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Shareholder Complaints Seek to Hold Directors Liable for Lack of Diversity

Posted by Francesca Odell, Victor Hou, and James Langston, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, August 11, 2020

Editor’s Note: Francesca L. Odell, Victor Hou, and James Langston are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Odell, Mr. Hou, Mr. Langston, Roger Cooper, Michael Albano, and Mark McDonald. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

Earlier this month, three separate shareholder derivative lawsuits were filed in California federal court against the directors and officers of Oracle Corporation, Facebook, Inc., and Qualcomm, Inc., respectively. The three complaints, filed by the same lawyers, contain intentionally provocative allegations that, despite public statements emphasizing the importance of diversity within their respective organizations, the boards and executive management teams of Oracle, Facebook, and Qualcomm, remain largely white and male, and have failed to deliver on their commitments to diversity. While calls to strengthen commitments to diversity at public companies have steadily increased, these complaints go a step further and seek to reshape the boards and executive teams through litigation and hold directors and executive officers personally liable for perceived diversity shortcomings.

The plaintiffs will need to overcome a number of hurdles in order to sustain their novel claims. But the complaints touch upon serious issues at the center of a broader conversation, and similar lawsuits are likely to come. Many organizations have stated publicly that they are committed to improving racial, gender, ethnic, sexual and other forms of diversity. Last year’s Business Roundtable Statement on the Purpose of a Corporation also included a “fundamental commitment” to “foster[ing] diversity and inclusion, dignity and respect” among corporate employees. Such statements, however, have not always translated into results. The complaints against the Oracle, Facebook, and Qualcomm boards thus serve as a reminder that stakeholders of companies making public commitments to diversity are increasingly expecting those companies to follow through, and for their boards to focus on diversity and inclusion at all levels within their organizations. The recent complaints also serve as a reminder that those stakeholders—including stockholders—may pursue litigation in their attempts to hold directors and officers accountable.


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