In the (Alphabet) Soup
Q&A with D&O Insurer Defense Attorney, Dan Bailey, Partner at Bailey Cavalieri
Will DEI-fueled EPL discrimination claims drive D&O lawsuits?
Directors and officers of publicly traded companies generally are untroubled by litigation involving employment practices liability (EPL). Case law over the decades involving employment-related lawsuits and securities class actions rarely names board directors and senior executives, unless the claims involve sexual harassment. That complacency may soon shatter.
The reason is the federal government’s current focus on diversity, equity, and inclusion (DEI) programs to determine if a company’s policies related to hiring, promotion, and compensation discriminate against any employee group, says one of the country’s preeminent D&O insurer defense attorneys, Dan Bailey, a partner at Columbus, Ohio-based law firm Bailey Cavalieri.
The following Q&A has been edited for clarity and concision.
Q
What is it about DEI that makes it ripe for D&O litigation?
A
If you step back, a classic employment discrimination claim is not actionable against directors and officers, just against the company itself. That’s why, when you see these large employment class action claims, the directors and officers are not implicated. If the claim involves sexual harassment [involving a board director or executive], that’s a different story, of course. But DEI changes the picture—not in the sense that directors and officers will be named in a direct discrimination claim but in a secondary shareholder derivative lawsuit alleging mismanagement. [A shareholder derivative lawsuit is legal action initiated by a shareholder or group of shareholders on behalf of the company.]
Q
What specifically in a DEI context would put directors and officers in the hot seat?
A
It’s a classic catch-22. On the one hand, it is fair to say most directors and officers, at least in my experience, recognize the real value to the company in having a diverse workforce. They consider diversity, in an employment context, to be an asset to the company. On the other hand, there is a strong perception, maybe with some accuracy, that if you have an effective diversity program in an employment context, you almost by definition prefer some potential classes of employees over other classes.
Q
And that leads to a perception of discrimination?
A
Yes. We now know that “reverse discrimination”— where majority group employees may be overlooked for jobs and promotions—is unconstitutional.
That’s the substance of the Supreme Court’s ruling in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College. While a strong and effective DEI program benefits the company, it may also constitute reverse discrimination, creating liability for the company. Companies are trying to walk this very thin line. Directors and officers who promote the benefits of the DEI program, while at the same time backing away from disclosures advertising the benefits, are walking the same line.
Q
So, the challenge is to maintain a diverse workforce without commenting on the DEI program that gave rise to the diversity. What’s interesting is that just a few years ago, I wrote articles in which board members were enthusiastic about their DEI initiatives, if not overly so. Now, it’s the other way around.
A
That’s true to a certain extent, After the death of George Floyd [in 2020], shareholder derivative lawsuits were filed against directors and officers for not doing enough to increase diversity. Those cases were dismissed or were resolved in one way or another for not large dollar amounts. As the political climate shifted in the last couple years, we’re now seeing claims on the other side: companies like Starbucks, McDonald’s, and Target are criticized for having DEI programs. The fallout, in some cases, resulted in boycotts that [financially] harmed the company. Directors and officers who supported the programs were subsequently named in shareholder derivative lawsuits.
Q
With regard to Target, which faced a consumer boycott after it shifted away from its DEI initiative, I understand that its board members and executives were named in a derivative shareholder lawsuit for allegedly mismanaging the program by not adequately disclosing the related financial risks. Is this the tip of an emerging iceberg?
A
From an insurance standpoint, these issues are front and center. More such claims are likely. For now, companies and board members need to focus on how to maintain a diverse workforce without overtly suggesting they’re looking to hire a particular class of employees. But that, as I said, is the catch-22.
