How Boards Should Be Thinking about the Supreme Court’s SFFA Affirmative Action Decision

In June 2023, the U.S. Supreme Court held that Harvard University and the University of North Carolina’s admissions programs, which considered candidates’ race in admission decisions, violated the Fourteenth Amendment of the U.S. Constitution and Title VI of the Civil Rights Act of 1964.[1]  While these decisions, known collectively as SFFA, do not apply to a corporation’s employment decisions, language in the Court’s opinion has led many to speculate as to how the precedent could potentially be expanded to this context.  The Court’s majority noted that the language of Title VII of the Civil Rights Act, which, broadly speaking, bars discrimination in employment decisions, is almost identical to corresponding language in Title VI.  Notably, in writing a concurrence joined by Justice Thomas, Justice Gorsuch observed that Title VII is “[j]ust next door” to Title VI, and noted that the majority opinion tracks the Supreme Court’s prior rulings interpreting “materially identical language in Title VII,” prompting Justice Gorsuch to ask rhetorically whether it makes sense to “read the same words in neighboring provisions of the same statute—enacted at the same time by the same Congress—to mean different things?” 

Even before SFFA, so-called “reverse discrimination” claims were being pursued by employees, shareholders and watch-dog groups alleging discriminatory treatment against white, cisgendered male employees based on the defendant companies’ Diversity, Equity and Inclusion (DEI) initiatives.[2]  Very soon after the Supreme Court issued SFFA, litigations challenging certain aspects of various corporate DEI programs were filed, asking courts to extend the SFFA majority’s ruling to hold these aspects are also unconstitutional.  Companies, and their management teams and boards, should be prepared for increased employment-related litigation including litigation that seeks to hold executive officers and directors personally liable for purported breaches of their fiduciary duties in connection with the corporation’s DEI policies. 

Because these challenges are so recent, it remains unclear how the SFFA holding will specifically be applied to DEI programs that relate to workplace hiring and promotion in the public company context.  So while executives and directors may be concerned that a company’s DEI policies could expose them to breach of fiduciary duty claims post-SFFA relating to “reverse discrimination”, they simultaneously cannot ignore the pre-SFFA (and continuing) risks of regulatory enforcement actions and litigation alleging discrimination against employees from historically underrepresented minority groups or a corporation’s failure to effectively implement and oversee a DEI program and live up to DEI commitments.  Over the past three years, approximately 40 lawsuits have been filed alleging failures by companies to protect employees from historically underrepresented minority groups and increase workplace diversity.[3]  Several of these were shareholder derivative and federal securities actions alleging that directors violated their Caremark oversight duties by, for example, failing to monitor their companies’ compliance with anti-discrimination laws, authorizing false statements about the companies’ commitment to diversity in proxy statements and other publicly available documents (such as company websites and sustainability reports) and failing to ensure that diverse candidates were selected to sit on the board.[4]  Others were discrimination-related suits brought under Title VII of the Civil Rights Act by U.S. agencies or employees from historically underrepresented groups alleging that the companies failed to prevent workplace harassment based on sex, race or religion.[5]  There is little reason to believe that SFFA will reduce the risk of such litigation, as the Supreme Court was united in acknowledging that discrimination remains a persistent problem that must be addressed.  Indeed, Justice Thomas noted in his concurring opinion that he was “painfully aware of the social and economic ravages which have befallen my race and all who suffer discrimination,” and Justice Kavanaugh similarly stated in his concurring opinion that “racial discrimination still occurs and the effects of past racial discrimination still persist.”

Companies should also keep in mind these additional considerations as DEI programs are reviewed and overseen in the wake of SFFA.

• First, companies should remain aware of and account for the increasing number of shareholder proposals and proxy advisor and institutional investor guidelines demanding that companies strengthen their commitment to diversity.  In the 2023 proxy season, for example, shareholders submitted 29 proposals relating to racial equity/civil rights audits; 24 proposals that requested a report on the effectiveness of the company’s DEI efforts; 16 shareholder proposals asking for a report on gender or ethnic pay disparities; and 6 proposals asking for a report on the company’s board diversity. Overall, diversity and human capital-related proposals received an average of 27.1% of shareholder support during the 2023 proxy season.[6]
• Second, institutional investors continue to prioritize diversity and listing exchanges continue to focus on it as well.  Blackrock, for example, has stated that U.S. boards should aspire to 30% diversity of membership and encouraged boards to have at least two directors who identify as female and at least one who identifies as a member of an underrepresented group; and Glass Lewis will generally recommend against Russell 3000 Nominating & Governance committee chairs if the board is not at least 30% gender diverse, and against Russell 1000 Nominating & Governance Committee chairs if the board has fewer than one director from an underrepresented community.[7]  Nasdaq has also instituted “disclose or explain” rules regarding board diversity, including a rule for Nasdaq-listed companies with six or more directors to (1) have at least one director who self-identifies as female, and at least one director who self-identifies as an ethnic minority or LGBTQ+, or explain why the company does not have at least two directors who self-identify in these categories, and (2) subject to certain exceptions, provide statistical information on the gender, race and LGBTQ+ identification of the board of directors on the company’s website, proxy, 10-K or 20-F.[8]
• Third, state and federal regulators have also increasingly focused on diversity-related disclosures that are intended to increase transparency for consumers and investors about a corporation’s diversity efforts.  At the state level, for example, California enacted the VC Diversity Law requiring “venture capital companies” with business ties to California to file annual reports detailing (1) specified demographic data for the founding teams of all portfolio companies invested in during the prior year and (2) the aggregate amounts of investments made by the venture capital company during the prior year and investments in specified categories of portfolio companies.  And, at the federal level, the SEC had rulemaking on human capital disclosure on its agenda for the latter part of 2023 and board diversity disclosure on its agenda for early 2024 “to enhance registrant disclosures about the diversity of board members and nominees.”[9] 
• Fourth, a number of credible studies have shown calculable benefits to innovation, culture and the bottom line for companies that make real, sustained efforts to diversify their workplaces and address systemic racism.  Numerous studies have shown that businesses that do not consider diversity in their employment programs risk overlooking top talent, reducing innovation, and weakening financial performance.[10]  For example, diverse companies tend to be more financially successful than non-diverse companies, as evidenced by a 2020 study showing that companies in the top quartile for diversity and inclusion were 36 percent more likely to show financial results above the median for companies in their industries, and other similar studies that show more diverse companies generally enjoy greater sales revenue and market share, and success in investments than less diverse peers.[11]  Moreover, research by Deloitte found that promoting all forms of diversity, equity, and inclusion can lead to superior employee engagement and satisfaction, helping a company’s bottom line.

So, how should management teams and boards be thinking about DEI programs after SFFA?  Many stakeholders will continue to expect corporations to demonstrate a commitment to and focus on DEI at all levels within the organization, and to follow through on those commitments.  Management and boards of companies should be able to articulate their DEI policies and programs, including how they are in the best interest of the company and its stakeholders, aligned with the company’s mission and what measurable goals they are intended to achieve.  Board oversight is an important element and area of focus in management’s ability to create a company’s vision on DEI and articulate such vision to investors and other stakeholders in a clear and strategic manner. 

Management and boards should also consider the following courses of action:

• Identify measurable and articulable benefits of workplace diversity, including profitability, strategy and benefits to decision-making, and develop programs closely tailored to those benefits.  This may include adopting broader approaches to diversity that are more likely to withstand legal scrutiny and connecting DEI programs directly to clearly communicated business goals.
• Assess existing hiring, promotion and DEI policies and values statements in corporate mission statements and trainings to ensure they do not run afoul of how Title VII is likely to be interpreted post-SFFA, and set appropriate goals for increasing diversity and inclusion that are relevant to measurable business objectives, to the extent possible; be sure to document these actions and conversations.  Though numerical targets can be used to measure progress, they should not be the end goal.
• Review the company’s prior public statements and disclosures about diversity to ensure that any policy changes are not inconsistent with past statements.
• Monitor new litigation and regulatory actions relating to discrimination in hiring and promotion practices and keep note of judicial interpretations of SFFA in this context.
• Collect and analyze internal data about the results of DEI programs to be able to provide metrics that will help to explain the relevance of the programs to the company’s business objectives.
• Increase corporate reporting and controls over DEI programs and disclosures to ensure missed goals or policy violations are promptly flagged to the board.
• At the board level, review and improve committee charters, governance rules and trainings to reflect the company’s DEI policies.
• Foster relationships with investors, clients, customers and other stakeholders that promote collaboration to understand the benefits of and enhance corporate diversity and inclusion.
• Send a message from leadership addressing diversity, but review and consider public statements carefully. Focus on inclusiveness and diversity of perspectives and eliminating bias, and avoid stating that any one protected characteristic offers more value than another.
• Prepare for an impact on the hiring pipeline, including the likely decline in diversity of enrolled students at universities and colleges that may lead to less diversity in job applicant pools and fewer workers from groups that are historically underrepresented to fill vacancies and advance to leadership roles.

In summary, companies should review hiring and promotion practices that account for diversity and corporate DEI programs through the SFFA-lens, while ensuring that such review considers the still very real and meaningful litigation and regulatory risks associated with potential discrimination against individuals from historically underrepresented groups.  As boards of directors oversee these reviews, they should also be mindful of prior statements the company has made about its DEI programs or hiring and promotion practices and ensure any programmatic changes are consistent with such statements.

This article was republished by Harvard Law School Forum on Corporate Governance.

[1] 600 U.S. 181 (2023).

[2] See, e.g., Nat’l Ctr. for Pub. Policy Rsrch. v. Schultz et al., No. 2:22-cv-00267 (E.D. Wash. 2022) (Starbucks); Craig v. Target Corp. et al., No. 2:23-cv-00599 (M.D. Fla. 2023) (Target); Am. All. for Equal Rts. v. Fearless Fund Mgmt., LLC, No. 1:23-cv-03424 (N.D. Ga. 2023).

[3] See David Hood, “Lawsuits Challenge Corporate Diversity Pledges after Floyd” (April 7, 2023), available here.

[4] See, e.g., Kiger v. Mollenkopf et al., 1:21-cv-00409 (D. Del. Mar. 22, 2021) (derivative suit alleging Qualcomm Inc.’s directors breached fiduciary duties and violated Section 14(a) of the Securities Exchange Act of 1934 by breaking promises to diversify all-white board); In re Danaher Corp. S’holder Derivative Litig., No. 1:20-cv-02846-TNM (D.D.C. Sept. 1, 2020) (derivative suit alleging Danaher’s board and CEO made misleading statements about company’s commitment to diversity); Ocegueda v. Zuckerberg, No. 3:20-cv-04444 (N.D. Cal. July 2, 2020) (derivative suit alleging Facebook’s executives and directors breached fiduciary duties and violated Section 14(a) by touting Facebook’s commitment to diversity while engaging in discriminatory hiring practices and failing to diversify its board and management); Esa v. NortonLifeLock Inc., No. 5:20-cv-05410 (N.D. Cal. Aug. 5, 2020) (derivative suit alleging NortonLifeLock’s board breached fiduciary duties by making misleading statements about commitment to diversity in spite of ongoing discriminatory practices and failure to diversify board and management).

[5] See, e.g., U.S. Equal Emp. Opportunity Comm’n v. Tesla, Inc., No. 4:23-cv-04984 (N.D. Cal. Sept. 28, 2023); Taylor v. Delta Air Lines, Inc., No. 1:22-cv-03130 (N.D. Ga. Aug. 8, 2022).

[6] Data is from Proxy Analytics. Proposals submitted by anti-ESG proponents are omitted from these statistics.   

[7] William J. Chudd et al., Current State of Board Diversity Rules and Policies, GTDT Practice Guide Diversity and Inclusion 2023 (Aug. 29, 2023).

[8] Nasdaq, “NASDAQ’s Board Diversity Rule: What Companies Should Know” (Feb. 28, 2023), available here.

[9] Office of Information and Regulatory Affairs, Office of Management and Budget, Human Capital Management Disclosure, “Corporate Board Diversity”, (Spring 2023), available here; For additional information, see our Oct. 2023 blog post available here.

[10] See, e.g., Rocío Lorenzo et al., Boston Consulting Group, “How Diverse Leadership Teams Boost Innovation” (Jan. 13, 2018), available here; Erik Larson, Forbes, “New Research: Diversity +Inclusion = Better Decision Making At Work” (Sept. 21, 2017), available here; HERS Update: Gender Diversity Continues to Drive Alpha, Morgan Stanley Research (February 1, 2023), quoted in Dean J. Cimino, Morgan Stanley, “Why Gender Diversity May Lead to Better Returns for Investors” (Feb. 2023), available here; Morgan Stanley Research, “Gender Diversity Keeps Paying Dividends” (Mar. 7, 2023), available here.

[11] See, e.g., McKinsey & Co., “Diversity Wins: How Inclusion Matters” (May 2020), available here; see also Vivian Hunt, Dennis Layton & Sara Prince, McKinsey & Co., “Diversity Matters” (Feb. 2, 2015); Vivian Hunt, Sara Prince, Sundiatu Dixon-Fyle & Lareina Yee, McKinsey & Co., “Delivering Through Diversity” (Jan. 2018); BCG, “How Diverse Leadership Teams Boost Innovation” (Jan. 23, 2018); Dieter Holger, Wall Street Journal, “The Business Case for More Diversity” (Oct. 26, 2019), available here; Cedric Herring, 82 AM. Sociology Review 868, 876, “Is Diversity Still a Good Thing?” (2017); Paul Gompers & Silpa Kovvali, Harvard Business Review, “The Other Diversity Dividend” (July–Aug. 2018), available here.