It's no coincidence that boards are discussing DEI on a more frequent basis. Certainly, diversity, equity and inclusion is critical as a people strategy—but it is also an invaluable risk management strategy. With increased scrutiny from third parties, such as governing bodies, consumer groups and activist shareholders, DEI is an important loss prevention tool that may also mean fewer employment practices claims.
This article highlights some of the new laws or regulations on DEI, pertinent claims and the possible impact DEI efforts might have toward mitigating those claims.
New DEI Legislation and Regulations
A number of states have introduced or passed legislation regarding board diversity.5 California's new law AB 979, among the first, requires that each board have at least one member from an underrepresented community on their board by the end of 2021. Depending on the board's size, additional members may be required. Failure to comply will result in significant fines.
The SEC also recently approved NASDAQ's new rules on board diversity. These rules require at least two diverse directors or explanations as to why a NASDAQ-listed company does not comply. Disclosure of statistical information using a board diversity matrix is also required. The rules apply to almost all NASDAQ-listed companies and failure to comply could result in delisting. While there is speculation that the rules will be challenged prior to taking effect, their passage is indicative of a shift to more formalized regulation around DEI in board settings.
Over the past year, a new claim trend has emerged: D&O claims alleging a lack of board diversity. Specifically, derivative demand letters, lawsuits and/or books and record demands have been brought against large, publicly-traded companies alleging a lack of board diversity. Many of these claims were brought against large, publicly-traded, California-domiciled organizations during the time between when statute AB 979 was passed and when it went into effect.
How DEI Can Reduce Risk and Strengthen Company Culture
It is likely that there are more claims than what the dockets might suggest, as some claims have not yet progressed beyond the demand letter stage. It is also important to note that many of these claims have been dismissed; however, those dismissals have been without prejudice or on federal forum selection clauses, meaning that the door is not entirely closed on subsequent litigation.
In terms of DEI, Employment Practices Liability claims are also relevant. Claims alleging discrimination can be made under federal Title VII laws or relevant state laws. The protected classes also tend to align with the focuses of DEI efforts, such as race, gender, disability, sexual orientation and pay equity. As a proxy for claim frequency, the EEOC releases charge statistics. Overall charges are down from the relative high watermark set by the post-financial crisis 10 years ago. Some speculate that the relatively low number of EEOC charges in FY2020 are due to the workforce shift to remote work, and that claims may increase in conjunction with returns to the workplace.
Overall, these claims pose a growing financial risk—a risk that can be mitigated through the right DEI strategy.
The Organizational Impact of DEI
The effects of a diverse, equitable and inclusive organization can be felt holistically—from improving employee well-being to minimizing discrimination claims and total cost of risk. Here are just a few of ways DEI improves organizational health overall: