Corporate America’s DEI dilemma: Balancing legal risks and diversity commitments

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Introduction: A year in review following the ruling

Almost a year ago, on June 29, 2023, the US Supreme Court delivered a landmark ruling against race-based affirmative action in college admissions (Students for Fair Admissions), citing violations of the Fourteenth Amendment and Title VI of the Civil Rights Act. While this decision only directly affects government entities and universities, there has been growing concern that it could set a precedent that extends to the private sector, especially considering the close relationship between Title VI and Title VII, which governs private employment practices.

Over the past year these concerns have begun to materialize, with conservative organizations like the American Alliance for Equal Rights (AAER) initiating a string of legal challenges against certain corporate DEI practices, drawing on provisions of the Civil Rights Act. As companies assess the legality of their DEI programs and hedge against potential lawsuits for “reverse discrimination,” they have scaled back their DEI efforts or removed references to DEI targets and programs in their annual reports, especially those related to race. Others have cited diversity initiatives as a risk factor in their recent 10-K filings, reflecting a broader trend of reevaluating the public presentation of these initiatives due to legal and political pressures.

Conversely, many companies highlight the business benefits of DEI initiatives in their 10-Ks. Even before the ruling, large companies like Apple and Starbucks raised alarm that ending affirmative action could reduce the diversity of job applicants, potentially hindering DEI efforts. The ruling came amid a surge in corporate DEI initiatives following George Floyd’s tragic murder and the wave of Black Lives Matter protests in 2020, further reinforced by increased regulatory and investor focus on diversity disclosures. Despite some companies scaling back, a December 2023 survey of 194 chief human resource officers showed most are committed to DEI, with none planning to scale down initiatives and 63 percent planning to focus on attracting a more diverse workforce. Recent research from the National Bureau of Economic Research underscores the need for continued DEI efforts, revealing significant racial bias in hiring practices at many large US companies.

As the DEI legal landscape shifts, companies are actively re-strategizing to strike a balance between the risks of maintaining a DEI program and the risks of not having one. Michael Elkins, a labor and employment attorney, describes this dilemma as a “Catch-22.” He states, “I’m not sure which fear is greater right now: the fear of getting sued for having a program or the fear of getting sort of taken to task by eliminating the program.”

In the sections that follow, we will explore the specific legal challenges DEI programs face post-ruling and provide guidance on how companies can navigate this evolving landscape while maintaining their commitment to diversity, equity, and inclusion.

What aspects of DEI programs are at risk?

The Supreme Court ruling in Students for Fair Admissions has intensified scrutiny on DEI initiatives, raising legal concerns for both educational institutions and the private sector. This section delves into these legal challenges, focusing on the implications of the ruling and subsequent lawsuits targeting corporate DEI practices.

Students for Fair Admissions

In Students for Fair Admissions, the Supreme Court ruled that Harvard College and the University of North Carolina (UNC) violated the Equal Protection Clause of the Fourteenth Amendment and Title VI of the Civil Rights Act of 1964 by using race as a determinative factor in admissions. The Court found the programs lacked measurable criteria, used race in a potentially negative way, and lacked a logical endpoint.

Subsequent Supreme Court actions on affirmative action and DEI

Since this ruling, the Supreme Court has declined to hear new challenges to race-related admissions policies. In Coalition for TJ v. Fairfax County School Board, the Court effectively allowed a high school policy aimed at removing barriers for students of color to stand. Similarly, it declined to review a case involving race-based affirmative action at West Point. These decisions demonstrate a careful approach by the Court in establishing race-neutral methods for creating inclusive student bodies and in extending the Students for Fair Admissions decision to other educational institutions, such as military academies.

However, the Supreme Court did issue a ruling related to DEI programs in April 2024 in Muldrow v. City of St. Louis. The decision stated that employees no longer need to show “significant” harm, such as a demotion or pay cut, to file a discrimination claim. Instead, experiencing “some harm,” like a less prestigious role or an inconvenient schedule, is sufficient. This ruling may make it easier to challenge DEI initiatives in the workplace.

Civil Rights Act — What was already illegal before the ruling?

It is crucial to note that discrimination based on race and other protected traits has long been illegal under Title VII of the 1964 Civil Rights Act, which prohibits favoring one race over another in employment. Stacy Hawkins, a law professor at Rutgers University, emphasizes that while explicit race-based decisions are risky, considering race to address historical underrepresentation has been viewed as permissible under the law.

Recent lawsuits — What corporate DEI practices are currently being challenged?

Since the June 2023 ruling, AAER has been leading the charge on legal challenges against certain corporate DEI practices. AAER was founded by Edward Blum, the activist instrumental in the two cases against Harvard and UNC — ultimately consolidated by the Supreme Court that resulted in the ruling against affirmative action.

Last August, AAER filed a lawsuit against Morrison Foerster, a prominent corporate law firm, alleging that their fellowship program was discriminatory as it excluded non-minority groups, limiting its program to first-year law students from “diverse population[s] that ha[ve] historically been underrepresented in the legal profession,” encompassing Black, Native American, and, LGBTQ+ people, for example. In response to the lawsuit, Morrison Foerster revised its eligibility criteria to target “exceptional first and second-year law students with a demonstrated commitment to diversity and inclusion in the legal profession,” removing references to underrepresented groups. Subsequently, AAER dropped the lawsuit. Beyond Morrison Foerster, AAER has targeted several other major law firms, including Perkins Coie and Winston & Strawn. In both instances, the firms removed racial criteria from their fellowship programs after being sued.

Another key AAER lawsuit involves Fearless Fund, a venture capital firm based in Atlanta, Georgia, owned by two Black women. AAER alleges discrimination in their grant program, which was exclusively offered to Black women-owned businesses. Fearless Fund argues that their grant program is considered “charitable giving” and is protected by the First Amendment. On June 3, a federal appeals court affirmed the grant of a preliminary injunction to block the program.

Highlighted in both cases above, the legal challenges in the past year center on DEI initiatives with explicit eligibility requirements that prioritize underrepresented groups. These cases align with the concerns expressed by 13 Attorneys General in July 2023, who specifically cautioned against companies implementing “race-based quotas or preferences,” “whether under the label of ‘diversity, equity, and inclusion’ or otherwise.”

Corporate actions potentially at risk

In this evolving legal context, analyses by law firms Ogletree Deakins and Crowell & Moring identify several corporate DEI actions that are more likely to face scrutiny:

  • Requiring diversity quotas for boards or interview slates.
  • Setting goals to improve representation for specific positions.
  • Limiting opportunities to underrepresented groups (e.g., employment, promotions, funding, mentorship, training, affinity groups, talent and, leadership development).
  • Targeting minority-owned vendors.
  • Dedicating investments exclusively to underrepresented groups.
  • Providing incentives based on DEI criteria.

What aspects of DEI programs are less at risk?

While some DEI practices involving race-based quotas and preferences face increased legal risk following the Supreme Court ruling, many aspects of corporate DEI programs are less likely to be vulnerable to legal challenges.

EEOC guidance and attorney general support

In the hours following the ruling, the US Equal Employment Opportunity Commission (EEOC) Chair Charlotte Burrows assured companies that it remains lawful to implement DEI programs aiming to ensure equal opportunity for all backgrounds. Burrows emphasized that the ruling does not address employer efforts to foster diverse and inclusive workforces. Echoing this sentiment, 21 Attorneys General and the District of Columbia published a joint letter emphasizing that efforts to recruit diverse workforces and create inclusive environments are legal and reduce the risk of discrimination lawsuits.

Inclusion strategies

To avoid growing legal risks around reverse discrimination, Ogletree Deakins suggests taking broader approaches to improve diversity, such as comprehensively centering inclusion within corporate DEI strategies. Inclusion plays a pivotal role in fostering an environment that not only benefits everyone but also establishes a welcoming, respectful, and supportive space for individuals with different talents and backgrounds. Fostering inclusion, in turn, acts as a catalyst for organically improving representation and discouraging discrimination. Examples include making resource groups open to anyone regardless of their background and offering such resources for a range of underrepresented groups (beyond just racial minorities, women, and, LGBTQ+ people), like veterans or employees with disabilities.

Debiasing, ambient, and universal strategies

In their Harvard Business Review article, New York University School of Law professors Kenji Yoshino and David Glasgow propose three strategies for DEI programs adaptable to conservative trends in employment law:

1. Debiasing:

  • Creating an equal playing field for opportunities
  • Example: Revising job listings to eliminate biased language

2. Ambient:

  • Increasing diversity without targeting underrepresented groups
  • Example: Outreach to diverse colleges for recruitment

3. Universal:

Setting goals and targets

The ACLU of Southern California highlights that companies can legally set goals to boost underrepresented group representation. Firms can set numerical goals to correct disparities compared to the local job sector, ensuring selected candidates are qualified and avoiding rigid quotas. These initiatives should be structured to avoid harming non-targeted groups and be temporary, concluding when sufficient representation is attained.

Focusing on non-protected groups

Though Title VII bans discrimination based on race, color, national origin, sex, and religion, it does not ban discrimination based on socioeconomic status. Following the Supreme Court ruling regarding race-based admissions, some colleges are weighing the pros and cons of basing admissions on socioeconomic status, a variable correlated with race.

Race-focused programs

Shaun Harper, tenured professor at the University of Southern California (USC) and executive director of the USC Race and Equity Center, emphasizes the importance of continuing racial equity efforts and discusses four race-focused programs that do not legally constitute reverse discrimination against white employees:

1. Promoting diversity without engaging in discrimination.

2. Seeking qualified underrepresented candidates for traditionally white-dominated executive roles.

3. Offering a leadership program open to all but focusing on underrepresented groups to improve managerial diversity.

4. Conducting hiring campaigns aimed at underrepresented groups to broaden the talent pool.

Best practices for employers

To help organizations adapt to the shifting DEI legal landscape and recent Supreme Court ruling, we outline key best practices that can help foster DEI initiatives that are consistent with current case law, inclusive, and aligned with business goals:

1. Conduct legal compliance review of DEI programs

Review DEI programs with legal professionals to ensure compliance with federal and state laws, avoiding rigid quotas or preferential treatment.

2. Document non-discriminatory employment decisions

Document legitimate non-discriminatory reasons for employment decisions to mitigate the risk of lawsuits. This practice ensures transparency and fairness in hiring, promotions, and other employment actions.

3. Create inclusion-focused DEI initiatives

Develop inclusive DEI programs that foster a supportive workplace culture of belonging, acceptance, and, respect at all levels. Focus on removing barriers for historically marginalized groups while ensuring inclusivity for all employees, making sure that everyone feels valued and has access to resources and opportunities, regardless of their background.

4. Balance diverse perspectives on DEI

In many cases, companies may need to balance the perspectives of historically marginalized groups with those of more conservative stakeholders who may oppose certain DEI initiatives. If DEI programs are downscaled, it is essential to communicate with employees about the reasons for this change.

5. Connect DEI initiatives to business outcomes

Link DEI initiatives to business performance through measurable methods like employee engagement surveys and retention rate monitoring. Demonstrating the impact of DEI on business outcomes, such as increased innovation, productivity, and profitability, helps to justify these initiatives and secure ongoing support.

This article was written by Carli Schoenleber (Senior Communications Manager, Content and Engagement Specialist), Chika Acholonu (Associate Director of ESG, DEI Committee Lead), Mary Reames (Director of Communications), Paulynn Cue (Chief Communications Officer), and Alex Williams (Senior Finance and HR Coordinator) at Verdani Partners.

References

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Glickman, Ben and Lauren Weber. “Diversity Goals Are Disappearing From Companies’ Annual Reports“. Wall Street Journal. Accessed June 6, 2024.

Hudson, Clara and Riddhi Setty. “Firms From KKR to Coors Flag DEI as Business, Legal Risk (1)“. Bloomberg Law. Accessed June 6, 2024.

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Muldrow v. City of St. Louis, Missouri, et al“. Supreme Court of the United States. Accessed June 6, 2024.

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Telford, Taylor. “Law firm opens diversity fellowship to all students after lawsuit“. The Washington Post. Accessed June 6, 2024.

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Mark, Julian and Taylor Telford. “Conservatives are suing law firms over diversity efforts. It’s working“. The Washington Post. Accessed June 6, 2024.

Mark, Julian. “Can this firm invest in only Black women? This case will decide“. The Washington Post. Accessed June 6, 2024.

Ellis, N.T. “Federal appeals court blocks Fearless Fund from issuing grants to only Black women“. CNN. Accessed June 6, 2024.

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