The rise of shareholder lawsuits in relation to company diversity and inclusion policies: insights from America

The importance of implementing and executing robust diversity and inclusion (D&I) policies is a rising priority for companies worldwide as they come under scrutiny by the media and investors. The legal framework continues to evolve to reflect this shift in societal values and expectations. This increased focus has resulted in D&I policies becoming a more important factor in investment decisions and accordingly several shareholder disputes have been brought against companies for their failure to implement or adhere to D&I commitments.

With the rise of greenwashing litigation and securities class actions in Australia,1 Australia may see an increase in shareholder disputes related to companies D&I policies in the coming years. This article explores the likelihood of Australia seeing an increase in these types of disputes, with guidance from developments in the United States.

Australia’s legal landscape

In Australia, the legal landscape surrounding shareholder D&I class actions remains untested. Australia does not have any laws specifically mandating companies have D&I policies. However, existing anti-discrimination laws are likely to influence how companies approach the implementation of such policies and broadly encourage D&I. In particular, federal anti-discrimination laws permit acts of “positive discrimination” aimed at encouraging greater access to opportunities for certain groups of disadvantaged people.2

We also note two trends that are likely to result in an increase in Australian companies adopting D&I policies:

(a) Media coverage criticising companies for inadequate D&I commitments;3 and

(b) Studies reporting the benefits of having a more diverse and inclusive workplace.4

Potential grounds for disputes

Shareholders could potentially sue a company’s directors and officers for inadequate implementation of D&I policies where it results in:

(a) Misleading and deceptive conduct: If the company has made statements to the market about its D&I commitments and policies which are false or misleading, the company may have breached the Australian Consumer Law and/or ASIC Act;

(b) Breach of fiduciary duty: If directors and officers fail to exercise reasonable care and skill or act in good faith and in the best interest of the company, they may breach the fiduciary duty they owe to investors. Any breach may be supported by evidence indicating it resulted in:

(i) Reputational damage to the company: Public backlash against discriminatory practices or a lack of diversity could hurt the company’s image, impacting stock prices.

(ii) Breach of laws and regulations: If a company is found to have contravened the law, such as anti-discrimination laws, it could lead to fines and penalties, impacting profitability.

(iii) Lack of talent acquisition and retention: A company which fails to be inclusive and diverse is likely to find it harder to attract and retain highly skilled staff, impacting innovation and productivity.5

The American precedent

The United States has seen a recent increase in shareholder derivative actions,6 alleging loss resulting from a company’s failure to meet or comply with its D&I policies. Since 2022, at least a dozen shareholder derivative actions have been brought against the directors and officers of several publicly listed companies, including Facebook, Oracle, Gap, and Cisco in respect of D&I issues.7

In these actions it is generally alleged that the directors and officers violated their fiduciary duties by failing to introduce or adequately enforce D&I policies within the company, thereby contradicting public statements regarding the company’s commitments to improve D&I. The shareholders alleged their investment was made based on these public disclosures and that they were accordingly deceived as D&I issues were ignored by the company. It is further alleged that this conduct was an abuse of control, resulted in unjust enrichment, violated section 14(a) of the Securities Exchange Act of 1934, and was a breach of the directors’ and officers’ duty of oversight which requires them to monitor the companies’ compliance with anti-discrimination laws.

Some of the grounds upon which these actions are based includes:

(a) Lack of diversity: The company failed to meaningfully diversify its board and executive team which contradicted representations made in Proxy Statements and the lack of diverse perspectives hindered the company’s decision-making and innovation.

(b) Discriminatory practices: The company engaged in discriminatory promotional and hiring practices, failed to curb hate speech, combat pay equity gaps and prevent sexual harassment or discrimination within the workplace. This is alleged to have damaged the company’s reputation and contradicted representations made regarding the company’s D&I commitments.

Presently these actions rarely make it past the pleading stage due to a lack of evidence by claimants to substantiate their allegations. Shareholders are required to plead particularised facts about the conduct allegedly engaged in by the directors and officers and have so far failed to meet this standard of proof. However, it signals a growing willingness of shareholders to hold companies accountable for D&I shortcomings and may pave the way for similar class actions in Australia.

Further, the recent decision of the Federal Court of Australia in ASIC v Vanguard Investments Australia Ltd8 suggests that Australian courts may be willing to entertain allegations against companies with misleading D&I policies. Although Vanguard concerned greenwashing, the decision focused on misleading investors in respect of the application of ESG criteria. This is readily comparable to claims about misleading D&I policies, as both are likely to rely on the same provisions of the ASIC Act which prohibit misleading or deceptive conduct in relation to financial products or services. ASIC’s willingness to hold companies accountable for greenwashing suggests they might be similarly inclined to pursue companies for misleading investors about D&I practices and serves as a warning for companies in Australia.

It is important to note that there have also been several shareholder lawsuits in the United States alleging that the company’s D&I policy is discriminatory. In 2022, a shareholder derivative action was brought against Starbucks’ directors and officers.9 It was alleged the directors and officers breached their fiduciary duty to shareholders by embracing policies designed to positively discriminate in favour of certain minority groups, which violated anti-discrimination laws. The Court dismissed the claim stating the shareholders were clearly ‘pursuing… personal interests rather than those of Starbucks’ and ‘If the [shareholders do not] want to be invested in ‘woke’ corporate America, perhaps [they] should seek other investment opportunities rather than wasting this court’s time’.

The above decision predated the landmark ruling of the United States Supreme Court in 2023 which held that race-based affirmative action in the college admissions policies of Harvard University and the University of North Carolina was unconstitutional.10 Although this decision applies solely to affirmative action in college admissions and does not directly impact commercial D&I policies, it has nonetheless resulted in many reverse-discrimination challenges being made against corporate D&I policies.11. This increased scrutiny has created a level of uncertainty for corporations regarding the implementation of D&I initiatives and resulted in at least six major United States companies modifying D&I policies previously aimed at promoting racial and ethnic representation.12

These developments in the United States highlight the importance of Australian companies consulting with lawyers specialising in employment and discrimination law to ensure they lawfully navigate D&I in the context of this continually evolving and politically sensitive area of law.

Looking ahead

While Australia has not yet faced a shareholder dispute brought in respect of a company’s D&I policy, the potential exists. There is a clear possibility this may occur as expectations continue to evolve on D&I matters. Companies with inadequate D&I policies expose themselves to potential lawsuits from shareholders in the future. As such, companies should focus on developing, maintaining and complying with a robust D&I policy not only to meet societal expectations but also to decrease the risk of litigation.

1 See for example, ASIC v Vanguard Investments Australia Ltd [2024] FCA 308.
2 Age Discrimination Act 2004 (Cth) s 33; Disability Discrimination Act 1992 (Cth) s 45; Racial Discrimination Act 1975 (Cth) s 8; Sex Discrimination Act 1984 (Cth) s 7D.
3See for example, Paulina Duran, ‘ACSI will urge members to vote against male directors if a 30pc women quota isn’t met’, The Australian Business Review (Web page, 17 May 2023) <https://www.theaustralian.com.au/business/acsi-will-urge-members-to-vote-against-male-directors-if-a-30pc-women-quota-isnt-met/news-story/23e29fb493fe92e4576c8da5e1cdd209>; Elizabeth Dwoskin and Nitasha Tiku, ‘A recruiter joined Facebook to help it meet its diversity targets. He says its hiring practices hurt people of color’, The Washington Post (Web page, 6 April 2021) <https://www.washingtonpost.com/technology/2021/04/06/facebook-discrimination-hiring-bias/>.
4See for example, Sylvia Ann Hewlett, Melinda Marshall, and Laura Sherbin, ‘How Diversity Can Drive Innovation’, Harvard Business Review (Web page, December 2013) <https://hbr.org/2013/12/how-diversity-can-drive-innovation?trk=article-ssr-frontend-pulse_little-text-block>; Dame Vivian Hunt et al, ‘Delivering through diversity’, McKinsey & Company (Web page, 18 January 2018) <https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/delivering-through-diversity?trk=article-ssr-frontend-pulse_little-text-block>; Juliet Bourke, ‘The diversity and inclusion revolution: Eight powerful truths: Deloitte Review, issue 22’, Deloitte Insights (Web page, 22 January 2018) <https://www2.deloitte.com/us/en/insights/deloitte-review/issue-22/diversity-and-inclusion-at-work-eight-powerful-truths.html?trk=article-ssr-frontend-pulse_little-text-block>.
5Ibid.
6A shareholder derivative action is a claim or proceeding brought by a shareholder on behalf of a company against a third party, usually an executive director or officer of the company.
6Ocegueda v. Zuckerberg, No. 20-cv-04444 (N.D. Cal. July 2, 2020); Klein v. Ellison, No. 20-cv-4439 (N.D. Cal. July 2, 2020); Kiger v. Mollenkopf, No. 21-409-RGA (D. Del. July 17, 2020); Esa v. NortonLifeLock Inc., No. 5:20-cv-05410 (N.D. Cal. Aug. 5, 2020); In re Danaher Corp. S’holder Derivative Litig., No. 1:20-cv-02445 (D.D.C. Sept. 1, 2020); Lee v. Fisher, No. 3:20-cv-06163 (N.D. Cal. Sept. 1, 2020); Falat v. Sacks, No. 8:20-cv-01782 (C.D. Cal. Sept. 18, 2020); City of Pontiac Gen. Emps.’ Ret. Sys. v. Bush, No. 5:20-cv-06651 (Sept. 23, 2020); Emps.’ Ret. Sys. of Rhode Island v. Silverman, No. 3:20-cv-08438 (N.D. Cal. Nov. 30, 2020); Foote v. Micron Tech. Inc., No. 21-cv-00169 (D. Del. Feb. 9, 2021); Lee v. Phillip Frost, No. 1:21-cv-20885 (S.D. Fla. Mar. 5, 2021); Phyllis Gianotti v. Lloyd H. Dean, No. 2021-0642 (Del. Ch. Jul. 28, 2021).
8[2024] FCA 308.
9National Center for Public Policy Research v. Schultz et al., No. 2:22-cv-00267.
10Students for Fair Admissions, Inc. v. President and Fellows of Harvard College, 143 U.S. 2141, 2175 (2023), together with No. 21–707, Students for Fair Admissions, Inc. v. University of North Carolina et al.
11For example, America First Legal has filed multiple federal civil rights complaints with the U.S. Equal Employment Commission (EEOC) against 33 major U.S. companies, including McDonald’s, Disney, Hershey, Kellogg’s and Nike. America First Legal alleges these companies have D&I policies which are unlawful and discriminatory and request that the EEOC accordingly investigate the company. See, American First Legal, “Woke Corporations” (Web Page, 2024) <https://aflegal.org/woke-corporations/#:~:text=Shake%20Shack-,America%20First%20Legal%20filed%20a%20federal%20civil%20rights%20complaint%20with,end%20its%20discriminatory%20employment%20practices>.
12Jody Godoy and Disha Raychaudhuri, “Some companies alter diversity policies after conservatives’ lawsuit threat”, Reuters (Webpage, 19 December 2023) <https://www.reuters.com/business/some-companies-alter-diversity-policies-after-conservatives-lawsuit-threat-2023-12-18/>.

This article may provide CPD/CLE/CIP points through your relevant industry organisation.

The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.

Mark Brookes
Partner
Greg Stirling
Partner
Madeleine Jones
Law Graduate

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