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Don't Make Texaco's $175 Million Mistake

March 1, 1997
In 1994, a group of senior executives at Texaco Inc. were in a meeting discussing a class-action discrimination suit brought by nearly 1,400 black professionals and middle managers at Texaco who claimed they were denied promotions because of their race. The meeting was secretly taped by one of the participants who, after he was laid off by the company last year, handed the tapes over to the suing employees' attorneys.

After reading transcripts of the tape, The New York Times reported that Texaco's executives had used racial slurs—including the "n" word—and poked fun at Kwanzaa, an African-American holiday. These affronts were in addition to plotting to destroy documents demanded in the discrimination suit.

The ensuing publicity was a public relations nightmare. The Rev. Jesse Jackson called Texaco "the Mark Fuhrman of Corporate America," a reference to the detective in the O.J. Simpson criminal case who was accused of using racial epithets. Civil rights groups including the National Urban League and the NAACP called for boycotts of Texaco gas stations. Texaco's stock price dropped several percentage points. And federal prosecutors launched a criminal investigation into obstruction-of-justice charges. The firestorm of negative publicity was so intense the company settled the racial-discrimination case two weeks later, agreeing to pay more than $175 million over the next five years. Although the company's new CEO, Peter Bijur, did what he could to repair the damage by acting quickly, the company's torn reputation will probably take a long time to heal.

The diversity debacle at Texaco made fascinating reading for several weeks. But for corporate human resources executives, the incident is much more significant, because it serves as yet another glaring reminder of how HR practices can build—or destroy—a company's bottom line. In fact, it's one of the best case studies in recent memory to show the financial impact of diversity work —or the lack of it.

What happened at Texaco also serves as a wake-up call to every other business in the United States. Good intentions aside, it's clear Corporate America has a long way to go in creating companies that truly value and support diversity—especially racial diversity. And although the huge financial impact of ignoring racial diversity in the workplace is, perhaps, not the best reason why companies should focus on eliminating bias at work, it's actually the reason that's garnering the most attention lately.

Texaco focuses attention on the need for diversity initiatives. As shocking as the Texaco fiasco appeared to laymen, few people involved with corporate diversity efforts were surprised. How could this happen? "Very easily," says Michele Fantt Harris, former president of the Black HR Network, and assistant vice president of HR for the Association of American Medical Colleges in Washington, D.C. "The gentlemen on the tape said what they believed," she says. "A Texaco can happen most places I know of."

Her reaction is echoed by minorities and diversity professionals all across the country, many of whom believe deep-seated executive prejudice was bound to be exposed someday. Like the videotaped police beating of Rodney King a few years back, to scores of Americans, the Texaco tape wasn't an isolated incident. Instead, it brought to light the harmful attitudes and behaviors that continue to exist in the world. "The only thing different about Texaco was that a tape recorder was in the room," says Yvette A. Hyater-Adams, senior vice president of change management for CoreStates Financial Corp. in Philadelphia. "Texaco got caught."

(Efforts by Workforce to contact the head of Texaco's diversity effort were unsuccessful. A company representative did, however, refer us to the company's new "comprehensive plan to ensure fairness and economic opportunity for employees and business partners."

To be fair, there has been great progress in the diversity movement over the last several years. By 1994, 72 percent of Fortune 500 companies had started diversity initiatives, according to a survey conducted by A.T. Kearney Executive Search, a recruitment firm based in Chicago. Only a handful of companies reported having diversity programs a decade earlier. But the progress appears to be slowing down. According to another survey in 1996 by the same organization, the number of firms with diversity efforts had increased just two percentage points, to 74 percent.

"Corporate America has lost momentum over the last two to three years in the creation of new diversity programs," says Michelle Smead, vice president and diversity practice leader at A.T. Kearney. "The reason for this needs to be explored so that CEOs can better understand how proactive handling of diversity issues can positively impact management goals and how neglect of these issues may produce tragic consequences such as those recently experienced by Texaco."

Peter Robertson, director of EEO Services for Organization Resources Counselors (ORC) in Arlington, Virginia, agrees. Because of all the publicity surrounding California's Proposition 209, which bans affirmative action at the state level, as well as the perceived erosion of federal equal employment opportunity (EEO) and affirmative action enforcement, he believes companies are doing even less to enforce EEO guidelines and to make the workplace a hospitable environment for women and minorities.

"I estimate only about 15 percent of companies have quality EEO and diversity programs in place," he says. The rest are gradually dismantling their EEO functions, eroding their ability to deal with discriminatory behavior rather than eliminating the behavior altogether. Considering that charges of race discrimination still form the largest percentage of cases filed with the Equal Employment Opportunity Commission (EEOC)-more than both gender and age discrimination-the relaxed attitude toward potential racial discrimination is bound to be expensive.

Ignoring diversity is costly. Although all the negative publicity surrounding Texaco makes, on its own, a good business case for keeping the focus on diversity high, there are other bottom-line reasons why companies can't slack off, not the least of which is the potential for increased, costly litigation. In a recent report by ORC that tracked recent large-settlement discrimination cases, racial-discrimination cases —especially those with class-action status—have won some of the largest jury awards and cash settlements. In fact, Texaco's cash settlement of more than $140 million, combined with additional concessions valued by plaintiffs' lawyers at $35 million-is the largest settlement ever in a racial-discrimination case.

The visibility of the Texaco case, coupled with the financial windfalls received by plaintiffs in the other recent lawsuits, will increase the willingness of those who have been treated unfairly to pursue legal action, says Taylor Cox Jr., associate professor of the University of Michigan Business School at Ann Arbor, and author of the book, "Cultural Diversity in Organizations," (© 1993, Berrett-Koehler Publishing, San Francisco).

Robertson adds that potential plaintiffs will be helped by attorneys who are more willing to take on these lawsuits thanks to the increased potential for large damage awards, and by judges who are more likely than ever to grant certification for large-scale, class-action cases. Additionally, there are many winning plaintiffs eager to lend a hand. A report available on the World Wide Web, for example, is called: "How to Sue Your Corporate Employer for Unlawful Discrimination or Harassment and Win." It was written by a former employee of Hughes Aircraft Systems in El Segundo, California, who claims to have won a jury award worth $86.9 million in a racial-discrimination suit.

According to Robertson, the next group of lawsuits, which is already under way, is what he calls "second-generation" discrimination suits. "The first wave of discrimination cases was based on the failure of companies to hire more women and minorities," he says. With the hiring problem mostly solved, the next round of lawsuits is being based on the failure of companies to promote and compensate those employees at the same level as white males. In fact, this is what formed the basis of the Texaco case.

Another reason to work vigilantly against discrimination is the increased potential for public pressure and boycotts by civil rights groups. Even the threat of a boycott, as in the Texaco incident, can provide a lot of leverage for groups seeking redress for past discrimination. In 1996 alone, Avis, Mitsubishi, R.R. Donnelly and the United Dairy Farmers were targets of boycotts because of alleged racial discrimination. "The Texaco incident does have the potential to catalyze the civil rights movements into a more aggressive campaign," says Wade Henderson, executive director of the Washington D.C.-based Leadership Conference on Civil Rights. Money, as they say, talks. And businesses increasingly will have to listen, because internal diversity awareness and fairness aren't the only good financial reasons to focus on discrimination.

Business success may depend on good diversity relations. Even though preventing boycotts and lawsuits may be enough of a bottom-line reason for companies to shore up their diversity efforts, an even better, long-lasting and more proactive reason is that it's for the good of the business overall. Sure, it would be nice to think companies would embrace diversity because "it's the right thing to do." But as the 1996 A.T. Kearney survey revealed, 74 percent of companies with diversity efforts attribute them to business, societal and/or political pressures—not basic ethical values. Given that, one of the primary business reasons to pursue diversity sensitivity is increasing the company's ability to attract and retain customers.

Boston-based BankBoston, for example, was able to document its business case for diversity by taking a look at the financial value of certain demographic groups and thus, its need for quality banking relationships. When research conducted through Money magazine, "Marketing News," and the book, "Multicultural Marketing," by Marlene Rossman (© 1994, AMACOM Press, New York) put the total U.S. purchasing power of Asian Americans at $100 billion, Hispanics at $193 billion, African-Americans at $284 billion and gays and lesbians at $500 billion, it didn't take long to convince the company's senior executives that diversity was a sound business strategy, according to Kim Cromwell, director of workforce effectiveness. "The total purchasing power for these groups cuts across all industries," Cromwell says, "so any company can benefit from a business strategy based on diversity."

The bank's decision to pursue diversity as a business strategy was further strengthened by Harvard Business School research. "We realized that diversity efforts can increase employee satisfaction," Cromwell says, "and the Harvard Business School has been able to demonstrate a strong link between employee satisfaction, customer satisfaction and shareholder value."

The connection between diversity and shareholder value was further established in a 1994 report by the Glass Ceiling Commission, a division of the U.S. Department of Labor established by Congress in 1991 to eliminate the barriers to advancement for women and minorities. The report found that the annualized return for the 100 companies which rated lowest in EEO issues averaged 7.9 percent, compared to 18.3 percent for the 100 companies that rated highest in their equal employment opportunities. Put another way, the stock performance of firms that were high performers on Glass Ceiling-related goals was 2.5 times higher than that of firms which invested little toward achieving such goals.

Why we're still struggling with diversity. Given the solid business motivation for diversity, why are companies still struggling with discrimination-related issues? Why is the potential for lawsuits still rising 33 years after the passage of the Civil Rights Act? How does a Texaco incident happen in an age when 74 percent of large companies claim to be pursuing diversity initiatives?

"Because the changes companies have made have been largely cosmetic in nature," explains Hyater-Adams. Up to this point, most diversity work has been focused solely on diversity-awareness training, she says. This raises the awareness of individual employees but does nothing to change the culture itself.

Diversity consultant Elsie Cross of Elsie Y. Cross Associates in Philadelphia agrees, adding that much of the training done to date has been superficial. "You can't take people who've grown up in a prejudiced society and get rid of their beliefs and attitudes in a half-day training session," she says. Not only that, but in seeking to address every kind of difference imaginable, including age, religion, management level and even the particular concerns of white males, much of the training has become watered down. While this may make the training more palatable to some, Cross says it takes the focus off the very real oppression that still exists for women and minorities.

The stock performance of firms that were high on [diversity]-related goals was 2.5 times higher than firms that weren't.

In fact, by hoping that training, on its own, will be the solution to their diversity woes, companies have probably lost more ground than they've gained. This is because training done in the absence of any formal support for change can increase divisiveness in the workplace. Why? Not only because it raises awareness of tense issues, but also because it can increase the expectations of women and minorities, and increase fear and resistance among white men.

"Most organizations that have invested in diversity training haven't received a proper return on their investment," Cox says. Just look at Texaco: the company had initiated a diversity effort a year before the secret tape was made, and senior executives had attended at least one awareness session.

To make the workplace an environment that's truly inclusive of diversity, companies must begin to think of training as a component of their diversity strategy, not the strategy itself. Hyater-Adams believes companies must now concentrate on the second stage of diversity work that she calls "integration and application." This stage not only seeks to address what training ignored, such as management hypocrisy, but also seeks to make diversity work a business strategy. The goal, according to diversity experts, is to create a workplace in which white males, women and minorities are fully integrated and have equal access to power, promotions and opportunities.

How? There's still no definitive, cut-and-dried formula for diversity that succeeds for every company. Even the best diversity training, programs and initiatives, although no longer in their infancy stages, certainly are still at the toddler level. However, there's much to learn from the organizations that have successfully pursued diversity goals.

Elements of a successful diversity initiative. Although companies must customize their diversity initiatives to meet their own unique needs, diversity efforts that are perceived to be effective do share some common characteristics.

The first is top-level leadership, commitment and accountability. Companies must have a clear, unambiguous policy of diversity that comes from the very top, says BankBoston's Cromwell. "Here, HR doesn't own diversity," she says. Instead, HR is a consultant to the effort.

In her company, the CEO has led the diversity charge and has assigned several senior executives to key diversity positions. A senior vice president led the effort to document the business case for diversity, for example. Not only that, but two senior executives also are assigned as sponsors for each employee resource group. These are groups formed to address the concerns of specific employee populations such as African-Americans, gays and lesbians, Hispanics and people with disabilities. To increase understanding, the senior executives assigned to these groups don't fall into those particular classifications. Two white executives, for instance, sponsor the African-American group.

To make sure the bank's top 200 executives understand the challenges inherent in diversity work, they're required to attend a five-day diversity leadership conference. "This allows them to slow down, consider their own issues relative to diversity and get educated about the challenges involved," Cromwell says. To keep the diversity discussion alive, conference attendees are encouraged to maintain contact with each other afterward. One group of attendees formed a "reading circle" in which members share information with each other on diversity topics. Conference goers also are invited to attend follow-up seminars and events, such as one held last November on cross-race mentoring.

Important as executive training is, May Snowden, executive director, diversity, at US WEST in Englewood, Colorado, thinks executives must also be personally committed to the effort. "I believe the incident at Texaco happened because executives gave their 'buy-in' to diversity, but not their personal commitment," she says. In other words, they talked the talk in public but didn't get personally involved. How should a company engender personal commitment from upper-level leaders? By holding them accountable, she says, both quantitatively and qualitatively, to setting and meeting diversity goals.

According to a recent study by New York City-based The Conference Board, as much as 25 percent of managers' and executives' bonus and incentive compensation is being tied to diversity objectives. "Companies want managers who aren't only successful with profit margins, but who also can create a positive environment that values, respects and leverages all employee talents while providing fair advancement for all employees," explains Michael Wheeler, research associate in The Conference Board's HR/organizational effectiveness department, and author of the report. "Holding management and employees accountable for diversity-related behaviors and actions becomes a basis for creating inclusive environments."

At US WEST, for example, managers must demonstrate their personal commitment to diversity through direct involvement on committees, task forces or community groups-they can't pass the task off to a subordinate-and they must show how their commitment is changing the demographic profile of workers in their unit, division or community. Furthermore, a portion of their compensation is tied to the achievement of diversity goals. Although there's no set formula, appraisals drive compensation, and work with diversity contributes to a good appraisal, explains Lois Leach, company spokesperson. What are the consequences if diversity goals aren't met? "Let's just say there have been people whose careers didn't fare well because of a lack of commitment to diversity," she explains.

Next, conduct ongoing diagnostics. Companies can't proceed with diversity unless their leaders understand issues involved with each group. Performing regular diagnostics, in the form of focus groups and employee evaluations, can help HR executives uncover these issues. "Companies must [analyze] the data by different populations," says Cromwell. If they don't, issues that affect certain employee populations-the lack of informal mentoring for minorities, for example-may not be noticeable when combined with other employees' responses.

Diagnostic work helps diversity professionals understand what issues to tackle first. At UNUM Life Insurance Company of America, based in Portland, Maine, executives had trouble understanding why the company couldn't retain minority employees. After much evaluation, they realized that although their focus on minority recruitment may have successfully attracted employees to the company, they weren't staying long.

Why? "Because internally, we thought we had to be color blind and treat everyone alike," explains Sandy Bishop, manager of diversity. In retrospect, she says, what the company should've done was recognize that real differences exist for people of color, both in terms of experience and opportunity. Ignoring those differences led the company's minority employees to think their issues weren't understood.

The company culture wasn't the only problem, however. Externally, the community itself wasn't supportive of diversity—minority employees were having a hard time finding supportive churches, social clubs and consumer services.

Putting their recruitment efforts aside, the company has spent the last six years working hard to help employees understand that differences do matter, and that people from different backgrounds have different perspectives and issues that should be addressed head on. They achieved this understanding through company-sponsored diversity-awareness training; the development of employee "affinity groups"; ongoing visibility of diversity issues in the company newsletter; and by holding employees accountable through their performance-management plans and for participation in activities that increase their diversity awareness. "For diversity to work, employees had to be accountable for pursuing their own education," Bishop says.

Through its work with local schools, nonprofit groups and other companies, the organization also has worked to make the community more supportive of diversity. "It has taken awhile, but we believe we've created a culture that supports and understands differences," Snowden says. "Now, we can begin to focus our attention on changing HR activities to reflect our diversity goals."

Make sure there's company support and regular evaluations. After diagnostics, make sure your company has supportive systems and practices. As Snowden suggests, companies must have a supportive culture in place before true diversity can become a goal. Training and education is an important first step in creating a supportive culture, but there comes a point when all of the company's systems and practices must reflect the diversity effort. Companies that have made diversity an integral part of their business philosophy recruit using "nontraditional" sources, such as black and Hispanic fraternities. They ask minority employees how changes in benefits will affect them. And when designing products or creating marketing campaigns, they ask for input from a diverse range of consumers.

For instance, at CoreStates Financial Corp. every major project team, including those for reengineering and quality initiatives, are created using a cross section of employees. "We want to make sure the input of all employees is considered on major business initiatives," says Hyater-Adams. "But more than that, we want diverse teams of employees to lead their business units."

Finally, make sure you conduct regular evaluations. Companies must always be taking the pulse of employees to make sure that no diversity issue is overlooked. "What most companies need today is better information on minority issues," says Robertson. This includes statistics on the workforce profile, on major lawsuits or employee complaints of discrimination, and performance data about individual managers. This information must be shared with upper-level executives on a regular basis along with all the other profit-and-loss data they receive. If Texaco's executives had been receiving this information regularly, Robertson suggests they might never have been the target of a discrimination suit, or the ensuing negative publicity.

Of course, when it comes to diversity work, nothing is guaranteed. All a company's best intentions and its chief executives can be thwarted by the discriminatory actions of a single manager. But if company leaders begin to approach diversity like any other major business initiative—be it safety, reengineering or self-managed teams—they'll be in a better position to institutionalize diversity and truly encourage and embrace the different perspectives of each employee.

No doubt, the hardest part of the work will be having patience for the long road still ahead. But for HR executives, it's work worth doing because of the strong message it sends to employees, and increasingly, to consumers. "Companies that are surviving in today's competitive marketplace are those that have focused their attention on HR [issues]," says Robert Drago, professor of economics at the University of Wisconsin in Milwaukee. If companies can eliminate discrimination in the workplace, just think of the impact it can have on the marketplace, the bottom line and in society overall.

In the final analysis, perhaps the best way to look at this issue is the way Cross describes it: "Diversity isn't the problem, it's the ideal." It's certainly an ideal worth striving to attain—and a financial driver we can no longer ignore.

Workforce, March 1997, Vol. 76, No. 3, pp. 58-66.