New York is pressuring insurance companies into "diversity" hiring. This raises potential constitutional problems, because government agencies are not supposed to pressure regulated firms to use race or gender in hiring decisions. In 1998, an appeals court struck down an FCC regulation that prodded companies to try to achieve diversity goals in hiring, by auditing them if they failed to achieve those goals. (See Lutheran Church v. FCC (1998)).
Yet last month, New York's Department of Financial Services wrote:
To: All New York Domestic and Foreign Insurance Companies
Re: Diversity and Corporate Governance
As Superintendent of the New York State Department of Financial Services (DFS), I have consistently stressed the critical importance of diverse perspectives to problem-solving. Research shows that diverse teams perform better, innovate more, and are more effective at managing risks….DFS expects New York-regulated insurers to make the diversity of their leadership a business priority and a key element of their corporate governance….
DFS has evaluated different regulatory approaches to promote DEI in the insurance industry, including the imposition of quotas and the collection and disclosure of diversity data….Based on our research and outreach, we have determined that the best way for DFS to support the insurance industry's DEI efforts is by collecting and publishing data relating to the diversity of corporate boards and management. Data collection is essential to identify areas for improvement, set goals and measure progress toward those goals...making that information public will allow companies to assess where they stand compared to their peers and, we hope, raise the bar for the entire industry. Transparency is a powerful catalyst for change….
As a first step, DFS will collect data from New York domestic and foreign insurers with more than $100 million in annual New York premiums relating to the gender, racial, and ethnic composition of their boards and management….
Hiring based on race or gender can be quite harmful. Whether or not naturally-occurring "diversity" helps employers perform better, coerced hiring based on gender or race does not. Pressure to hire based on race or gender can damage a company's performance by resulting in less qualified hires. After Norway adopted gender diversity rules for corporate boards — requiring companies to have boards of directors comprised of at least 40 percent women — unqualified people ended up as corporate directors. “A study by the University of Michigan found that this led to large numbers of inexperienced women being appointed to boards, and that this has seriously damaged those firms’ performance.”
A 2009 study in the Journal of Financial Economics found that the "average effect of gender diversity on firm performance is negative," so "mandating gender quotas for directors can reduce firm value." (See Renee B. Adams & Daniel Ferreira, "Women in the boardroom and their impact on governance and performance," Volume 94, Issue 2, November 2009, Pages 291-309)
Even on government boards, where representing society at large can be more important than paper qualifications, judges have said that gender quotas and set-asides are unconstitutional. Courts have struck down gender-balance requirements for boards and commissions in cases such as Back v. Carter (1996), rejecting the argument that setting aside seats for women and minorities promotes "inclusion" and "diversity."
A court rejected the idea that the FCC could consider gender "diversity" in awarding broadcast licenses, in order to provide diverse perspectives on the airwaves, in Lamprecht v. FCC (1992).
So New York should not be able to force insurers to consider gender or race in hiring to promote "diverse perspectives to problem-solving."
Under the Constitution, diversity is only a reason for an institution to voluntarily consider applicants' race -- not a reason for a government agency to force it to use race. The Supreme Court has said that because colleges have "academic freedom," they can consider college applicants' race in admissions to promote "diversity." (See, e.g., Regents of the University of California v. Bakke (1978)).
But there is no "academic freedom" involved in a state insurance regulator pressuring private companies to hire differently than they otherwise would. Such pressure limits companies' freedom, rather than exercising it.
Moreover, discrimination statutes restrict diversity-based hiring. Some courts have ruled that "diversity" is not a reason for considering race in hiring, as opposed to college admissions. (See, e.g., Messer v. Meno (1997); Taxman v. Board of Education (1996)).
If an employer has a "manifest racial imbalance" in its workforce compared to the qualified labor pool, it can often voluntarily consider race in hiring. (See Janowiak v. South Bend (1984)).
But the fact that an employer can voluntarily use race does not mean the government can force it to do so. (See Truax v. Raich (1916)).
It is true that diverse companies often do better than non-diverse companies -- but their diversity is due to their growth, rather than their growth being due to their diversity. Affirmative action plays no role in their success.
With each passing year, the percentage of minority college graduates grows, because young people as a group are more heavily minority than their elders, due to immigration -- immigrants are disproportionately Asian or Hispanic -- and the higher black and Hispanic birthrate.
So a company that is not growing and hires few new people will naturally have a smaller percentage of minorities in its ranks than a company that is growing and hiring new people. An expanding company’s success does not occur because of the rising number of minorities in the company; rather, the company's expansion results in it hiring new employees, who are disproportionately minorities compared to its original workforce. That gradually results in more "diverse" workforce, even without any affirmative action or racial preferences in hiring.
But such gradual increases in diversity are not enough to satisfy New York's Department of Financial Services.
Hans Bader practices law in Washington, D.C. After studying economics and history at the University of Virginia and law at Harvard, he practiced civil-rights, international-trade, and constitutional law. He also once worked in the Education Department.