A federal judge allowed a class action lawsuit against Wells Fargo to move forward, rejecting the bank’s motion to dismiss. The suit alleges that Wells Fargo conducted fraudulent, “sham interviews” of diverse candidates to inflate its diversity statistics and mislead investors.
The case highlights a practice known as “diversity washing,” where companies exaggerate or embellish their diversity, equity, and inclusion (DEI) efforts to gloss over less favorable real diversity data. As corporate America has emphasized DEI commitments in recent years, diversity washing appears to have become more common.
Diversity Washing
Besides public relations value, the practice seems to provide financial benefits. Research from Stanford Graduate School of Business finds that companies identified as “diversity washers” often receive higher environmental, social, and governance (ESG) ratings from firms like Refinitiv and Sustainalytics. This allows them to attract investments from funds focused on responsible investing.
“This misalignment between what is reported and what is practiced can mislead investors and stakeholders, causing the misallocation of capital,” says David Larcker, an accounting professor at Stanford GSB.
The research, published in the Journal of Accounting Research, analyzed thousands of companies’ financial documents since 2020. It found a major uptick in discussion of DEI issues, even as racial and gender workforce diversity made minimal changes. While companies with greater diversity did discuss DEI more often, the study’s authors found the link was weak overall.
Many firms seem to use “opportunistic DEI disclosures” to exaggerate commitment to increasing diversity. Diversity washers were more likely to face discrimination penalties and negative news about diversity issues.
“These large disconnects between what companies say and do on diversity are predictive of very negative behaviors,” says co-author Edward Watts. “If you have a bigger disconnect, you’re more likely to have a questionable diversity policy without a hard target.”
The study found diversity washing extends beyond financial reporting to other communications like CSR reports and social media. The researchers say these companies tend to use ambiguous, forward-looking language about improving diversity rather than aiming for real change.
Misleading Investors
This allows them to boost ESG scores and ownership by funds focused on responsible investing. But it means capital does not flow to the companies that are substantively committed to DEI. Investors may focus too much on what firms say rather than demographics data.
“Are investors being tricked?” asks Watts. “There have been growing pressures for disclosures related to diversity and pushback from companies, but without this information, investors cannot make educated decisions.”
The researchers conclude that stricter enforcement and standardized mandatory reporting rules are needed to ensure truthfulness. They add that though the SEC has increased scrutiny around ESG marketing by investment firms, they must do the same for companies’ claims.
Wells Fargo Lawsuit Alleges “Fake Interviews”
The Wells Fargo case spotlights an extreme version of diversity washing. First filed in 2023 by shareholders, the lawsuit alleges the bank conducted fake job interviews with minority and female candidates to inflate its diversity metrics.
While that initial case was dismissed, an amended version has now survived a motion to dismiss in a California federal court. The class action suit argues Wells Fargo misled investors by exaggerating its diversity statistics.
It points to the company’s 2021 proxy statement, which claimed over half of interviewed candidates for high-paying roles were “diverse.” The plaintiffs argue Wells Fargo inflated this number by interviewing diverse candidates it had no intention of hiring.
“Wells Fargo understands the value proposition of DEI and pandered to it by misrepresenting the diversity of its workforce,” the lawsuit states. It alleges fund managers were misled into investing in Wells Fargo based on diversity numbers that masked discriminatory hiring practices.
In its attempt to dismiss the case, Wells Fargo argued its proxy statements contained protected, forward-looking statements under safe harbor provisions. But Judge Edward Chen ruled that diversity statistics concerned past hiring rather than future plans.
The bank also claimed job interview details were not material information for investors. Judge Chen disagreed, noting that diversity disclosures matter to shareholders and citing research on the financial benefits of diversity washing.
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Stanford Professor: “Wells [Fargo] Case Tip of the Iceberg”
Professor Larcker says the Wells Fargo case reflects growing evidence that major corporations frequently embellish their commitment to diversity. His research suggests diversity washing is widespread even as social pressure for DEI transparency builds.
“I think this is just the tip of the iceberg,” Larcker says. “We’re going to see many more cases where companies have been promoting an image around diversity that doesn’t match the actual data.”
Larcker believes ambiguity around what constitutes misleading diversity claims has allowed the practice to proliferate. While fake interviews at Wells Fargo reflect an extreme example, many companies use exaggeration and spin to overstate DEI progress.
Tougher reporting standards are essential to end dubious practices, Larcker argues. He believes threats of litigation seen in the Wells case will make executives realize they must back their diversity rhetoric.
“Companies are going to have to work a lot harder to substantiate the actual diversity they’re achieving if they want to talk about it publicly,” says Larcker. “Otherwise we’ll see many more lawsuits like this one.”
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