Can the law help, or hurt, the push for more diversity on American corporate boards?

By Michael Murphy, Ervin Cohen & Jessup LLP

The lack of diversity on corporate boards – and how to cure this problem – has long been a topic of debate. A 2018 McKinsey study reported a correlation between companies with diversity in management and “greater financial returns”. Activists often cite this study when pressuring companies to diversify leadership.

The law is now increasingly used to force diversification among corporate leaders.

Some states now require disclosure of director diversity statistics, or non-binding encouragement to improve these numbers. A proposed Nasdaq policy to set diversity benchmarks, and require disclosure and explanations for failure to hit those targets, was approved by the SEC on 06 August 2021.

In 2018, California imposed gender diversity requirements on publicly traded companies with executive offces in the state, and, in 2020, it passed a similar requirement for racial diversity. A handful of states are watching California, and may follow its lead, as courts consider legal challenges. Challenges to these new regulations have been slow to emerge, as few companies want to be on the record as opposing diversification.

It is too early to conclude whether these rules will effect meaningful change, and early evidence is mixed. Nevertheless, even for companies outside these jurisdictions, and for whom diversity is not a priority, waiting to address the issue is ill advised. This is because of one additional legal tool: the increasing use of shareholder derivative suits challenging the accuracy of corporate policies promoting diversity that do not match that company’s actual management demographics. As Google, Facebook, and others have learned, even though these lawsuits are frequently dismissed, significant reputational harm can be caused simply upon their filing.

In the wake of George Floyd’s murder in 2020, diversity is becoming an expectation among consumers and on social media. Corporate boardrooms and executive suites will not likely be excused, even if these various legal tools do not survive in the courts.


Michael Murphy

Michael Murphy

GGI member firm
Ervin Cohen & Jessup LLP
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Ervin Cohen & Jessup LLP is a fullservice law firm that provides a broad range of business-related legal services including real estate, litigation, corporate, tax, land use, employment, bankruptcy, estate planning finance, healthcare, intellectual property, and technology law.

Michael Murphy is a Partner in the Litigation Department of Ervin Cohen & Jessup LLP. He has extensive experience in corporate governance disputes and litigation involving breaches of fiduciary duty, fraud, derivative actions, as well as real estate, trademark law, anti-SLAPP, and defamation, among other types of business litigation.


Published: Litigation & Dispute Resolution Newsletter, No. 15, Autumn 2021 l Photo: alfa27 - stock.adobe.com

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