In recent years, senior leadership teams have been held increasingly accountable for their organizations’ failures by shareholders, stakeholders and the general public. Specifically, organizations’ diversity and inclusion practices have garnered additional scrutiny.
Certain social initiatives—such as the Black Lives Matter and #MeToo movements—have helped elevate awareness on the importance of promoting diverse representation and adopting effective inclusion measures within the workplace. As such, senior leaders who fail to uphold these practices risk severe reputational damages, potential lawsuits and an increased likelihood of directors and officers liability (D&O) claims.
Keep reading to better understand the ramifications that senior leaders could face from poor diversity and inclusion measures, the latest legislation regarding such measures, and top tips for fostering diversity and inclusion within the workplace.
Consequences of Lacking Diversity and Inclusion in the Workplace
First and foremost, senior leaders who fail to promote diversity and inclusion are missing out on various organizational advantages. By establishing diverse representation and maintaining an inclusive environment, organizations can benefit from unique employee perspectives, a deeper talent pool, increased innovation and boosted workplace morale. In fact, a recent study from McKinsey & Company found that organizations with diverse workforces are 25% more likely to outperform their less diverse counterparts.
Apart from missing out on key organizational benefits, it has become increasingly common for senior leaders to face lawsuits due to poor diversity and inclusion practices—namely, shareholder derivative lawsuits. Such suits entail a shareholder suing specific senior leaders on behalf of an organization for their alleged failures.
These lawsuits have stemmed from allegations that senior leaders breached their fiduciary duties by:
- Not following through on previously stated commitments related to developing workplace diversity and inclusion initiatives
- Misrepresenting the diversity of senior leaders or failing to ensure diverse leadership altogether
- Retaliating against individuals who voice workplace diversity and inclusion concerns
Several major U.S. organizations have been impacted by these lawsuits in recent years—including Facebook, Oracle, Gap, Cisco and Pinterest. Such cases carry not only severe reputational damages but also substantial legal and defense costs.
Additionally, these lawsuits can lead to D&O claims. As a result, underwriters in the D&O market are expected to ask more questions and seek additional documentation regarding policyholders’ diversity and inclusion practices.
Legislation on Diversity and Inclusion
Over the past few years, both federal and state regulators, as well as a major stock exchange, have developed standards regarding diversity and inclusion expectations for organizations.
At the federal level, the U.S. Securities and Exchange Commission (SEC) released new disclosure requirements in 2018, calling on organizations to be more transparent about the diversity of their senior leadership teams. These requirements ask public organizations to share certain self-identified characteristics of their senior leaders (e.g., gender, race and sexual orientation).
In 2020, the National Association of Securities Dealers Automated Quotations (NASDAQ)—a major stock exchange—submitted a proposal to the SEC, asking for approval of new diversity standards for the senior leadership teams of NASDAQ-listed organizations. The SEC approved NASDAQ’s standards in 2021. These standards, called the “Final Rules,” include the following:
- All NASDAQ-listed organizations must either include or publicly share why they have chosen not to include a set number of diverse members on their senior leadership teams. Diverse members must self-identify as belonging to a racial minority population or as female or LGBT. Keep in mind that diverse members may self-identify with one or multiple of these characteristics. The number of diverse members required depends on the size of organizations’ senior leadership teams.
- All NASDAQ-listed organizations must disclose annual diversity statistics regarding their senior leadership teams’ self-identified characteristics.
- NASDAQ will provide organizations with complimentary recruiting resources should they require assistance in hiring diverse senior leaders.