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The other big end-of-term SCOTUS development that could impact “human capital” risks was the decision in two companion cases that struck down the use of “affirmative action” in college admissions. You might think that companies can ignore this holding since it directly applies only to educational institutions and isn’t interpreting the laws that specifically apply to private businesses, but this Morrison Foerster memo explains several ways in which corporate DEI programs could be affected.

Corporate governance and securities advisors need to be aware of these issues because many companies have been increasing their disclosures about DEI programs & metrics – either in SEC filings or on their websites. That means you need to be able to spot disclosures that could imply that the company is engaged in risky practices.

Beyond the disclosure, if human capital is a significant issue at your company, you may need to collaborate with the DEI team, HR, and employment lawyers to be able to update the board on management’s assessment of risks and any significant changes to practices. As the MoFo memo alludes to, a handful of companies are already facing litigation.

The memo suggests taking the following steps to mitigate risks (also see this Cooley memo):

1. Review DEI Programs for Vulnerabilities: Companies should review existing DEI efforts with an eye toward areas of vulnerability and confirm that the initiatives do not create unlawful preferences based on protected characteristics or include quotas or set asides. Employers should consider including race-neutral factors, such as socioeconomic status, first-generation professionals, and geographic diversity, which could help increase diversity in the workplace while mitigating the risk of potential challenges.

2. Review Written DEI Materials: Employers should review their DEI program materials for any statements that describe their companies’ practices in a manner that could be viewed as unlawful. In some cases, plaintiffs have used statements in DEI policies and literature to support reverse discrimination claims.

3. Justify Efforts for DEI Programs: Employers should be prepared to justify the importance of their existing DEI programs and how those programs are consistent with the law.

4. Train Leadership and Managers: Companies should ensure that their leaders and managers are educated on the benefits and objectives of the companies’ DEI and affirmative action programs. It will be important for managers to understand what DEI means and that they cannot give preferential treatment to underrepresented groups when making employment decisions.

5. Review Diversity Trainings for Risk: Employers should review current diversity trainings, including unconscious bias training, considering recent legislation aimed at limiting DEI programs and trainings that might make their programs vulnerable to attack.

6. Monitor State Laws on DEI: Companies should continue to monitor state and local laws and regulations aimed at limiting or requiring DEI efforts to ensure compliance with those laws.

All that said, the EEOC also issued a press release about the ruling, which says:

It remains lawful for employers to implement diversity, equity, inclusion, and accessibility programs that seek to ensure workers of all backgrounds are afforded equal opportunity in the workplace.

This Covington memo walks through the context of that statement, summarizes EEOC guidance that applies to DEI programs and distinguishes them from “affirmative action,” and concludes:

In considering what initiatives could be targeted for litigation, employers should give thought to the extent to which their DEI efforts and initiatives implicate tangible employment actions or, instead, promote a more equitable and inclusive work experience.

Companies may take different approaches in responding to this SCOTUS decision and the general “anti-woke” backlash. For example, some may issue statements to employees and other stakeholders that they’ll continue to prioritize DEI in a way that’s consistent with the Court’s decision, and others may decide that it’s better not to comment. I know Ngozi will be sharing her valuable perspective as a DEI leader, including thoughts on preserving a diverse talent pipeline, over on PracticalESG.

– Liz Dunshee