Using the Federal Securities Law to Improve Diversity on Corporate Boards

Let me make the case for the use of our federal securities laws to improve diversity on corporate boards. Beginning on July 2, 2020, my firm filed complaints on behalf of our shareholder clients against Oracle, Facebook, Qualcomm, Cisco, Gap, NortonLifeLock, and Monster Beverage for violations of section 14(a) of the Securities Exchange Act of 1934 for making false statements about diversity in the companies’ annual federal proxy statements. The cases are brought as shareholder derivative actions, which have long been recognized as important mechanisms to address director misconduct: “The machinery of corporate democracy and the derivative suit are potent tools to redress the conduct of a torpid or unfaithful management.” Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984), overruled in part on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). To some, this is a “liberal” versus “conservative” political issue. Let me attempt to explain why, when properly framed, this is incorrect. While some have asserted that the cases attempt to impose a quota system on publicly traded companies, forcing them to appoint a certain number of historically underrepresented individuals to their boards, the fact is that the cases only seek remedies that have been available since Congress passed the Securities Exchange Act in 1934. While it is true that my clients’ cases ask the companies to voluntarily agree to certain governance changes as part of any settlement, the fact remains that a court presiding over a civil shareholder lawsuit cannot compel a publicly traded company to add an individual to its board over its objection. What shareholders and courts can do is to hold individual directors liable for lying about the role of diversity at their companies. And, as demonstrated below, the origin of the requirement for public companies to disclose the role that diversity plays (if any) in nominating individuals to serve on their boards had its genesis in a rule the U.S. Securities and Exchange Commission (SEC) passed on December 16, 2009.