How boards can protect companies from the anti-DEI movement

Large U.S. companies like Starbucks, Target, and Amazon have faced frivolous lawsuits and threats from conservative activists, accusing them of pushing diversity to the point they violate the rights of white employees. 

Those voices have only grown louder. And judging by the deafening silence from most business leaders and the marked drop in references to DEI on earnings calls and elsewhere, it appears that many companies are taking their DEI work underground or scaling back altogether. 

From a strictly pragmatic point of view, staying out of political crosshairs may be prudent: Lawsuits cost time and money and can jeopardize a company’s reputation in the eyes of consumers, employees, and investors. But Ishan Bhabha, a partner at Jenner & Block who has advised large companies and colleges in DEI-related cases, says corporate boards should become risk-intelligent before making hasty retreats. That means understanding how courts may interpret various laws that apply to DEI measures and then deciding how much risk their company can tolerate. “It may be that your corporate values are such that you don’t mind being the poster child for a lawsuit defending DEI,” he says. (Besides, the vast majority of corporate DEI efforts are perfectly legal, he adds, “and always have been.”)

Boards that fear legal attacks should ensure their companies’ DEI programs are tied to specific business outcomes, not to diversity targets, several attorneys tell Fortune. Partnering with organizations that can boost the diversity of one’s candidate pool is fine, for example, but it’s dangerous to set a quota, which could be seen as incentivizing hiring managers to give preference to candidates based on race or gender. 

Linking DEI efforts to a corporate mission or financial goals allows companies to invoke the business judgment rule and to address measurability in a legal challenge, says Jennifer Kennedy Park, a partner at Cleary Gottlieb who focuses on white-collar defense and crisis management. But don’t stop with hiring programs: Companies should be prepared to defend any strategy that gives any member of a protected class an opportunity, whether a job, promotion, extra training, or supplier contract.  

Tina Shah Paikeday, global head of the diversity, equity, and inclusion practice at Russell Reynolds Associates and a senior member of its board and CEO advisory practice, similarly urges her clients to begin emphasizing the “E” and “I” in DEI, not diversity alone. Companies can safely do things such as champion programs designed to eliminate bias from recruiting and create board-level metrics from employee surveys about inclusiveness.

Businesses should also ensure that their DEI communication is consistent and accurate, says Paikeday. Scour corporate websites, social media posts, regulatory filings, memos to staff, and media interviews because activists may try to exploit any misalignment. Many boards have also begun protecting themselves by disclosing to investors the risk of DEI-related lawsuits, whether from opponents or advocates.

Francesca Odell, a partner at Cleary Gottlieb who advises clients on corporate governance matters, says she expects board-level diversity will also come under fire as the push against DEI deepens, even though activists have already failed to block initiatives like Nasdaq’s board diversity rule. Board diversity is an easier target if it is more detached from strategy or mission, Odell says. For that reason, she suggests that boards list in their charter all the criteria they value in a director, which may include a combination of diversity of background and skills.

Semafor recently reported that a group of conservative attorneys is planning to sue boards for failing in their fiduciary duty to maximize profit for shareholders by allowing firms to pursue diverse workforces, but attorneys say that proving such a breach would be a high bar to clear. For now, business leaders should be careful not to overcorrect and lose sight of their real risks, says Cleary Gottlieb’s Park. Most firms are still most likely to be sued by employees or job candidates who are part of historically underrepresented groups. “We’re worried now about the one-off lawsuit by the cisgender white man,” she says, “when you probably have 20 lawsuits from people who don’t look like that.”

Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan

Noted

“The decline of sustainability on the [Davos] agenda is clear in everything from statistics to the streets. One case in point: Last year, over 60 chief sustainability officers were assigned the coveted ‘white badge’ designating a company’s top participant in Davos. This year, by our count, that number dropped by about 20% to around 50.”  

—Peter Vanham, executive editor at Fortune.

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