Corporate boards may want to consider developing a strategy to deal with shareholders who may seek to hold companies accountable for meeting commitments to diversity by filing lawsuits.
A lawsuit filed by shareholder R. Andre Klein on July 2, represents a more aggressive approach to getting companies to embrace “diversity and inclusion” than what has normally been the standard route of filing shareholder resolutions to address diversity at major U.S. corporations. If successful, this could lead to more lawsuits that seek to force companies to implement diversity initiatives faster and in more significant ways. Corporate boards should watch what happens with this lawsuit and determine if they can be attacked in a similar way.
The lawsuit, Klein vs. Ellison et al, contends that “Oracle has no real commitment to diversity and its board is turning a blind eye to the company’s miserable failure to ensure the ‘diversity’ trumpeted by the directors in Oracle’s filings with the Securities and Exchange Commission and its annual reports to shareholders.”
The lawsuit notes that a Department of Labor lawsuit claimed Oracle’s discrimination against minorities has “resulted in at least $400 million in underpaid salaries,” and “Oracle’s board and workforce reveal one of the lowest prevalence of Black individuals and minorities in Silicon Valley.” (Oracle’s 14-member board has only one minority member) The lawsuit claims these facts and “a lack of truthfulness and effort on the part of the board to fulfill their fiduciary duties,” has resulted in reputational damage that hurts Oracle shareholders.
This lawsuit could become more important than people think. The obvious issue for the Oracle board is the embarrassment of having to be hauled into Federal Court over diversity issues. Each Oracle director now has to deal with the fact that they may be asked why there was no action taken during their tenure on the board. Additionally, in today’s racially charged environment, how do you craft a legal defense that argues against diversity? Such a defense would no doubt bring unwanted negative attention to the company and the board.
But perhaps more important is this: because the board publicly asserted its intension to implement diversity in SEC filings, the shareholders are arguing that the board disclosed false and misleading statements that affected investment decisions. Investors who value companies that believe in diversity may have purchased Oracle shares because of statement in its SEC filings, only to find later that the diversity claims were false. Those are serious charges.
As the lawsuit asserts, “Oracle’s directors have deceived stockholders and the market by repeatedly making false assertions about the company’s commitment to diversity. In doing so, the directors have breached their duty of candor and have also violated the federal proxy laws. Their conduct has also irreparably harmed Oracle.” Regulatory fines and penalties may be possible.
If the plaintiff prevails, it will be interesting to see what the fallout is. The lawsuit is calling for Larry Ellison to be replaced as Oracle chairman and at least three board members be replaced by two Black and one other minority board member. It also asks that an annual diversity report be produced and increased efforts to hire, promote and mentor minorities be implemented at the company. It’s not clear if any of that will be granted, but Oracle could agree to much of these demands to make the lawsuit disappear.
However, if the court finds that companies can face significant financial damages for making unfounded claims about human capital management decisions in their public disclosures, it heightens the level of accountability of the board to implement strategies that actually achieve the results that are promised. This would represent a new level of respect for the impact that human capital management decisions can have on the financial fortunes of a company, and would warrant additional study by corporate boards.
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