Attorneys from two California law firms have filed shareholder derivative lawsuits against the boards of seven major corporations since July, seeking to bring diversity to boardrooms and c-suites by holding the boards responsible for their false and misleading statements about diversity in the companies’ proxy statements.
“There is a glaring lack of diversity in the corporate boardrooms where decisions are being made,” said Louise Renne, former San Francisco City Attorney and an attorney for the plaintiffs in three of the cases. “With the renewed focus on the Black Lives Matter movement this year, it’s clearer than ever that we need to use all the tools available to address systemic racism. This litigation is another avenue to push for diversity and bring new voices into the top levels of decision-making.”
The plaintiffs’ legal team has employed the firmly-established protection of the federal securities laws to try to hold corporate boards liable for making misleading statements about diversity to shareholders. In 2009, the Securities & Exchange Commission passed a new rule requiring publicly-traded companies to start disclosing what role, if any, diversity plays in the process used by companies to nominate persons to serve on their board of directors. However, until now shareholders have not brought many cases under the 2009 SEC rule.
The shareholders who have brought the cases against the seven companies – Oracle, Facebook, Qualcomm, the Gap, NortonLifeLock, Cisco and Monster Beverage – seek to hold the board of directors and top executives at each corporation liable for making misleading statements about diversity, statements which have led to reputational and financial damage. Both institutional and individual shareholders view statements about diversity as highly material and important to their investment decisions.
Specifically, the plaintiffs allege that the board members breached the Securities Exchange Act of 1934 by authorizing false statements about their commitment to diversity in their proxy statements. The U.S. Securities and Exchange Commission requires companies to provide these documents to shareholders so they can make informed voting decisions. Plaintiffs claim board members did not follow through on the promises in their proxy statements.
Since diversity leads to financial and reputational benefits for companies, plaintiffs also allege that the board of directors at these corporations have breached their fiduciary duties by making false statements about diversity and then failing to seek and nominate diverse candidates to the board.
The cases have all been filed in California courts over the last three months. Attorneys from Bottini & Bottini, Inc. and Renne Public Law Group, the two firms involved in the litigation, filed the two most recent cases this month against Monster Beverage Corporation and Cisco Systems.
“Monster, similar to the other corporations involved in these lawsuits, publicly asserts that their diversity is a ‘tremendous asset,’ yet they don’t have a single Black or minority senior executive or board member,” said Ruth Bond, an attorney for three plaintiffs and a partner at Renne Public Law Group. “Stakeholders expect companies to follow through on their promises. Leadership needs to back up the words in their public reports by including diverse voices at the highest levels.”
The lawsuits seek several remedies, including the replacement of several current directors at each company with Black and minority directors. Additionally, plaintiffs seek funds dedicated to the hiring and promotion of Black and minority workers, compensation plans that tie 30 percent of executive compensation to the achievement of diversity goals, annual diversity reports and annual diversity training for all board and high-level executive officers.
“Corporate directors agree that diversity needs to be increased at their companies and that doing so leads to increased profits, but so far they have not followed through on their promises,” said Frank Bottini, an attorney for the plaintiffs in all seven cases. “We encourage companies to work with us to bring about necessary change, but if they fail to do so then the directors of such companies should be held liable for their false statements to shareholders.”