Evolving Legal Landscape of DE&I: Considerations for Boards

Following the tragic murder of George Floyd and the subsequent nationwide protests, organizations intensified their focus on diversity, equity, and inclusion (DE&I). Business leaders were collectively asking, “How do we use this tragedy for good?” With that came a tidal wave of investments and strengthened commitments to racial justice and corporate DE&I programs.

However, in 2023, the social and political landscape around these issues shifted dramatically after the Supreme Court struck down the affirmative action admissions programs at Harvard College (Harvard) and the University of North Carolina (UNC), outlawing the use of race in college admissions. The Students for Fair Admissions decision (“SFFA”) energized a simmering anti-DE&I movement, emboldening challenges to diversity initiatives across many segments of the American economy. As a result, employers, philanthropic organizations, and even government entities have found themselves targets of litigation, as well as attacks from legislators and other public officials.

The Court’s Decision in SFFA

In SFFA, Harvard and UNC admitted to using race as a “plus-factor” for applicants of certain racial backgrounds during the admissions process as a way to maintain racial diversity among its yearly entering classes. By a 6-3 vote, the Supreme Court declared that considering race in this manner violates the 14th Amendment Equal Protection Clause. The majority based this decision on findings that both schools failed to demonstrate their compelling interests in a measurable way, failed to avoid racial stereotypes, and did not offer a logical endpoint for when race-based admissions would cease.

In reaching this decision, the Court majority framed the college admissions process as “zero-sum,” meaning that a boost for some applicants based on race inevitably disadvantages applicants who do not receive the same consideration. The majority also dismissed the idea that a desire to remedy general, “societal discrimination” is a compelling interest sufficient to excuse race-conscious decision-making otherwise prohibited by the 14th Amendment. Notably, the Court distinguished this from efforts to address the effects of directly established past discrimination, which the Court identified as a “compelling interest” permitting “race-based government action” not implicated by this case.

In response to the decision, the Equal Employment Opportunity Commission (EEOC)—the agency responsible for enforcing federal workplace antidiscrimination laws—issued a statement insisting that SFFA would not have an immediate effect on private employers or their DE&I initiatives. However, in a concurrence to the majority decision, Supreme Court Justice Neil Gorsuch predicted the Court’s pronouncements about what counts as unlawful racial discrimination would likely carry over to other contexts, specifically highlighting the similarities between Title VI of the Civil Rights Act of 1964 (which SFFA alleged was violated by Harvard’s and UNC’s admissions practices) and Title VII of the Civil Rights Act of 1964 (Title VII), the federal statute prohibiting employment discrimination. So far, Justice Gorsuch’s prediction has proven to be true.

The Evolving Legal Landscape Post-SFFA

Despite being factually limited to the college admissions process, the SFFA decision has had wide implications for race-conscious DE&I efforts in corporate settings, especially for private employers. Lawsuits challenging DE&I programs have largely been brought under two federal antidiscrimination laws, Title VII and Section 1981 of the 1866 Civil Rights Act (Section 1981). Title VII prohibits employers from making “adverse employment decisions” based on protected categories, including race, color, religion, sex, and national origin. The statute applies to any aspect of employment, including hiring, firing, pay, job assignments, promotions, training, and other terms and conditions of employment. Meanwhile, Section 1981 prohibits race-based discrimination in contractual relationships. Litigants have heavily relied upon Section 1981 in bringing recent lawsuits opposing DE&I initiatives because it permits claims to be filed directly in federal court, whereas Title VII requires plaintiffs to first bring their claims to the EEOC or a similar state agency or risk having them dismissed on procedural grounds.

Lawsuits challenging corporate DE&I programs under these statutes have generally come from activist organizations, such as the American Alliance for Equal Rights (AAER) and America First Legal (AFL), as well as individual plaintiffs. In some instances, activist groups have urged government agencies to further investigate an organization’s DE&I practices. As the topic of DE&I has become more politicized, several states have also passed legislation to ban or restrict diversity initiatives in a multitude of settings. Efforts by government agencies to address well-documented racial disparities and improve diversity in corporate leadership have been opposed through litigation as well, and there also have been several notable shareholder suits targeting DE&I initiatives. 

By way of example, the following DE&I-related initiatives have been challenged recently:

• Diversity Hiring and Promotion Goals. A number of cases have cropped up where nonminority plaintiffs have claimed they were fired or demoted because of their employer’s push to meet diversity objectives. These so-called “reverse discrimination” claims have been on the rise even before SFFA. In one notable case, decided just a few months before SFFA, a jury awarded $10 million to a white male executive who claimed he was fired because of his race and sex pursuant to a company-wide initiative intended to remake its “workforce to look like the community it serves.” Although the jury award was reduced on appeal, the federal appellate court upheld the verdict based on trial evidence, including the company’s stated commitment to increasing diversity among the executive and senior leadership ranks and use of DE&I metrics to track progress towards that goal. Similar claims have been on the rise.
• Workplace Diversity Trainings. Company trainings that discuss topics related to race, gender, and sexual orientation have also come under fire recently. For example, in De Piero v. Penn State, a federal judge held that requiring an employee to attend mandatory DE&I trainings that “discussed racial issues in essentialist and deterministic terms—ascribing negative traits to white people or white teachers without exception and as flowing inevitably from their race” might create a hostile work environment on the basis of race. In reaching this conclusion, the judge emphasized that while “discussing … the influence of racism on our society does not necessarily violate federal law … the way these conversations are carried out in the workplace matters.” Such DE&I trainings have been scrutinized in other cases, and at least one state has tried (albeit unsuccessfully) to curtail workplace DE&I trainings through proposed legislation.
• Diversity Fellowships and Pipeline Programs. Programs created to increase the representation of racial minorities, women, and LGBTQ+ individuals in certain corporate sectors have become consistent targets by opponents alleging violations of Section 1981. For example, a few months after SFFA was decided, the AAER sued three law firms, and threatened to sue several others, alleging the firms’ diversity fellowship programs were racially discriminatory because only students of certain racial backgrounds were eligible to apply. This included two programs for which eligibility was limited to applicants who identified as a member of a “group historically underrepresented in the legal profession.” Ultimately, the AAER withdrew all three lawsuits after the firms removed references to race from the eligibility criteria of their diversity programs and added language clarifying that students of all racial backgrounds could apply.
• Grant Making and Corporate Giving. Corporate philanthropy programs created to address racial disparities have also faced legal challenges. The most high-profile of these cases involved Fearless Fund, a Black-women-owned venture capital firm that awarded $20,000 grants to Black-women-owned businesses through a contract-based, competitive application process. In late 2023, the AAER sued Fearless Fund seeking an injunction to permanently halt its operations, arguing that its race-specific focus violated Section 1981. Although the injunction request was initially denied by an Atlanta-based district court judge on First Amendment grounds, a federal appellate court panel reversed the decision by a 2-1 vote. The dissenting appellate judge called the lawsuit “manufactured” and a soccer "flop," insisting that plaintiffs failed to show they were harmed in any way by Fearless Fund’s program. Notably, just a week earlier, an Ohio-based district court judge dismissed similar claims against an insurance company’s grant program for Black-owned small businesses on this very basis.
• Supplier Diversity Programs. Initiatives to increase spending with minority-owned suppliers have also come under scrutiny. For example, a 2023 shareholder derivative suit against Starbucks criticized its DE&I initiatives, including its commitment to increase spending with diverse suppliers and goal of allocating a percentage of its advertising budget to minority-owned and targeted media companies. The court did not address the merits of whether Starbucks’ various DE&I initiatives were lawful under Title VII or Section 1981, but it characterized the lawsuit as “nothing more than a political platform.”
• Employer-Sponsored Resource Groups and Related Programming. Although not directly tested in this case, another recent Supreme Court decision—Muldrow v. City of St. Louis—may make it easier for plaintiffs to challenge workplace programs for women, racial minorities, and other underrepresented groups under Title VII, including initiatives driven by employer-funded resource groups. In Muldrow, the Court held a plaintiff need only show “some harm” (rather than “significant” harm or disadvantage) to support an actionable Title VII claim. The decision is likely to expand the types of employer actions that can be challenged and potentially increase legal risk associated with commonplace corporate DE&I efforts that do not directly impact hiring, promotion, or compensation.

Given that the legal landscape surrounding these issues is rapidly evolving, and since the challenges to DE&I initiatives are still relatively recent, it remains difficult to predict how the SFFA decision will be applied to a variety of workplace initiatives intended to enhance DE&I. Responses from companies facing lawsuits or legal threats related to their DE&I practices and initiatives have varied, depending on each organization’s risk tolerance, corporate values, and overall business strategy. Recognizing that there is still a strong business case for fostering diverse, equitable, and inclusive workplaces, some companies have faced these lawsuits head-on without changing their existing initiatives, while others have sought to alter their diversity programs to reduce risk.

Beyond workplace diversity, the legal landscape for board diversity is also in flux. In August 2021, the US Securities and Exchange Commission (“SEC”) approved Nasdaq’s new rules intended to enhance board diversity among its listed companies. These rules were inspired by calls for transparency from institutional investors, as well as research showing that public companies with diverse boards generally perform better than companies with boards lacking in gender and racial diversity. In 2021, the Alliance for Fair Board Recruitment and the National Center for Public Policy Research both filed petitions challenging the SEC’s order approving the Nasdaq board diversity rules. They argued that the Nasdaq disclosure rules mandate unlawful race and gender discrimination in zero-sum board director selection scenarios and further infringe on corporate First Amendment rights against compelled speech. Additionally, plaintiffs insist the SEC lacks authority under the Securities Exchange Act of 1934 to enforce such diversity requirements.

In October 2023, a three-judge panel of the US Fifth Circuit Court of Appeals unanimously upheld the Nasdaq board diversity rules. The court determined that the SEC’s approval order was within the agency’s authority and reasonably based on evidence that board diversity disclosures are important to investors, influencing their investment and voting decisions. Further, the panel held that Nasdaq is not a state actor subject to constitutional restraints.In May 2024, plaintiffs successfully petitioned for the case to be reheard  by all active justices sitting on the Fifth Circuit. A decision from the court is expected later this year. Even if the SEC approval order is reversed, it is likely that demands from institutional investors for improved diversity and transparency will continue.

Strategic Guidance and Considerations for Boards

Board oversight remains critical to an organization’s ability to create and maintain its DE&I strategy. Here are some considerations for boards given the highly dynamic legal landscape following SFFA:    

• Reaffirm Commitments to Diversity. Notwithstanding the uptick in challenges to corporate DE&I practices, the business case for workplace and boardroom diversity generally remains strong. Substantial academic and empirical research has shown that board diversity can positively affect a variety of corporate performance outcomes, such as risk mitigation, innovation, and shareholder protection. And at least so far, shareholders and institutional investors have continued to call for transparency and progress toward improving board diversity, albeit with fewer proxy proposals than in previous years. As directors and other organizational leaders reflect on the fundamental value of diversity to the corporate mission, it may be worthwhile to reaffirm diversity as a core component of the business strategy, ensure leadership can explain how the organization’s overarching DE&I strategy and initiatives align with long-term value creation, and clearly communicate this rationale to stakeholders. It is important to draw a clear connection between DE&I initiatives and the organization’s values, vision, and business objectives to minimize the chance that such efforts appear performative.
• Review and Refresh DE&I Strategy and Practices. Following SFFA, organizations–with the aid of legal counsel–should take stock of their recruiting, hiring, and promotion practices, as well as corporate statements, employee policies, sustainability reports, trainings, and other DE&I initiatives and policies. Certain practices that were unlawful before SFFA remain unlawful, such as making hiring decisions based on race or gender or maintaining race-based quotas. However, there are many diversity-related initiatives that are permissible under the existing legal framework, such as expanding recruiting efforts to a broader range of schools and geographic markets than those traditionally targeted to attract a more diverse pool of candidates for consideration. After auditing existing practices and de-risking aspects of such practices that may face greater scrutiny under current laws, organizations can continue to focus on high-impact efforts to ensure workplaces and boardrooms include a range of backgrounds, experiences, and perspectives that contribute to innovation and better decision-making.
• Evaluate Public-Facing Statements. Public disclosures and communications that tout an organization’s progress toward specific racial and gender diversity goals may be more likely to spark potential legal threats. To that end, organizations should review public filings and disclosures, websites, and any public statements that have been or will be issued to ensure that messaging is consistent with the company’s DE&I strategy and has been reviewed by legal counsel. Organizations must balance the risk of issuing certain public-facing statements with the need for transparency around their progress and reaffirming efforts to advance diversity. Reframing communications around DE&I goals and strategies (for example, by expanding the definition of diversity, focusing on traditionally overlooked groups rather than protected categories, or removing numerical targets that appear more like quotas) may mitigate against risk of colorable legal challenge  while still conveying relevant messaging around corporate initiatives and progress.
• Acknowledge Risk Exists. As topics surrounding DE&I have become highly politicized, there is no easy solution to eliminate risk in today’s climate. For example, broadcasting laudable diversity goals in proxy statements or public disclosures might satisfy certain stakeholders, while prompting other stakeholders or activist organizations to launch challenges to such practices. By contrast, if an organization were to discontinue its DE&I initiatives altogether, perhaps the risk of anti-DE&I litigation would decrease—however, this could erase progress and lead to an uptick in traditional claims of discrimination by underrepresented groups, in addition to upsetting certain stakeholders. How an organization responds will involve a balancing of the risks and business imperatives, while acknowledging risk will still exist. 
• Monitor Developing Case Law and Trends. Boards and company leadership would benefit from partnering with legal counsel to monitor developing case law and legislative trends regarding DE&I. New questions influencing legal risk arise with each new litigation or legal challenge, so it will be important to track how recent matters progress through the lower courts and before government agencies. Likewise, it will be important to monitor state-level activity, given the number of states with proposed or passed legislation restricting DE&I initiatives in various settings.

Conclusion

With a growing number of lawsuits targeting DE&I initiatives, as well as dozens of proposed pieces of legislation aimed at DE&I practices at the state and federal level, the legal landscape continues to be in flux. Factors such as the upcoming presidential election, potential shifts in government agency leadership, and the Supreme Court’s posture may continue to shape the DE&I outlook. Regardless, boards of directors should remain vigilant and seek the advice of legal counsel when determining how to adjust to legal developments on the horizon. Ultimately, while initiatives aimed at advancing diversity are under heightened scrutiny following SFFA, carefully thought-out initiatives that do not run afoul of the law may still be implemented.

Questions for Directors to Ask

1. Have the DE&I initiatives, policies, and statements of the organization been reviewed with the assistance of legal counsel?
2. Are the organization and board aligned on the organization’s risk tolerance and values with regard to DE&I efforts?
3. Has the organization taken appropriate steps to de-risk existing DE&I initiatives, policies, and statements that may be higher risk? 
4. Do the organization and board have a shared understanding of how “diversity, equity, and inclusion” is defined, and does the definition align with the organization’s values, visions, and overall mission?
5. Are the positions or committees primarily responsible for advancing DE&I in the workplace visible to and supported by company leadership, including the board?
6. Are there additional measures or initiatives that could be enacted to make the organization’s existing practices more equitable and inclusive? 

Natalie C. Chan is a Partner and Robert Johnson III is an Associate at Sidley Austin LLP. Mallory Bucher, Lana Dargan, and Lucy Nottingham from NACD contributed to this article.

Sidley Austin and NACD thank the following Center for Inclusive Governance® Advisory Council members for their thoughtful insights: Luis Aguilar, Cari Dominguez, and Lori George.

About the NACD Center for Inclusive Governance®.

NACD believes that it, its members, and partners have a unique opportunity to bring together their expertise, resources, and influence to create systemic change that will shape the American boardroom. The Center for Inclusive Governance® (the Center) is based on a shared understanding that a diverse and inclusive board is critical to long-term value creation for every organization and to society more broadly. The Center aims to create pathways for diverse talent, build a more inclusive boardroom, and convene members, regulators, corporations, and other partners to execute our commitment to boardroom diversity.