Other than the pandemic, the biggest story of 2020 has been the racial justice movement and protests that followed in the wake of the May 2020 death of George Floyd. In response to the recent demonstrations and social unrest, there has been a renewed focus on equality and diversity issues. Among many other things, investors and activists are raising concerns about the lack of racial diversity on corporate boards. For example, in late June, a California legislator introduced a bill that would require corporations to include on their boards persons from “underrepresented communities.”
In addition to these legislative efforts, activist investors seeking to advance board diversity objectives have launched a series of shareholder derivative lawsuits against the directors of several companies, accusing the boards of violating their legal duties by failing to diversify the company’s board and otherwise failing to address diversity and equality issues. These lawsuits also allege that the boards misled investors about their companies’ diversity and inclusion practices. The lawsuits typically seek a variety of remedial measures, including the addition of African-American directors to the companies’ boards; the creation of a fund to promote diversity and inclusion in the defendant company’s workforce; the setting of minority hiring goals, with executive compensation tied to achievement of the objectives; and the institution of periodic board diversity training.
There have now been a total of eight of these board diversity lawsuits. Six of these lawsuits — against the boards of Oracle, Facebook, Qualcomm, NortonLifeLock, The Gap and Monster Beverage Corporation — all were filed by the same law firm and all involved California-based companies. Based on these six filings, the board diversity litigation phenomenon looked as if it might be nothing more than the quixotic quest of a self-appointed agent of a racial justice cause. However, a lawsuit filed on September 1, 2020 against Danaher Corporation — which is based not in California, but the District of Columbia — and another lawsuit filed on September 23, 2020 against Cisco Systems was filed by a different and higher profile plaintiffs’ law firm, raising the possibility that this litigation trend may become both more generalized and more extensive. Interestingly, the Cisco Systems action follows a pre-suit demand on Cisco System’s board, which is in contrast to the other prior suits.
The need for greater African-American representation at the board level is not a new issue. The obvious reason these lawsuits are being filed now is the current heightened focus on racial justice issues. The plaintiff lawyers are well aware that this casts a harsh light on the lack of African-Americans in corporate leadership and puts pressure on companies and other organizations to take remedial steps.
These lawsuits have only just been filed, and it remains to be seen what, if anything, they may accomplish. The filing of these lawsuits does show how the current racial justice movement in the U.S. not only has important implications for the social and political context for businesses in this country, but also creates dynamics — including the threat of litigation — that put pressure on businesses to reexamine past practices. At a minimum, these lawsuits demonstrate that, among other things, lack of board diversity may represent a D&O claim risk. There are a significant number of other companies that lack African-American directors; these companies may face the possibility that they, too, are targeted in one of these board diversity lawsuits, which by itself may motivate companies to reconsider the composition of their boards.
The contents of this blog were sourced directly from RT ProExec Insights Volume XXI, Issue 1, Fall 2020.