Affirmative-Action Reaction

After Supreme Court Ruling, Businesses Must Rethink Their Policies on Diversity

By Matt Murray
Staff Reporter of The Wall Street Journal

For American business, this summer's Supreme Court decision on affirmative action brought a double message: Efforts to promote diversity are acceptable, but racial quotas aren't.

Many companies seized on the first part of the message, and celebrated it. A number of large employers, including Ford Motor, General Electric and American Airlines, had supported the University of Michigan's defense of affirmative action in its admissions policies, and Justice Sandra Day O'Connor, writing the majority opinion upholding the system that gives an edge to minority applicants to the university's law school, explicitly cited that support.

But the court also made it clear, in striking down a points-based admission system used by Michigan's undergraduate school, that any hiring process resembling a quota system probably isn't legal. The court ruling could force significant rethinking of corporate policies for personnel ratings and even compensation.

"There will be some challenges internally to companies that tie management bonuses to diversity goals," says Freada Klein, a San Francisco diversity trainer. The ruling against the undergraduate school's system, she added, also will prompt employers "to make sure they aren't giving preferential treatment to minority candidates."

How Diverse Are We?

Moreover, the court's action is likely to raise questions at many companies about how truly diverse they are, says David Thomas, a professor at Harvard Business School who studies the rise of black executives. While companies have made great strides in recruiting more minorities over the past decade, those workers still have higher rates of attrition than other workers, and remain thinly represented in senior management ranks, Mr. Thomas notes. Minority employees, including managers, tend to occupy lower-ranking staff jobs that carry less prestige and often less pay.

"We know we can get people through the door, but now the question is, 'Which door in the company is it?' Is it the door into the more dynamic parts of the business?" he says.

Indeed, for all the progress that has been made, the numbers aren't encouraging in many sectors. Of the nation's 500 largest companies, only three are led by African-Americans-American Express, Merrill Lynch and AOL Time Warner. On Wall Street, meanwhile, in a 2001 survey that polled some of Wall Street's biggest firms, the Securities Industry Association, an industry group, found that among respondents, 50% of the work force consisted of white males. Of the other half, 32% of employees were white women, 9% were men of color and 9% were women of color.

Discussing, let alone answering, such questions will be tricky for many companies. Virtually all large companies have affirmative-action plans in place, especially if they do business with the federal government, but they rarely offer more than broad, long-term goals-and are almost never discussed publicly in any specifics. The vagueness in those plans could be underscored by the court ruling.

Justice O'Connor "is clearly saying you can have goals," says Barbara Arnwine, executive director of the Lawyers' Committee for Civil Rights Under Law. "But they must be flexible, they can't be rigid, and they can't be a quota."

More Creative Ways

Some experts hold out hope that by knocking out quotas, the decision could encourage companies to find more creative ways of hiring and interacting with minorities beyond the recruiting stage. Some companies have already made moves in that direction by emphasizing purchasing from minority businesses and serving minority clients.

In October 2001, Merrill Lynch, for instance, launched a program aimed at attracting more minority customers. The so-called Multicultural and Diversified Business Development group comprises a staff of just 10 people based in New Jersey. But it works with more than 1,300 of the firm's financial advisers nationwide to help target potential clients in the South Asian, Latino and African-American communities.

The business has only modest expectations, but so far it has exceeded them, attracting $600 million in net new money in 2002, surpassing its goal for the year of $500 million. Merrill also plans to add new staff and introduce a program targeting Chinese-Americans by the end of the year.

And some experts warn that legal challenges could mount for companies going forward aggressively with affirmative action. The use of preference programs to steer contracts to women and minority-owned businesses, for instance, has already been under steady legal assault for more than a decade.

While many supporters of such programs say they were pleased to see the court enshrine the principle that race matters, the reality is that programs that steer business to disadvantaged contractors on the basis of race have been getting scarcer and scarcer for several years, replaced mostly by programs that use geography as the indicator of disadvantage.

Do you think the Supreme Court made the right decision in the two University of Michigan cases? How important is diversity in the workplace? Write to letters.classroom@wsj.com.