On June 29, 2023, in Students for Fair Admissions Inc. v. President and Fellows of Harvard College and Students for Fair Admissions Inc. v. University of North Carolina, the U.S. Supreme Court made it unlawful for universities and colleges to consider a college applicant's race in college admissions decisions designed to achieve the objective of a more diverse student body. Although the decision does not address corporate DEI efforts in the workplace, the Court's ruling has implications for such efforts and the board's role in overseeing them. Among other things, critics of these initiatives will be emboldened by the Court's decision to challenge how they are structured and how they are implemented as a practical matter. Companies, with oversight from their boards, should review their DEI programs to ensure that they comply with applicable state and federal law, and to ensure that disclosures about their programs evidence thoughtful attention to their design and implementation in compliance with applicable law.
The Board's Role in Overseeing Corporate DEI Initiatives
Corporate DEI programs have included efforts to increase diversity at the board level as well as in management and other employment positions. Such efforts include promotion of equal opportunities for job applicants and employees, which may involve diversity training and recruitment initiatives, racial equity audits and commitment to equal pay. Corporate DEI efforts, and public disclosures about these efforts, have been a focal point for companies and their investors over the past several years. For public companies, this focus has been heightened by SEC disclosure requirements regarding the role of diversity in identifying nominees to the board, Nasdaq's comply-or-disclose board diversity listing rules, the laws of some states, Institutional Shareholder Services' and Glass Lewis's proxy voting policies, proxy voting policies of large institutional investors and many shareholder proposals. Shareholder proposals have included those seeking adoption of policies to follow the “Rooney Rule” (a policy that requires women and minorities to be included in the initial pool of candidates) in director nominations, those seeking to require companies to disclose their EEO-1 reports or similar workforce diversity metrics, and those seeking various types of reports on companies' diversity policies and practices.
For companies with corporate DEI programs, the board's role with respect to such DEI initiatives is that of oversight. The board's oversight role may also be delegated to standing committees, such as the compensation committee (which is frequently delegated oversight of human capital management issues), or to a stand-alone ESG committee. The board also may implement its own policies with respect to diversity at the board level. Accordingly, it is important that directors understand the potential ramifications of the Court's decision for corporate DEI programs.
Applicability to Corporate DEI Initiatives
The Court's decision does not expressly address DEI in the employment context. Instead, the decision addresses the equal protection clause of the U.S. Constitution and Title VI of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, color and national origin in programs receiving federal financial assistance. These laws are not directly applicable to private employers. However, Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination by private employers based on race, color, religion, sex and national origin, is similar to Title VI. Unlike in the higher education context, employers generally have been prohibited from considering race and other protected factors in employment decision-making. Accordingly, if a corporate DEI program was legal before the Court's decision, the program remains legal after it.
With respect to board diversity initiatives, Title VII and other employment discrimination laws protect only employees and create rights only for employees. The director position is not an employment position. Therefore, directors who are not company employees are not protected by employment discrimination laws in their capacity as directors (although a director who is also an employee is protected from employment discrimination in his or her capacity as an employee).
Practical Implications for Boards Overseeing Corporate DEI Programs
While the Court's decision does not directly impact corporate DEI programs, it has ramifications for companies and their boards, such as the potential for:
- Increased litigation over corporate DEI programs. The Court's decision is likely to result in increased litigation over corporate race-conscious programs under workplace antidiscrimination laws, including under Title VII. Historically, Title VI and Title VII case law have been persuasive with respect to one another, and the Court's decision is likely to result in further test cases challenging corporate DEI programs, such as claims alleging discrimination against members of a historically dominant or majority group in favor of an underrepresented minority group (commonly referred to as reverse discrimination) in making employment decisions.
- Increased backlash against corporate DEI efforts. Companies and their boards may face increased backlash over their DEI efforts. For example, some companies have encountered shareholder proposals in the past few years that would require companies to report on the risks of workplace antidiscrimination policies. Such proposals previously have seen very low levels of support, but these types of proposals may now increase or garner more support. In addition, the Court's decision could have a chilling effect on support for shareholder proposals requesting increased DEI disclosure or the adoption of DEI policies. The decision also could result in an increase in some state legislatures' efforts to impose limits on workplace DEI initiatives. For example, Texas and Florida have recently passed laws to curb DEI programs at public universities and in the workplace. Other state legislatures may see the Court's decision as an impetus to pass similar legislation.
- Decreased corporate diversity. The Court's ruling could lead to fewer employment opportunities for underrepresented minorities because fewer diverse applicants may be admitted to selective universities without race-conscious admissions programs, a point made by various large companies that submitted amicus briefs to the Court. This could mean that companies will find it difficult to hire as many workers from underrepresented groups and ultimately could result in fewer such workers advancing into leadership roles.
Considerations for Maintaining Legally Compliant Corporate DEI Programs
Although the Court's decision does not change the law in effect for corporate DEI programs, the decision is likely to result in new challenges for boards at companies with existing DEI programs. Given the anticipated increase in scrutiny of corporate DEI efforts, companies and their boards would be wise to carefully consider the structure and implementation of their existing DEI programs and related policies for compliance with federal and state laws. In addition, companies and boards should ensure that disclosures about DEI programs reflect careful attention to their design and how they are carried out as a practical matter, in compliance with applicable law.
Companies will need to balance the challenges of increased scrutiny of corporate DEI programs against pressure they may continue to face from investors, customers and employees to ensure that boards and workplaces are sensitive to the negative effects that historical discrimination against women and minorities has had on their opportunities in the workplace. In overseeing corporate DEI strategies, boards should keep in mind that workplace antidiscrimination laws prohibit the use of quotas or preferences for applicants of a certain race, gender or other protected classes, and prohibit the use of membership in a protected class in hiring and promotion decisions. In addition, the use of gender- or race-based “plus factors” in the hiring and promotion process is prohibited under existing workplace antidiscrimination laws.
However, many practices designed to promote a diverse workplace remain legal. As long as employers do not use protected characteristics when making employment decisions, they may have policies and practices that promote a more inclusive work environment. For example, corporate diversity recruitment efforts can focus on increasing the number of diverse applicants in the hiring pool, such as by adopting diversity policies in line with the Rooney Rule. Companies can take measures to reduce bias in their hiring and promotion practices. They can review and perhaps enhance family-friendly programs and mentorship programs. Companies may also want to review their definition of diversity and consider expanding it to focus on factors like disadvantages overcome, military service or language proficiencies. Further, in response to the potential decrease in job applicants from historically underrepresented groups graduating from selective colleges, companies with strong commitments to workplace DEI may seek to implement more expansive recruitment practices to ensure that qualified members of underrepresented groups are recruited for job opportunities.
Because the Court's decision has no impact on efforts by boards to increase diversity among their own members, boards may find it more important to continue such efforts, as a diverse board may be in a better position to oversee a company's efforts to provide an inclusive workplace. Increasing board diversity also may help companies proactively address upcoming SEC rules, given that the SEC's latest regulatory agenda maintains its plans to issue a proposed rule on enhancing board diversity disclosures, expected to be forthcoming in spring 2024.
Although the extent of the Court's decision creates uncertainty for companies' DEI programs and boards' oversight of such programs, boards can best position themselves by proactively considering these issues in preparation for what may come.
Jennifer Kogos, a partner in Jones Walker LLP's labor & employment practice group, assisted in preparing this article.