On November 30, 2020, shareholders in Pinterest, Inc. filed a derivative lawsuit in the Northern District of California against Pinterest and nine of its officers and directors. The shareholders are alleging breach of fiduciary duty, waste of corporate assets, abuse of control, and violation of Section 14(a) of the Securities Exchange Act of 1934, which prohibits the inclusion of materially misleading statements or omissions in a proxy statement (the “Complaint”).1 The Complaint states that Pinterest has maintained a “systematic culture, policy, and practice of illegal discrimination on the basis of race and sex, from at least February 2018 through the present.”2
Per the Complaint, “Pinterest’s top executives and members of its Board of Directors [ ] personally engaged in, facilitated or knowingly ignored the discrimination and retaliation against those who spoke up and challenged the Company’s White, male leadership clique.”3 As evidence, the Complaint cites Pinterest’s firing or “forc[ing] out” of three female executives — (1) Ifeoma Ozoma, (2) Aerica Shimizu Banks, and (3) Francoise Brougher — two of whom are African American, in retaliation “for seeking equitable leveling and pay.”4 Ozoma previously served as Pinterest’s Public Policy and Social Impact Manager.5 Banks previously served as Pinterest’s Head of Federal Affairs.6 And Brougher previously served as Pinterest’s Chief Operating Officer.7 These executives described their experiences at Pinterest publicly, and Bloomberg, The Washington Post, and The New York Times all covered their allegations.8 Brougher has since individually sued Pinterest for gender discrimination and retaliation, and The New York Times has continued to cover that lawsuit.9
The Complaint describes a “virtual walkout” staged by Pinterest employees “demanding greater transparency in compensation and increased diversity among Pinterest’s senior leadership.”10 The virtual walkout’s website, “changeatpinterest.com,” asserts that Ozoma, Banks, and Brougher’s experiences were “not isolated cases” but “representative of an organizational culture that hurts all Pinterest workers.”11 Moreover, the Complaint notes a Business Insider article describing “multiple Black employees who complained of being fired or pushed out of the Company with no real explanation after receiving positive reviews and exceeding performance goals.”12
The Complaint alleges that “[b]y committing the misconduct alleged herein, Individual Defendants breached their duties of good faith and loyalty in the management and administration of Pinterest’s affairs and in the use and preservation of Pinterest’s assets.”13 The Complaint further alleges that because Pinterest’s directors and officers perpetuated (or failed to prevent) the above-described culture, “the Company’s financial position and its goodwill and reputation among its largely female user base (which Pinterest’s success depends upon) were harmed and continue to be harmed.”14 The Complaint notes, “Public scrutiny of Pinterest and press coverage of discrimination at the Company has continued for months, leading to a user boycott, a public petition signed by 25,000 people demanding Pinterest ‘Pay your Black employees what you owe them!’”15
The Complaint also states that “advertisers [ ] do not wish to be associated with a women-focused product under intense criticism for discriminating against women, particularly women of color.”16 And the Complaint claims that the misconduct alleged also “harm[s] [ ] the Company’s ability to hire and retain talent, particularly diverse talent, which Pinterest itself admits harms its business.”17
Moreover, the Complaint alleges that Pinterest’s 2020 proxy was materially misleading regarding how Pinterest calculated executive compensation, because it “omitted that the Compensation Committee had assigned Brougher’s [Restricted Stock Units (“RSUs”)] in an amount that discriminated on the basis of sex, was not fully reflective of her role, contributions and ability to contribute to Pinterest’s long-term objectives, and that the decisions made to set her RSUs treated her unequally relative to her similarly situated male counterparts.”18
This is the latest in a series of lawsuits brought by shareholders in technology companies alleging that environmental, social, and governance (“ESG”) failures constitute breaches of fiduciary duties or federal securities laws violations by the companies’ boards and officers.19 It remains to be seen if (and to what degree) these lawsuits will be successful. However, as public companies increasingly focus on the business implications of ESG issues, it seems likely that plaintiffs will continue to test the limits of when/how the law requires public companies to act on those ESG issues.
Accordingly, the possibility of a derivative or securities lawsuit is yet another reason for companies to be “risk creative” in assessing the scope of their enterprise risk management processes and programs. While companies often come to ESG as a result of investor engagement efforts, the benefits of a robust ESG strategy are not limited to the creation of disclosures – a sophisticated ESG strategy can also equip a company to more effectively and efficiently identify, manage and mitigate nonfinancial risks, including risks associated with the corporate culture.
1 See Complaint at 1, Employees’ Retirement System of Rhode Island, et al., v. Benjamin Silbermann, et al., No. 3:20-cv-08438 (N.D. Cal. Nov. 30, 2020), ECF No. 1.
2 Id. ¶ 1.
3 Id.
4 Id. ¶¶ 2-3.
5 Id. ¶ 86.
6 Id. ¶ 97.
7 Id. ¶ 2.
8 Id. ¶ 4.
9 Id. ¶ 5.
10 Id. ¶ 6.
11 Id.
12 Id.
13 Id. ¶ 316.
14 Id. ¶ 1.
15 Id. ¶ 18.
16 Id.
17 Id.
18 Id. ¶ 193.
19 See Kiger v. Mollenkopf, Case No. 3:20-cv-01355 (S.D. Cal. July 17, 2020); Ocegueda v. Zuckerberg et al., No. 3:20-cv-04444 (N.D. Cal. July 2, 2020); Klein v. Ellison et al., No. 3:20-cv-04439 (N.D. Cal. July 2, 2020).
