The Impact of Diversity and Inclusion on Management Liability

In recent years, senior leadership teams have been pressured to hold their organizations accountable and focus on specific diversity and inclusion goals for the benefit of shareholders, stakeholders and the general public.

Certain social initiatives have helped elevate awareness of the importance of promoting diverse representation and adopting effective inclusion measures within the workplace. Senior leaders who fail to uphold these practices risk severe reputational damage, potential lawsuits and an increased likelihood of Directors and Officers Liability (D&O) claims.

Consequences of lacking diversity and inclusion in the workplace

When senior leaders promote diversity and inclusion at work, they gain a variety of benefits. Organizations will gain unique employee perspectives, a larger talent pool, increased innovation, and increased workplace morale by establishing diverse representation and maintaining an inclusive environment. According to a recent McKinsey & Company study, companies with diverse workforces outperform their less diverse counterparts by 25%.

In addition to missing out on important organizational benefits, companies and their leadership teams can face lawsuits when they lack diversity and inclusion practices. These lawsuits stem from claims that senior executives violated their fiduciary responsibilities 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 a diverse leadership team.
  • Retaliating against individuals who voice workplace diversity and inclusion concerns.

Such cases carry severe reputational damage and substantial costs related to legal defense and settlement amounts. These types of lawsuits may be covered by a D&O insurance policy. As a result, D&O underwriters are asking more questions and seeking additional documentation regarding policyholders’ practices surrounding diversity and inclusion.

How Your Startup Can Implement Effective Diversity, Equity and Inclusion Practices

Legislation on diversity and inclusion

Federal and state regulators, as well as a major stock exchange, have developed standards for organizations’ diversity and inclusion expectations in recent years.

The Securities and Exchange Commission (SEC) of the United States issued new disclosure requirements in 2018, requiring companies to be open about the diversity of their senior leadership teams. These requirements require public organizations to share certain self-identified leadership characteristics (e.g., gender, race and sexual orientation).

In 2021, the SEC approved new diversity standards for senior leadership teams of NASDAQ-listed organizations after NASDAQ submitted a proposal to the SEC. The standards are called the “Final Rules” and include the following:

  • All NASDAQ-listed organizations must 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 LGBTQ+. 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 if they require assistance in hiring diverse senior leaders.

Best practices for promoting diversity and inclusion

In order to promote diversity and inclusion among their senior leadership teams and overall workforces, organizations should consider implementing the following measures:

  • Take steps to ensure diverse representation within the senior leadership team.
  • Require the senior leadership team and the remainder of the workforce to participate in routine training on diversity and inclusion topics.
  • Allocate additional resources toward hiring, mentoring, and promoting employees who belong to underrepresented communities.
  • Create an annual workplace diversity and inclusion report. This report should provide data regarding the organization’s hiring, advancement and compensation practices for employees who belong to underrepresented communities.
  • Consider establishing a diversity and inclusion officer or department. This individual or department should be responsible for ensuring the organization upholds its diversity and inclusion initiatives and remains compliant with all applicable federal, state and stock exchange legislation regarding such initiatives.
  • Keep detailed documentation of all workplace diversity and inclusion initiatives.
  • Consult a trusted insurance professional to determine specific D&O insurance needs as it pertains to diversity and inclusion concerns.

For more risk management guidance, contact us today at kapnick.com or 888-263-4656.

Leave a Reply
Related Posts
Read More

The Ultimate Guide to Continuity Planning for Your Small Business

Businesses face a variety of potential emergencies and threats that can disrupt their operations.   From natural disasters to cybersecurity attacks, it’s pivotal to safeguard your business in case something happens.    Enter: Business continuity...