The threat of legal action against companies that publicly support Diversity, Equity and Inclusion (DEI) appears to be influencing some corporate boards to alter the language of their DEI policies. According to several news reports in December, at least six major companies changed language of their DEI policies after receiving letters from conservative groups threatening to sue them for discriminating against white people. Reuters reported that JPMorgan Chase, Yum! Brands, American Airlines, Lowe’s and BlackRock were among companies that modified goals for increased racial representation in their workforce or eliminated language that designated certain programs for underrepresented groups after receiving such threats. These changes have come in the wake of the ongoing backlash from conservative groups against DEI. Corporate board members may want to review the changes these companies have made to their DEI policies and determine whether they want to follow suit.
DEI is a Risk Management Issue
It appears that some governance practices may expose corporate board members to a higher degree of risk than others. For companies that truly believe in diversity and inclusion, a higher level of internal scrutiny will need to be applied to any disclosures regarding diversity efforts going forward. This may require that adjustments are made before this upcoming proxy season.
Since 2021, conservative organizations such as America First Legal and the National Center for Public Policy Research have been claiming that DEI programs constitute illegal discrimination and a breach of the directors’ duties to investors. Programs with goals for increasing numbers of underrepresented groups or executive compensation incentives for increasing gender or racial representation are the primary targets of potential lawsuits.
Ironically, some shareholders are filing shareholder proposals asking for companies to be more transparent and deliberate about pursuing racial and gender equality, which could also expose them to lawsuits claiming discrimination against women and underrepresent groups. This reality has created risk on both sides of the DEI landscape.
Board Discussions About Diversity and The Business Model
Since it appears boards face potential legal actions on either side of the diversity issue, it might be a good idea for corporate board members to have an honest dialogue about what is in the best interest of the company. When conservatives argue against ESG, they say that companies should be solely focused on making profits for the company, so companies may need to demonstrate how pursuing certain diversity initiatives supports increasing profits.
• Language modification. Simple modifications to the language contained in public disclosures may solve some of the potential legal threats from conservative groups. The companies that have publicly acknowledged language changes provide a blueprint for other companies to follow and build on when confronting backlash about diversity programs.
• Add legal expertise. Corporate boards may want to consider expanding their legal team. Adding additional legal professionals who have experience dealing with discrimination lawsuits could be helpful when crafting disclosures involving diversity and inclusion. Since companies may experience lawsuits from both sides of the diversity issue (discrimination against underrepresented groups or reverse discrimination against whites), a frank discussion about how the risks in this area are evolving may be appropriate.
• Make a commitment. At the end of the day, companies are going to be judged on this issue by their shareholders and customers. Whatever policies companies decide to enact, they should commit to their position and defend it with sound governance principles.