How DEI Trends Can Create New Exposures for Your Business

Is your company as devoted to social causes as it claims to be? If there’s a discrepancy between what your organization claims and what you actually do, you could face litigation. Diversity initiatives could also result in claims of discrimination. DEI trends are creating exposures, and this is an area where businesses need to advance cautiously.

Diversity, Equity and Inclusion

Diversity, Equity and Inclusion, often abbreviated as DEI, has become a buzzword in modern business. According to the U.S. Chamber of Commerce, DEI initiatives involve the creation of “a place where everyone is welcome, supported, and has the resources they need to grow and thrive regardless of identity, origin, or difference in circumstances.”

UW Research asserts that each of the three elements focuses on distinct values. Diversity refers to the presence of differences in the workplace, whether the differences refer to age, gender, religion, race, sexual orientation or something else. Equity refers to ensuring that everyone has the access, resources and opportunities needed to succeed. Inclusion refers to creating a workplace culture that welcomes, values and respects everyone.

According to a survey from Incfile, 15% of small businesses say they started investing in DEI during the pandemic, and 82% of small business owners say they’re making DEI a priority.

The Business Case for Case for DEI

As employers compete for top workers in a tight labor market, it may pay to consider whether a company’s company culture reflects the values of its workforce. According to a survey from CNBC, 80% of workers say they want to work for a company that values diversity, equity and inclusion, while Monster found that 86% of job seekers say that DEI is a motivating factor.

Research has also suggested that diversity may have a positive impact on profitability. McKinsey & Company has found that diverse companies are more likely to financially outperform their peers. In 2019, companies in the top quartile of gender diversity were 25% more likely to achieve above-average profitability when compared to companies in the fourth quartile. For diversity in ethnicity, the difference was 36%.

Attempts to Legislate DEI

California has tried to make board diversity a legal requirement. The Women on Boards law required public corporations based in California to have a minimum number of female directors. A separate law created a similar requirement for board members from underrepresented communities.

However, Reuters says that opponents to the Women on Boards law claimed that it amounted to sex discrimination and was in violation of the state’s constitution. According to the National Law Review, both of the laws have been struck down by judges.

New York has enacted its own diversity on boards law. However, unlike the California law, it does not require a certain number of female or minority board members. Instead, it created reporting requirements. A report from the New York Department of State shows that 25.57% of directors were women in 2021.

Reverse Discrimination

When companies are pursuing DEI initiatives, they need to watch out for actions that could lead to claims of reverse discrimination.

According to the EEOC, protections against sex discrimination and harassment apply to both men and women. Likewise, the EEOC states that race discrimination protections apply to all races, not just minority races. According to NBC News, a jury awarded $10 million to a male executive who claimed he was fired because he was a white man and the company was trying to increase diversity.

Failure to Deliver

Another liability exposure can occur when businesses claim to support DEI but fail to act in accordance with these claims. As more and more companies make statements about their DEI goals, this is a growing risk.

According to Risk & Insurance, one expert warns that directors are increasingly vulnerable to litigation if they fail to act or fail to act fast enough, and shareholders may claim that the company was harmed even if no adverse event or tangible loss has occurred.

These lawsuits aren’t just hypothetical. Jones Day says that a number of shareholder derivative lawsuits have been filed over alleged failures on the part of directors and officers to uphold commitments to diversity. Shareholder lawsuits may also claim that toxic workplace cultures threaten investments and create liability, and Bloomberg Law says these lawsuits are becoming more common, citing a shareholder suit against Tesla as an example.

Navigating DEI Initiatives

As companies navigate the evolving social and legislative landscape related to DEI trends, there are many liability exposures to avoid. An insurance package that includes Employment Practices Liability Insurance and D&O Insurance can help protect your company. Learn more.