Shareholders, stakeholders and the general public are increasingly scrutinizing bad leadership practices and their effect on an organization’s downfall. Recently, business’ diversity, equity and inclusion (DEI) practices have garnered increased attention. The issue cannot be ignored as the Equal Employment Opportunity Commission (EEOC) claims over 36% of all charges filed are either racial discrimination, harassment or retaliation based.

Recent social initiatives (e.g., Black Lives Matter, #MeToo) have elevated the public’s awareness of the need for more workplace diverse representation and effective inclusion measures. Should your senior leaders ignore these opportunities, it could increase your risk of severe reputational damages, potential lawsuits and directors and officers (D&O) liability claims.

First and foremost, senior leaders who fail to promote DEI are missing out on various organizational advantages. By establishing diverse representation and maintaining an inclusive environment, your organization can benefit from unique employee perspectives, a deeper talent pool, increased innovation and boosted workplace morale. In fact, a recent study from McKinsey & Company found that organizations with diversified workforces are 25% more likely to outperform their less diverse counterparts.

Risks to Watch

Legislation on Diversity, Equity & Inclusion

In response to public pressure, DEI expectation standards have been developed by government regulators and NASDAQ. Advisements include:

Government Regulations

The U.S. Securities and Exchange Commission (SEC) released disclosure requirements for organizations to provide greater transparency regarding their senior leadership team’s diversity. Public organizations are to share certain self-identified characteristics of their senior leaders (e.g., gender, race, sexual orientation).

The White House has discussed plans to require public organizations to disclose their senior leadership team’s racial and gender composition.

California passed legislation requiring public organizations to ensure at least one of their senior leaders belongs to an underrepresented community (Black, African American, Hispanic, Latino, Asian, Pacific Islander, Native American, Native Hawaiian, Alaska Native or LGBT). Several additional states are following suit to implement diversity-related requirements for organizations.

Stock Exchange

The National Association of Securities Dealers Automated Quotations (NASDAQ) submitted a proposal to the SEC, requesting approval of new diversity standards for NASDAQ-listed organizations’ senior leadership teams. Approved in 2021, the standards or “Final Rules” include:

• All NASDAQ-listed organizations must either publically disclose board-level diversity statistics through a standardize template or explain any deviation from the required senior leadership diversity standard. Diverse members must self-identify as either a racial minority population, female or LGBT individual.
• All NASDAQ-listed organizations must disclose annual senior leadership diversity statistics.
• NASDAQ provides organizations in need with diversity hiring assistance with complimentary recruiting resources.

Social considerations, such as racial and gender equality and social justice, are at the forefront of recent litigation trends where shareholders have challenged corporate statements concerning DEI. The litigation demonstrates that directors and officers of public companies face the risk of personal liability even if they had previously identified environmental, social and corporate governance (ESG) goals and implemented measures to monitor and achieve those goals.

Shareholder Derivative Action

It has become increasingly common for senior leaders to face lawsuits based on DEI practices or shareholder derivative lawsuits. These claims involve the shareholder(s) suing the company’s directors and officers for misstating DEI information or overstating DEI commitment goals.

Shareholder derivative litigation often follows an adverse event that is believed could have been avoided or mitigated through proper corporate governance and adherence to fiduciary duties. A derivative suit generally will allege that the board failed to take appropriate steps to prevent the liability or exposure.

Common allegations from these lawsuits include:

• Failure to comply with previous workplace DEI initiative commitments
• Falsifying senior leadership diversity or ignoring inclusion
• Retaliating against individuals who voice workplace DEI concerns

Several major U.S. organizations have been impacted by these lawsuits in recent years, including Meta, Oracle, Gap, Cisco, Tyson Foods and Pinterest. These cases can cause your company severe reputational damages, substantial legal and defense costs, and D&O claims.

Underwriting Pressure

As a result of increasing litigation, underwriters are expected to ask more questions and seek additional documentation regarding your organization’s DEI practices. Expect underwriters to require proof of your diversity and inclusion controls, procedures and training. Partner with your broker to review both D&O and EPL policy and procedure concerns. Risk mitigation strategies can help to prevent future lawsuits.

Best Practices for Promoting Workplace Diversity, Equity & Inclusion

In order to promote diversity, equity and inclusion among your senior leadership teams and overall workforce, your organizations should consider implementing the following measures:

• Take steps to ensure diverse representation within your senior leadership team. Adjust or expand existing leadership positions as needed.
• Require your senior leadership team and the remainder of the workforce to participate in routine training on diversity, equity and inclusion topics.
• Allocate additional resources to hiring, mentoring and promoting employees who belong to underrepresented communities. Doing so should provide your employees with further opportunities related to professional development.
• Create an annual workplace DEI report. This report should provide data regarding your organization’s hiring, advancement and compensation practices for employees who belong to underrepresented communities.
• Consider establishing a DEI officer or department that is responsible for ensuring your organization not only upholds its diversity, equity and inclusion initiatives but also remains compliant with all applicable federal, state and stock exchange legislation regarding such initiatives.
• Keep detailed documentation of all your workplace diversity and inclusion initiatives. Be prepared to share this documentation with D&O insurers.
• Consult a trusted insurance professional to determine specific D&O coverage your business needs as it pertains to diversity and inclusion concerns.

We’re Here to Help with Risk Management

Your organization’s unique attributes and risks determine the extent of D&O insurance coverage your business will need. It is imperative to understand the types of liabilities and coverages available through D&O insurance to make sure your senior leaders are protected. For more information about diversity, equity and inclusion risk or directors & officers’ insurance options, connect with a member of our team.