Articles Judy Warner Jun 12, 2023
It is not enough to have a diverse workforce if there is no equity, nor is it enough to have diversity and equity in the workplace if there is no inclusion. Internal auditors can help ensure DEI efforts are meaningful.
To be successful at diversity, equity, and inclusion (DEI), organizations must make each aspect a performance target. It is not enough to have a diverse workforce if there is no equity, nor is it enough to have diversity and equity in the workplace if there is no inclusion. It is not enough to have DEI without a shared sense of belonging among employees. And none of that matters if a corporate culture does not support the safety of all employees regardless of rank.
Enter internal audit and its purpose to enhance “the organization’s success by providing the board and management with objective assurance and advice.” As companies around the globe increase their commitment to demonstrably improve their DEI performance amid greater expectations from stakeholders, internal auditors have a fundamental role to play to ensure DEI efforts are measured, meaningful, and modeled.
Views on the social purpose of companies have historically vacillated between shareholders and stakeholders. The U.S. has lagged most countries in Europe and Japan in embracing the social values of stakeholder capitalism such as DEI. While U.S. companies stressed the need to maximize shareholder profits, global organizations such as the Caux Round Table for Moral Capitalism promoted “responsible business.”
Views on stakeholder capitalism began to change in the U.S. in 2019 when the influential Business Roundtable redefined “the purpose of a corporation to promote an economy that serves all Americans.” Concurrently, the company’s role and responsibility to build a sustainable future for all stakeholders crystallized around environmental, social, and governance (ESG) factors, including DEI. The 2020 murder of George Floyd in Minneapolis at the hands of white law enforcement officers and subsequent civil rights protests forced a renewed reckoning for most business managers. CEOs worldwide promised to embrace DEI initiatives. Stakeholders listened.
The number of companies issuing corporate sustainability reports and linking executive compensation to specific ESG and DEI performance metrics is growing globally, according to JUST Capital, a nonprofit that chronicles corporate efforts on myriad stakeholder measurements. In the U.S., 34% of Russell 1000 companies publicly disclosed data on gender, race, and ethnicity by job category from annual filings (EEO-1 reports) in 2022 — up from just 3% in 2019. Moreover, the companies that disclose EEO-1 or equivalent data outperformed other companies by 7.9% over the one-year period ending in 2022, according to JUST Capital.
A growing number of publicly listed companies are producing reports on DEI that go well beyond regulatory and compliance mandates and stakeholders’ expectations (see the “Top 10 Most Just Companies” on this page). “If an organization publishes DEI statistics to the marketplace, internal auditors can provide assurance by independently testing the data for completeness and accuracy,” according to a new report, Supporting Diversity, Equity, and Inclusion From the Inside Out, by Deloitte and The IIA’s Internal Audit Foundation. The report is the third in a series of reports on internal audit’s role in DEI.
Despite the strides chronicled by organizations like JUST, a growing backlash against DEI and ESG initiatives is having an impact, slowing or even reversing progress. One case in point involves boards of directors. In 2022, the percentage of seats going to first-time directors, women, and directors from diverse ethnicities declined, according to the Board Monitor US 2023 report from Heidrick & Struggles, a Chicago-based executive search and corporate consulting firm. At the same time, there was an increase in the percentage of newly elected directors with CEO, chief financial officer, or previous board experience at publicly listed companies, as well as directors over age 60.
Another troubling sign: Job postings in 2021 for corporate DEI roles were down 19% compared to 2020, according to New York-based global advisory firm Russell Reynolds Associates. Chief diversity officers (CDOs) who remain in these positions do so amid an increasingly tough economic environment exacerbated by recession fears and corporate downsizing. As it is, CDOs hold the shortest tenures of any C-suite roles — less than two years at S&P 500 companies, according to Russell Reynolds. Some 60% of diversity officers at those companies left their positions between 2018 and 2021, the last year for which the firm has data.
The costs associated with turnover extend well beyond the bottom line, says Aarti Shyamsunder, global head of DEI at Accenture’s YSC Consulting. “It’s not just the cost of replacing a hire,” she explains. “It’s about the message that it sends out, the loss of reputation, and the suspicion or fear that it might cause, especially in minority group members’ minds.”
Directors say questions now being asked in C-suites and boardrooms center on how assertive organizations should be in presenting their DEI-related goals and accomplishments amid hyper-polarized social and political differences. “The bottom line is that the risks around business sustainability and continuity — those areas covered by E, S, and G — should all be part of a well-developed enterprise risk management framework,” says Stuart Levine, chair and CEO of a leadership consulting practice and former global CEO of Dale Carnegie & Associates.
However, Levine says ESG is being co-opted by politicians and conservative commentators to further their personal agendas. “While we all have to contend with that on some level, it’s never been more important for boards to stay laser-focused on the business and on the purpose of the business,” says Levine, a former independent director for companies such as Broadridge Financial Solutions and J. D’Addario & Co.
1. Bank of America Corp.
2. NVIDIA Corp.
3. Microsoft Corp.
4. Accenture plc
5. Truist Financial Corp.
6. Verizon Communications Inc.
7. Hewlett Packard Enterprise Co.
8. Apple Inc.
9. Intel Corp.
10. JPMorgan Chase & Co.
Some organizations don’t want to blaze the trail for ESG or DEI initiatives. Instead, their approach is more wait and see. “Let’s see what everybody else is doing first and make our way through this in a balanced, intentional way,” observes U.S. Army Lt. Gen. (ret.) Karen Dyson. “Let’s not do anything too quickly or too rash, and let’s not lose sight of the fact that we have identified goals for ourselves, and we don’t want to walk away from those either.”
Dyson says she views this moment in business history as pivotal. From her vantage point as a director on boards including Genworth Financial, Calibre Systems, and USAA Federal Savings Bank, companies are making gains on DEI. “We’re seeing progress on public disclosures and in sustainability reports,” she says. “Management is paying attention. And management has a desire to grow diversity to demonstrate equity and inclusion.”
Helping corporate leaders grow DEI is one way internal audit can have a huge impact. At financial services giant Prudential, internal audit helps lead the charge in promoting DEI initiatives, says Cecilia Orchard, senior vice president and chief auditor. For nine years, Prudential’s commitment to ethics has been recognized in Ethisphere Institute’s annual World’s Most Ethical Companies ranking. Moreover, the company’s commitment to doing the right thing extends to social responsibility and environmental sustainability.
Orchard says internal audit can serve the organization’s strategic DEI imperatives. “Internal audit can help management assess the method, process, and controls followed to determine the strategy and confirm there is alignment to the organization’s overall vision and strategy,” she says. “This includes ensuring that different leaders from across the organization who should have input into any strategy are consulted, including for DEI practices.”
DEI is among many topics and risk drivers that Orchard reports about regularly to the audit committee, she says. Moreover, internal audit helps ensure Prudential’s DEI initiatives are accountable. “The internal audit process confirms accountability of DEI programs and practices that are integral to any DEI strategy,” Orchard explains. “By ensuring the right people are accountable and that accountability measures exist, the opportunity for success in DEI programming increases dramatically.”
Assurance is one way internal audit can be a DEI catalyst (see “Questions About DEI” on this page). The Deloitte/Internal Audit Foundation report notes “internal auditors can bring valuable insights into how DEI programs are designed and whether they are operating as envisioned.”
To provide these insights, the report advises auditors to:
But how much impact can internal audit have on DEI initiatives? Dyson suggests boards and management evaluate internal audit’s effectiveness on DEI by asking questions such as: How does internal audit think about DEI when looking at processes? Is it auditing the hiring and talent acquisition processes? Is it auditing retention and how that relates to succession planning? Is it auditing compliance with those policies to provide feedback to management about how they are doing with their goals?
Another way internal audit can help as it develops its audit plans is to consider what behaviors or methods can be audited: What is in scope? What should be in scope? “By asking these kinds of questions, internal audit can help management shape what is measurable,” Dyson says. “That becomes part of the internal review process.”
Compliance with laws and regulations is easy to define and achieve, but accomplishing change in an organization is more difficult, with much of it falling into internal audit’s usual scope of policies and processes. “One of the processes I particularly like is to expand the view of DEI hiring — who’s on your hiring panel?” Dyson says.
Jan Babiak, an audit committee member at Bank of Montreal and Walgreens Boots Alliance, says auditors have an imperative to provide insights to management about the current state of DEI initiatives together with advice on continuous improvement. That may be challenging for audit functions with limited familiarity or experience with DEI issues.
“As a director, I think about the skill sets within internal audit, how it thinks about its own succession, and whether those processes need to be augmented by outside advisors,” she says. “It really depends on the capabilities and priorities of the internal audit team and its ability to recognize where it needs help.”
But what about internal audit’s own commitment to DEI? CAEs should look inward to determine whether internal audit is practicing what it preaches on DEI. “Internal audit has a responsibility for thinking about its own DEI — this is not only in recruiting, but also in retention,” Babiak says.
The Deloitte/Internal Audit Foundation report points out that auditors can set an example for the organization “by incorporating DEI principles into the day-to-day activities of the internal audit function and holding themselves accountable by assessing the effectiveness of their own DEI initiatives.”
In addition to its own DEI programs, internal audit should evaluate its recruiting, learning, and development activities to ensure it has diverse talent, the report advises. Internal audit also should design a roadmap and metrics to assess the progress of its DEI strategy.
As a former director, Levine says he looked to internal audit to be a beacon of corporate integrity because it was trusted. “Internal audit should also be a model for diversification that, if successful, can be transplanted like seedlings throughout the organization to develop and attract diverse leadership and create a healthy culture,” he says.
Audit executives and corporate directors say there are several questions that internal auditors should ask about diversity, equity, and inclusion in their organizations. The answers can provide a starting point for assessing and measuring the effectiveness of DEI initiatives.