How Signaling and Reputation Economics Explain the Changing Landscape in DEI in Business

Signaling theory is a standard topic in university economics as a fundamental tool to understand how agents communicate hidden attributes in markets. When the quality or intent of something is not directly observable, people and firms use signals—actions or policies—to communicate the credibility, or to signal the value, of what they are doing. In reputation economics, that logic is carried through, where the long-term value of business will largely rest on how consistently and openly those signals are received by customers, staff and investors.

Signaling and reputation economics is evident in the evolving DEI landscape in business. DEI stands for Diversity, Equity, and Inclusion efforts. There are a variety of reasons that companies are feeling pressure to approach things differently, from legal, political and shareholder pressures. Meta and Amazon are two high-profile companies that are scaling back their DEI efforts, saying that cost implications (and some legal questions) left them no choice. In the meantime, the trio of Apple, Costco and Walmart are doubling down when it comes to their DEI efforts, pointing toward a renewed vow to have diverse workforces.

The Signaling Function of DEI

DEI programs – if actively maintained – sends strong signals about internal culture, long-term view, and value alignment. Such signals are very valuable in industries where the talent is highly mobile, where competition for labor is high, or in cases where the consumers are highly sensitive to value. A company’s DEI stance goes on to become the company brand—whether intentional or not.

Consider Apple. The company persists in promoting its inclusive hiring practices and supplier diversity programs through their investor reports and public statements. This is a signal for progressive customers and employees that Apple values corporate citizenship—not just the bottom line. Similarly, Costco shareholders recently voted down a proposal to assess the “risks” of DEI programs, making clear that its constituents do not view inclusivity as a threat, but as a benefit.

On the flip side, when companies retreat from DEI, it may be a sign of short-term cost-cutting or ideological repositioning. In 2023, Meta disbanded parts of its DEI infrastructure as part of larger layoffs. Officially framed as being part of a restructuring, the change prompted public criticism and called into question the company’s strategy for its workforce in the long term and its internal culture. Such moves can have negative impacts on trust and can take away from a company’s attractiveness to the younger, more value-driven job seekers out there.

The Economics Driving the Shift

Several forces are at play:

Labor Market Demographics: As per a Deloitte study, Millennials and Gen Z will form 58% of the global workforce by 2030. Diversity and inclusion are high on the list of these generations’ considerations when choosing employers.

Investors Expectations: ESG (Environmental, Social, Governance) metrics are increasingly driving capital allocation. In a 2022 McKinsey report, 40% of institutional investors said they now take workforce diversity and inclusion into account when making decisions in their portfolios.

Political and Legal Pressure: In the U.S., both state legislatures and advocacy groups have pushed back against corporate DEI efforts, a movement they refer to as “woke capitalism,” putting companies in a precarious position between compliance and backlash. Meanwhile, the U.K. Financial Conduct Authority is transitioning from mandatory to voluntary DEI guidance in an effort to be more flexible, but it also signals reputational risk for firms perceived as disengaging.

Global Asymmetry: By comparison, the EU’s new Accessibility Act, set to take effect in 2025, will impose higher requirements for inclusivity and accessibility across sectors—leaving businesses to face more stringent requirements abroad while wading through more lax ones at home.

Ramifications and Strategic Outlook

The signaling value of DEI is especially important in industries such as tech, finance, and media, where employees are highly mobile and high-level talent remains in short supply. Scaling back on DEI work may save money in the short run, but it also risks sending the signal of stagnation, exclusion, or tone-deafness—discouraging top-tier applicants, alienating mission-oriented consumer, or bringing brand equity down.

At the same time, companies who persist with DEI initiatives despite policy ambiguities are giving a more enduring message of cultural confidence and resilience. These companies can benefit from the pendulum swinging back towards diversity as a policy issue, or as international regulatory alignment (as is the case of the EU) establishes higher-set expectations.

Conclusion

The shifting tectonics of DEI in business are not just a cultural or legal story — it’s also an economic one. DEI is how companies signal who they are, what they believe and how they see their future. In a reputational market, signalling theory offers a clean way to see why some firms lean in, while others pull back. The signals they send today could be the opportunities that find them tomorrow.