The Legal Side: Principles to Guide The “Why” and the “How” of DEI Programs

Law firm Wachtell, Lipton, Rose & Katz offers practical advice for management and board directors about DEI practices in the wake of the Supreme Court’s ruling in the SFFA v Harvard case. The piece offers sound reminders about the legality of DEI programs and contains key principles to keep in mind as DEI initiatives are evaluated during this rapidly changing time.

• Think about the why. As fiduciaries, board directors and executive officers are expected to exhibit informed judgment for the best interest of the long-term value of the corporation. When considering the role that diversity, equity and inclusion play in the workforce, leadership may determine that diverse perspectives and an inclusive culture help the company achieve its business goals and therefore programs that advance DEI are in support of shareholder objectives.
  
  
• Understanding and effectively communicating how DEI strategies can contribute to better decision making and deliver better business outcomes which can maximize long-term value is paramount. Consider the impact of these policies on talent strategies, on employment and discrimination claim risks, and for business outcomes.
  
  
• Keep in mind what is still lawful today: efforts to reduce bias in hiring and promotion decisions, offering training on unconscious bias, partnerships to attract diverse talent, including diverse candidates in interview slates, involving diverse suppliers in vendor RFPs, and providing mentorship programs and ERGs to promote inclusion.
  
  
• Know what is not permitted under Title VII of the Civil Rights Act for employment related decisions and ensure that policies demonstrate strict compliance with the law. Protected categories such as an individual’s race, color, religion, sex, or national origin cannot be factored into employment decisions. DEI goals should not be met through quotas or by using a protected category as a factor in a “tie breaker.” It is permissible to consider contributions to the company’s success, challenges the candidate has overcome and a candidate’s unique perspective and background that may affect future success.
  
  
• Remember that a plaintiff’s burden of proof to determine discrimination under Title VII is that they experienced an “adverse employment action” motivated by a protected category such as race, color, religion, sex or national origin.

While not specifically mentioned in this blog, DEI goals are the most common category of ESG metrics in executive incentive compensation plans and increased in prevalence from 2021 to 2022, according to the 2023 FW Cook report. However, Cook notes a leveling off of the use of ESG in compensation plans this year, highlighting the pressure for companies to include more quantifiable measurements and increased transparency “around performance achievement and corresponding impact on company value.” Their analysis indicates, “Investors are primarily concerned with how ESG measures are implemented, expecting clear targets that have a strong tie to long-term strategy while also being measurable and transparent.” Rewarding for DEI achievements may not go away but is an area expected to evolve in light of DEI programs being under the microscope.