Tackling Legal Challenges To DEI Initiatives

What do the World High Wire Championships have in common with DEI initiatives? Each is a fine balance. Last week’s US appeals court decision to uphold Nasdaq’s board diversity rule to have women and minority directors on their boards or explain why they do not was welcomed by DEI advocates. Still, legal challenges to grantmaking to diverse beneficiaries; impact investing in diverse investees; and board, workforce, and supplier diversity initiatives are mounting. This heightens the risk and cost of pursuing diversity and inclusion. At the same time, organizations should not be too hasty to forgo the benefits of diversity and inclusion or abandon missions for which racial justice or DEI are core. Weighing these tradeoffs is a fine balance. Let’s examine each dimension of the fine balance between mitigating DEI legal risk and harnessing the benefits of DEI.

Grantmaking to diverse beneficiaries and impact investing in diverse investees. Following a series of rulings in August and September about whether a grant program for businesses run by Black women is discriminatory but before a final decision in American Alliance for Equal Rights (AAER) v. Fearless Fund Management, LLC, grant makers and impact investors focused on diverse beneficiaries and investees may wish to take precautionary measures. These measures may include documenting specific past discrimination in violation of the Constitution or a statute that grant programs seek to address or adding risk factors to private placement memorandums of impact investment funds. Alternatively, they may choose to continue to defend their programs under the “business judgement rule” to validate legitimate business objectives to invest in and support underrepresented groups. Some grant makers and impact investors are broadening the definitions of diversity that their programs use, and others are continuing to give grants to and make investments in whomever they deem fit.