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How Will Corporate DEI Policies be Affected by the Supreme Court Ruling in the University Affirmative Action Cases?
Episode 77th November 2023 • The Informed Board • Skadden, Arps, Slate, Meagher & Flom LLP
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Skadden partners Ann Beth Stebbins, David Schwartz and Lara Flath discuss the implications for US companies of the Supreme Court’s decision in June striking down race-based affirmative action programs in higher education. David Schwartz is global head of Skadden’s labor and employment group, and Lara Flath is a Skadden litigation partner who represented the University of North Carolina (UNC) in the litigation relating to its consideration of race in the admissions process.

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Name: Ann Beth Stebbins

Title: Partner at Skadden

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💡 Featured Guests 💡

Name: David E. Schwartz 

Title:  Partner at Skadden

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Name: Lara A. Flath  

Title:  Partner at Skadden

Connect: LinkedIn

 

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Voiceover (:

From Skadden, you are listening to The Informed Board, a podcast for directors facing the rapidly evolving challenges of a global market, a compliment to our newsletter for directors. Our aim with this podcast is to help flag potential problems that may not be fully appreciated, explain trends, share our observations, and give directors practical guidance without a lot of legal jargon. Join Skadden Partners who draw on years of frontline experience inside boardrooms to explore the complex issues facing directors today.

Ann Beth Stebbins (:

In June, the Supreme Court struck down race-based affirmative action in higher education. Will the court's decision have implications beyond higher education? I'm Ann Beth Stebbins, a partner in Skadden's M&A Group, and your host of The Informed Board podcast. Joining me today to discuss the broader reach of the court's decision are David Schwartz, global Head of Skadden's Labor and Employment Group, and Lara Flath, a partner in Skadden's Complex Litigation and Trials Group, who recently represented the University of North Carolina in the federal trial regarding the constitutionality of the use of race in undergraduate admissions.

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Lara, let's start out with a quick overview of the court's recent decision. What were the key holdings and what was the court's rationale?

Lara Flath (:

There are three aspects of the court's holding that are particularly important to the broader context that we're discussing today. First, the majority opinion held that the universities proffered interests to support their consideration of race. While commendable, were not sufficiently measurable to satisfy the legal standard. Specifically, the court explained that because courts cannot determine when the claimed benefits, such as fostering innovation or enhancing cross-racial understanding have been reached, they were not sufficiently measurable. The court also emphasized the need for a connection between the means employed, so in the case of Harvard and UNC, considering race as a factor in admissions, and those goals pursued.

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Second, contrary to prior precedent expressly permitting the use of race as a "plus factor," the court focused on the zero-sum nature of the admissions decision outcome. Does someone get in, do they not? And the court found that a benefit provided to some applicants on the basis of race, but not others, is necessarily discriminatory. The court further reasoned that race conscious admissions programs inherently engaged in stereotyping by permitting a preference on the basis of race alone.

(:

Third, the court focused on the fact that there was no defined endpoint in these programs when the university said they would no longer need to consider race in their admissions' outcome. Emphasizing a 25-year sunset provision that had been talked about in prior case law on the use of race and affirmative higher education admission. Those are really the three main aspects of the holdings that are being looked at both in the context of higher ed as well as broader context.

Ann Beth Stebbins (:

Are you anticipating cases being brought in the future that seek to apply these holdings to other contexts?

Lara Flath (:

The plaintiff that brought these suits in both Harvard and UNC has stated in public interviews that the landscape has shifted and that litigation will both continue and will proliferate. In fact, we started to see some of this litigation outside of the context of higher education already starting before the Supreme Court's decision in June, and we expect it to continue in a variety of contexts outside of higher ed.

Ann Beth Stebbins (:

Before we move on to the litigation landscape, it might be important to ground our audience, David, in DEI programs generally and how they've evolved and what the current state of play is prior to the recent Supreme Court decision. Walk us through that.

David Schwartz (:

Sure. DEI programs have been around for a long time and they cover a lot of different ground. From my perspective as an employment lawyer, they start with how do we think about recruiting to make sure we're getting a diverse group of employees into our company. DEI efforts then continue while people are employed. Many employers have affinity groups or employee resource groups, ERGs, and those are really groups that help support various groups of employees within an organization. DEI may impact other areas like mentoring and training, making sure that typically underrepresented groups who may not have had the same opportunities for mentors or training along the way get that mentoring and training in a more formalized way.

Ann Beth Stebbins (:

So of the policies that you described, David, are there any that are likely targets of plaintiffs who are seeking to expand the reach of the students for fair admissions decision?

David Schwartz (:

Sure. I think what we're seeing right now, Ann Beth, is plaintiffs focusing on what it is that companies are saying about their DEI programs. In other words, for those who are publishing programs or talking about programs in race conscious, zero-sum ways, that's where the plaintiff groups are focusing their attention. We've seen it with some hiring programs that are designed specifically for underrepresented minorities. We've already seen a couple of lawsuits brought in that area. And we've seen it in a few others as well. There are a number of groups out there looking at corporate filings, like proxy statements and ESG reports, to see how companies describe their efforts. And where they see language that describes programs in exclusionary race conscious way, they're going after those programs first. That's really the low hanging fruit here.

Ann Beth Stebbins (:

So what's really interesting to me is the plaintiffs here are not necessarily the aggrieved party. It's not someone who didn't get in or someone who didn't get the job. It's organizations that are looking at this more systemically. Is that right, Lara?

Lara Flath (:

Absolutely right, Ann Beth. And that is a feature of what we're seeing, especially in this corporate context. Frequently, the plaintiffs or potential plaintiffs in these actions are, as they would describe themselves, public interest organizations, which then can either seek to sue in a representative capacity if perhaps they are a shareholder in a corporation. They can seek to sue in a shareholder derivative suit brought against the directors and officers and executives of a particular company or can sue to impose to say, we would've applied for this program if we had been eligible in particular internship programs that were only open to certain underrepresented minorities.

David Schwartz (:

We've also seen plaintiffs who do feel aggrieved. In other words, white men typically at companies using DEI programs as evidence of what often is called reverse discrimination, meaning discrimination against someone who's white or male or more particularly someone who's both. And courts have accepted the use of DEI programs as evidence of discriminatory intent against white men in particular.

Lara Flath (:

There's also been attention from state attorney generals from both sides of the political aisle, both Republican and Democratic Attorney Generals' issued letters in July 2023 after the decision came out, talking about the implications of this. And even Congress people and senators are also issuing letters. There's been a lot of attention and a lot of different interested constituencies.

Ann Beth Stebbins (:

And is this a red, blue issue?

David Schwartz (:

It is absolutely a red, blue issue That is exactly how it broke down among the AGs.

Ann Beth Stebbins (:

Let's talk about affirmative action more generally and maybe some distinctions that we can make between the affirmative action considerations in the court's decision and affirmative action policies that are part of corporate DEI programs. David, how do we think about affirmative action in those two contexts and what's different?

David Schwartz (:

Here's the way I think about it. In the educational context, I think up until the recent case, race was considered a plus factor. In the employment context, affirmative action is thought of a little bit differently. Some companies will have affirmative action plans, but at a high level, at least, their plans that are developed by companies, often government contractors or subcontractors, that identify areas of underrepresentation among women or people of color in their organization in particular roles. And if there's an area of an underrepresentation, the employer will then identify steps to take affirmative actions to remedy those shortfalls over the course of time. They're not firing people in order to make room for others, but there are affirmative steps that they can take.

(:

The most common example is just casting a wider net, looking harder, opening the talent pool, getting more applicants in and being more thoughtful about how and where employers are going to look for applicants. Tying some of the mentoring and training programs that we've talked a little bit about to affirmative action plans can be another step that employers can take with a greater degree of comfort that those plans will not later be challenged.

Ann Beth Stebbins (:

So affirmative action plans are required for government contractors?

David Schwartz (:

They are required for government contractors if the government contract is big enough. They're also required for government subcontractors. That is someone who the main contractor hires to work on the government program. Again, subject to certain dollar limitations.

Ann Beth Stebbins (:

And is there any conflict between those requirements and the court's decision? Can you square the limitations on affirmative action that were part of the court's decision with the requirement that companies who do business with the government have affirmative action plans?

David Schwartz (:

The way I look at it, race is used differently in these two different contexts. In the educational context, it was considered as a factor in making a decision on who should receive an acceptance. In the employment context, we're really looking at areas of existing underrepresentation in the existing cohort and then looking for ways to close that gap over time in a way that still picks somebody who is the best qualified or at least equally qualified for the position.

(:

One other point that's worth thinking about, affirmative action. Some employers are required to have affirmative action plans like we talked about, government contractors, but companies can adopt their own affirmative action plans on a voluntary basis if there's an underrepresentation of a particular group. And I think, over time, we may see employers making more use of voluntary affirmative action plans so that they can connect the steps that they want to take on a DEI front to a particular underrepresentation that will provide a greater level of safety and defense for them in promoting these programs.

Ann Beth Stebbins (:

But could also draw the attention of plaintiff organizations as well to these types of programs?

David Schwartz (:

It could do that too. Yes. I think, from an overall perspective, as I think about it, Ann Beth, there's risk on both sides. There's risk to doing nothing. There's risk to doing too much if too much is the right way to put it. In other words, DEI efforts should, over the long run, create a bigger pipeline with more people in entry-level positions and in a pipeline for promotion over time. The trick has always been, and now just under a greater microscope, employers cannot make those decisions in an expressly race conscious way.

Ann Beth Stebbins (:

So back to the red, blue question, have the two political sides focused at all on affirmative action plans and whether or not those should be limited?

David Schwartz (:

I haven't really seen anyone coming after affirmative action plans yet. Whether that will change in time, I don't know, but that has not been the focus of the plaintiff groups that we've been talking about.

Lara Flath (:

I'd agree with that. I think you even saw some splits in the EEOC, commissioners with respect to DEI policies, similar to the red, blue divide that we talked about with the state attorney generals, but none have really specifically focused on affirmative action plans in the employment context.

Ann Beth Stebbins (:

Lara, we talked earlier about plaintiffs finding policies to attack by going through proxy statements, filings that corporations make with the SEC, public statements that corporations are making. How should companies be thinking about their messaging around DEI programs in light of this plaintiff focus?

Lara Flath (:

The law in this context has not changed. That being said, companies should always strive to be truthful and accurate in those public statements. In this environment, everything a company puts out, particularly about DEI programming, is likely to be scrutinized, what a company is saying publicly, what it says internally and how it actually implements, these policies that it's talked about. The policies and messages that we see sort of getting the most scrutiny are ones that the plaintiff organizations have described are ones that can be viewed as either racially exclusionary or zero-sum.

(:

So in that context too, especially if it's messaging about hiring or spend quotas, if quotas are tied to bonuses or compensation, those are places in the messaging where I think it's really important to be very truthful and very accurate about how the policies and programs are intended to apply and how they actually do apply. But the pressure applies both ways. Companies that have put out statements, policies about the importance of their DE&I initiatives, may also get pressure from shareholders or other entities seeking to ensure that a company is living up to those commitments, companies very much facing, I think, pressure from both directions of the political spectrum right now on these issues.

David Schwartz (:

Aspirational goals are okay from a legal perspective. Where employers and companies are finding more difficulty is setting quotas. One of the things employers should be thoughtful about is in setting goals and thinking about the rewards for satisfying those aspirational goals. How are people going about achieving those goals? And so while it might be fine to have an aspirational goal, if that aspirational goal is then tied to some kind of monetary reward, people may be incentivized to take shortcuts and hit their goals in a way that's not entirely proper.

Ann Beth Stebbins (:

One of the things we've seen in other contexts are shareholders using books and records demands in order to gather more information about a company's internal practices. Have we seen any two 20 books and records demands for information about DEI policies, implementation of DEI policies, measurement of DEI objectives or anything else that might be the focus of plaintiffs? Is this a tool in their toolbox?

Lara Flath (:

I think it's always a tool in their toolbox and is frequently used in this context. Of course, depending upon whether or not they're a shareholder of the company, whether they've made a demand, all of those similar permutations that we typically see in that context.

Ann Beth Stebbins (:

So it's not just the messaging, it's really internal practices as well that are coming under scrutiny.

Lara Flath (:

I think in the first instance we've seen the messaging be this low hanging fruit, but it would not surprise me if we sort of start to see more of that uptick as the pressure to seek change in these policies to the extent that continues.

Ann Beth Stebbins (:

What has been the reaction of investors? Are investors making more demands on corporations to show the benefit to the business of DEI policies?

David Schwartz (:

I think, from what I've seen so far, the big investors are sitting on the sidelines on this one. They're not really waiting into whether DEI programs at particular companies are good or bad, should exist or not exist, or how they should be implemented. There are a few investors out there who have agitated for more DEI, but as far as big institutional investors, I haven't really seen that happening.

Ann Beth Stebbins (:

In light of potential expansion of the decision, what should corporate boards be doing?

David Schwartz (:

The first thing is going back and looking at your public filings and looking at your public statements and seeing what have you said about your programs and are there adjustments that could and maybe should now be made in light of the standard that's been announced by the court. We've said a couple of times, and I'll just maybe reiterate it, the law didn't really change in the employment space, but I think what has happened is plaintiff firms are looking much more closely at what's being said and they're far more likely to take action if there's something obvious that they can go after. And so I think the very first thing to do is just look at what you're saying through the eyes of what a plaintiff's firm would do with what you're saying.

Lara Flath (:

I think in addition to looking at your public statements, looking at your policies and practices to ensure full compliance with the law and staying apprised of recent developments as this area of the law continues to evolve. Are your DEI objectives clear and connected to specific business goals? Are those initiatives and programs distinct from and able to succeed without the use of impermissible racial quotas? In terms of affinity groups, the employee resource groups that David mentioned, are those initiatives and programs open to all? Are there policies that potentially could be viewed as providing, say, a zero-sum advantage on account of race? And are your public statements accurately describing your initiatives and policies as they're implemented?

(:

Additional considerations, I think, for a board and a company to really look at your governance process, periodic checks and reports, and fundamentally, what's the business rationale for these strategies that a company has decided to put in place already? Is there evidence? How are those initiatives helping to attract and retain key talent? What's the impact of your DEI strategies on risk of employment discrimination claims? Is there evidence about how diverse perspectives contribute to better decision-making and business outcomes? All of these ways in which a company can look at how returns from your DEI strategies are commensurate with the corporate resources that are being used to further those types of initiatives.

David Schwartz (:

I do think companies are also thinking, what do they mean by diversity? I think for a long time it's been race and sex, maybe veteran status, maybe LGBTQ status, maybe disability status. But I do think people are at least starting to think about whether the diversity is a broader concept. Should it take into account socioeconomic status and background, first generation college graduate status, geographic diversity? All of which are not as obvious, and they require more work to see what those are, but I do think employers are at least thinking about whether they ought to be opening up their definition of diversity in a more explicit way.

Ann Beth Stebbins (:

In more inclusive categories that would be less susceptible to challenge.

David Schwartz (:

Correct. Socioeconomic status is not a protected category under Title VII. Same thing for first generation college. So these are areas where employers can consider free of concern about being sued for making decisions because someone is or is not in a protected category.

Ann Beth Stebbins (:

And could result in the achievement of diversity goals, but using different criteria to enlarge the pool.

David Schwartz (:

Correct. Again, without using those as a pure proxy for something, that is a protected characteristic.

Ann Beth Stebbins (:

And then the last point I wanted to cover was metrics for measuring successive programs. That seems to be another area where boards and corporations should be cautious as well. Even if the external messaging, the internal messaging is in accordance with the court's decision and where the law is on this today, corporations need to be cognizant of the way that they are measuring and tracking the results of these programs. Is that a fair statement?

Lara Flath (:

I think it's always important to be cautious about what data you're collecting and when you're using it. That shouldn't be taken as a message to stop tracking that or just stop trying to measure your goals. You've got to be able to know sort of where you are, where you're going, and all of those aspects. You should still know where, for example, vendor spend money might be going, how you're doing in terms of the diversity of your workforce or other pieces like that.

Ann Beth Stebbins (:

You can track the diversity of your workforce and you can have a diverse workforce as a goal. It's the means to get to that goal that are subject to scrutiny.

Lara Flath (:

That's exactly right. So are you using a quota where you say, "We are going to hire to hit 25%"? That's going to be different than saying, "We are at 22%. We'd ideally like to get to a higher percentage." But again, you're not then using race as the decision-making factor in that zero-sum outcome of this is why we're hiring someone. To be clear, you can't do that under the law now. Nothing from this decision has changed that, and it's just making sure that people are really following the law with respect to those sorts of decisions.

Ann Beth Stebbins (:

Well, Lara, thank you very much. David, thank you. I think this has been an informative session. And I hope you'll come back and join us as the law continues to evolve in this area.

David Schwartz (:

Thanks for having us.

Lara Flath (:

Thanks so much, Ann Beth.

Voiceover (:

Thank you for joining us for today's episode of The Informed Board. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at skadden.com. The Informed Board is a podcast by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. This podcast is provided for educational and informational purposes only and is not intended and should not be construed as legal advice. This podcast is considered advertising under applicable state laws.

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