VII. ECONOMIC EFFECTS OF AFFIRMATIVE ACTION ON ORGANIZATIONS
At issue in any discussion of the merits or drawbacks of affirmative
action programs is the impact, if any, on organizations. Thus, we now turn to research on
organizational performance. Two categories of organizational performance are reviewed --
measures of organizational effectiveness and measures of financial equity.
A. Organizational Effectiveness
Several studies have examined how affirmative action programs, or lack
thereof, influence various measures of organizational effectiveness. In a study of
manufacturing firms, Leonard (1984a) found that the percentage of woman and minorities in
a firm (construed as a measure of the success of affirmative action policies) were not
associated with measures of manufacturing productivity and efficiency. Lovrich, Steel, and
Hood (1986) compared police departments in 65 cities that had substantially increased
their percent of minority police between 1978 and 1984 to those in of 56 cities that had
shown little increase. The two groups of departments were equally effective. In a study
using the same procedure, Steel and Lovrich (1987) compared performance of police
departments from 1970 through 1980. The found no consistent differences in performance
between departments with many (N = 34) or few (N = 39) female officers.
B. Stock Prices
Hersch (1991) found that firms charged with violations of
antidiscrimination laws experienced significant losses in equity value when a suit,
decision, or settlement was announced. Moreover, the average loss to shareholders exceeded
the amount the firm was required to spend to settle the case. Wright, Ferris, Hiller, and
Kroll (1995) obtained similar results, and also found that firms receiving awards for
exemplary affirmative action programs from the OFCCP had significant and positive excess
returns (with respect to market valuation) on the ten days following the announcement,
although this dissipated over time.
C. Summary
The research on organizational effectiveness has been limited to
cross-sectional analyses comparing organizations that probably differed in their emphasis
on affirmative action. Thus, there is a clear need for longitudinal research and for
research on the effects of specific AAPs on organizational effectiveness. Nonetheless, it
is interesting to discover that these studies provide no evidence for a negative effect of
affirmative action on firm performance; there were no differences between organizations
that appeared to emphasize affirmative action and those that did not. This conclusion
contrasts with the prediction that increased minority hiring will be associated with
decreased utility (e.g., Hunter, Schmidt, & Rauschenberger, 1977). There is a need to
reconcile the theoretically-based prediction of decreased performance with the empirical
finding of no difference. This discrepancy may be explained by Steffy and Ledvinka's
(1989) computer simulation of the long-term effects of selecting employees according to
different fairness rules (e.g., Cleary's regression approach versus proportional hiring by
racial group). They found that utility was strongly affected by selection ratio and
selection validity, but only weakly affected by the fairness rule (selection procedure).
These results suggest that the use of affirmative action to increase minority
representation may have little effect on organizational productivity in the long run, as
demonstrated by the research summarized in this section. The nonsignificant effects are
also inconsistent with the contention that increasing diversity will improve
organizational performance (e.g., Fernandez, 1991), though of course there is more to
diversity than race and gender. In the second area of research, it was found that stock
prices drop when organizations are charged with violations of antidiscrimination laws, and
rise when organizations are acknowledged for excellent affirmative action efforts.
Finally, it is important to stress that, although we have included all
the relevant articles of which we are aware, this review of economic effects doubtlessly
is not comprehensive. We provided this information because evaluations of affirmative
action may be affected by assumptions of its economic effects.