Doing A Deep Dive On Discrimination

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Shareholders are demanding civil rights audits. A look at when you should do one—and how to do it right.

After the murder of George Floyd two years ago, companies across corporate America looked for ways to help combat racism and further inclusivity. Many issued statements, made contributions to organizations that fight racial injustice and expanded DEI initiatives. But now a new method of assessing and addressing internal inequities—one largely driven by shareholder pressure—is emerging: the civil rights audit.

The trend began when a handful of companies facing criticism about inequities opted to conduct these internal exercises meant to discover, catalog, analyze, root out and correct elements that institutionalize, encourage or condone racism. After civil rights audits had been conducted at companies like Facebook, Airbnb and Starbucks, socially progressive investor groups began introducing shareholder proposals asking for other companies to do the same, and pressure has been building ever since.

Johnson & Johnson shareholders recently approved a civil audit of the company. Home Depot, Chevron and AT&T are other legacy-economy companies that faced calls in the spring to conduct racial equity and racial justice audits, and Tesla is encountering similar demands. In fact, in-depth examinations for hunting down and exposing corporate racial sins are rapidly becoming ensconced as a gold standard for shareholder groups trying to hold directors’ feet to the fire on a range of social and governance issues.

“It’s definitely become a standard tool in the advocacy toolkit, along with shareholder resolutions and other ways to hold companies accountable,” says Victoria Baxter, a senior client partner focused on ESG for Korn Ferry, an executive consulting and recruiting firm.

Resistance has been relatively futile. In May, the Securities & Exchange Commission shot down a request by McDonald’s to exclude such a proposal from its proxy ballot. Directors were already having difficulty keeping up with the tide of ESG initiatives and proposals sweeping over corporate America. JPMorgan Chase CEO Jamie Dimon tried to fend one off by dismissing civil rights audits for adding “bureaucracy and BS” but ultimately ended up agreeing to conduct an analysis.

Even Larry Fink, the CEO of asset-management giant BlackRock—who has been pressing directors to embrace ESG reforms—found himself initiating a civil rights audit of his company last spring, after a string of negative headlines cast doubt on whether the investment firm really was a champion of diversity, as it loudly projected in the post-Floyd era.

“Accountability and transparency are essential principles in achieving our ambitions in this area, and we must lead by example,” Manish Mehta, BlackRock’s global head of human resources, and Michelle Gadsden-Williams, global head of DEI, said in an internal memo last year that was leaked to the press. “We obviously have a great deal of work to do across the firm to achieve our ambitious goals in DEI.”

Despite the concerning conflation of the terms “civil rights” and “audit,” these exercises can be useful benchmarks, say diversity experts. “An audit gives you a baseline, and it represents that a company is not afraid of the information that it may get back, but is willing to use that information, hopefully, to make change,” says Angela Reddock-Wright, a DEI mediator and consultant in Los Angeles.

Boards should also be aware that some regulators are applauding these exercises. For example, Thomas DiNapoli, comptroller of New York State, has come out as a staunch advocate of racial equity audits.

Some investors even want to leverage audits as an investment filter. Nia Impact Capital, for example, a California-based asset manager with a “gender-lens focus,” is also “building a specific U.S. racial justice portfolio,” says Kristin Hull, Nia’s founder and CEO. “We’re going to ask any companies we’re considering for that portfolio to do a racial justice audit.”

 However, most boards remain on the sidelines of the civil audit arena. “We’re seeing a wait-and-see approach by many clients, waiting to see how the shareholder proposals that are out there play out for the companies,” says Adrianna ScheerCook, an attorney with Troutman Pepper in Richmond, Virginia.

Still, directors should understand civil rights audits and be aware of the possibility that one may be in their company’s future. Here are some ideas for navigating this nascent arena:

What’s the point? Typically, civil rights audits focus on racial equity, diversification of leadership ranks and ensuring that internal policies and procedures align with achieving equity and inclusion of racial and ethnic minority members. However, they may also cover female equity and empowerment, sexual orientation, disability and age.

Ultimately, they’re about doing the right thing and demonstrating that you’re doing so. “ESG requires transparency, and most companies who are doing it better are being transparent,” says Baxter. “And if they’re doing it well, they should be taking into account civil rights and DEI and any policies and practices that may be discriminatory.”

Define the objectives. “The term ‘civil rights audit’ is so broad,” says Hailyn Chen, co-managing partner of the Munger, Tolles & Olson law firm. “You need to define what you’re looking at.”

Because audits often include examinations of how a company’s makeup and policies affect both internal and external constituencies, they vary greatly by industry and company. They can comprise “the treatment of customers at a company’s physical locations,” write Ron Berenblat and Elizabeth Gonzalez-Sussman of the Olshan Frome Wolosky law firm, as well as “the targeting of products, and even political contributions.”

At tech companies, for instance, audits are examining inequities in the marketplace that may result from corporate practices, such as algorithms that may involve baked-in racial discrimination.

Consider opening the curtains. Some companies choose to conduct what are called “privileged internal investigations” instead of publicly disclosed audits. “That allows you to figure out what’s wrong without having to disclose it and decide if you want to waive privilege and disclose it,” Chen says. “But what a lot of companies do is a privileged investigation, then take corrective action, and maybe at the end of the day no one knows about it, but you’ve satisfied governance and fiduciary duties.”

Boards and management teams can also  choose to correct apparent weaknesses before committing to an audit, or in advance of one. “What are the pinch points that they know about internally?” ScheerCook says. “To the extent a company knows there is a particular issue of a lot of importance or have made a statement that they’re committed to something, they can take a proactive focus on that first, which will allow them to shape the audit a bit more.”

Some directors may feel discomfort about such an unusual exercise. “There will be lots of naysayers,” Chen says. “It’s common for directors to feel, ‘Why should we air our dirty laundry? Why should we raise our litigation risks? Someone will file a lawsuit. Why should we issue a public report?

‘“The answer that we’ve seen with companies ahead of the curve like Airbnb is that [a civil rights audit] has actually reduced the overall risk. While you may take a PR hit for some negative stuff that comes out, if done right, it can actually mitigate risk. It shows that you’re being proactive, and often people who feel aggrieved by some of this stuff actually just want the company to own the issue and say they’re going to do better.”

Decide who should do it. Experts say civil rights audits are best conducted independently, by the board’s independent directors. For some boards, that means forming a special committee.

To conduct the audit, companies often hire law firms, or civil rights activists such as Laura Murphy, a pioneer who conducted the Airbnb and Facebook audits.

“Engage an auditor who has experience, who understands their role isn’t to come in and blow up the company but to propose a corrective action plan that’s achievable and in line with the continued success of the company,” Chen advises.

And she notes, in favor of law firms, that attorneys “can write reports that are attuned to potential litigation, so you can have transparency while also making sure whatever you release publicly is drafted in a way that best protects you from potential litigation.”

Seek quality as well as quantity. While data about hiring and promotion levels is often a prime target of civil rights audits, most of them also have a huge qualitative component that relies on surveys and interviews to ascertain, essentially, how a company’s employees and other constituencies feel about its race-related practices—not just what the raw data show.

“A big part of the audit is interviewing employees and board members, so you want someone who has a great bedside manner, and who can come into the organization and establish good, positive relationships and build trust,” Reddock-Wright says. “Because if everyone just comes to the table and this is just another check-the-box kind of moment, and it’s not real, it’s not going to service anyone.”

Expect to make changes. Civil rights audits, once initiated, are not fated to serve as a mere investigatory exercise. New York state regulator DiNapoli, for instance, believes that audits must include not only information about the status quo but also “whether any changes to existing programs or new measures or initiatives would help a company become more equitable and inclusive, [and] whether a company has sufficient mechanisms in place to monitor effectiveness.”

Ideally, your auditor will work with the company to develop a public report that outlines corrective actions that will address any issues uncovered in the process. “Most audits come with recommendations as well as findings,” Baxter says. “That should be a healthy, constructive conversation. That’s not saying the board has to, wholesale, take all the recommendations, but the board should be open to some of them and consider whether they make sense for the company and your business strategy.”

Chen says that “there’s greater chance of success if the changes proposed are implementable. But I don’t think companies can conduct these today and come away saying, ‘Everything’s fine.’ That doesn’t fly. People would say, ‘Give me a break: What are you sweeping under the rug?’” CBM

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