Firms From KKR to Coors Flag DEI as Business, Legal Risk (1)

JetBlue Airways Corp., Molson Coors Beverage Co., and Leidos Holdings, Inc. are part of a growing group of companies listing DEI as a “risk factor” in their securities filings, citing a potential business impact from taking too much or too little action on diversity.

The flurry of securities filings noting potential legal and reputation risks stemming from diversity, equity and inclusion efforts follows the US Supreme Court’s June decision curtailing affirmative action in college admissions, as well as political backlash from conservative groups that say corporate DEI programs discriminate against White and male workers.

Former Trump advisor Stephen Miller-led America First Legal has filed bias litigation and sent over 30 requests to the US Equal Employment Opportunity Commission to investigate DEI policies at companies like Southwest Airlines Co, Major League Baseball, and Macy’s Inc. Some companies, including Pfizer Inc., have altered the eligibility language of their DEI programs following lawsuits.

While some companies have scaled back or reshaped their DEI efforts, businesses overall are telling shareholders diversity is still a priority. Companies that list diversity efforts as a risk factor in their 10-Ks also point to DEI in the filings as pivotal to the success of their business.

Out of more than a thousand public companies that filed 10-Ks between the Supreme Court’s decision and March 8, more than two dozen of them mentioned DEI as a risk factor, according to a Bloomberg Law analysis. Some companies were also reporting DEI as a risk factor before the Supreme Court decision, but they mainly focused on risk from not doing enough on DEI, the analysis showed.

“Companies are really in a Catch-22,” said Michael Elkins, a labor and employment attorney and founder of MLE Law. “I’m not sure which fear is greater right now: the fear of getting sued for having a program or the fear of getting sort of taken to task by eliminating the program.”

A New Risk

The companies noting DEI as a risk come from an array of industries, from educational technology company Duolingo, Inc. to investment management company KKR & Co. Inc.

It’s notable that DEI is now being included as a risk factor because, if there’s any litigation down the road, companies could point to their securities filing to prove to shareholders that they considered the risk, said Atinuke Adediran, an associate professor at Fordham University School of Law.

While risk factors typically refer to the potential negative impact of a merger or market conditions or something similar, diversity stands out as a less traditional point to highlight. Risk factors can act as a shield against lawsuits from shareholders, but the specific risks are going to vary widely depending on what might be material to a business.

“There’s a reason why they’re putting it there,” Adediran said. “I don’t know that this is going to be standard, but I am almost certain that there will be more of this.”

The 10-Ks in which diversity was listed as a risk factor were identified through a Bloomberg Law keyword search for 2023 Fiscal Year EDGAR filings.

While at least two dozen companies have so far listed DEI as a risk factor, it’s too early to get a full picture of how many will eventually do so, as many 10-K filings, which are typically released in the first half of the year, have not yet been published. Some companies, including JetBlue and Jones Lang Lasalle, also used the same or similar language about diversity as a risk factor in their last 10-K before the Supreme Court decision.

JetBlue said in its 10-K on Feb. 12, that “negative perception of DEI initiatives, whether due to our perceived over-or under-pursuit of such initiatives, may likewise result in issues hiring or retaining employees, as well as potential litigation or other adverse impacts.”

Engineering company Leidos said there’s a risk it could be “viewed negatively based on positions we do or do not take or work we do or do not perform” on environmental social and governance, including DEI goals, according to its filing on Feb.13.

Twilio also listed DEI as a risk factor. AFL in September 2022 requested the EEOC investigate the tech company over alleged consideration of race in layoffs.

Some companies were explicit about the impact of the high court’s affirmative action decision and conservative backlash.

Blue Owl Capital Corp., for example, noted on Feb. 23 that state attorneys general, among others, have said the Supreme Court’s decision on affirmative action in higher education should be applied to employment and private contract matters.

“If we do not successfully manage expectations across these varied stakeholder interests, it could erode stakeholder trust, impact our reputation, and/or constrain our investment and fundraising opportunities,” the filing said.

TPG Inc., Synonvus Financial Corp., iHeartMedia Inc., and Ares Management Corporation also listed DEI as a risk factor. KKR, Jones Lang Lasalle, iHeartMedia, Ares and TPG declined to comment, and the other companies with these risk disclosures didn’t respond to requests for comment.

“I think that we’re just going to see more of this because people know what’s right and errant legal advice and false information has been tolerated in this space for far too long,” said Gene Hamilton, vice president of AFL, which has targeted companies with litigation over their diversity efforts. “Eventually there will be significant costs associated with providing such errant advice or information.”

Companies across industries have also felt some pressure from shareholder activists to disclose more information related to diversity, such as specifics on pay equity information.

Different Values

Aside from risk factor disclosures, some companies are using risk-hedging language to talk about diversity efforts more broadly. Over a dozen US companies including Uber Technologies Inc. have removed DEI terms like “anti-racist” and “unconscious bias” from their corporate filings this year, according to Bloomberg News.

Bloomberg News has also reported that companies including JPMorgan Chase & Co. and United Parcel Service Inc., dropped references to specific groups like women and LGBTQ+ workers that their diversity initiatives were meant to help. Coca-Cola Co. dropped references to a program focused on promoting women into more senior roles after three years of mentions, according to the article.

Major law firms Morrison & Foerster LLP and Perkins Coie LLP made changes to the eligibility language of their diversity and inclusion programs after being sued by conservative activist Edward Blum’s American Alliance for Equal Rights. The organization dropped its suits against Morrison & Foerster and Perkins Coie following the language changes. Another law firm, Gibson, Dunn & Crutcher LLP, which represented Morrison & Foerster in the AAER litigation, also changed the eligibility criteria for its diversity scholarships.

But most companies are continuing to embrace DEI as a corporate value.

A survey of 194 chief human resource officers published by the Conference Board in December found that none of the respondents plan to scale back their DEI initiatives, programs or policies. In fact, 63% said they plan to focus on attracting a more diverse workforce.

Companies might feel like they’re “caught between and rock and a hard place,” when it comes to satisfying all stakeholders with their DEI approach, said Joanna Colosimo, vice president of workforce equity and compliance strategy at DCI Consulting.

Some businesses could face negative backlash from current and prospective employees if they choose to eliminate or significantly change their DEI program, said Stephen Chu, chief legal officer and people officer at Instride, a technology services company.

He said that as general counsel for a business, there are times when he will decide to take on a risk because it’s the right thing to do, “but at the same time, you have to acknowledge that the risk is there.”

Chu said that when it comes to DEI programs, “how we’re actually rolling out the programs is harder, because we are trying to avoid pitfalls that didn’t exist before.”

“And some of those pitfalls, you’re just going to say, ‘Well I’m willing to take the PR risk on it,” he said.