As I have noted on this site, though companies face pressure from a number of constituencies to establish their ESG credentials, taking the ESG initiative can have a number of consequences, including, for at least some socially active companies, the possibility of litigation (as discussed, for example, here). In the following guest post, Sarah Abrams, the Head of Professional Liability Claims at Bowhead Specialty, takes a closer look at these issues potentially affecting socially active consequences and considers the potential consequences for D&O insurers. I would like to thank Sarah for allowing me to publish her article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
Perhaps stemming from the 2010 U.S. Supreme Court Citizens United v. FEC[i] decision finding corporations have a right to free speech (in that case political speech), more and more companies have come out publicly in favor of, or against a variety of social and political issues. In the past two years, US companies have found themselves under pressure to take stands on racial equality, COVID-19 vaccinations, voting rights, the war in Ukraine, gun regulation and, in the wake of the Dobbs v. Jackson Women’s Health Organization decision, women’s reproductive rights.[ii]
Once a corporation, especially a publicly traded one, vocalizes its support or opposition, lawsuits are immediately filed. Aside from follow-on litigation having the ability to impair management liability insurance, making a statement on a particular social or political policy often leads to shareholder litigation. As opined by Utpal Dholakia P.h.D.[iii] in a “The Science Behind Behavior” Psychology Today post “when a [public company] decides to take a stance, it alienates a significant fraction of the company’s customers, employees, investors, and other constituents.[iv]
Certainly the profile of litigation filed just within the summer months of 2022 against Unilever[v], Wells Fargo[vi] and Starbucks[vii] supports Dr. Dholakia’s theory. Each suit arose out of a public position on a particular social issue and, in the case of Wells Fargo and Starbucks, had shareholder plaintiffs on both sides of the diversity, equity and inclusion debate. It is too early to determine whether this new round of litigation will go the route of the Board Diversity derivative litigation dismissals in 2021.[viii] Either way, costs incurred to defend litigation, particularly if separate counsel is required for executives, impair director and officer liability retentions and/or limits.
Despite the clear correlation between public position statements and lawsuits, companies have began to consider the prospective fall out as the “cost of doing business.” Notably, however, that cost is one often put on insurers. Certainly in underwriting, the history of a public company taking a stance on social issues should be considered alongside a loss run history of shareholder lawsuits. The specific platform itself seems to further inform the risk to subsequent litigation.
The Conference Board, a nonpartisan 501(c)(3) think tank published a recent survey of 300 US public, private and non profit corporation insights on how companies are responding to high profile social issues.[ix] The largest percentage of companies reported taking a public stance on Racial Equality (61%), followed by LGBTQ+ rights (44%), Vaccination and other COVID-related issues (40%) and Gender Equality (39%).
There is a significantly large number of shareholder derivative and recent securities class action suits stemming from corporate positions on racial equality. Especially in light of the “anti ESG” shareholder proposals, with the National Center for Public Policy Research (NCPPR) filing ten “civil rights and non-discrimination” proposals.[x]
On the other hand when a company like Dick’s Sporting Goods takes a position on gun safety and Dobbs, both issues ranking among the lowest in percentage for companies to take a stance on[xi], civil rights suits were filed[xii], but no shareholder derivative or securities class action have yet to follow. Similarly, when chief executives of Atlanta-based Delta Air Lines and Coca-Cola forcefully condemned Georgia passing a restrictive voting bill[xiii] no adverse action was taken.[xiv] There were, however, threats by Coca-Cola Co shareholders against the company’s board unless it ended policies to promote diversity among outside lawyers.[xv]
Just looking at survey responses from The Conference Board and recent lawsuits, there appears to be a correlation between the type of social issue that a company decides to take a position on and the number of follow-on lawsuits. For example, when a larger number of companies take a public stance on racial equality, a larger number are sued by plaintiff shareholders alleging the company was either not doing enough or doing too much.
Notably, 61% of the companies cited the issue’s relationship “to the company’s core values” as criterion for deciding whether to take a stand on issues raised by the Supreme Court’s decision. Only 29% cite the relationship to the company’s business. Given this statistic, it would seem prudent for public company director and officer underwriters to start asking what the company core values are and whether it plans to take a public stance in support of them.
[i] https://transition.fec.gov/law/litigation/cu_sc08_opinion.pdf, U.S. Supreme Court No. 08-205
[iii] Utpal Dholakia Ph.D. | Psychology Today
[iv] Why (Most) Companies Should Avoid Taking Political Stances | Psychology Today
[v] City of St. Clair Shores Police and Fire Retirement System, et. al v. Unilever, et. al (USDNY 1:22-cv-05011); Securities Complaint alleging that Ben & Jerry’s board resolution to end sales considered to be Palestinian territories illegally occupied by Israel was politically sensitive and that Unilever delayed announcement of the resolution because Unilever was “aware of the negative consequences.”
[vi] Khorsow Ardalan, et. al v. Wells Fargo & Company, et. al (USDC ND Cal 3:22-cv-03811); Securities Class Action alleging that Wells Fargo, as part if its efforts to diversify its work force, instituted a “Diverse Search Requirement,” also referred to as a diverse slate hiring policy which apparently was not effectuated; leading to fake interviews of diverse candidates and eventually paused.
[vii] National Center for Public Policy Research v. Howard Schultz, et. al (WA, Spokane County 22-2-02945-32); Shareholder complaint alleging that the Starbucks DEI policies “required Starbucks to discriminate based on race” and facilities “Starbucks’ active discrimination based on race in its employment decisions”; requires Starbucks to discriminate in its compensation of its officers based on the race of their workforce; and requires the company to discriminate in its contracting with its suppliers and media companies, based on the race of potential vendors’ ownership.”
[viii] See Oceguda v. Zuckerberg, USDC ND CA 20-cv-04444; Lee v. Fisher, et. al USDC ND CA 20-cv-06163-SK; Klein v. Ellison, et. al, USDC ND 3:20-cv-04439; City of Pontiac General Employees’ Retirement System v. Joyce, et. al, USDC DC 1:20-cv-02445; Lee, et. al v. Frost, et. al USDC SDFL 21-20885; Toronto ESA v. NortonLifelock Incorporated, USDC ND CA 20-cv-05410; Kiger v. Mollenkopf, USDC DE 21-409; City of Pontiac General Employees’ Retirement System v. Bush, et. al, USDC ND CA 20-cv-06651.
[x] 2022 Proxy Season Review: Increased Shareholder Focus on Racial Justice | WilmerHale
[xi] Only 10% of The Conference Board companies had addressed the Dobbs v. Jackson Women’s Health Organization decision externally and 38% reporting they had addressed it internally with 31% stating that they would not plan on responding.
[xii] Tyler Watson, who claimed that Dick’s violated the state’s discrimination statutes after they refused to sell him a rifle because he was not at least 21 years old, has reportedly reached an agreement to end a pending lawsuit. The terms of the settlement have not been released but the man had sought $1 million in damages. Dick’s settles age discrimination suit over refused gun sale to man under 21 :: Guns.com. After the decision in Dobbs v. Jackson Women’s Health Organization, which overturned Roe v. Wade, Dick’s announced a special employment benefit of “up to $4,000” in travel reimbursement for an employee, spouse, or dependent enrolled in their medical plan, along with one support person, to obtain an abortion. America First Legal (AFL) immediately filed a civil-rights lawsuit arguing Dick’s policy discriminates against female employees who choose to give birth. Dick’s Sporting Goods hit with civil rights complaint over reimbursing workers for abortion travel – Washington Times
[xiii] MLB moves All-Star Game out of Atlanta over voting law controversy – ABC News (go.com)
[xiv] Dick’s Sporting Goods hit with civil rights complaint over reimbursing workers for abortion travel – Washington Times
[xv] IN BRIEF: Coca-Cola investors threaten suit over law firm diversity policy | Reuters