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How Companies Can Reduce Risk of DEI-Related Enforcement Actions

Jan. 19, 2023, 9:00 AM

Last year brought heightened government interest and noteworthy charges in environmental, social, and governance matters. All signs indicate that government investigations in this space will increase in scope and number.

Government investigations are disruptive to company operations, but those involving diversity, equity, and inclusion can cause other significant problems. Companies should be aware of these risks and take proactive steps to reinforce their DEI-related controls. These efforts can prevent massive monetary penalties and hits to a company’s reputation.

DEI-related investigations target the ‘S’ in ESG. Government scrutiny of alleged DEI violations is unsurprising, considering the heightened attention that companies, investors, employees, and communities have placed on bolstering DEI efforts.

Several government agencies have instituted a range of investigations. In each case, authorities investigated a company’s DEI initiative and alleged that program was used as a tool to commit fraud.

For example, the New York attorney general’s office settled with the Pike Co. for falsely declaring, in connection with a public schools project, that it had complied with project-specific diversity requirements. The state alleged that Pike falsely certified—and otherwise took steps to conceal—that it subcontracted with minority- or women-owned businesses, despite using non-MWBs as subcontractors.

The settlement resulted in Pike paying a six-figure monetary fine and agreeing to a plan requiring it to implement compliance, remediation, and training measures. Pike’s settlement represents the latest in a multi-year enforcement campaign by the New York attorney general’s office that has produced settlements with 10 companies and garnered more than $1.3 million in fines and penalties.

What an Investigation Brings

A government investigation may undermine a company’s DEI efforts when a heightened focus is rightly being placed on that work.

Research indicates that a focus on DEI improves a company’s bottom line. A government investigation that distracts from DEI initiatives can compromise a company’s financial aspirations, beyond the cost of responding to and resolving the government investigation.

In addition, companies’ DEI efforts have historically not been subject to the type of third-party scrutiny they are now receiving. This means company leaders may be unaware of weaknesses in DEI-related controls that could lead to increased liability or extend the duration of an investigation longer than necessary.

Because of these potential repercussions, it is essential that companies take steps to insulate their DEI-related controls from significant weaknesses and prevent a mismatch between stated DEI initiatives and actual practices. There are several key steps companies can take to mitigate the risk of having their DEI efforts investigated.

Accurately Assess Program

Before releasing a new DEI initiative or plan, an organization needs clear insight into how the measure will fit within the company’s overall operations. Some organizations adopt cookie-cutter policies and programs that are insufficient to meet their needs.

At minimum, conducting a survey or assessment to identify weaknesses in controls and areas for improvement can provide invaluable insight and help with the creation of a DEI program that will withstand scrutiny during an investigation.

Ensure Efforts Cascade

Having a great DEI program on paper is insufficient, and so is one only embraced by a company’s DEI team or top leadership. To prevent this, companies should integrate DEI-related obligations with personnel and programs at varying levels within the organization.

Companies may call such personnel diversity or culture champions, or a similar title.

Regardless of the term used, the intent behind it is the same—the selected individuals agree to support and promote the company’s DEI efforts.

Provide Confidential Reporting Methods

Companies should endeavor to create an atmosphere where employees believe two things.

First, employees must believe they can confidentially report diversity lapses. Employees must also believe any reports they make will be taken seriously and addressed appropriately.

Establishing such an environment will help companies identify problematic areas before they metastasize.

Without a confidential reporting mechanism, employees may fail to report issues that companies need to know in real time or soon after.

Audit Compliance

Finally, companies must implement a system to ensure compliance with their DEI policies by all relevant personnel. Companies can ensure—or at least increase the likelihood of—compliance in a variety of ways.

Conducting periodic audits is an effective way to identify problems on the back end.

Taking these steps does not guarantee that an organization will insulate itself from investigation completely. A company could have, for instance, a rogue employee whose conduct sparks an investigation.

Nevertheless, companies can reduce their risk profiles by proactively strengthening their DEI-related controls.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Danette R. Edwards, a former senior counsel in the Securities and Exchange Commission’s Enforcement Division, is a litigation partner at Katten Muchin Rosenman.

Johnjerica Hodge is a litigation partner focused on ESG-related issues and leads the corporate and social governance and investigations group at Katten Muchin Rosenman.

Ryan J. Meyer is a litigation partner focused on defending companies and executives in government investigations, civil enforcement actions, and criminal proceedings at Katten Muchin Rosenman.

Katten associate Ifedapo Benjamin contributed to this article.