Workplace diversity policies targeted in shareholder disputes

Shareholders interested in corporate diversity and inclusion practices and workplace culture are increasingly turning to litigation as a tool to hold companies accountable.

Lawsuits brought by shareholders claiming their investments are threatened by a poor work culture present a new area of ​​liability for companies that may have previously addressed such allegations through arbitration and nondisclosure agreements. Unlike many employees, shareholders are generally not bound by these types of agreements.

A shareholder lawsuit against Tesla Inc. earlier this month is the latest example of this emerging tactic. The suit accuses the electric vehicle maker’s executives and directors of allowing a “toxic work culture” to fester at the company, exposing Tesla to potential liability.

The case stems from allegations of racial discrimination and harassment at Tesla’s factory near San Francisco, the subject of separate litigation by the California Department of Fair Employment and Housing.

Mike Delikat, an employer-side attorney at Orrick Herrington & Sutcliffe LLP, said the bump from this type of shareholder lawsuit has pushed his practice more toward securities litigation.

Delikat is part of a group of labor lawyers whose work now focuses on reducing corporate liability for shareholder actions.

“These things have now become much more than just individual employment claims, they have become securities litigation against the board of directors because it gets a lot more attention and reaction,” he said. declared.

Executives and investors are watching these cases closely and doing what they can to avoid being next, said John Streur, managing director of Calvert Research and Management.

“So when you see the media attention, when you see inquiries, when you see reports and when you see all of this happening, that drives change,” Streur said. “And no leader wants to be in that position.”

Protesters gather against Fox News TV personality Bill O’Reilly, who has been the subject of numerous sexual harassment allegations and legal settlements, outside News Corp headquarters. and Fox News in Midtown Manhattan on April 18, 2017 in New York City.

Photo by Drew Angerer/Getty Images

No longer individual

The case against Tesla borrows from a playbook dating back five or six years, when shareholders began suing companies for employment-related claims that were previously handled individually by the employees themselves.

“What happened is that in the past it was either individual cases of discrimination or harassment under labor law or sometimes class actions,” Delikat said. “And then the smart securities litigators on the plaintiffs’ side realized that a lot of those claims involved the C-suite or prominent high-level executives.”

One of the first high-profile examples was a shareholder lawsuit against Twenty-First Century Fox Inc. related to sexual harassment claims against prominent Fox News personalities, including Bill O’Reilly, which the company settled. Shareholders alleged that company executives had not done enough to prevent harassment and avoid costly settlements with alleged victims.

This shareholder lawsuit settled in 2017 for $90 million.

Parent company of Google Inc. Alphabet Inc. settled a similar lawsuit related to sexual misconduct in 2020 for a $310 million commitment to diversity and equity initiatives.

L Brands Inc., which once owned Victoria’s Secret, agreed last year to spend $90 million to change its corporate practices as part of a shareholder lawsuit settlement alleging a toxic culture of sexual harassment and misogyny. Victoria’s Secret parted ways with L Brands last August, and the parent company has since changed its name to Bath & Body Works.

Activision Blizzard Inc. also faced legal action alleging company management failed to end a culture of racial and sexual harassment, leading to dispute by the US Equal Employment Opportunity Commission and California’s DFEH. A California federal judge dismissed the lawsuit last month, ruling that the shareholder who brought it had failed to exhaust other remedies.

Wider Disclosures

In the past, some companies have published studies on pay equity in an attempt to stifle shareholder claims in this area. Making this information public pushes companies to improve diverse hiring and retention, which can help avoid costly employment discrimination lawsuits or public relations scandals.

Microsoft Corp. told its shareholders in April 2016 that it would work to close its gender pay gap, which was $0.02 on the dollar at the time. In 2017, the company said it had achieved equal pay for men and women.

Expedia Inc. made a similar announcement following pressure from investors.

Publicly traded companies face increased human capital disclosure requirements from the United States Securities and Exchange Commission. The agency signaled in its spring regulatory agenda that it will update existing requirements by October to require more specific and quantitative information about a company’s workforce, such as employment statistics. salary equity.

Sarah Maynard, head of diversity and inclusion at the CFA Institute, said shareholders are increasingly demanding this kind of information about companies’ workforce policies.

“A lot of it depends on how advanced they are as individuals, shareholders and investors,” she said. “But essentially they’re certainly looking at risk mitigation at the most basic level, but they’re also looking at, for example, retaining employees and staff.”

Investment management firm Calvert, for its part, has launched an initiative to get companies to disclose their EEO-1 forms, an annual workforce demographic reporting standard for companies with more than 100 employees. That’s just the tip of the iceberg, Streur said.

“But we still need a lot more companies to provide that information, and we also need a lot more detail about how companies treat people,” Streur said.

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