The Future of DEI Shareholder Proposals

Following the death of George Floyd and the Black Lives Matter protests against racial inequity in 2020, many companies increased their commitments to diversity, equity and inclusion (DEI), as well as their external discussion of DEI. We also saw an increase in the number of shareholder proposals submitted to companies, including from progressive groups, promoting DEI initiatives and/or requesting that companies evaluate and report on the effectiveness of their DEI programs. For purposes of this article, we refer to these proposals as “pro-DEI proposals.”

However, for the 2023 proxy season, we began to see a shift in the number and composition of shareholder proposals related to DEI, with the number of pro-DEI proposals declining and the number of equality-related proposals from conservative or libertarian groups increasing. For purposes of this article, we refer to these proposals as “anti-DEI proposals.”

In June 2023, the U.S. Supreme Court in Harvard v. Students for Fair Admission held that the use of affirmative action in higher education was both unconstitutional and violated the Civil Rights Act, including a concurring opinion from Justice Gorsuch that focused on the application of Title VI of the act (which covers discrimination in education) and suggesting that Title VII (which covers discrimination in employment) would have similar application. Following the Supreme Court decision, 13 Republican Attorney Generals sent a warning letter to the CEOs of Fortune 100 companies demanding they “refrain from discriminating on the basis of race, whether under the label of ‘diversity, equity, and inclusion’ or otherwise.” In response, 21 Democratic Attorney Generals published their own letter criticizing the Republican Attorney Generals for their intimidation tactics and efforts to “roll back the progress” that these Fortune 100 companies had made in fostering diversity.

Lawsuits followed, with a number of high-profile companies (and several major law firms) sued over their DEI programs. Complaints have also been filed with the Equal Employment Opportunity Commission (EEOC) and Department of Labor’s Office of Federal Contract Compliance. There have also been a number of customer boycotts of companies who have publicly promoted DEI.

While diversity was once generally considered a positive factor, the topic of DEI has recently become more politically polarized. Companies have also become increasingly aware of the legal risks and potential reputational risks associated with race-based programs. Some companies have even pulled back on their DEI initiatives (at least publicly) as a result of the recent backlash.

In this article we outline some of the more common DEI-related shareholder proposals submitted to companies in the 2024 proxy season and the voting results for these proposals as compared to the 2023 proxy season. For a summary of DEI-related shareholder proposals submitted for the 2020 – 2023 proxy seasons, please see What’s Next for Diversity Shareholder Proposals (harvard.edu).

The data used in our analysis was provided by Proxy Analytics. As used in this article, the proxy season refers to the period from July 1 through June 30. Voting results from the 2024 proxy season are reported as of June 12, 2024.

Key Takeaways from the 2024 Proxy Season

• The number of pro-DEI proposals submitted by shareholders decreased overall compared to the 2023 proxy season, with 42 pro-DEI proposals submitted for the 2024 proxy season compared to 90 pro-DEI proposals submitted for the 2023 proxy season.
• The number of anti-DEI proposals submitted by shareholders increased overall compared to the 2023 proxy season, with 30 anti-DEI proposals submitted for the 2024 proxy season (with two of these subsequently withdrawn) compared to 15 anti-DEI proposals submitted for the 2023 proxy season. The increase was attributable to an increase in anti-DEI Report proposals (described below).
• Average support for all DEI proposals (including anti-DEI proposals) decreased or remained flat as compared to average support for these proposals in the 2023 proxy season.

The following is a summary of the pro-DEI proposals and anti-DEI proposals submitted to companies in the 2024 proxy seasons and the voting results compared to the 2023 proxy season.

Racial Equity/Civil Rights Audits

These proposals generally ask a company’s board of directors to commission an independent review of the impact of its policies, practices and products or services on racial minorities (in the case of racial equity audits) or a broader protected class of individuals (in the case of civil rights audits). The input of a company’s stakeholders, including employees, customers and civil rights organizations, is often sought as part of the assessment. Such audits may be conducted to identify potential biases in employee hiring or promotion, measure progress against stated diversity goals, identify ways to improve upon existing DEI policies and procedures, and assess product impact on diverse communities.

Six of these shareholder proposals were submitted to companies in the 2024 proxy season. As of the writing of this article (through June 10, 2024), five of these proposals have gone to a vote, with none of them receiving majority support. This compares to 29 of these shareholder proposals submitted to companies in the 2023 proxy season, with 16 of the 2023 proposals going to a vote, and none receiving majority support. Average support for these proposals declined significantly from 22% in 2023 to 13% in 2024.

A variation of the Racial Equity/Civil Rights Audit proposal is a proposal that asks a company’s board of directors to commission an audit to determine if and to what extent the company’s programs and practices direct systemic discrimination against groups or types of employees, including non-diverse employees. For purposes of this article, we refer to this proposal as the “Anti-DEI Audit proposal.”

The number of Anti-DEI Audit proposals also decreased, with just four of these proposals submitted to companies in the 2024 proxy season, compared to 12 of these proposals submitted to companies in the 2023 proxy season. Two of the four 2024 proposals were submitted to Starbucks Corporation and one of these was withdrawn. Average support for these proposals remained flat at just 2% for both the 2024 and 2023 proxy seasons.

Report on the Effectiveness of DEI Efforts Proposals

These proposals generally request that a company’s board of directors produce a report to shareholders on the effectiveness of its DEI efforts using quantitative metrics for hiring, retention and promotion of employees, including data by gender, race and ethnicity.

Shareholders submitted 13 of these proposals to companies in the 2024 proxy season, representing a significant decrease from the 34 proposals submitted to companies in the 2023 proxy season. As of the writing of this article, 12 of the 2024 proposals have gone to a vote, and none have passed. One proposal received majority support during the 2023 proxy season. Average support for these proposals declined slightly from 27% in 2023 (for the six proposals voted on during the 2023 proxy season) to 25% in 2024.

A variation of the Report on the Effectiveness of DEI Efforts proposal is a proposal that asks the company’s board of directors to produce a report evaluating how it oversees risks related to discrimination against individuals based on their race, color, religion (including religious views), sex, national origin, or political views, and whether such discrimination may impact individuals’ exercise of their constitutionally protected civil rights. For purposes of this article, we refer to this proposal as the “Anti-DEI Report proposal.”

Anti-DEI Report proposals increased significantly in 2024, with 26 of these proposals submitted to companies in the 2024 proxy season compared to just three submitted to companies in the 2023 proxy season. As of the writing of this article, 24 of the 2024 proposals have been voted on and none have received majority support. One proposal was withdrawn and one remains to be voted on. Average support for these proposals increased slightly from less than 1% support in 2023 to 2% support in 2024.

Gender/Racial Ethnic Pay Gap Disparity

These proposals generally request a report on the disparity in compensation based on gender and/or race or ethnicity in a company’s workforce. The requested report would provide both quantitative median and adjusted pay gaps across race and gender, and include associated policy, reputational, competitive and operational risks, and risks related to recruiting and retaining diverse talent.

The number of these proposals submitted remained steady, with 16 of these proposals submitted to companies in both the 2024 and 2023 proxy seasons. All 16 of the 2024 proposals have been voted on, with none of them receiving majority support (although one came very close). For the 2023 proxy season, only 10 of these proposals went to a vote, and only one received majority support. Average support for these proposals decreased from 34% in 2023 to 29% in 2024.

Report on Risks Associated with Omitting Viewpoint and Ideology from Written Equal Employment Opportunity (EEO) Policy

This type of proposal seeks a report detailing the potential risks associated with omitting viewpoint and ideology from a company’s written EEO policy.

Six of these proposals were submitted to companies in the 2024 proxy season, compared to just one of these proposals submitted in the 2023 proxy season. As of the writing of this article, all six of the 2024 proposals have been voted on (although the results of one vote have not yet been reported). None of the 2024 proposals (for which results have been reported) or the 2023 proposals has received majority support. Average support for the 2024 proposals was 1.6% compared to 1.9% for the 2023 proposal.

Board Diversity

These proposals generally request that the company’s board of directors prepare a report on steps the company is taking to enhance gender and racial and ethnic board diversity. Suggested actions to increase board diversity include disclosing a commitment to gender, racial and ethnic diversity in governance documents; committing to include diverse candidate slates for board seats; disclosing the gender, racial and ethnic composition of the board of directors in the proxy statement; and discussing board strategies to reflect diversity in the company’s workforce, community and customers. The companies receiving these proposals generally did not disclose any racial or ethnic board diversity and/or had no or limited gender and racial/ethnic diversity.

The number of board diversity proposals decreased from six proposals submitted to companies in the 2023 proxy season (of which shareholders voted on four) to just one proposal submitted in the 2024 proxy season. None of the proposals submitted during the 2024 or 2023 proxy seasons received majority support. The one 2024 proposal received 26% support compared to average support of 19% for the proposals voted on during the 2023 proxy season.

Notably, Nasdaq listed companies are already subject to board diversity rules requiring them to disclose the demographics of their boards of directors and to have, or explain why they do not have, diverse boards (please see SEC Adopts Nasdaq Rules on Board Diversity for details on the Nasdaq diversity rules). Following their adoption, two conservative groups filed a lawsuit challenging the legality of the rules. In October 2023, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit upheld the rules, but the petitioners were later granted a rehearing by the full Fifth Circuit, which occurred on May 14, 2024.

The State of California has also taken steps to increase diversity on corporate boards by enacting two laws which would have required publicly traded companies based in California to have board members from traditionally underrepresented communities. Lawsuits challenging the constitutionality of both laws were filed shortly after their enactment. Trial courts agreed with the challengers and issued permanent injunctions barring the State of California from enforcing the board diversity mandates (please see California Court Finds California Board Diversity Law… and California Court Strikes Down Board Gender Diversity Statute). The California Secretary of State is currently appealing the trial courts’ decisions, but the appeals have been stayed pending the California Supreme Court’s decision in another case regarding whether taxpayers have standing to file an action against state officials.

Report on Racism in Company Culture

This type of proposal requests that the company’s board of directors prepare a report analyzing whether the company’s written policies or unwritten norms reinforce racism in company culture and providing any planned remedies. In the supporting statement, the company is encouraged to consider consulting outside expertise and to elicit feedback from employees.

There were four of these proposals submitted to companies in the 2023 proxy season, with average support of 11%. As of the writing of this article, none of these proposals have been submitted for the 2024 proxy season.

Final Thoughts

The results of the 2023 and 2024 proxy seasons may suggest that investors have begun to take a more critical view of DEI proposals (both pro- and against), questioning whether and to what extent the actions requested by these proposals will actually provide the meaningful information or changes they are seeking, or are cost-effective. The money and time required to produce audits and/or reports evaluating DEI (both the positive and negative impacts) can be significant, and may not be in the best interests of every corporation.

Given the relatively low support for these proposals in the 2023 and 2024 proxy seasons and the changes in the larger societal context discussed above, it seems likely that the number of DEI proposals (including anti-DEI proposals) submitted to companies in future years will continue to decline. This is not to say that DEI initiatives are a thing of the past, however. Many companies (and investors) recognize that research has shown that businesses that are more diverse have better financial outcomes. For example, a 2023 global analysis conducted by McKinsey & Company found that companies with high gender or ethnic diversity have a 39% greater likelihood of financially outperforming companies who are not diverse.

However, most investors would probably agree that there is no one-size-fits-all approach to DEI, and companies need to approach DEI in line with their respective corporate values and long-term business objectives. A company’s DEI strategy must be well thought out, particularly in light of the risks now facing companies. Proponents (and opponents) of DEI may, therefore, be better served engaging in meaningful conversation with companies outside the public arena.

Legal counsel should ensure they understand this evolving area of law and the historical context of the DEI movement so they can effectively advise companies and their boards of directors on DEI strategy amidst the changing political climate.