Corporate Diversity Disclosures and Board Accountability

The public was already scrutinizing corporate diversity and anti-discrimination efforts. Then came the social unrest that swept the nation after the Memorial Day 2020 death of George Floyd. Now, corporations are under even more scrutiny when it comes to these efforts.

Three derivative lawsuits against three major corporations and their directors allege that the companies' statements about their commitment to end discrimination and support diversity and inclusion were false. The three companies being sued by their shareholders are Facebook, Oracle, and Qualcomm.

The "S" in ESG

ESG (short hand for "environmental, social, and governance") is a very broad and often ill-defined concept that is nevertheless of increasing importance in Corporate America. ESG efforts are focused on a company's stand on and activities concerning environmental, social, and governance issues.

This trend has been gathering steam for a while. Many will remember the controversial letter from BlackRock CEO Larry Fink that said it's time for corporations to create social value and not just shareholder value.

Employees are also expecting more from their employers. For example, I have written in the past about incidents like the global employee walkout at Google regarding sexual harassment and diversity issues at the company.

More recently, we've seen big brands make statements and donate large sums of money in support of the Black Lives Matter movement. For example, Apple has pledged $100 million to its racial equity and justice initiative.

Corporate justice statements and initiatives are laudable. But are some of these statements and initiatives merely a thin sheet of wallpaper being used to cover up the grim reality of corporate indifference to racial diversity? One plaintiff's firm has filed three lawsuits alleging exactly this.

The Derivative Lawsuits Over Diversity Disclosures

The three separate lawsuits filed in July 2020 against three high-profile companies allege the following (complaints linked below):

Facebook: False assertions about commitment to diversity and inclusion within the company along with its failure to curtail hate speech and allowing discriminatory advertising on their platform that has led to a boycott by more than 100 advertisers.

Oracle: False assertions about their commitment to diversity within the company and equity issues that involved a Department of Labor lawsuit claiming that they have underpaid minorities and women by $400 million over a four-year period.

Qualcomm: False assertions claiming to have a policy that requires diversity and inclusion at the company. The complaint asserted they have made little to no progress in diversity matters pertaining to the board, management, and employees since settling a lawsuit in 2016 for $19.5 million for pay discrimination against approximately 3,300 female employees.

In these three suits, the plaintiffs point to diversity-related statements made in company proxy statements (as well as other public statements) and then use actual diversity statistics to challenge the veracity of these statements.

For example, in the Oracle complaint, plaintiffs note that the 2019 Oracle proxy says that "[d]iversity and inclusion in our workforce starts at the top," but that "Oracle has failed to create any meaningful diversity at the very top of the company — the board of directors." As proof, the plaintiffs assert that "Oracle is one of the few remaining public companies without a single African-American director."

The lists of remediations demanded in the various complaints are lengthy. In various combinations the demands include:

• Resignation of a founder as chair of the board.
• Resignation of at least two to three directors to be replaced with Black people and other minorities.
• Replacement of a chief diversity officer with a person of color.
• Director defendants return their 2020 compensation (including stock grants) and donate the money to charities whose efforts include the advancement of black people and minorities in Corporate America.
• Creation of a fund ranging from $700 million to $1 billion towards the hiring, promoting, and mentoring of minorities.
• Publication of an annual diversity report
• Annual training of the board and management that focuses on diversity, affirmative action, anti-discrimination, anti-harassment, and pay equity issues.
• Revised executive compensation program that makes 30% of compensation tied to the achievement of diversity goals.
• Replacement of external auditor.

The Lessons

These suits have only recently been filed, so we are a long way from knowing how a court will treat them, assuming they are not settled before a court even has a chance to weigh in.

Indeed, some of the demands in these lawsuits may seem outlandish (e.g., replacing external auditors for not detecting that internal controls were failing to stop discrimination and promote stated diversity goals).

Nevertheless, there are still lessons to be learned from these suits considering the current political climate. Moreover, it seems likely that more suits of a similar nature could be on the way.

First and foremost, it is important for a board to be thoughtful about their disclosures concerning diversity, including their aspirations vis-à-vis diversity. Enthusiasm for the goals of ending discrimination and embracing more diversity is certainly laudable. This enthusiasm, however, is no excuse for factual disclosures to be contorted into aspirational statements that stretch beyond what a corporation has or can realistically achieve in a near-term time frame.

As much as the board should defer to management about most employment issues, the board will ultimately be responsible for all disclosures made by the company, particularly if these disclosures are in documents filed with the SEC. For this reason, the board has an important role in ensuring the accuracy of diversity disclosures as part of its oversight responsibility.

No company or board wants to be labeled as hypocritical. Moreover, it is clear that the public, employees, stakeholders, and shareholder plaintiffs will be increasingly less tolerant of articulated commitments to diversity that are not followed by clearly achieved diversity milestones in a reasonable period of time.

I've written in the past about politics in the boardroom. The guidance I gave at that time remains relevant:

One question a board might ask is: Whose job is it to make these political decisions?

There's a good argument that this is a management decision. Yet, if management goes in a direction that causes a company to lose value, clearly shareholders will be disappointed by the board's lack of oversight.

…You will want to be sure that you have a shared understanding between management and the board as to who is making these decisions and what that decision-making process looks like.

While these three lawsuits may have varying degrees of merit, the win is not being sued in the first place. If you are sued, it is important to have a good record of what were the underlying activities taking place that support the disclosures that were made.

Getting in front of these fraught issues, including by reviewing disclosures made to date to determine if they accurately reflect the steps already taken and milestones already achieved by your company, is an important step for a board to take now.