In the wake of the US Supreme Court’s recent decision striking down affirmative action in higher education in Students for Fair Admissions v. Harvard University and Students for Fair Admissions v. University of North Carolina (Harvard/UNC), corporations are being swept into a nationwide conflict over diversity, equity, and inclusion (DEI) initiatives. Corporate boards should consider taking preventive measures now to mitigate litigation risk.
Many corporations have already received well-publicized letters from state attorneys general challenging or affirming DEI initiatives in hiring, vendor sourcing, and other facets of business. Even prior to the Supreme Court decision, the plaintiffs’ bar had begun to challenge corporate DEI practices via lawsuits and agency charges.
Given the Supreme Court’s rejection of race-conscious decision-making in Harvard/UNC, those legal challenges will likely increase over the next few months. Following those lawsuits, there will inevitably be stockholder derivative litigation directed at corporate boards in connection with their role in overseeing the business.
Corporate boards should consider taking action now that will both satisfy their fiduciary obligations and help protect against claims of fiduciary breach to come.
LIABILITY
Directors of Delaware corporations (and those incorporated in many other jurisdictions) have a fiduciary duty to monitor risk of harm to the corporation, including risks that the corporation is in violation of the law. When directors become apprised of a material risk, they can be held personally liable if they consciously disregard their duty to respond and address the risk.
Arguably (but in the views of plaintiffs’ firms, unquestionably), every board of directors whose company maintains DEI programs has been put on notice by Harvard/UNC of potential illegality with respect to some DEI programs. Having been arguably apprised of a risk that the corporation is in violation of the law, directors discharging their fiduciary duties should consider addressing the risk to the corporation that it will be found in violation of the law, or they may expose themselves to litigation risk if the corporate risk later comes to fruition—for example, if the corporation suffers a judgment finding the corporation is in violation of the law in an anti-discrimination class action directed at DEI policies.
MITIGATING RISK
Fortunately, mitigating risk to the board in these circumstances is fairly straightforward: A board (or a committee thereof reporting to the full board) need only direct that the risk be investigated and evaluated with the conclusions later reported back to the board to determine whether further action need be taken.
The review of the corporation’s DEI programs should be conducted by competent counsel providing a report to the board, which may include advice regarding actions to be taken; however, such review should, in all cases, evaluate the risk of illegality regarding the corporation’s DEI programs and ensure that there are internal controls in place to monitor and report risks of illegality in the implementation of its DEI programs.
Critically, the board’s delegation of the review of DEI programs, the report back to the board on the results of that review, and the board’s deliberations as to next steps, if any, must be documented in board minutes, preferably in a manner that could later be disclosed without waiving attorney-client privilege.
Should the corporation later be determined to have violated the law, taking the aforementioned preventive measures before the risk materialized will serve three important purposes:
- The board will have documented that it satisfied its fiduciary duties of oversight with respect to the risk.
- The board will have created a succinct record that may later be used to respond to books and records demands, with the potential impact of causing plaintiffs’ counsel to abandon further efforts at investigation or litigation.
- Even if the conclusions and recommendations from the review later turn out to be wrong (for example, if the review concluded that the DEI programs were legally compliant but were later found to be illegal), the board can later invoke the review as a defense to liability.
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