Lawsuits Challenge Corporate Diversity Pledges After Floyd

A growing number of lawsuits accuse major companies that prioritized diversity, equity and inclusion initiatives in recent years of falling short on their promises.

Almost 40 suits have been filed against companies including Delta Air Lines Inc. and Wells Fargo & Co. in the last three years because of allegedly misleading statements about diversity and equity commitments, according to an analysis of Bloomberg Law data. A common theme between the suits allege companies failed to live up to their DEI aspirations or, in some cases, implemented goals that allegedly fall outside a company’s mission to return value to shareholders.

Many companies were quick to make to make statements and incorporate new policies to address racial, ethnic and gender inequality among their employee ranks after George Floyd’s murder in 2020. Those new policies have been cited in numerous employee and investor suits, with more expected if companies fail to fully integrate DEI pledges into their workforce and board level operations, labor attorneys and DEI consultants said.

“You’re going to likely—at least for a while—continue to see that tested,” said Tyree Jones, chair of Reed Smith’s Global Labor and Employment Group.“Particularly as more companies too, sign on with very clear DEI goals and objectives and then their employees or shareholders seek to hold them accountable for that.”

Wells Fargo, under fire from regulators for a spate of scandals, is involved in at least five different shareholder suits alleging the bank breached its fiduciary duty by violating federal anti-discrimination laws. One suit, brought by Asbestos Workers Philadelphia Pension Fund last month, alleges the company conducted “sham interviews to nominally fulfill a diversity-enhancing policy.”

According to the suit, Wells Fargo’s board acted on DEI issues “only after negative media coverage forced them to.” The pension fund cites internal documents that show the board continued to face “major difficulties” meeting its DEI targets, even after the bank’s Chief Executive Officer Charlie ScharfScharf initiated his “Diverse Search Requirement” program, which required interviewing diverse candidates for all open jobs paying more than $100,000 a year.

A spokesperson for Wells Fargo declined to comment.

Litigation Risk Everywhere

To assess the breadth of cases, Bloomberg Law searched “diversity,” “diversity, equity and inclusion” and “DEI,” and more than a dozen related terms in lawsuits filed by employees and shareholders against US companies in the nearly three years since Floyd’s death on May 25, 2020.

The uptick in cases appears to be the result of increased employment discrimination claims, said Sarah Fortt, global co-chair of Latham & Watkins LLP environmental, social and governance (ESG) practice.

Those claims, she said, are “based on historically protected classes, such as race/ethnicity and gender, as well as an increase in “‘reverse discrimination’ claims.”

A March 2021 case brought against Delta Airlines alleges an employee faced sexism, discrimination, hostility and harassment, in violation of the company’s anti-harassment and anti-discrimination policies. The employee alleged Delta ignored its own policies and procedures, citing the company’s equal employment opportunity and non-discrimination policy, as well as its internal ethics policy handbook.

“Delta’s failure to follow its own policies and procedures regarding discrimination and its failure to enforce the law,” an amended complaint in the case says, “constitutes negligence.”

However, the judge dismissed the case five months later, solely on the grounds that the allegations—which date as far back as 2017—weren’t filed on time. Such discrimination charges must be filed within 300 days, which the employee didn’t do.

The airline didn’t respond to a request for comment.

Investor Suits

Some of the lawsuits were in the form of shareholder derivative actions, in which shareholders allege that a company’s failure to meet certain DEI objectives—like increasing the number of women in management—caused the company’s shares to lose value. Corporate goals are often disclose in public company statements or financial disclosures shared with investors.

“The reactions that I’ve noticed over the last two years have included shareholder derivative actions, really on both sides of the coin,” Jones of Reed Smith said. “Either challenging that the company was really fulfilling its stated commitment to DEI objectives, or questioning whether the company’s commitment to DEI objectives was actually taking away from the bottom line and a non-business related distraction.”

One such derivative suit was brought by employees’ pension funds of the city of Pontiac, Mich., against science and technology company Danaher Corp. in September 2020. The fund alleged the company misled investors by failing to hire a Black board member, while touting its commitment to DEI in its annual reports and website statements.

The judge dismissed the case in June 2021 because the fund didn’t demand the board hire a Black board member before suing, according to court filings.

Danaher didn’t respond to a request for comment. The company ultimately named a Black board member, A. Shane Sanders, senior vice president of business transformation at Verizon Communications Inc. in 2021. The company also disclosed the diversity-makeup of its current board in its 2023 proxy statement. It said half of its 14-member board are female and/or racially or ethnically diverse.

How-to Manual

Companies have to balance needs of the business, employees, shareholders and customers when developing DEI initiatives—while at the same time avoiding litigation from any of those parties, according to several DEI-specialized lawyers, researchers and practitioners.

One approach is to write policies “aspirationally,” or in non-specific terms, Jones and others said. For example, a company can write a goal of matching the proportion of minorities of their workforce to the proportion of minorities on its board, instead of setting a hard quota to hire a certain number of minorities on its board.

Nasdaq-listed companies generally must have at least one woman and at least one minority or LGBTQ member on their boards—unless they disclose why they can’t have diverse members. There is greater leeway for smaller companies.

While Nasdaq allows exemptions, the stock exchange company is being sued by the National Center for Public Policy Research and other conservative groups who allege that the rules are the same as a quota requirement. The plaintiffs won a legal victory last year when California’s Superior Court struck down a state law that explicitly required companies based in the state to have women and minority or LGBTQ board members.

While companies must avoid quotas, a policy can’t be written as a check-the-box exercise whose only purpose is to market the company as inclusive, according to Elena Philipova, director of sustainable finance at Refinitiv, a data and research arm of the London Stock Exchange Group.

Such surface-level proposals only embitter employees, according to Philipova. The most successful companies are transparent about their goals, listen to their employees and integrate DEI goals into the every aspect of the business, she said. Refinitiv identifies the top 100 most-diverse and inclusive global companies in an annual index it launched in 2016.

“It really needs to be genuine and authentic and built into the DNA of the organization, and then being transparent about it,” Philipova said.

For public biotech company Illumina, which made No. 6 on Refinitiv’s 2022 Global Diversity and Inclusion Index, DEI goals are integrated into revenue-raising aspects of the business. Lisa Toppin, chief diversity officer at Illumina Diversity, equity and inclusion initiatives can’t solve all “societal ills,” Toppin said, and they’re not supposed to. They’re designed to help employees feel seen and heard at work—they don’t have to check their identities at the door.

DEI “practices” are exactly that: practice. Illumina and other companies haven’t always gotten it right, but the principles should evolve to fit the needs of businesses and their employees. Some of it has been a trial-and-error process, but that “learning” is ongoing, she said.

“What we can hope for is that each each company is finding their way,” Toppin said.