Corporate America Tweaks Diversity Initiatives Amid Pushback

Businesses are trying to fashion programs that foster inclusion without running afoul of the law and potentially bringing costly consequences, according to lawyers and corporate advisers working on such policies. That means some are abandoning the most legally risky and potentially discriminatory practices, such as numerical targets that can be seen as “quotas" or the use of unconscious bias training that casts blame.

A less-divisive approach is in at many organizations.

After George Floyd’s murder in 2020, U.S. businesses from sneaker company Nike to Wells Fargo bank rolled out diversity, equity and inclusion initiatives as the country took a hard look at racial inequality. But legal pressure following last year’s Supreme Court decision to strike down affirmative action in college admissions has led to, if not a retreat from DEI programs, a rethink in how to best approach them.

“Frankly, employers got really comfortable doing some things that were questionable," said Johnny Taylor Jr., an employment lawyer who heads the Society for Human Resource Management, a trade group for human resource executives. “I just cringed at some of the pronouncements that were being made."

“Some well-intentioned CEOs and board leaders made major pronouncements that [for example] one in three of our going-forward hires are going to be people of color or women. And you just can’t say that," Taylor said.

Taylor said some business leaders he has spoken to have begun wholesale reviews of their organizations’ DEI policies. Any policy shifts tend to be undertaken quietly, however, because businesses don’t want to give plaintiffs’ lawyers a potential angle to sue by implicitly conceding a past policy might have been illegal, he said.

“Not surprisingly, they’re not exactly announcing it," he said.

Will DEI programs disappear?

The programs themselves don’t seem to be disappearing. Chief human resource officers don’t plan to scale back diversity initiatives, according to 194 executives who participated in a survey released in December by the Conference Board, a nonprofit business research organization.

Still, the tone has shifted, said Diana Scott, leader of the Conference Board’s U.S. Human Capital Center.

“Many companies felt pressure to jump on the bandwagon, and I think the pendulum swung way, way, far in one direction," Scott said. “Some companies are quietly pulling back from quotas and things that could be perceived as discriminatory."

The U.S. Supreme Court’s decision last year in the case challenging affirmative action at Harvard University didn’t directly touch on employment law, but prodded some businesses to reconsider their practices.

“The Harvard decision woke up a lot of people," said Natasha Teleanu, a former U.S. Justice Department lawyer who now works at the law firm O’Melveny & Myers.

Challenges to DEI

Shareholder activists, politicians, conservative groups and employees all have repeatedly challenged what they say are illegal practices that some of the country’s most influential corporations have used in the pursuit of diversifying their workforces.

In the educational sphere, the Harvard case ended a legal epoch, but there is no single analogous case poised to redefine employment law. Some cases on discrete practices, though, are working through the courts.

At a hearing in Miami last week, for example, an appeals court heard arguments on the legality of a program, operated by the philanthropic arm of venture fund Fearless Fund, that awards grants to businesses owned by Black women. The U.S. Court of Appeals for the 11th Circuit voted to block the fund from picking new grant winners while it considers the appeal.

In a ruling last month, a federal judge refused to throw out a case challenging diversity training at Pennsylvania State University that a professor said vilified white people, though the judge dismissed some claims.

Aggrieved white employees are increasingly bringing lawsuits over what some term “reverse discrimination," and in some cases winning damages in the tens of millions of dollars.

“They’re real," said Melissa Atkins, a partner at the law firm Obermayer Rebmann Maxwell & Hippel who represents employers. “You see more of them now than you have in years past."

A federal jury, for example, last year awarded more than $25 million to a white former Starbucks regional manager who oversaw a Philadelphia store where two Black men were arrested in 2018, finding that her subsequent firing was a result of racial discrimination.

Starbucks said it remains committed to “creating a culture of warmth and belonging, where everyone is welcome." It has set goals of achieving “racial and ethnic diversity" of at least 30% at the corporate level and at least 40% in manufacturing and store roles by 2025. The coffee chain also has created a fund that invests in small-business growth in “communities with historically limited access to capital."

Starbucks declined to comment on what changes it made to its human resources policies, if any, following the lawsuit.

Targeting the targets?

Fixed numerical targets, sometimes seen as quotas, have drawn particular attention in the new environment, and lawyers say they can potentially open a company up to legal action. Following the Harvard decision, a group of Republican attorneys general last year warned businesses against the use of racial quotas and preferences.

A group headed by Stephen Miller, a former senior adviser to former President Trump, also has sued and lodged official challenges targeting dozens of businesses. In the past few months, America First Legal has filed federal complaints over alleged quotas at Nike that it says discriminate against white men, alleged antiwhite racial quotas at toy makers Hasbro and Mattel, and allegedly discriminatory practices at American Airlines, Southwest Airlines and United Airlines.

United said it maintains the highest standards for pilot hiring, training and safety, and that it provides no exceptions. American and Mattel declined to comment. The other companies didn’t respond to requests for comment.

Companies also face challenges from right-leaning groups using the ownership of their shares as a basis to challenge diversity programs. Last year saw a record number of what are known as anti-ESG shareholder proposals, including some challenging employment practices. The abbreviation is short for environmental, social and corporate governance.

Scott Shepard, executive director of the Free Enterprise Project at the conservative think tank National Center for Public Policy Research, said his organization is trying to negotiate with a number of companies right now after floating shareholder proposals. NCPPR already has put forward proposals targeting financial services firm Citigroup, snacks and soda company PepsiCo and farm machinery maker John Deere.

John Deere declined to comment. Citigroup and PepsiCo didn’t respond to requests for comment.

Additionally, boards can be sued on the grounds that they failed to curb diversity policies that could in theory open a company up to discrimination lawsuits from white or male employees.

Another practice under scrutiny is the use of diversity training programs that bring up hot-button topics such as “white supremacy," which some say can foster antagonism.

A Canadian antiracism trainer, for example, drew scrutiny after allegedly bullying a white principal who disagreed with the trainer’s views on systemic racism. The principal sued after allegedly being ostracized by colleagues in the wake of the training and later died by suicide. The company behind that training, Kojo Institute, called the allegations false and said it still believes white supremacy is an important topic to address.

“We would not go anywhere near training that uses phrases like ‘white supremacy,’" said Domenique Camacho Moran, a partner at law firm Farrell Fritz who advises companies on employment law. “You have to be really careful not to be part of the problem."

Despite the frothy legal environment, many advisers feel diversity programs are valuable and can be crafted in a way that insulates the companies from legal challenges. Corporate advisers roundly suggest focusing on the “I" of DEI—that is, inclusion.

“We want everybody to feel like they belong," said Moran.

Write to Richard Vanderford at Richard.Vanderford@wsj.com