Tackling Legal Challenges To DEI Initiatives

What do the World High Wire Championships have in common with DEI initiatives? Each is a fine balance. Last week’s US appeals court decision to uphold Nasdaq’s board diversity rule to have women and minority directors on their boards or explain why they do not was welcomed by DEI advocates. Still, legal challenges to grantmaking to diverse beneficiaries; impact investing in diverse investees; and board, workforce, and supplier diversity initiatives are mounting. This heightens the risk and cost of pursuing diversity and inclusion. At the same time, organizations should not be too hasty to forgo the benefits of diversity and inclusion or abandon missions for which racial justice or DEI are core. Weighing these tradeoffs is a fine balance. Let’s examine each dimension of the fine balance between mitigating DEI legal risk and harnessing the benefits of DEI.

Grantmaking to diverse beneficiaries and impact investing in diverse investees. Following a series of rulings in August and September about whether a grant program for businesses run by Black women is discriminatory but before a final decision in American Alliance for Equal Rights (AAER) v. Fearless Fund Management, LLC, grant makers and impact investors focused on diverse beneficiaries and investees may wish to take precautionary measures. These measures may include documenting specific past discrimination in violation of the Constitution or a statute that grant programs seek to address or adding risk factors to private placement memorandums of impact investment funds. Alternatively, they may choose to continue to defend their programs under the “business judgement rule” to validate legitimate business objectives to invest in and support underrepresented groups. Some grant makers and impact investors are broadening the definitions of diversity that their programs use, and others are continuing to give grants to and make investments in whomever they deem fit.

Board diversity initiatives. In the wake of the two Crest vs. Padilla lawsuits, Alliance for Fair Board Recruitment v. Weber, and Alliance for Fair Board Recruitment, National Center for Public Policy Research v. Securities and Exchange Commission; legal opinions range from companies can pursue board diversity goals as long as the state does not require them to corporations that impose board diversity mandates on their own are just as liable as the state. Last Wednesday, three judges on the 5th Circuit Court added clarity by ruling that violations of the Constitution apply mainly to actions of the government, not private companies. The judges also ruled that many investors make important investment decisions based on the makeup of a company’s board and therefore it is crucial to maintain the Nasdaq’s board diversity rule to have women and minority directors on their boards or explain why they do not.

As the potential for additional court cases remains, focusing on accessing the broadest base of talent without specific targets in mind poses less risk of legal challenges than setting an objective for representation of underrepresented groups broadly. Implementing quotas for people with particular protected characteristics generates the greatest risk of legal challenges.

Workforce diversity. Lawsuits like those against Schultz et al (of Starbucks
SBUX
), American Airlines, Kellogg’s
K
Company, Morrison & Foerster LLP, Perkins Coie, Meta, Something Ideal, Inc., the Association of Independent Commercial Producers, and BBDO Worldwide, Inc. create the impression that any kind of race-conscious or race remedial efforts to improve racial equity is at risk of being challenged. According to America First Legal, quotas and programs restricted to particular races are most likely to face lawsuits. Casting a wide net, rather than relying on word of mouth to recruit applicants is likely to yield a more diverse candidate pool without the risk of affirmative action programs. In addition, rather than earmark opportunities for candidates from historically underrepresented groups, organizations may wish to instead emulate large law firms and target candidates “with a demonstrated commitment to diversity and inclusion,” those “who have demonstrated resilience and excellence,” or “proven DEI leadership” instead. Organizations should also bear in mind that mentorship or coaching programs for specific underrepresented groups may be viewed as discriminatory against those who are not offered an employment benefit of equal value. As described in W.K. Kellogg Foundation’s HR Toolkit for Racial Equity, employee resource groups can increase employee engagement and retention and inform innovation and connection with diverse customers and stakeholders. Where organizations have made the business case from both an employee and an organizational value perspective and solicited staff feedback to identify areas of interest, the legal risk of operating employee resource groups should be relatively low.

Supplier diversity. In response to National Center for Public Policy Research v. Schultz et. al and Senator Tom Cotton’s letter to Target
TGT
Corp, companies can mitigate legal and regulatory risk by confirming that supplier diversity policies cannot be judged as illegal and do not have a negative effect on the bottom line. Companies may also wish to review peer approaches to supplier diversity and adopt best practices. Companies may also reduce legal risk by documenting any positive impact that supplier diversity policies may have had on revenues, reputation, or recruiting.

Just Like the World High Wire Championships

Organizations can mitigate the risk of legal challenges to their DEI work by avoiding diversity targets or quotas, discussing diversity in a general way, or considering a broader range of dimensions of diversity than racial and gender. Organizations can also make holistic decisions that note diversity, if self-reported, alongside numerous other attributes in the assessment of an opportunity or candidate, rather than focusing on representation.

At the same time, such “DEI hushing” can obscure accountability and prevent sharing best practices and lessons learned. This can dampen diversity of thought and entrench exclusion. For organizations where the benefits of diversity and inclusion are tangible or racial justice or DEI is fundamental to their missions, mitigating the risk of DEI-related litigation may come at the cost of violating fiduciary duty or duty to their missions.

Just like the World High Wire Championships, the anti-DEI lawsuits and fine balance among these tradeoffs remains an area to watch.

This article does not constitute legal advice. In addition, the opinions expressed in these articles are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer or company.