving greater business performance. The Board has specifically refused to endorse the pursuit of diversity for its own sake; instead, the Board endorses value-driven diversity management. [FN58] Although the Board has recognized that measuring the benefits of diversity can be very difficult, [FN59] it concluded, as early as 1995, that businesses should recognize that diversity can be used to enhance the bottom line or can have negative consequences for companies that choose to ignore diversity issues. [FN60] "Leading edge companies" are executing diversity strategies *98 based upon business imperatives notwithstanding the lack of certain evidence showing benefits. [FN61] The Conference Board reflects the beliefs of the nation's business leaders that embracing diversity is profitable. [FN62] More recently, the Conference Board researched diversity at the board level of corporate America. [FN63] In this study, the Conference Board concluded that board diversity can enhance shareholder value. [FN64] In sum, "leading companies are integrating diversity into corporate objectives with the belief that a diverse workforce can help generate new ideas and help companies be more responsive to diverse markets." [FN65]

*99 The conclusions of the Conference Board and Society for Human Resource Management have support in a study undertaken by the American Management Association. [FN66] The study included a survey of over 1,000 managers and executives and evaluated the impact of diversity upon corporate performance objectives such as productivity and net operating profits. The study concluded that diversity in senior management consistently correlates to superior corporate performance. [FN67] More specifically, the study found that firms having diverse senior management teams achieved better financial performance than firms that responded negatively to the survey regarding the presence of diversity. [FN68] Thus, the study indicates that diverse work groups are more productive work groups. [FN69]

The recent psychological evidence in support of this finding is powerful. Empirical research on the diversity of small working groups directly supports the value of ethnic diversity. [FN70] Heterogeneous working groups offer more creative solutions to problems than homogenous working groups. [FN71] They also show greater inclination for critical thinking and are likely to avoid problems associated with "group think," where members mindlessly conform to group precepts. [FN72] Ethnicity provides the necessary heterogeneous perspective sufficient to trigger "kaleidoscope thinking" by providing a variety of perspectives, and to combat "group-think." [FN73] This *100 is consistent with data showing that people of different ethnic backgrounds hold distinct "world views" and that Hispanic, Asian, African and Native Americans have not been so assimilated that these unique views have been lost. [FN74] This is the difference that drives the value of diversity. [FN75] In sum, the findings based upon feedback directly from managers are consistent with a wide variety of studies examining the impact of diversity upon group action. [FN76] What these managers are saying is thus backed up by scientific evidence: managers that can manage diversity well will be more productive than those who are unable to cope with increasing diversity. [FN77]

One area where this value is unleashed is the ability to exploit diversity to achieve greater market penetration. [FN78] Obviously, if there are different "world views" *101 among traditionally excluded cultures, then there are real insights that can be provided by a diverse workforce. [FN79] Indeed, researchers theorize that cultural background and ethnic identification play a major role in consumer behavior. [FN80] Thus, leading business academicians argue that the insights and sensitivities brought by people from varying ethnic backgrounds help companies reach a wider variety of markets. [FN81] They note that "people with similar frames of mind, similar values and principles have a strong basis for communication and communication is the art of sales." [FN82] It is not, however, just a matter of communication. "What minority consumers respond to most eagerly is a level of respect that too often is missing in their transactions with mainstream businesses." [FN83] Economists have similarly found that "individuals with similar characteristics communicate at lower cost." Therefore, "efficiency and competition dictate matching employees and customers." In other words, it is the invisible hand driven by the need for efficient communication between customer and employee that often drives hiring decisions. [FN84] It is not, however, just a matter of communication. "What minority consumers respond to most eagerly is a level of respect that too often is missing in their transactions with mainstream businesses." [FN85] It is noteworthy, however, that the business case for diversity does not rest on morphological features and racial affinity, but rather cultural insights and understanding. [FN86]

*102 All of this thinking on diversity in the professional literature is mirrored in the academic literature. For example, Professors Thomas and Ely undertook a six-year research effort examining diversity practices of business organizations, with a particular focus upon the practices of three business organizations. [FN87] They found that the best firms find ways to integrate, as opposed to assimilate, diversity into all aspects of their operations by promoting equal opportunity for all employees, acknowledging and valuing differences. and allowing such differences to unlock growth and learning. [FN88] Those companies that pursue such diversity can "unleash the powerful benefits" of diversity, including catalytic learning, creativity, flexibility and, ultimately, profitability. [FN89] In short, CEOs wishing to innovate successfully must "hire, work with, and promote people" unlike those currently dominating corporate America. [FN90]

Empirical research testing the business case for diversity management has thus far provided strong support for all of its major premises. [FN91] First, in a detailed *103 study of the effects of diversity management upon the stock price valuation of a firm, empirical data suggest that announcements that a firm has obtained diversity awards is associated with competitive advantage (as reflected by increased stock prices) and that announcements that a firm has been sanctioned for discrimination is associated with inability to achieve such advantage. [FN92] Second, sound diversity management programs are associated with higher productivity and higher profitability. [FN93] Third, diversity management programs reduce stigmatization (compared to affirmative action programs), thereby contributing to the success of traditionally excluded groups of employees and providing a further competitive advantage. [FN94] Fourth, firms with diversity management policies are more creative, flexible and better problem solvers. [FN95] Finally, organizations perceived to be pursuing diversity management were more attractive employers to potential recruits (of all backgrounds) than those not having that perception; this implies yet another competitive cost advantage. [FN96] The business case for the value of diversity is also bolstered by evidence from other areas of society that increasingly are recognizing the importance of embracing diversity. Most recently, in the field of education the evidence is mounting that *104 pursuing diversity enhances the ability of educational institutions to achieve their institutional goals. [FN97] In an important study, the Civil Rights Project at Harvard University found that students graduating from elite law schools, such as the University of Michigan and Harvard Law School, "experienced powerful education experiences from interaction with students of other races." [FN98] The study further concluded that exposure to diverse student bodies allowed white law students to better understand critical dimensions of their profession. [FN99] Seventy percent of the Harvard students and seventy three percent of Michigan students found that racial [FN100] diversity enhanced their educational experience. [FN101]

*105 This is also consistent with the massive study of the efficacy of affirmative action and diversity initiatives at elite universities, undertaken by Derek Bok (former President of Harvard) and William G. Bowen (former President of Princeton). [FN102] They found that "of the many thousands of former matriculants who responded to our survey, the vast majority believe that going to college with a diverse body of fellow students made a valuable contribution to their education and personal development." [FN103] This suggests that diversity may have a catalytic effect. It seems reasonable to conclude that once business managers are exposed to diverse perspectives, they can be expected to think in more diverse ways.

Professors Bowen, Bok, and Burkhart offer other business lessons from the Bowen and Bok study. First, their study shows that the "myth of pure merit" -- that recruiting is some kind of precise science that could, for example, be reduced to a mathematical formula -- can hamstring businesses that fail to recognize where their skill gaps or institutional blind spots are located. [FN104] Recognizing the benefits of diversity empowers a company to approach hiring in a more eclectic fashion, including recognizing that a firm has too many individuals of a homogenous background and not enough individuals of different backgrounds. [FN105] Thus, if a company believes that persons of a given background likely will provide a keener understanding of the cultural demands of a given market segment and currently has *106 no individuals of that background, it makes sense to consider benefits that may be reaped from increasing diversity even if that means being sensitive to gender or ethnicity. [FN106] Second, Bowen and Bok caution against applying more lenient performance standards to minority employees. "The lesson we draw from the data is that it is a disservice to compromise on standards." [FN107] Expecting less from minority hires benefits neither them nor the company, is likely to instill hostility toward diversity initiatives, and detracts from the value-driven basis for embracing diversity. [FN108] Setting high expectations is in itself important to maximizing the performance of all employees. [FN109]

All of this evidence showing the value of diversity in terms of increased profitability is consistent with the actual market performance of those companies that aggressively embrace diversity. "A study of the Standard and Poors 500 by Covenant Investment Management found that businesses committed to promoting minority and women workers had an average annualized return on investment of 18.3 percent over a five-year period, compared with only 7.9 percent for those with the most shatter-proof glass ceilings." [FN110] Similarly, each year Fortune magazine and the Council for Economic Priorities try to assess a company's overall diversity efforts. [FN111] The 50 companies chosen as the "Diversity Elite" for 1999 as "a group have performed terrifically, about matching the S&P 500 over the past year and beating it over the past three and five years." [FN112] The 1998 list also outperformed the S&P 500. [FN113] On a macro *107 scale, the U.S. economy also lends support to the value of diversity. For example, in 1986, Japan's Prime Minister Nakasone claimed that the United States could not hope to compete with Japan so long as its population has so many blacks and Hispanics. [FN114] In fact, Japan has since experienced a series of economic setbacks, while the U.S. has enjoyed an unprecedented period of high growth and productivity gains. [FN115] Indeed, the U.S. economy has rightfully been termed the envy of the world. [FN116] The U.S. economy has scored this impressive growth at the same time that the diversity of its work force has rapidly increased. [FN117] In sum, one of the world's most diverse economies is also one of its most successful. [FN118]

The conduct of business in a complex and dynamic environment often requires that best practices be adopted before definitive evidence of efficacy is available. This is one of the major reasons why business schools rely extensively upon case studies to develop best practices. It is fair to say that by 1999, the best available business literature was replete with case studies demonstrating the value of diversity. [FN119] This is not to say that diversity always leads to enhanced organizational effectiveness. Indeed, an important study from 1996 shows that thinking about diversity in narrow terms, such as only focusing on increasing traditionally under-*108 represented groups, inhibits the effectiveness of diversity. [FN120] The point here is simply that the most innovative and sophisticated elements of the business community have concluded that embracing diversity, can, when properly managed, create "powerful" benefits. [FN121] The evidence thus far strongly suggests that companies adept at managing diversity can do so in a manner that achieves greater profitability. [FN122]

Some of the most persuasive evidence in favor of embracing diversity is the devastating losses suffered by those companies that have allowed sexism or racially hostile environments to fester within their businesses. The most notorious example of such a casualty is Texaco Oil Company, and the unfortunate Texaco shareholders during the time that the racism within Texaco came to light. [FN123] Texaco's nightmare began in 1994, when African-American employees filed a class action lawsuit alleging pervasive racial discrimination. [FN124] The extent of Texaco's discriminatory misconduct came to light in late 1996, when a senior executive released highly controversial tapes that appeared to contain racial slurs emblematic of a racially hostile environment. [FN125] Once allegations of Texaco's misconduct surfaced, its shareholders suffered stunning losses, as its market capitalization plunged by $1 billion. [FN126] Subsequent reports demonstrated that the tapes were not isolated circumstances of racial bigotry, but that instead such attitudes appeared to have permeated Texaco's business culture. [FN127] Ultimately Texaco paid $176 million, the largest amount ever paid in a racial discrimination suit, to settle the class action claims of over 1,400 African-American *109 employees. [FN128] Texaco also suffered from a serious bout of negative publicity that caused investors to flee the company [FN129] and consumers to threaten boycotts. [FN130] Nor is Texaco alone among companies that have felt the sting of being caught engaging in blatant racism, as companies ranging from Denny's to Shoney's have paid multi- million dollar sums arising from discrimination charges. [FN131] As our population gets more diverse, and globalization proceeds apace, our nation is certain to see more "Texacos," and the amount of damage to be absorbed by such firms for failing to remedy misconduct is sure to increase exponentially, as investors learn to avoid closed corporate cultures and consumers and labor markets react to patent racism. [FN132]

In sum, the business world has built a powerful case that if cultural and ethnic diversity is properly managed it can lead to a variety of benefits ranging from improved recruitment and retention to more insightful marketing and superior group interaction. All of these benefits ultimately lead to increased profits. The case enjoys support from leading business professionals, trade groups and publications, as well as psychological studies and empirically-based business studies. The early returns indicate that businesses that are the most aggressive in moving to diversify their workforces are out- performing the companies that are laggards. The next section of this article will explore in detail the practices these companies are employing in connection with their diversity initiatives.

II. Best Diversity Practices

Certainly, diversity, although a powerful tool, is not a magical sure-fire road to enhanced profitability. Managing diversity is as important as bringing diversity to a business. [FN133] Many corporations, most notably Texaco, have suffered dire consequences from an inability to manage diversity. [FN134] These instances, however, do not detract from the central thesis of this article that businesses are using diversity as *110 a competitive advantage in order to maximize profits, and that the legal system should accommodate, encourage and respond positively to this new paradigm of viewing diversity as a strength. Instead, these instances highlight the need for policies that assure that business organizations truly embrace diversity rather than pursue policies of tokenism or tacit exclusion. The point is that diversity must be properly managed. [FN135] The EEOC has studied the "best practices" of the business community in the area of diversity management and has released a task force report that defines and summarizes the "best practices" that the leading firms have adopted. [FN136] Combined with the empirical evidence in support of diversity management and the work of other diversity management scholars, a fairly clear picture has developed illuminating proper diversity management practices. In sum, a "best practice" breaks down artificial barriers to hiring and promotion, embraces fairness to all employees and comports with law. [FN137] These diversity practices are also what distinguishes naked racial preferences from the business imperative of managing a diverse workforce in an increasingly diverse business environment. Thus, the following best practices both define and identify the kind of diversity initiatives that are the focus of this article.

A. Make Diversity a Board-Level or Senior Management Issue

Diversity, as envisaged within the business community, transcends all business segments, from marketing to human resources. [FN138] Finance departments must consider the impact diversity may have upon the firm's cost of capital. [FN139] Legal departments must consider how best to protect the corporation from legal exposure arising from potential diversity mismanagement. [FN140] Virtually every corporate stakeholder has an interest in diversity management. In short, diversity is so important to all corporate functions and constituencies, it is a compelling issue for *111 board and senior management attention. [FN141] At the very least, making diversity a board issue will assure a deliberative process for promulgating diversity policies that is at least capable of involving all firm sectors in the process, and producing written, carefully considered policies that may be disseminated to all employees. In a firm of any significant size, this process is now essentially a legal mandate. [FN142]

"Before diversity can be valued and properly managed in any organization, the leadership must be committed to it." [FN143] Consequently, all business experts agree that diversity initiatives cannot succeed without, at least, the involvement of senior management. [FN144] The Glass Ceiling Commission undertook extensive investigation into the best practices of corporate America in managing diversity. One of its findings was that change must come from the top. [FN145] Thus, the Commission recommended that the board of directors, as well as corporate CEOs, set company-wide diversity policies and actively promote their diversity initiatives. [FN146] Similarly, the EEOC found that "the CEO must be firmly behind" diversity initiatives and the only means to ensure CEO commitment is for the board of directors to insist upon it--only the board holds this authority. [FN147] In fact, the Texaco directors were literally blind-sided by the explosion of bad publicity and the extent of Texaco's exposure. [FN148] Corporate directors have thus learned that they must ask "tough questions" about diversity management and demonstrate the importance of this issue. [FN149]

*112 B. Eliminate Invidious Discrimination

At the dawn of the 21st Century, there can be little doubt that America in general, and corporate America in particular, suffers from pervasive racism and sexism. [FN150] For example, in 1991, the Urban Institute conducted a study of employment discrimination experienced by African Americans. [FN151] The study paired equally qualified African-American and white males, and worked to match their dress, mannerisms and background. These pairs applied for 476 positions in such cosmopolitan areas as Chicago and Washington, D.C. In 20 percent of the applications, the white applicant fared better than the African- American applicant. [FN152] Such patent discrimination is not limited to African Americans. The Urban Institute has established similar hiring bias against applicants who are Hispanic. [FN153] Studies involving a broad range of business decisions, from mortgage processing to small business lending, document pervasive discrimination based upon race, ethnicity and gender. [FN154] If corporate representatives discriminate in hiring and in granting mortgages, certainly discrimination can be expected in other contexts. Thus, the findings of the U.S. Department of Labor, Glass Ceiling Commission seem to furnish further compelling evidence of a pervasively discriminatory business environment. In its final report, issued in November of 1995, the Commission found that there was a "glass ceiling" that operated to stunt the advancement of women and minorities in *113 American business organizations. [FN155] The Commission conducted exhaustive hearings and a detailed investigation into the problems faced by minorities and women in advancing in business. Its findings are disturbing to any person wanting to believe that America should be a meritocracy:

i) 97 percent of senior managers in corporate American are white and 95 percent are male;

ii) African-American men with professional degrees earn 21 percent less than white men with the same degrees;

iii) 0.4 percent of managers are Hispanic, even though 8 percent of the population is Hispanic;

iv) Asian Americans earn less than whites and receive fewer promotions, even with more education. [FN156]

Additionally, disabled persons also seem to be subject to pervasive discrimination--as of 1992 only 35 percent of disabled persons participate in the workforce. [FN157] Finally, even as recently as 1998, women made only 62.7 percent of the salary of male employees, and such discrepancies prevailed even when compared with men of comparable levels of seniority, or performing comparable functions. [FN158] All of this demonstrates that too often corporate America is hobbling itself by failing to assess properly the talents of its labor pool. [FN159] While admittedly, the U.S. is far ahead of many of its competitors, much work remains undone. [FN160] Corporations must create cultures that have zero tolerance for invidious discrimination. [FN161] In order to create *114 such zero-tolerance cultures, policies prohibiting invidious discrimination must be enacted and enforced to a much greater extent than they have been in the past. Corporate America is doing a miserable job of eliminating pernicious discrimination. Corporate directors and officers must face the fact that, here, the job is not getting done.

More aggressive policies are clearly mandated. Managers indulging in personal racist bigotry or other forms of unlawful discrimination must be subject to dismissal. Employees generally, but particularly supervisors, must be punished for the use of racial slurs or racial epithets. [FN162] Prospective employees should be subject to inquiries designed to uncover those that are patently racist or sexist. [FN163] Obviously, draconian investigative and hiring practices could be counterproductive. Corporate America, however, simply cannot afford to hire or retain racial extremists and sexist bigots. From a legal point of view, employees of this nature can expose firms to legal liability and unlimited monetary loses. [FN164]

Suggestions for improvement also include corporate self-testing and self- auditing. Corporations themselves would ferret out corporate representatives indulging in baseless discrimination. This technique is frequently used to test quality management in order to uncover invidious discrimination in a variety of other contexts and would certainly carry a large deterrent effect. [FN165] There is no reason to believe that external testing is likely to cease, as many government regulators and civil rights experts are calling for expanded testing, in all areas in which discrimination is occurring, from employment to housing. [FN166] A corporation is far better served by uncovering employees that discriminate than by having outsiders *115 find discrimination. [FN167] Those found to be engaging in unfounded racial discrimination must face harsh sanctions, such as dismissal, in order to create sufficient deterrent effect. These steps could, in combination, prove a powerful tool for stemming discrimination.

Another means for ferreting out discrimination or harassment is assuring that employees have an effective means of reporting misconduct. Multiple channels of redress should be available so that an employee is not just relegated to communicating problems through their immediate supervisor, who may have incentives for discouraging complaints or may even be the offending party. [FN168] Here, too, it seems that women should be able to assert problems to other women of authority and minorities to other minorities. Perhaps nothing is more stressful to an employee than reporting a supervisor for inappropriate, even outrageous, conduct. Thus, the person representing the corporation must demonstrate extraordinary sensitivity and discretion. [FN169] Some companies have even gone so far as to create toll-free, 24-hour hotlines to field harassment complaints. [FN170] Again, an effective grievance procedure is a precondition to obtaining the maximum degree of legal protection available in this area. [FN171]

The elimination of all forms of bigotry and harassment in the workforce is fundamental to the establishment of a fair work environment necessary to maximize the productivity of all workers in a diverse environment. [FN172] As such, effective programs in this area are indicative of initiatives designed to stem invidious discrimination and unlock the maximum potential of all employees.

*116 C. Encourage the Positive Use of Diversity

Once the business case for diversity is properly understood, the methods for encouraging the positive uses of diversity are easily comprehended. Human resource managers should be reaching out to attract qualified applicants in ways that ensure the corporation is drawing from the largest labor pool possible. The Human Resources Department could be expected to be more successful in this effort with the benefit of women and minorities, who could provide insight into reaching the full extent of the expanded labor pool, and in demonstrating to women and minority candidates that the corporation holds fair opportunities for such candidates. [FN173] As the EEOC has observed, companies must "develop a vision of what your company will look like when you have achieved full diversity ...." [FN174] This means that employers must communicate and reinforce the means by which diversity is a business asset and think about how diversity fits with the business needs of a given position.