Derivative suits driven by diversity concerns are beginning to spill into the boardroom, marking a shift from traditional shareholder actions. Historically, these suits were used to protect a corporation from its board’s imprudent investment or financial actions. However, in recent times, shareholders have been using derivative actions to hold corporations accountable for the diversity, equity, and inclusion (DEI) commitments they publicly endorse, scrutinizing the boards for any alleged inaction or minimal action in this area.
JD Supra notes that there has been a significant uptick in DEI suits in 2020, sparked by social justice movements following the shooting of George Floyd. These suits are specifically a type of environmental, social, and governance (ESG) lawsuits that focus on challenging board decisions and practices about DEI principles.
Such an approach suggests a new role that shareholders take in corporate governance. By utilizing derivative suits, they can pressure boards to fulfill their DEI commitments and, as such, also affect ESG factors with financial and reputation implications for the company. It also reaffirms the increasing trend where corporate social responsibility extends much beyond lip-service, reaching the very core of boardroom decision-making.
Professional corporations and law firms must adjust their strategies to account for the evolving risks of shareholder derivative suits, paying attention to both the probability and potential implications of these lawsuits. The landscape of corporate legal concerns continues to evolve with wider societal shifts, and understanding the dynamics of DEI suits forms an important aspect of this changing scenery.