As I have noted in recent posts on this site, the developing trend toward anti-ESG litigation has targeted, among other corporate initiatives, company adoption of diversity, equity and inclusion (DEI) programs. These and other developments have encouraged some companies to soft-pedal their initiatives in this and other areas, a phenomenon that has been described as “greenhushing.” But as noted in a recent memo from attorneys at the Wachtel Lipton law firm, while scrutiny for DEI initiatives may continue, companies and their boards properly may pursue DEI strategies as part of their companies’ overall missions. The August 19, 2023, memo in the Harvard Law School Forum on Corporate Governance can be found here.

DEI initiatives of course gained a great deal of attention in the wake of the death of George Floyd in May 2020, and the widespread civil unrest that followed. More recently, corporate DEI initiatives have come under scrutiny, at least in certain circles. For example, since the U.S. Supreme Court’s decision at the end of June declaring the use of affirmative action in college admissions to be unconstitutional, the conservative state attorneys general (and others) have, in reliance on the court’s decision,  targeted corporate diversity, equity, and inclusion efforts. Among other things, a group of red states’ attorneys general in July 2023 sent a letter to the CEOs of the Fortune 500 companies “threatening legal consequences” over race-based employment preferences and diversity policies.

The efforts challenging DEI initiatives is not limited just to political and legislative moves. Activists seeking to challenge DEI policies have also filed litigation, including, for example, the action filed last year against Starbucks, and the lawsuit filed more recently against Target.

As the law firm memo notes, the court in the Starbucks lawsuit recently granted the defendants’ motion to dismiss, in an oral decision. The law firm memo described the ruling as “reaffirming the right of boards to make their own determinations regarding DEI strategy and policies.”

The law firm memo quotes the judge in the Starbucks case as saying that “the plaintiffs have ignored the fundamental rules of corporate law, including the business judgment rule. Courts of law have no business involving themselves with legitimate and legal decisions made by board of directors of public corporations,” adding that “whether DEI policies … are good public policy is something for our politicians to decide. It’s something for corporations to decide. It is not something for this court to be involved with.”  

The law firm memo goes on to discuss how boards may initiate and continue DEI initiatives and strategies. Boards and management, the memo notes, “may consider and determine – as part of an informed and deliberate exercise of business judgment – that certain DEI initiatives and strategies advance the company’s mission and operational success.” These initiatives may include, for example, adoption of policies that aim to eliminate bias across the workforce and supply chain. “Setting DEI goals is not per se illegal,” the memo notes, “provided that the means by which such objectives are pursued do not utilize protected categories such as race, gender or religion to determine employment outcomes.” Programs that cultivate diverse talent and promote equal employment opportunities for underrepresented groups “remain legal and should not be conflated with ‘affirmative action.”

But while these kinds of efforts properly may be pursued, and while the law with respect to DEI programs has not changed, “scrutiny will likely continue.” Companies pursuing these kinds of strategies need to be prepared to face potential claims, regardless of the merits of the claims. The Starbucks decision is “an important and helpful reminder of the need to ground assessments of DEI programs in an informed and deliberate exercise of business judgment.”

The law firm memo focuses on the recent decision in the Starbucks case, but another example where the court has found business judgment principles sufficient to allow corporate decision making on ESG-related issues to withstand scrutiny is the recent Disney decision, discussed here.