By Danielle Walker

In early January, McDonald's announced it would be ending many of its diversity, equity, and inclusion initiatives. As part of the changes, the company said it would stop its practice of "setting aspirational representation goals" for its workforce and retire a program encouraging its suppliers to take a DEI pledge.

Additionally, McDonald's said it would stop referring to its diversity team as such, and instead call it the "Global Inclusion Team."

The changes at McDonald's came after a 2023 Supreme Court ruling against affirmative action in Harvard's admissions process, which had a chilling effect on corporate DEI initiatives. More recently, companies have had to contend with the Trump administration's anti-DEI executive orders targeting federal agencies and the private sector. (Some groups quickly pushed against the executives orders with lawsuits, including the city of Baltimore, the National Urban League, the National Fair Housing Alliance, and groups representing professors, restaurant workers and chief diversity officers.)

Despite these shifts affecting the legal landscape for corporate DEI, large corporations that have reversed course on their diversity initiatives aren't necessarily in the clear.

The big money -- large shareholders like pension funds and other institutional investors -- aren't all staging a retreat. In fact, many of these investors (which often have investment horizons spanning decades) see companies' diversity, equity, and inclusion practices as aiding their long-term competitive performance.

Many shareholder proxy votes have also affirmed keeping DEI policies in place because investors see them as improving long-term performance. In recent months, shareholders at Costco, Apple, and John Deere voted against anti-DEI proposals by wide margins.

A recent survey by investment consulting firm Cambridge Associates found that most institutional investors don't see changing attitudes about DEI as affecting their approach to sustainable and impact investing.

In February, Cambridge Associates released the survey, which queried foundations, colleges and universities, cultural and research institutions, religious institutions, independent schools, pensions, and hospitals.

Among 251 respondents who were surveyed last year, 95% of investors said that anti-DEI or anti-ESG sentiment, and/or related legislation, had not affected their sustainable and impact investing strategy.

Eye on McDonald's. Just two days after McDonald's announcement, one of the fast-food chain's shareholders, the California State Teachers' Retirement System, raised the issue at its board meeting.

"So they're talking about changing their language," Calstrs portfolio manager Lynn Paquin said at the pension fund's Jan. 8 investment meeting while updating the board on McDonald's revised DEI initiatives.

Calstrs, the second-largest public pension fund in the country, held 1.2 million shares of McDonald's stock, which were valued at around $300 million as of June 30, 2024, according to public disclosures by the pension fund.

"I think all of this is coming down to how they talk about things," Paquin said of McDonald's DEI changes. "I think that they recognize there have been benefits to their workforce and their productivity. So they don't want to end it."

"But, they're not going to be as public facing, in many cases, [like by] sponsoring certain community events. But they will continue to offer the training, inclusion programs [and] diversity programs to their workforce. And they will continue to report on that," Paquin said.

In its January email to employees, franchise owners and suppliers, McDonald's CEO Chris Kempczinski and other senior leaders said the company would continue to annually report demographic information about its board, employees, and suppliers.

McDonald's didn't respond to a request for comment for this article.

The fast-food behemoth is just one of multiple large corporations in recent months -- a group that also includes Google, Meta, Ford, and Walmart -- to scale back or retool its DEI initiatives.

Calstrs, which manages $352.7 billion in assets, didn't stay on the sidelines.

Its investment staff sent letters to other portfolio companies that rolled back their DEI initiatives and requested engagement meetings, Paquin said at the time of the January meeting, but didn't name the companies. Calstrs investment staff had held 10 engagement meetings with the companies, which weren't named in the meeting.

Letters were also sent to companies with "great DEI programs urging them to continue," Paquin said.

The efforts at Calstrs demonstrate that even if corporations begin to shy away from the DEI acronym or related corporate initiatives, investors will still need a risk management system to gauge how corporate culture, diversity of background and thought, and leadership values work to create a competitive advantage -- or disadvantage -- for companies.

As Paquin made clear, the language of DEI may go out of favor, but the principles aren't out of play for investors.

In an email, a spokeswoman for Calstrs noted that the pension fund has a "fiduciary duty to protect the best interests of our members and beneficiaries by ensuring our portfolio's long-term financial success."

"We believe a company's efforts to attract and retain a board of directors and workforce with a variety of perspectives reflects strong governance and good business. We have not made any changes to our voting practices and continue to vote in accordance with our Corporate Governance Principles," the spokeswoman wrote.

Risk management. For shareholders, workplace inequality remains a business risk -- one that could open corporations up to discrimination lawsuits, costly settlements, result in a poor work culture and problems retaining talent, and even put companies in the crosshairs of regulators.

Calstrs isn't the only mega investor keeping track of portfolio companies' DEI practices, or lack thereof.

Last March, New York state Comptroller Thomas DiNapoli, trustee of the New York state Common Retirement Fund, announced that he was filing shareholder proposals to address DEI issues at a number of the fund's portfolio companies, including Tesla, Wells Fargo, and Chipotle Mexican Grill.

DiNapoli said at the time that these companies had been affected by discrimination or harassment allegations, and that overall, "failure to establish robust DEI policies and practices can result in reputational damage, the loss of talent, and stunted innovation."

On April 2, DiNapoli reaffirmed the importance of corporate DEI in a written statement to Barron's, specifically as it pertains to the New York fund's shareholder interests.

"Companies that embrace inclusion and actively seek out diversity in all its forms are better positioned to create long-term shareholder value," DiNapoli said. "The Fund continues to encourage its portfolio companies to adopt forward-thinking strategies that result in attracting top talent from the broadest and most diverse talent pools."

Write to advisor.editors@barrons.com

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April 15, 2025 08:47 ET (12:47 GMT)

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