More firms may be exposed to D&O suits over diversity

Posted September 14th, 2020.

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Judy Greenwald

Following a flurry of recent suits against companies over a lack of diversity at the board level, more companies that do not have Black directors or top officials should expect to face litigation that could trigger directors and officers liability claims, experts say.

While it’s unclear whether the suits are primarily being used as instruments of change rather than for financial recompense, corporations face increased urgency to improve diversity during recent sometimes violent clashes over racial justice, they say.

Legislatures in some states are also looking to force change.

Meanwhile, other companies are pledging commitments to put Black people on their boards.

Companies that have been sued in recent months include Danaher Corp., The Gap Inc., Norton LifeLock Inc., Qualcomm Technologies Inc., Facebook Inc. and Oracle Inc.

The lawsuit against Washington-based Danaher, for instance, asks that three new persons, including two African Americans and one other racial minority, be named to its board and that the company invest $150 million in economic and social justice programs for the African American community designed to address historical racial disparities.

“I would expect to see more,” said Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co.

H. Vince McKnight Jr., Washington-based managing partner at prominent plaintiff firm Sanford Heisler Sharp LLP, said while his firm has not filed any such suits to date, “under the right circumstances, we might.”

While the issue of increased racial diversity is not new for corporations, it has “new urgency now because of the racial justice movement, and there’s lots of pressure on companies to consider things that may have been accepted practice in the past,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC

The lawsuits have parallels with litigation that arose out of the #MeToo movement, which led to state legislation mandating that boards have female members, said Alexandra Jennings, vice president at EPIC Insurance Brokers & Consultants in Portland, Oregon.

The 2018 California Women on Boards law requires publicly held California companies to have one or two female directors on their boards depending on their size by Dec. 31, 2021.

It’s not clear whether the suits “will be successful from a dollar settlement perspective,” but they have already succeeded in putting a light on the issue, Ms. Huskins said.

“I’m curious to see whether these lawsuits will be successful,” said Jeffrey D. Polsky, San Francisco-based co-chairman of Fox Rothschild LLP’s labor and employment department.

“They’re not claiming discrimination per se, they’re claiming securities fraud. They’re saying when the companies represented they were addressing diversity in public announcements, that was untrue,” he said. “I don’t know if success means winning the lawsuit, or persuading companies to diversity their boards more.”

Courts are hesitant to contradict the business judgments of boards without a clear example of impropriety, said Philip K. Miles III, a labor and employment lawyer and a shareholder with McQuaide Blasko Inc. in State College, Pennsylvania.

“But from a PR perspective, how much do these companies want to fight for their rights to have an all-white board,” he said. “I imagine they’ll try to find some way to resolve these lawsuits without incurring too much litigation costs.”

Ms. Jennings said from a D&O perspective, the critical question is how the insurance market will respond to the lawsuits, particularly given the challenges it is already facing with higher claims and increased rates. The litigation could also hit the employment practices liability insurance market if it leads to wrongful termination suits, she added.

Environmental, social and corporate governance suits “are already impacting the D&O insurance environment” and “are certainly contributing to the increasing D&O premiums we’re seeing for publicly-traded companies,” Ms. Huskins said.

Companies “should make genuine efforts to diversify, not just pay lip service to the idea, not just talk about their good intentions, but try to have boards that more closely reflect their communities,” Mr. Polsky said. “It’s obviously not something that happens overnight, but they should be able to show progress.”

Amy Epstein Gluck, a partner with FisherBroyles LLP in Washington who advises business owners on compliance with anti-discrimination laws, said, “You’ve got to put your money where your mouth is, so to speak.” The actions “have to match” companies’ slogans.

To avoid potential suits over lack of board diversity, organizations should first determine what statements have generally already been made, both internally and externally, on racial diversity and “confirm that those disclosures are accurate and not merely aspirational,” Ms. Huskins said.

Sometimes company employees who write about this issue “are well-meaning, but underinformed when it comes to issues of disclosure liability. It’s important for somebody who understands the legal landscape to review those statements the company has made,” Ms. Huskins said.

Companies’ nominating and governance committees should review how to address the issue, she said, noting that major shareholders are also pressing companies to address board diversity.

Meanwhile, the Board Challenge, a group of public and private companies and organizations, have launched a pledge for U.S. corporate board of directors to add a Black director within the next year.

In addition, communications and advisory firm Teneo in New York, the Ford Foundation in New York and the Executive Leadership Council, a Washington-based organization for the development of Black leaders, have launched of the Board Diversity Action Alliance, an initiative to increase the representation of racially and ethnically diverse directors on corporate boards of directors beginning with Black directors.

On the legislative front, on Aug. 30 the California legislature passed A.B. 979, which would require publicly traded companies in the state to have at least one minority director by the end of 2021. The governor is expected to sign it.

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