The Business Case for DEI in U.S. Legal Cannabis: Are Investors Rewarding the Right Behavior?

Guest post by Darryl K. Henderson, J.D. of Keith Consulting Group

I recently read posted on LinkedIn about about the Model Municipal Social Equity Ordinance proposed by the Minority Cannabis Business Association (MCBA). This model legislation was drafted with the assistance of the National Cannabis Industry Association and the Drug Policy Alliance.

One of the comments to the LinkedIn post said, in pertinent part, “I’d say there are plenty of free-market capitalists who say that we will build the industry consumers demand and support – they are also largely the ones who will or already are positioned to profit, regardless of matters of equity or fairness.” That comment made me think, if the term “consumers” is broadly interpreted to mean product/service buyers and investors, should the U.S. legal cannabis industry thrive irrespective of the views of “consumers” about matters of DEI?

Defining DEI

Let’s establish a baseline of definitions:

Diversity – technically refers to differences. However, people can be different and similar, but not the same, because of diversity attributes. So diversity refers to diversity attributes, which define each of us as a unique person. Diversity attributes include the following:

• Personalities – our pattern of thoughts, feelings and behaviors.
• Characteristics – our race, color, ethnicity, sex, age, disability status, sexual orientation, gender identity, talents, etc.
• Backgrounds – our socioeconomic status, geographic origin, national origin, international status, language, family background, educational background, work experience, job title, military veteran status, etc.
• Affiliations – our marital status, parental status, religion, political affiliation, organization membership, etc.

Several diversity attributes naturally exist within an organization. Other diversity attributes must be deliberately brought into an organization because for a variety of reasons they do not naturally occur. And diversity attributes shape how people think, behave and communicate.

Equity – refers to fair access, opportunity and treatment. Equity is codified in employment laws. The pursuit of equity, including anti-discrimination and anti-harassment, helps to foster an organizational culture that is supportive of diversity and inclusion.

Inclusion – means to involve. Inclusion is a choice. It refers to deliberate actions to engage and collaborate with people while allowing them to be themselves and do their best to achieve a common goal. Diversity without inclusion can lead to conflict, grievances, lawsuits, a negative organizational reputation, missed money-making opportunities, and avoidable business costs.

The Business Case for DEI in the U.S. Legal Cannabis Industry

Listed below are business reasons – beyond altruism – why legal cannabis organizations should invest time, talent and treasure into DEI initiatives:

1): To fulfill the organization’s broader mission & core values

Here is an example, using an organization that I am helping to develop a comprehensive DEI Strategy and Action Plan, the National Cannabis Industry Association (NCIA). The NCIA mission states that part of the purpose of the organization is:

Inclusion is one of its six core values:

NCIA advocates for a regulated but inclusive cannabis industry, open to responsible and capable American businesspeople from all walks of life. To that end, we support policies to protect members of disadvantaged communities from being shut out of employment in the emerging legal industry as well as sensible regulations and tax policies that will ensure the cannabis industry remains a vibrant and diverse business sector for years to come.

2): To buttress the organization’s abilities to attract, engage and retain diverse groups of highly talented employees and business partners

The communities in which legal cannabis organizations operate, and the markets from which those organizations select employees and suppliers, are diverse. Diversity is a fact of life, and top talent exists in equal proportions across demographic groups. So having a business environment that welcomes diversity and fosters equity and inclusion helps us to attract, engage and retain top diverse talent.

3): To enable the organization to actualize research findings that diversity, leveraged with inclusion, is good for business

A growing body of empirical evidence gathered by internationally-respected business sources has established that diversity, leveraged with inclusion, drives creativity, innovation, problem-solving, employee engagement and productivity:

• Gender-diverse companies are 15 percent more likely to financially outperform non-gender diverse companies (i.e., have financial returns above their respective national industry medians). And ethnically diverse companies are 35 percent more likely to financially outperform. – Source: McKinsey & Company, 2018
• Companies with at least one female board member had a return on equity of 14.1 percent over the past nine years, greater than the 11.2 percent for those without any women. The stock valuations are also higher for gender diverse boards versus all-male boards. – Source: Credit Suisse Group, 2018
• Employees of firms with 2-D diversity (i.e., inherent traits and acquired experiences) are 45 percent more likely to report a growth in market share over the previous year and 70 percent more likely to report that the firm captured a new market. – Source: Harvard Business Review, 2018
• Diverse and inclusive workforces demonstrate 1.12x more discretionary effort, 1.19x greater intent to stay, 1.57x more collaboration among teams, and 1.42x greater team commitment (i.e., higher levels of employee engagement, which is the core driver of business productivity). – CEB Inc. (formerly Corporate Executive Board), 2018
• According to the U.S. Census, African Americans, Hispanics and Asian Americans represent nearly 40% of the U.S. population. And consumers within those demographic groups have an impressive spending power of $3.2 trillion. – Nielsen Insights, 2018
• U.S. Millennials (born 1984 to 2002) represent 26% of households across the U.S. and are the most racially and ethnically diverse of all generations: 49% are white, 20% are Hispanic (the most of any generation to date), 12% are African American, 7% are Asian, and 12% comprise a selection of other races. – Nielsen Insights, 2018
• Women cannabis consumers have nearly doubled, and the growth of women entering the market has outpaced men, with women now representing 38% of cannabis consumers (from 35% in 2017). But baby boomer consumers grew 25% (the highest amongst demographic groups). – Eaze Insights, 2018

4): To correct the negative effects of the nation’s war on drugs and the DEI issues within the U.S. legal cannabis industry

Our nation’s war on drugs and the disproportionately negative impact on people of color (“PoC”) and poor people point directly to African Americans and Hispanics.

It is well documented that President Richard Nixon, in 1970, wanted to link cannabis use and its contrived negative effects to black people and hippies, who he perceived to be his political enemies. Unfortunately, Nixon’s ill-motives have endured to the detriment of PoC for more than 50 years, up to present day.

FBI data reveals that 659,700 cannabis-related arrests occurred in 2017, comprising 40% of all reported U.S. drug arrests. This was nearly 12,000 more cannabis arrests than were made in 2016 (which, in turn, saw an increase from 2015). Studies show that PoC are arrested for cannabis crimes at 4x the rate of whites despite the fact that PoC consume cannabis at roughly the same percentage rate as whites.

To compound the negative reality of the statistics above, Marijuana Business Daily, the leading cannabis industry publication, in 2018 reported that white men own and operate 81% of U.S. legal cannabis businesses, while PoC own and operate just 19% of those businesses. By comparison, white men own 57% of total privately-held businesses in the U.S. and make-up 40% of the U.S. labor force.

The primary challenges to involving PoC in the U.S. legal cannabis industry are as follows:

• Fear – the fear amongst PoC to get involved in the industry, driven by (a) their awareness of the disproportionate number of convictions for PoC for drug crimes (e.g., 57% of people in state prisons for drug offenses are black and Hispanics, but they only make-up 32% of the U.S. population), and (b) their lack of education about both the benefits of cannabis use and the status of cannabis legalization.
• Money – the huge disproportionate lack of capital and access to capital for PoC to afford the thousands-to-millions of dollars in license-application fees, license fees, permits and capital outlays needed to launch and operate a legal cannabis business.
• Exclusion – the failure, too often, to include qualified PoC in the different ownership, governance, leadership and staff opportunities within the industry, as well as the inability of too many PoC to participate in the industry because of criminal non-violent drug convictions.

5): To enable the organization to sidestep avoidable business costs associated with inequitable behavior and legal noncompliance

Having a business environment that welcomes diversity and fosters equity and inclusion will enable legal cannabis organizations to comply with applicable equity standards, including federal, state and local regulatory and anti-discrimination laws, thus sidestepping the penalties and costs associated with inequitable behavior and legal noncompliance.

To put this risk in context, in FY 2017, the top five types of employment discrimination charges handled by the EEOC, the federal agency tasked with enforcing federal anti-discrimination and anti-harassment laws, were (1) Retaliation, (2) Race, (3) Disability, (4) Sex (including sexual harassment) and (5) Age. The EEOC reported a 13.6% increase in sexual harassment charges in FY 2018.

Boss Ladies of Cannabis (BLOC), founded by Rachel Colic, recently conducted a survey of 156 women working in the U.S. legal cannabis industry to ask their experiences with sexual harassment (as reported by Weedmaps on 2-21-2019). 53% of the respondents said they have experienced work-related harassment, with 46% saying it was sexual harassment. Only 30% said their companies deliver anti-sexual harassment training. Only 9% said they reported the incidents of harassment to the human resources department; the other 91% said they did not feel safe speaking out about the offensive conduct.

Russell Reynolds, the executive search consultancy, in an analysis published in Fortune.com on March 4, 2019 stated that companies who had public incidents of racist and sexist “bad executive behavior” in 2017 and 2018 saw an average 7 percent decline in market capitalization in the weeks following the news. The combined market hit was about $4 billion.

Bottom-line of the DEI Business Case

Fostering diversity and leveraging the value of diversity with equity and inclusion helps to enhance the quality of products/services, as well as drive business productivity, profitability and growth.

Close the Gap between Intentions and Reality

As a free-market capitalist, I have observed that U.S. history has shown that when left to normal practices, too often, capitalism excludes anyone not packaged as a white man. That has occurred both outside and within the U.S. legal cannabis industry. Despite the good intentions of many people, including white men, too often diversity, equity and inclusion have not been adequately integrated into capitalism.

Deliberate policies and practices are needed to foster fuller diversity and to leverage the value of diversity with equity and inclusion within the U.S. legal cannabis industry. Legal cannabis organizations – be it VC firms, private equity firms, investment clubs, regulatory agencies, cannabis-handling businesses, ancillary service businesses, industry associations, etc. – should make DEI a natural part of their everyday business strategies at every level and in every aspect of operations. That includes equitable opportunities for business ownership, board seats, executive roles, management staff, non-management staff, access to products/services, vendors/suppliers, community outreach, etc.

Social equity programs, which are one of several components of a comprehensive DEI Initiative, must be adequately equipped with funding, qualified mentoring for program participants, and other necessary resources to ensure success of the programs. This should occur through public-private partnerships at the state, local and federal levels – targeting partnerships with organizations like Women Grow (i.e., Business of Cannabis Mini Summits), National Urban League (i.e., entrepreneurship training programs), etc. Fostering successful U.S. legal cannabis enterprises is more than a states’ rights issue. The federal government has an important role to play in many aspects of the legal cannabis industry, to include successful execution of social equity programs and other DEI efforts.

But no DEI effort, regardless of the source, will foster DEI sustainability unless there is enlightened and actively committed leadership, coupled with meaningful accountability. What gets led, measured and rewarded or penalized gets done.

Big Data and data analytics are helping to transform and enhance businesses across the world. Why not use those tools within the U.S. legal cannabis industry to help foster DEI sustainability? Firms like New Frontier Data and BDS Analytics should begin to collect and analyze national DEI data and place the results onto a model DEI Scorecard. The information would have multiple uses, including the following:

• Help educate U.S. legal cannabis industry stakeholders about the status of DEI within the industry.
• Serve as benchmark data for legal cannabis business executives and help them to make better informed business management decisions about organizational culture, workforces, consumers, suppliers, community outreach, etc.
• Help industry associations to identify and celebrate the top companies in the U.S. legal cannabis industry with respect to DEI results – similar to the award and recognition recently given to Trulieve Cannabis Corp. by Minorities 4 Medical Marijuana.
• Supplement the due diligence conducted by product/service buyers and investors to determine what legal cannabis companies are leveraging the value of diversity, equity and inclusion to help drive the quality of their products/services and to enhance their business productivity, profitability and growth.

Final Thoughts

Lord knows that our world is not a utopia and it may not be so for some time. In the meantime, we should do all that we can to make incremental improvements. The business case for DEI is clear. Research conducted by reputable organizations show that good DEI policies and practices help businesses to make money and save money.

It is still early enough to positively influence the U.S. legal cannabis industry in an unprecedented manner. Let’s make DEI an integral part of business investment decisions and reward the right behavior.

About the author:

Darryl K. Henderson, J.D. is the president of Keith Consulting Group (KCG), a business management consulting firm that delivers advisory, project management and staff augmentation services. He has amassed a broad range of knowledge and skills in a variety of roles, including HR executive, chief diversity officer, chief employment compliance officer, operations executive, executive coach, entrepreneur, business management consultant, and employment and commercial lawyer. Darryl has worked with businesses within the biotech, financial services, technology, fuel, professional services, retail, grocery, restaurant, and U.S. legal cannabis industries. Globally, he has served businesses located in the U.S., Mexico, Canada, Italy, Ireland, and the UK. Darryl is in his sixth year serving as an Executive Coach in the University of North Carolina at Chapel Hill Kenan-Flagler Business School Leadership Capstone Program, where he coaches 2nd year MBA students to be more effective leaders, managers and team members. He earned a Juris Doctorate degree from the University of Georgia School of Law and a Bachelor of Arts in Economics degree from Emory University.

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