DEI continues to be the rule at Costco. Is company putting bottom line at risk?
WATCH: Costco shoppers speak out after company's DEI practices fall under scrutiny
Americans from Texas, Michigan and New York react to Costco's refusal to adhere to President Trump's private sector suggestion to band DEI hiring policies.
By now, many companies have learned the hard way that Diversity, Equity, and Inclusion (DEI) programs aren’t the business panacea they were once sold to be. In recent weeks, Google, Amazon, Walmart, Ford, McDonald’s and many other major corporations, facing backlash and declining employee morale, have backtracked from DEI, shifting gears in the face of mounting legal and financial risks. But Costco, against the tide, has doubled down on its DEI initiatives — at the peril of its bottom line, and now, its legal standing.
Costco’s DEI program isn’t just a set of lofty ideals. It is embedded in the company’s operations at every level, with a Chief Diversity Officer at the helm and employees dedicated solely to diversity goals. This program informs hiring decisions, with race and gender as key factors in determining who is hired.
Moreover, the company favors racial minorities and women-owned businesses when selecting suppliers, and its donations go to controversial activist groups — some of which have been accused of illegal racial discrimination themselves.
In a bid to halt Costco’s DEI trajectory, a shareholder proposal was recently brought forward, urging the company to evaluate the risks associated with its diversity policies. This proposal pointed to the legal case of Starbucks, which was forced to pay a $25 million verdict for a single instance of discrimination against a White employee. While that case involved only one individual, the financial fallout for Costco could be catastrophic.
While many companies move away from DEI, Costco continues to stick to its outmoded strategy. FILE: In an aerial view, the Costco logo is displayed on the exterior of a Costco store on July 11, 2024, in Richmond, California. (Photo by Justin Sullivan/Getty Images)
If even a small fraction of Costco’s up to 200,000 non-minority employees decided to sue, the company could face judgments running into tens of billions of dollars. But when confronted with this data, Costco didn’t retreat; instead, the company’s board rejected the proposal and defended its DEI program. The company claimed that its focus on diversity wasn’t just about improving financial outcomes, but about "enhancing our culture and the well-being of people whose lives we influence."
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Despite the risks outlined, the three biggest asset managers — BlackRock, Vanguard and State Street — were complicit with the board in driving Costco’s DEI push. With significant stakes in the company, these investment giants control nearly a fifth of Costco’s shares. Their votes likely provided the critical mass necessary for the proposal’s overwhelming passage. BlackRock, Vanguard and State Street have continued to champion DEI, even as its legal implications grow clearer.
Costco’s blind commitment to DEI is now drawing the attention of legal authorities at the highest levels. In late January, President Donald Trump issued an executive order directing federal agencies to scrutinize companies that maintain illegal discriminatory practices, including DEI initiatives. Each agency is tasked with identifying companies — such as Costco — that may be violating federal laws prohibiting discrimination.
On top of this, a coalition of 19 state attorneys general has stepped up, urging Costco to reevaluate its DEI policies. They argue that Costco’s programs may be in violation of anti-discrimination laws, and the company has just 30 days to comply with their demands or face further legal action.
Costco’s decision to dig in its heels on DEI is a bold one and could prove to be disastrous. The mounting legal challenges and the ever-growing body of evidence showing that DEI programs increase workplace hostility and fail to yield the promised business benefits should give pause to anyone still holding out hope for their success.
As more states and federal agencies take a closer look at the legal ramifications of DEI policies, companies like Costco may soon find themselves on the wrong side of the law, facing penalties that far outweigh any short-term cultural benefits. For investors, this should be a wake-up call. Costco’s stock has tripled over the past five years and is sitting at an all-time high. Pushing for divisive, race-based policies could alienate customers and increase legal exposure, impacting the share price.
The tide is turning for most firms. Companies across America are waking up to the dangers of DEI. Disney, Target and Anheuser-Busch all saw their stocks plummet after DEI controversies and are trying to make amends. Costco might be next to learn that diversity at the expense of the law and customer preference is a bet that doesn’t pay off.
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Anson Frericks is the co-founder of Strive Asset Management and the author of, "Last Call for Bud Light."
