RISK VS PROGRESS: HOW COMPANIES CAN AVOID BEING CAUGHT BETWEEN A ROCK AND A HARD PLACE

Risk vs. Progress

How Companies Can Avoid Being Caught Between a Rock and A Hard Place

As America seeks to confront the stark reality of structural racism, many businesses across the country are exploring what they can do to address inequality. Social and cultural shifts, too, are amplifying the calls for businesses to do more, with a heightened focus on the social responsibility of corporate America. However, as companies seek to act to address racial inequality, they must do so in ways that mitigate legal risks. By Jodi Bartle

DEI STRATEGY

CONVERSATIONS AROUND INEQUALITY ARE NOT NEW, but after George Floyd’s murder, something clicked for many Americans. Following that tragic event, an increasing number of entities have become more receptive to demands for racial equality. The pressure to act on calls for change came from a variety of quarters. Chief among them were the national focus on racial inequality and the Black Lives Matter campaign. Additionally, companies are facing the impact of the fledgling environmental, social and governance (ESG) movement, and a generational shift in expectations regarding the extent to which corporations should reflect their younger employees’ values on issues of public concern. Together these factors have heightened the pressure on America’s businesses to consider their role in combatting social and racial inequality.

In response, companies have taken a variety of approaches. Some have issued statements of support for

Black employees and customers or made racial equity commitments. Others, such as Airbnb and Citibank, have undertaken civil rights audits or reviews. Shareholders have played an active role in this process, too, by calling for workplace reviews and other measures.

As businesses move into uncharted waters, their leadership – and general counsels in particular – will be charged with the important task of determining how to execute racial equity commitments while mitigating risk. Increased regulatory scrutiny, as well as litigation threats from activist organizations, could pose challenges to efforts to address structural racism. One need look no further than courts’ invalidation of President Biden’s programs involving relief for disadvantaged farmers and restauranteurs. Some efforts at leveling the playing field face legal pushback. Although these risks may seem sui generis, the challenges facing chief legal officers are no different from the work they do every day: defining risks and managing trade-offs. Going forward, general counsels must help their clients navigate the competing pressures with respect to racial equity measures. They ought to consider best practices and carefully attend to the key choices – such as programmatic design and communications strategies – that influence the overall risk profile of corporate initiatives, ideally in partnership with legal experts on civil rights and antidiscrimination law.

ACKNOWLEDGE THE RECKONING

At many companies, there are mandates from the C-suite to be responsive in these areas. This can be viewed as an initial phase of corporate America’s ‘racial reckoning’ where there are concrete actions taken to confront inequality. But there is also some indication that, compounding external pressure, there is hydraulic pressure internally from companies’ own workforces to ask

questions about the fairness of their business and workforce practices.

Many employees now expect more from work than just a paycheck and a sturdy desk. Instead of looking to peer groups for conversations around social issues, people now often expect their employer to take a stand. Many younger employees carry a more activist mentality with them to the workplace and do not necessarily want space between the things they care about, the diversity they have experienced in college and the places where they work. Thus, there are external and internal pressures on organizations to address inequality, in the form of proposals for racial equity audits, questions around tech and the consequences of all this for democracy and human rights. This inside/outside game accentuates the impetus for change, and business leaders are becoming more prepared to take on some risk because they desire this change also.

Many younger employees carry a more activist mentality with them to the workplace and do not necessarily want space between the things they care about, the diversity they have experienced in college and the places where they work.”

Racial Equity Related Shareholder Proposal – 2021 Proxy Season

COMPANY INDUSTRY PROPOSAL RESULTS

Johnson & Johnson Manufacturing Conduct racial equity audit

Amazon

Walmart Retail

Retail Conduct racial equity audit

Report on whether and how Walmart’s racial justice goals and commitments align with employee starting pay The proposal failed with 34% of shareholders voting in support.

The proposal failed with 44% of shareholders voting in support.

The proposal failed with 12% of shareholders voting in support.

Goldman’s Sachs Financial Services Conduct racial equity audit

BlackRock Financial Services Conduct racial equity audit The proposal failed with 20% of shareholders voting in support.

The proposal was withdrawn after BlackRock agreed to conduct a diversity review (BlackRock hired Paul Weiss).

State Street

Wells Fargo

JP Morgan

Morgan Stanley Financial Services Conduct racial equity audit

Financial Services Conduct racial equity audit

Financial Services Conduct racial equity audit

Financial Services Conduct racial equity audit The proposal failed with 37% of shareholders voting in support.

The proposal failed with 13% of shareholders voting in support.

The proposal failed with 40% of shareholders voting in support.

The proposal was withdrawn after Morgan Stanley agreed to conduct a diversity review.

Citi Financial Services Conduct racial equity audit The proposal failed with 38% of shareholders voting in support.

Bank of America Financial Services Conduct racial equity audit The proposal failed with 27% of shareholders voting in support.

PayPal Financial Services Report to Board on workplace culture and inclusion The proposal passed voting in support. with 87% of shareholders

American Express Financial Services Publish annual report on diversity and inclusion efforts The proposal passed voting in support. with 60% of shareholders

IBM Technology Publish annual report on DEI efforts that includes a process for the Board to address program effectiveness The proposal passed with 94% of shareholders voting in support.

Intel

Chevron Technology Report to Board on whether policies and norms reinforce racism at the company

Energy Conduct racial equity audit The proposal failed with 11% of shareholders voting in support.

SEC approved company’s petition to exclude the proposal from a vote based on ongoing litigation.

DuPont de Nemours Inc. Energy Publicly disclose workforce data by race, ethnicity, and gender The proposal passed with 84% of shareholders voting in support.

UPS Shipping Publish annual report on DEI efforts that includes a process for the Board to address program effectiveness The proposal failed with 33% of shareholders voting in support.

Berkshire Hathaway Holding Publish annual report on DEI efforts that includes a process for the Board to address program effectiveness The proposal failed with 27% of shareholders voting in support.

Abbott Laboratories Pharmaceuticals Publish report on company’s plan to promote racial justice The proposal failed with 38% of shareholders voting in support.

ARTICULATE VALUES

Any Board now looking to act should become introspective. Foundationally, where is the organization on its inclusion efforts and initiatives, and how integral are these values to the company? What efforts and commitments have been made both internally and externally, and who is responsible for executing them?

Think about the fairness mechanisms of your workforce, internal diversity, equity and inclusion (DEI), recruiting, promotion, pay and outreach to the demographics of your customer base. For example, some financial institutions have lending obligations so as to ensure they are not cherry-picking wealthy communities and leaving out minority communities, to make sure they’re not compounding decades of discrimination through such practices as not making credit and other products available in all locations.

There’s a lot of discussion about the degree to which social responsibility corporations have to recognize the lingering effects of racial inequality, and to ask questions about how they can be a positive force in disrupting unequal structures. For Boards, think about who’s going to execute against the structure, and then set up a dialogue between business and legal to create pathways that advance things in a way that is consistent with your legal obligations.

DEI STRATEGY

DEFINING OBJECTIVES

When Boards are trying to get in front of the inequality gap, they must first decide whether they need to take race into account in addressing the issues they seek to remedy. The complexity is that anti-discrimination law, the notion of color-blindness, and reverse discrimination cases, in effect may make it difficult to confront inequality by pushing businesses to avoid talking about race and to look for race-neutral alternatives that may be less effective. Boards must therefore learn to describe goals in ways that are inclusive and about opportunity. Language should be clear and baked into the organizational mission. Planning initiatives with a clear understanding of the legal landscape is key to developing programs that are calibrated to achieve the company’s aim while avoiding unnecessary challenges.

CONDUCT VS. RISK APPETITE

Calibrate the level of risk you are prepared to run in your efforts. Some measures have much lower risk, such as where you’re trying to increase pools of applicants and reach broader audiences through marketing. When race becomes a decisional factor, it’s a heightened risk for an organization and might be more difficult to defend. Overall, you should carefully build programs in ways that avoid vulnerabilities to legal challenge. For example, if an organization sets a specific numerical hiring target, saying: “we’re going to hire X number of women,” it may be vulnerable to so-called reverse discrimination claims. Under this theory, efforts to advance the position of one group purportedly entail discrimination against another group (here, male job applicants). But there may be other ways to diversify the workforce, such as setting aspirational goals, actively expanding applicant pools, and ensuring that each applicant is evaluated under the same process and receives a holistic review.

Opening a dialogue with legal about how best to implement changes is worthwhile, because lawyers and in-house counsel will be thinking about litigation risk as well as reputational consequences. Attacks on diversity initiatives can become fodder for the media and ultimately hinder goals. Boards should think about the complexity of navigating these spaces and giving a voice to the relevant actors, recognizing that we are in a moment where some are prepared to lean forward and bear some risks.

Finally, buy-in is crucial; and as much as there is pressure now for organizational shift, companies should ensure that essential teams and leaders are onboard with racial equity strategies and that the change is tied into foundational values. In addition, progress comes through a wider understanding of, and responsibility for, such progress. Where possible, seek to build a coalition of employees who are committed to racial equality.

Starting Points

There are two initial ways Boards can begin to make a change towards equality:

DIVERSITY SUPPLIER INITIATIVES

Boards can use their resources, capital and market power to broaden the group of entities that serve minority-owned businesses, and to create opportunities for them. For example, the law firm WilmerHale announced it would invest in a traditionally Black-owned legacy bank in addition to other lenders, leveraging the firm’s market power to spread wealth and opportunity.

INTERNAL PAY AND RACIAL EQUITY AUDITS

Audits are where a company asks an expert to investigate the impact of its products, hiring practices or policies on protected classes and minority populations. The company often releases some form of the results publicly. Internal pay and racial equity audits are becoming more prevalent; Facebook and Airbnb were recently subject to racial equity audits by ACLU veteran Laura Murphy, who released a guide to conducting such audits for other organizations. Pay audits require data to see where people are based on their protected characteristics, compensation, and titles. When companies look at this data, they may see gender or race skews which unmask the structural way organizations manifest unfairness. The benefits of auditing are clear: you get ahead of issues, build credibility with your workforce and are better situated to create windows of opportunity.