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October 01, 2023

The goal of DEI is not without legal risk for corporate America

As a consultant with extensive legal experience, Paulette Brown helps clients create road maps to achieve greater diversity, equity and inclusion within their organizations.

On occasion, she’s had to temper unrealistic expectations.

“One organization asked, ‘In six months, can you tell me that we’ve improved?’ I’m like, ‘No, I can’t,’” recalls Brown, who was president of the ABA in 2015-16 and the first Black woman to serve. “They want something magic to happen just because they’ve gone through an exercise. That’s not how it works.”

DEI is more of a long game, but one that potentially can yield great benefits, even to a company’s bottom line.

“These are not situations where you can put a Band-Aid on something,” Brown says. “You have to create structure so that no matter who is around, these structures and new policies can exist and permeate throughout the organization.”

Implementing DEI-related goals can be challenging, as institutions—including law firms across the country—attempt to change their cultures from within. The move is also not without potential legal risks, as several U.S. corporations have learned.

George Floyd’s murder in 2020 prompted many businesses to pledge reforms in the way they hire and promote people from minority communities. But in some instances, corporations have been accused of overpromising and underdelivering, a disconnect that has been referred to as “diversity washing.” Some observers say companies may have good intentions but simply have failed to gain significant traction in a relatively short period of time.

Either way, dozens of recent lawsuits filed by employees or shareholders have targeted publicly traded corporations for their perceived DEI failures—a relatively recent trend that legal experts are watching.

One sweeping derivative action filed in March in the U.S. District Court for the Northern District of California accuses Wells Fargo Bank executives and board officers of breaching their fiduciary duties by lying about the institution’s DEI efforts, among them a program to interview minority candidates for high-paying jobs that plaintiffs allege was a sham. Plaintiffs, including a Philadelphia-based asbestos workers pension fund, seek restitution and other penalties from defendants, saying, “Wells Fargo’s business, goodwill and reputation have been, and will continue to be, severely damaged.”

On its corporate website, Wells Fargo says 45% of its U.S. workforce of 212,091 employees is “ethnically/racially diverse” and that 53% of its global workforce is female. The institution says it remains “committed to advancing diversity, equity and inclusion.”

Divergent viewpoints

On the other side, businesses also face pushback for wading into DEI.

Seattle-based Starbucks has promised to “achieve racial and ethnic diversity” of at least 30% at all corporate levels and a minimum of 40% for retail and manufacturing roles by 2025. Executive compensation is tied to “the building of inclusive and diverse teams,” the company says on its corporate website.

Those publicly stated aims were at the center of a 2022 lawsuit filed by the National Center for Public Policy Research, a conservative think tank and Starbucks shareholder, in Washington state superior court (the suit was transferred to federal jurisdiction). The organization’s derivative action claimed then-Starbucks CEO Howard Schultz and company officers and directors harmed investors by pursuing DEI policies that discriminated against nonminorities.

“The individual defendants took these actions despite knowing of a glaring, inconvenient fact: The policies they so trumpeted flagrantly violate a wide array of state and federal civil rights laws,” the complaint read. The lawsuit was dismissed in August.

Joseph Torres, a Jenner & Block partner in Chicago who co-chairs the firm’s labor and employment and business litigation practices, says the contrasting legal disputes over DEI policies reflect today’s cultural and political conflicts in the United States.

“Some people are saying, ‘You should stay out of that as a corporation—you make your widgets, and that’s how you maximize your fiduciary obligation,’” says Torres, chair-elect of the ABA Section of Labor and Employment Law. “And then you’ve got other people saying, ‘You as a company and as a member of the community have a fiduciary obligation to engage on these issues.’ We have two very divergent views on it, and I don’t see that going away any time soon.”

Torres says his firm considers diversity a priority but notes the legal industry as a whole continues to wrestle with DEI: “There’s been study after study [indicating] you continue to have these challenges with diverse lawyers coming into the legal community and not progressing—or exiting earlier than others. That’s a problem.”

DEI specialist Bonnie Levine, attorney and founder of Verse Legal in Atlanta, says ignoring diversity, equity and inclusion is not realistic, given the real-world pressures employers face, even from within their own ranks.

She argues that corporations can successfully develop policies if they get legal counsel involved early for collaborative discussions with DEI officers. This dynamic traditionally has been tense because of the inherent legal risks. But Levine says a new ABA initiative for anti-bias training in accredited law schools should yield positive results (under the nonstandardized requirement, law schools will provide training twice in a student’s career about bias, racism and cross-cultural competency).

“That was a huge step toward bridging the gap between DEI organizational decision-makers and lawyers. It’s just going to take a while to shake out,” Levine says.

Employers should be forthright about their efforts. “Being fake about DEI, using DEI solely as a marketing enterprise and then behind closed doors not really investing in it, that is lose-lose,” she says. “Because it makes people mad enough to sue you. And the reputational risks during an era of social media—hypocrite stories—they can go viral.”

Seeking accountability

Complicating matters is a murkiness surrounding DEI efforts. There is no conclusive way to determine whether businesses are realizing their goals or sincere about them, Stanford Graduate School of Business professor David Larcker says.

He is among the authors of an ongoing study on diversity washing that may be occurring as publicly traded corporations seek to bolster their environmental, social and governance credentials and attract investors attuned to them.

The challenge for researchers is a lack of standardized metrics, Larcker says. To apply a sort of “smell test” to individual companies, his group analyzed available data, regulatory filings and public relations material that corporations issue about DEI.

“At some level, we understand with investor relations or PR that they want to show the company in the best light. There’s always some tilt to that,” says Larcker, a Hoover Institute fellow.

The study, which is being peer-reviewed, does not single out corporations for misrepresenting their efforts. One statistic is telling: The U.S. workforce is 50.5% female and 40.7% nonwhite, but the actual representations of these groups within publicly traded companies are 41.2% and 29.8%, respectively.

Brown says organizations should have aspirational DEI “targets” rather than specific numerical goals as they fill jobs. But, she says, it’s OK for “bias interrupters” to request another candidate search if the initial recruiting attempt is disappointing.

Levine offers a different take: “The idea that you just run away from numbers is not going to be a sustainable solution.” Her advice is for companies to proceed in a “slow and steady” manner.

If there is good news for companies perplexed by the issue of DEI, it’s that the recent U.S. Supreme Court decision banning affirmative action in college admissions does not appear to have ramifications for employers.

Reviewing admissions systems at Harvard University and the University of North Carolina, the high court threw out using race as a factor when colleges select applicants. The majority opinion held that such programs cannot be accurately assessed and violate the equal protection clause, while the dissenting opinions said the rollback of affirmative action ignores systemic racial inequality in U.S. education.

Torres says employers remain free to cast a wide net as they as seek a diverse applicant pool. They still may wish to review their DEI policies, he says.

“It’s dangerous to overgeneralize [the decision] to any and all DEI programs because they come in lots of shapes and sizes,” he says. “The idea that you shouldn’t use race as a deciding factor in the context that the Supreme Court just evaluated sort of holds true in the employment context—and we’ve known that for a long time.”