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  • November 06, 2023

    The DEI Conundrum for Companies

    Companies are caught between realizing the benefits of a diverse workforce and the potential of a lawsuit for engaging in discriminatory practices. Nadelle Grossman discusses those competing considerations and how companies can find ways to further support DEI goals.

    Nadelle E. Grossman

    Companies are facing competing pressures in the area of diversity, equity, and inclusion (DEI) efforts. On the one hand, many companies identify the economic and institutional benefits of having a diverse workforce that reflects the different views, experiences, and ideas of their constituents. On the other hand, companies worry about being attacked for engaging in discriminatory practices.

    In his recent article in this blog, Clyde Tinnen reviewed the U.S. Supreme Court’s decision in Students for Fair Admissions, Inc. v. President and Fellows of HarvardCollege (SFFA opinion). According to Tinnen, “the Court’s interpretation would apply in broader contexts than just college admissions.”

    Those broader contexts include private employers. Thus, he notes that “It is advisable for businesses that have instituted these types of policies or programs” – referring to DEI programs, such as resource or affinity groups, as well as training programs and internships that set aside spots for a protected class – “to carefully review and consider the lawfulness of such policies or programs.”

    This article examines new developments that block the path toward DEI and offers areas of opportunity that can support DEI goals.

    Nadelle Grossman Nadelle Grossman, Tulane 1999, is the associate dean for academic affairs and professor of law at Marquette University Law School in Milwaukee. She teaches and writes in the areas of corporate law, corporate governance, and contracts.

    Not A Way Forward

    In 2020, the California legislature adopted a state corporate law requiring public corporations with headquarters in California to have a specified minimum number of ethnically and racially diverse or LGBTQ+ members on their boards of directors. This came on the heels of a 2018 California law requiring a specified minimum number of women serve on the board of any public corporation headquartered in California.

    California state courts held both laws unconstitutional under California’s constitution. State court appeals of both decisions remain pending. Meanwhile, in a separate federal case, the Eastern District of California held that the law relating to underrepresented minorities violated the 14th Amendment of the Constitution.

    From these decisions, at least as of now, it seems like state law mandates on diversity might not be a path forward in terms of increasing diversity at businesses.

    Some of the same nonprofits that brought challenges to these laws have also been initiating lawsuits against companies, law firms, and universities for opportunities that are explicitly made available only to members of underrepresented groups.

    For example, about a month ago, the American Alliance for Equal Rights sued Morrison & Foerster for their fellowship program, alleging they illegally discriminated on the basis of race.1 Morrison & Foerster’s fellowship program had been eligible to “first-year law students who are members of an underrepresented group in the legal industry.” After the lawsuits were filed, the law firm eliminated the language giving rise to the lawsuit. As a result of this change, the plaintiff dropped the lawsuit.2

    Other firms, too, have modified their eligibility criteria for fellowships and similar opportunities to eliminate any requirement that applicants be members of an underrepresented racial group, making any pending or potential challenge moot.

    Opportunities to Support DEI Goals

    Notwithstanding some of the recent developments that block DEI efforts, other developments confirm that DEI opportunities remain.

    Disclosure. In 2021, the U.S. Securities and Exchange Commission (SEC) approved a NASDAQ rule requiring companies that have shares listed on the NASDAQ to have at least one woman and at least one underrepresented minority or LGBTQ+ member on their boards, unless they report why they’re unable to comply.

    In a decision published by the U.S. Court of Appeals for the Fifth Circuit on Oct. 18, 2023, the Court upheld this rule.3 The Court found that “regardless of whether investors think that board diversity is good or bad for companies, disclosure of information about board diversity would inform how investors behave in the market.”

    While the plaintiff indicated it plans to appeal, there remains a substantive difference between the NASDAQ disclosure rule, which does not require any specific diversity, and specific diversity mandates. The former is more likely to survive a challenge based on discrimination than the latter. Thus, disclosure rules tied to diversity might be a path forward for regulators.

    Private ordering might also lead to more focus on DEI. Indeed, in the public company context, investors have put forth shareholder proposals for companies to disclose their DEI efforts. Those proposals often request:

    • a racial equity audit;

    • a report on the prevention of workplace harassment and discrimination;

    • a nondiscrimination audit; or

    • disclosure of DEI data or metrics or reporting on the effectiveness of DEI efforts or programs.

    Some of these requests, too, primarily focus on disclosure, with the other proposals focusing on the institution of processes designed to remove discrimination and bias.

    While these proposals do not usually receive majority support, even a proposal that achieves a 20 percent approval rate sends a message to the board and management about investors’ interests.

    And sometimes, these proposals do garner support from a majority of shareholders. For example, this last proxy season, one shareholder proposal, which requested a report on the effectiveness of the company’s DEI efforts and metrics, received support from a majority of shareholders, as did another one requesting a report on the company’s efforts to prevent workplace harassment and discrimination.4

    Proxy advisory firm Institutional Shareholder Services (ISS) as well as many institutional investors generally support an increase in board diversity as well. In fact, ISS has a voting guideline in which it will generally vote against or withhold its vote from the chair of the nominating committee where “the board has no apparent racially or ethnically diverse members.”5

    If institutional investors wish to vote against a board slate because that slate lacks adequate diversity, they are free to do so.

    Even absent regulation or shareholder initiative, companies often choose to disclose information about their commitment to DEI, commitment to removing discrimination, and efforts to remove barriers to the hiring, retention, and promotion of historically marginalized groups.

    In fact, both private and public companies often post statements on their websites describing their commitment to DEI and explaining steps they take to counter racism and discrimination and to promote the creation of an inclusive workplace.

    Removing Barriers to Inclusive Practices

    Another area where a company might be able to act in furtherance of its DEI goals is in instituting more inclusive processes as well as removing the opportunity for explicit or implicit biases.

    For example, many studies have shown the biases inherent in hiring. In one study, the researchers sent out resumes with similar levels of education, experience, and other strengths, but changed the names so that some resumes had a stereotypically Black or Latino name and the others had a stereotypically white name. The researchers found that on average, “white applicants receive 36% more callbacks than African Americans” while “[w]hite applicants receive on average 24% more callbacks than Latinos.”6

    To combat this type of bias, employers can institute more race-blind hiring processes, including removing candidates’ names and other potentially race-identifying information for purposes of the hiring process and using more objective criteria in selecting candidates to interview. They can also include a more diverse group to participate in hiring.

    Similarly, employers sometimes recruit employees from elite institutions and with degrees that are not diverse. Employers should consider whether they really need to only recruit from those institutions rather than from institutions that have greater diversity.

    Similarly, employers should consider whether recruiting employees with specific undergraduate degrees or specific past experiences might be unduly limiting their recruitment pool. If so, they might be able to advance diversity simply by recruiting a broader set of talent, recognizing that those employees might bring different skills and advantages to the firm.

    Each of these actions should not be troubling, under the U.S. Constitution or Title VII of the Civil Rights Act of 1964, as they do not discriminate against any person on the basis of race or other protected characteristic.

    Conclusion: There Are Other Ways

    While a company nowadays must be careful not to take actions that give members of underrepresented racial or other groups special treatment, they can continue to take other actions to advance their DEI goals.

    For example, they can evaluate how existing hiring or other processes might reflect biases, and take steps to remove those biases. They can expand their hiring criteria and consider new hiring channels that might open up opportunities to more diverse candidates. And companies can disclose these steps, as a way to show their commitment to DEI.

    The author would like to thank Mary Purdy, Marquette University Law School 3L, for her great research assistance in preparing this article.

    This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section webpages to learn more about the benefits of section membership.


    1 Julian Mark and Taylor Telford, “Conservative Activist Sues 2 Major Law Firms Over Diversity Fellowships,” The Washington Post, Aug. 22, 2023.

    2 Julian Mark, “Discrimination Lawsuit Dropped After Law Firm Opens Fellowship to All Students,” The Washington Post, Oct. 6, 2023.

    3All. for Fair Bd. Recruitment v. Sec. & Exch. Comm'n, No. 21-60626, 2023 WL 6862856 (5th Cir. Oct. 18, 2023).

    4 Gibson, Dunn & Crutcher LLP, Shareholder Proposal Developments During the 2023 Proxy Season, July 25, 2023.

    5Proxy Voting Guidelines, Benchmark Policy Recommendations, Institutional Shareholder Services (ISS), United States, Dec. 13, 2022.

    6 Quillian, et al., Meta-analysis of Field Experiments Shows No Change in Racial Discrimination in Hiring Over Time, PNAS (Proceedings of the Natinoal Academy of Sciences of the United States of America) 114 (41) 10870-10875, Oct. 10, 2017.

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