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

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.