Attacks against corporate DEI policies are legally weak — and companies like Costco know it
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Attacks against corporate DEI policies are legally weak — and companies like Costco know it
Costco isn’t backing down from pressure to change its diversity, equity and inclusion practices.
At Costco’s annual meeting, the company’s board of directors unanimously voted down a shareholder proposal from a conservative think tank that argued its diversity initiatives are “discriminatory” and called for the company to evaluate its DEI policies.
“DEI holds litigation, reputation and financial risks to the Company, and therefore financial risks to shareholders,” read the proposal from the National Center for Public Policy Research.
But the board said it believes its practices are “legally appropriate.” Costco’s board explained that having a diverse set of employees enhances the satisfaction of its members, who come “from all walks of life and backgrounds.” A diverse group helps the company select original products and shares insights into customers’ tastes and preferences.
Costco’s board also touted the benefits of having a diverse supplier base, which “fosters creativity and innovation.”
THE NCPPR is planning to submit another anti-DEI proposal, this time at Apple’s annual shareholder meeting later this month. Apple’s board of directors is recommending that shareholders vote against the proposal.
Costco’s and Apple’s responses are a stark contrast to the rollback in diversity initiatives happening at other major companies.
Google recently said it will no longer maintain its hiring targets for underrepresented groups, while its parent company Alphabet has removed diversity-related language from its annual report.
Target will end DEI goals that were aimed at increasing Black representation among its ranks and promoting Black-owned businesses. Other big companies like Amazon, Toyota and Walmart have also scaled back DEI-related policies.
Following the George Floyd protests in 2020, many companies vowed to implement hiring targets, support minority-owned businesses and provide financial support to organizations that champion diversity. But conservative groups have threatened legal action against DEI initiatives after the Supreme Court ended race-based admissions at colleges and universities. President Donald Trump also signed an executive order that ends DEI initiatives within the federal government.
In spite of these highly publicized efforts to threaten companies based on DEI policies, legal experts told us that not only should private companies be protected from legal action, but some companies’ DEI policies weren’t even that robust to begin with.
Costco’s opponents are trying to argue that the company is an example of “woke progressivism gone amuck,” but the company is doubling down because its policies are helping the company from a business standpoint, said Stacy Hawkins, a professor at Rutgers Law School.
“Costco says this is not about wokeness — this is about business strategy and sound decision making based on market analysis and business performance indicators,” Hawkins said.
The company’s policies are also not illegal, said Carliss Chatman, an associate professor at Southern Methodist University’s Dedman School of Law.
Corporate decisions are protected by what’s known as the “business judgment rule,” Chatman said. This means that the director of a corporation is immune from liability if they made decisions in good faith, acted as a “reasonably prudent person” would, and they acted in the company’s best interests upon reasonable belief.
Basically, the burden of proof to show that a company acted inappropriately is “very, very high,” Chatman said.
Most company charters also have exculpation clauses, which means even if a company’s share price goes down, that is not enough for shareholders to prove the corporation’s director breached their fiduciary duty, Chatman said.
“The principle in American business law is we want people to use the corporate forum to be innovative, take risks, grow our economy and try to do things that will advance and make us the best in the world. You can’t do that if people are so stressed out and concerned about liability,” Chatman said.
Lawsuits against DEI initiatives actually get dismissed often because many companies aren’t hiring a diverse-enough workplace, Chatman said.
The company would have needed to turn down someone who’s white without merit, she said.
“I think that’s why it’s so easy for corporations to make the announcement that they’re pulling back their DEI program,” Chatman said. “The DEI program didn’t really exist in the first place. It was always a marketing ploy.”
One way a company like Costco could land in legal trouble is if it explicitly excluded hires of a certain race or gender, or someone with a disability, without merit, Chatman said.
Or if the company, say, refused to buy any of its eggs from white-owned farms, she added.
Some people conflate the concept of DEI with affirmative action. But affirmative action, while a subset of DEI, generally entails setting specific numerical targets on who to hire, and takes a candidate’s protected status into consideration, said Lawrence Schaefer, president and owner of the employment law firm Schaefer Halleen.
“Affirmative action is rooted in the recognition that many protected classes have historically been discriminated against,” Schaefer said.
If a private employer set numerical targets, there’s a good chance the Supreme Court would use its ruling on college admissions to strike that down, Schaefer said.
But DEI is much more broad and involves doing outreach into minority communities, training and supporting minority candidates to ensure they’re fully supported in their job, and educating the workforce on how to be culturally sensitive, Schaefer explained.
That’s why Apple and Costco are prepared to continue with their current policies, Schaefer said.
Another misunderstanding about DEI programs? You may be a beneficiary and not even realize it.
“DEI includes disabilities. It includes veteran status, it includes race, it includes gender,” Chatman said. “There are DEI programs that are for first-generation college students. I think the problem is it’s been misbranded. DEI is just a dog whistle for Black.”
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