A settlement earlier this year between Pinterest and a class of its investors might serve as a wake-up call to general counsel whose company treats their diversity, equity and inclusion (DEI) policies as window dressing. The agreement, still preliminary but expected to be finalized, connects a company’s DEI policies to the fiduciary responsibilities of the management team and directors. 

"That was an incredibly successful [agreement]," Amy Crane, general counsel to Rhode Island’s treasury office and the Employees’ Retirement System of Rhode Island (ERSRI), said in a webcast hosted by corporate services technology company Broadridge. 

ERSRI was the lead plaintiff in a 2018 shareholder lawsuit against the social media company for an alleged culture of harassment and discrimination by its leadership. 

The company’s leaders, the ERSRI shareholders said in their complaint, "personally engaged in, facilitated or knowingly ignored the discrimination and retaliation against those who spoke up and challenged the company's white, male leadership clique."

In a key point, the shareholders said the toxic culture wasn’t just a cultural matter; it was a fiduciary issue because the company’s financial position and its goodwill and reputation was dependent on its largely female user base. 

"The Pinterest board's deference to a culture of sexism and systemic discrimination has impaired Pinterest's value and the value of the system's investment in Pinterest," Seth Magaziner, the Rhode Island state treasurer and head of the state’s pension fund, said at the time the suit was filed.   

Molly Bowen, an attorney with the lead plaintiff’s counsel Cohen Milstein, called the agreement groundbreaking because of the way it tied together the company’s culture with its fiduciary responsibilities.

"The settlement is the first of its kind to embrace diversity goals around a company’s product," she said. 

Blunt instrument

Shareholder litigation like Rhode Island’s remains a blunt and, for now, little-used instrument for addressing workplace issues involving gender and racial disparities, especially in the far-less litigious European Union. But that could change as more data emerges tying company business success to the diversity and practices of its leadership. 

"We’re seeing more data that makes the business case," said Serena Hallowell, an attorney with Motley Rice. "That data and the conversation [around DEI] lit a fire and investors have taken notice."

Among a surge of research tying better financial performance to company leadership diversity, The Wall Street Journal two years ago found that the S&P 500 companies with the most diverse leadership had an average annual stock return of 10% over five years compared to 4.2% for the least diverse companies.

Other studies have shown diverse companies performing better in part because of the different perspectives that women and minority managers and directors bring to strategy discussions. 

"From investors’ perspective, diversity is a material issue," said Ruthann Bartello, an associate director at Sustainalytics. "Companies have a more dynamic work environment, they better reflect their customer base, have a bigger talent tool and business tends to be more successful and see bottom-line improvement in stock performance."

Activist toolbox

Short of litigation, there’s an expanding toolbox shareholders are drawing from to prod companies to go beyond token actions, said Natasha Harrison, founding partner at Pallas Partners. 

"We’re seeing [shareholder] threats to refuse to vote in a chairman in certain circumstances where certain targets aren’t met in connection with the pace of women on boards," she said.

Some groups of shareholders are taking that a step further and nominating their own choice for chair. 

"If you’re taking that step, don’t just threaten," she said. "Actually nominate strong females and directors to the board. We’re seeing that [activism] increasingly amongst shareholders, putting forward a strong slate of women and many of them being chosen. So, this isn’t litigation in the traditional sense in England, but shareholder activism."

Regulators are following suit. In the United States, among other actions being taken. the Securities and Exchange Commission last year backed a policy shift announced by Nasdaq to require its 2,500 listed companies to have on their board at least one woman and one racial minority or person who identifies as lesbian, gay or other non-traditional gender orientation.  

The policy change has sparked a flood of lawsuits, against both Nasdaq and the SEC, on the grounds that it will force companies to make decisions not in their financial interest because they could feel pressure to tap people who are less qualified.

"I’m disappointed [SEC Chair Gary] Gensler is turning a financial regulator into a laboratory for progressive social engineering," Sen. Pat Toomey of Pennsylvania, the Banking Committee’s senior Republican, said in a statement supporting lawsuits challenging the policies. 

There’s a similar movement in Europe of regulators following investor diversity activism. The EU in mid-March passed a directive setting a quantitative target for the proportion of members of under-represented gender on the boards of listed companies. Companies would have to take steps to reach, by 2027, at least 40% of non-executive director positions held by members of the under-represented gender, or 33% of all board members. The EU Parliament still must pass the directive.

"I call for a swift start to negotiations with the European Parliament with a view to the final adoption of this directive, which will help to address the glass ceiling with which women are still too often faced in the world of work," Élisabeth Borne, France’s labor minister, said in a statement.

Groundbreaking settlement

In the Rhode Island case, Pinterest agreed to set aside $50 million to pay for a broad set of reforms. Among other things, the company must designate a board member to partner with the CEO to make sure diversity initiatives get the highest-level attention, conduct a twice-yearly look at the pay gap between men and women, factor diversity into its hiring practices and, in a key provision, release former employees from non-disclosure agreements (NDAs) that have kept them from talking about the company’s culture. 

"We were able to agree to a number of reforms," Crane said. "One of the more relevant [is the] NDAs. Oftentimes when you’re at a company you have to sign a nondisclosure agreement and you’re not entitled to share certain pieces of information, and unfortunately, sometimes that includes just not being able to speak about the environment you’re in."

Going forward, the way the Rhode Island fund went about the case might provide a template for action by other shareholder groups. 

As part of its due diligence, the pension fund requires companies to fill out a question sheet it has prepared to help ensure the principles of the board and management are aligned with the pension fund’s diversity and other goals, including those impacting environmental and governance issues. In Crane’s view, just by forcing the company to analyze and write down its performance against these goals, it puts the issues top of mind, and that in itself is part of the long-term process for bringing about change. 

"When they have to write an answer down, to say, 'Here’s our pay scale,' and they have to actually look at it, it’s hard to swallow" when the numbers don’t reflect well on the company, she said. "These are the small things that you’re chipping away at and then you finally get this buy-in."

In cases of litigation, when it comes time to hammer out an agreement, the process can make it possible for a company to undertake a change to a practice even if the practice is not the reason for the complaint.

"You’re in [negotiations] for one reason," Crane said. "That doesn’t mean you can’t ask them to make changes in another area. You go in privately to a company. You make a request for books and records. You’re coming in about a particular issue but the information that you get back might show a whole other area of improvement that’s needed, so make that demand … because they know they need to move [on an issue] somewhere."