DEI - Diversity, Equity, and Inclusion

Navigating the Complicated Trends in DEI: 

A Recruiter’s Perspective

During the past five years listed companies have faced a considerable amount of shareholder “activism” in the form of proposals demanding Diversity, Equity, and Inclusion (DEI) considerations as it relates to workforce recruiting, retention, and compensation practices. Initially, these proposals overwhelmingly demanded action to adopt and promote DEI through the recruiting, promotion and retention of a more diverse workforce and Board of Directors (BOD) representation in terms of gender and race. This trend in favor of DEI has faced a “backlash” with an increase in proposals demanding firms to stop “diversity” hiring, alleging that these are “quota” based discriminatory and unconstitutional practices. In short, firms are confronting opposing pressures through shareholder activism in favor and against DEI posing growing legal, reputational, and operational risks and concerns, regardless of which path they decide to take.

“The trend in favor of DEI has faced a “backlash” with an increase in proposals demanding firms to stop “diversity” hiring, alleging that these are “quota” based discriminatory and unconstitutional practices.”

 

Shareholders of publicly listed firms can submit a proposal before the annual shareholders’ meeting requiring that the firm or the BOD take specific action. Once a proposal is submitted, the company can face securities’ liability if it declines to include the proposal in its proxy material and put it for shareholder vote at the annual meeting. In the case of DEI, SEC policy has caused that the number of DEI proposals go to a vote since the SEC stated that all proposals that “raise issues with broad societal impact such that they transcend the ordinary business of the company” must be included in the proxy materials for shareholders’ vote. Although most of these proxy fights fail to achieve a majority vote, if the proposal passes, the company could be required to undertake costly audits and disclosure of sensitive information. For example, numerous proposals demand that the company make public information of quantitative data on workforce composition and recruitment, retention, and promotion rates of employees by gender, race, and ethnicity. Another recent trend is shareholder proposals that include requests for data on hiring processes and practices that result in age related discrimination (ageism) using AI screening algorithms and poor recruiting and interviewing practices.

 

“The SEC stated that all proposals that “raise issues with broad societal impact such that they transcend the ordinary business of the company” must be included in the proxy materials for shareholders’ vote.”

 

On the other hand, anti-DEI proposals are surfacing. The National Center for Public Policy Research, a conservative think tank, has submitted multiple proposals suggesting that DEI has had a negative effect on white employees. For example, Disney received a proposal requesting an audit of Disney’s anti-racist employee training arguing that such trainings are “themselves deeply racist and discriminatory”. The anti-DEI trend has been accelerated by the Supreme Court decision in Students for Fair Admissions v. Harvard, motivating shareholders to argue that DEI efforts pose litigation risks and must therefore be disclosed or terminated.

“Another recent trend is shareholder proposals that include requests for data on hiring processes and practices that result in age related discrimination (ageism) using AI screening algorithms and poor recruiting and interviewing practices.”

 

In terms of litigation, most of the litigation is from pro-DEI shareholders. For example, Wells Fargo has faced 40 shareholders’ class actions lawsuits between 2020-2023, from DEI supporters who alleged violations of SEC Act of 1934 and Rule 10b-5 since Wells Fargo violated its pledge of including underrepresented minorities in its pool of candidates causing the share price to drop[1]. In terms of lawsuits from anti-DEI supporters, they sued Starbucks for its DEI initiatives[2] (the lawsuit was dismissed). Similarly, America First Legal, a conservative group, sued Target alleging a loss of stock price due to target’s LGBTQ-themed merchandise[3].

Conclusion

DEI is an important consideration for companies, boards, and shareholders, implicating far more than an abstract social policy. Firms are onboard. DEI is a smart policy that results in value creation. After all, having a “diverse” workforce that represents and gives insights about the marketplace, is a strategically smart practice. Having diverse ideas is certainly better than having homogeneous views; employees need to be treated equitably and fairly, and companies need to create an inclusive participatory environment.

“After all, having a “diverse” workforce that represents and gives insights about the marketplace, is a strategically smart practice.”

 

Both pro-DEI and against-DEI shareholder activism will remain an issue for some time. Demands for companies’ books and records to investigate hiring and compensation related activities as it relates to race, age, and gender will continue. Risks related to proxy fights and litigation are real and will result on scrutiny and accountability of recruiting and compensation practices. Thus, the need for professional, thorough, and independent recruiting process is an imperative that firms can no longer ignore.

“The need for professional, thorough, and independent recruiting process is an imperative that firms can no longer ignore.”


 

[1] See D. Hood. “Lawsuits Challenge Corporate Diversity Pledges after Floyd”, Bloomberg Law {April 7, 2023)

[2] National Center for Public Policy Research v. Schultz, No.22-cv-267 (Nov 7, 2022), Dismissed Sept. 11, 2023.

[3] Craig v. Target, No.23-cv-599. (August 2023)

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