Equity Businessman Frustrated

Equity Theory As a (Terrible) Strategy for Growth

Many corporate executives have claimed that embracing “equity” theory at their companies (and, in the case of investment-house CEOs, trying to force equity on companies whether they like it or not) is in the objective, demonstrable best interest of shareholders.

Scott Shepard

Scott Shepard

Ok. Let’s analyze that claim.

What equity means is current discrimination now to make up for other discrimination against other people by other people in the past. And it also means dividing national wealth and power by a racial spoils system, with each racial and other identity-based group getting a proportional share, in disregard of individual accomplishment.

Don’t take my word for it. In the words of Ibram X. Kendi, universally recognized as an avatar of equity, “the only remedy to racist discrimination is antiracist discrimination. The only remedy to past discrimination is present discrimination. The only remedy to present discrimination is future discrimination.” Likewise he has proclaimed that “when I see racial disparities, I see racism,” such that equity requires the absence of disparities in racial outcomes. These assertions are not outliers, and these claims for equity have been extended on other surface-characteristic grounds, including sex, orientation and ethnicity.

There are many reasons why sensible corporate executives who retain fidelity to their fiduciary and moral duties to make their companies prosper would stay well away from anything to do with equity. Discrimination by race, sex, ethnicity and orientation isn’t just illegal; it’s unconstitutional. The fevered cogitations of faculty lounges and activist cadres don’t change that fact. When the lawsuits start, they will be won, and once a few are won, they will become a torrent. And just a speedy review of the highlights of equity-proponents’ thoughts – as short as the little summary above – would raise more than an echo of George Wallace (“segregation today, segregation tomorrow …”) in even the most lazily educated CEOs, who would then rightly drop the whole subject, entirely and forever.

The fact that so many haven’t is good evidence that they have strayed from their legal duties.

For some additional evidence, let’s play out how these theories would work in action at a corporation (or anywhere else) as a practical rather than a legal or ethical matter.

Posit, then, a company that has embraced equity, as so many have, and has begun to implement policies that train employees that disparities of outcome arise from discrimination by disfavored groups (whites, men, straight people) against whom current discrimination in various forms will be espoused until the company has achieved either equality of outcomes or outcomes in which the favored groups (non-whites, women, the panoply of non-straights) are receiving more than their “rival” disfavored groups. (After all, companies like Levi’s and CVS are actively discriminating against whites and men even as they proudly proclaim that non-whites and women are already statistically overrepresented in those companies.)

The first consequence is that high-achieving employees would look for other work, wanting to reap the rewards for their individual achievements rather than strive for a corporation that promises equality of outcomes on bases and axes that have nothing to do with their – or any – achievement. Right behind them will be employees who would prefer to be judged, as a great man once put it, “by the content of their character” and the objective value of their personal contributions. As the consequences of the embrace of equity became clearer, the less prescient but still able, valuable and virtuous would similarly look for other work.

For those workers who remain, the incentives to work hard and make money for the company, whatever that means for them in their positions, will have been drained away. If outcomes – including promotion and pay – are determined on the basis of surface characteristics, then there’s much less reason to work hard or perform well.  Disfavored groups will in fact have been told (as they have been told at Disney, Coca-Cola, Bank of America, Lowe’s and elsewhere) that timeliness, hard work and other fundamentals for success are themselves discriminatory.

These factors will decrease productivity companywide, which will decrease the assets available for compensation for all employees (including the high-flying corporate executives who introduced equity policies in the first place), which will decrease the “equitable” race-, sex- and ethnicity-normed outcomes available to everyone. In other words, all employees on the whole will be making less than they would have made otherwise. At the individual level, the least productive employees may still, for a while, make more under this outcome-equality than they would have under merit, but the most productive will be making significantly less. This will push more of the latter to leave, further reducing the overall productivity of the remaining employees.

All of this will cause employees, who have been encouraged by the adoption of equity policies to believe that they “deserve” normed outcomes, to pressure executives to reduce their salaries to increase workers’. The downward pressure on executive compensation will be increased by the fact that the overall decrease in productivity spurred by equity programs will also reduce revenue available for dividends and buybacks for shareholders. This in turn will reduce share prices, which will cause some shareholders to sell their shares so that they can invest in more sane, more productive companies, which will decrease the stock price further.

And so, by embracing equity, corporate executives will have set off two separate vicious cycles that will make their companies worth ever less, while making them likewise more rancorous places to work and to lead. They will put downward pressure on their own compensation and, eventually, put their own job security at risk.

All of this seems like an awfully high price to put on the privileging of personal policy preferences over the objective duty to shareholders to keep their companies growing. It is, in the not-very-long run, objectively bad news for everyone legitimately connected to and interested in the company – in other words, the real company stakeholders, not interloping “activists” with politicized designs. This shouldn’t be surprising, as equity is nothing more than socialism for the private sector. Equality of outcome without concern for individual merit or accomplishment is the final goal of all socialist systems, and the incoherence of that destination is why all socialist systems fail – and, without the imposition of force, fail fairly quickly. Because this brand of private socialism comes woven in explicitly racist, sexist and ethnic hate and discrimination, per Mr. Kendi above, it is particularly toxic and damaging.

Whatever motivates CEOs to embrace equity, then, cannot be their fidelity to their fiduciary duties or to company success. Proceed accordingly.

The National Center for Public Policy Research is a communications and research foundation supportive of a strong national defense and dedicated to providing free market solutions to today’s public policy problems. We believe that the principles of a free market, individual liberty and personal responsibility provide the greatest hope for meeting the challenges facing America in the 21st century.