In recent years, there has been pressure on top management teams to hold their organizations accountable and focus on diversity and inclusion goals for the benefit of shareholders, stakeholders and society at large.
Certain social initiatives have helped to promote diversity and raise awareness of the importance of effective inclusion measures in the workplace. Senior executives who fail to follow these practices are at increased risk of significant defamation, potential lawsuits, and directors’ and officers’ liability (D&O) claims.
Effects of lack of diversity and inclusion in the workplace
When senior leaders promote diversity and inclusion at work, they reap a variety of benefits. By establishing diverse representation and maintaining an inclusive environment, organizations gain unique employee perspectives, a larger talent pool, increased creativity, and workplace morale. According to a recent McKinsey & Company study, companies with a diverse workforce outperform their less diverse counterparts by 25 percent.
In addition to missing out on important organizational benefits, companies and their leadership teams can be sued when they don’t have diversity and inclusion practices in place. These charges stemmed from allegations that senior officials breached their fiduciary duties:
- Failure to follow through on previously stated commitments related to developing workplace diversity and inclusion initiatives.
- Misrepresenting the diversity of senior leaders or failing to ensure a diverse leadership team.
- Retaliate against individuals who raise workplace diversity and inclusion issues.
Such cases result in serious reputational and high costs associated with legal defenses and settlement amounts. These types of claims may be covered by a D&O insurance policy. As a result, D&O underwriters are asking more questions and seeking more documentation about policyholders’ practices around diversity and inclusion.
How your startup can implement effective diversity, equity and inclusion practices.
Law on Diversity and Inclusion
Federal and state regulators, as well as major stock exchanges, have in recent years developed requirements for the diversity and inclusion of firms.
The United States Securities and Exchange Commission (SEC) issued new disclosure requirements in 2018 requiring companies to be open about the diversity of their senior management teams. These criteria require public organizations to share certain self-identifying leadership characteristics (eg, gender, race, and sexual orientation).
In the year In 2021, the SEC approved new diversity standards for senior management teams of NASDAQ-listed firms after NASDAQ submitted a proposal to the SEC. The requirements are called the “Final Rules” and include:
- All NASDAQ-listed firms must publicly share why they choose not to include diverse members on their senior management teams. Different members should self-identify as belonging to an ethnic minority or as female or LGBTQ+. The number of different members required depends on the size of the organization’s top management teams.
- All NASDAQ-listed firms must report annual diversity statistics on the self-perceived characteristics of their senior management teams.
- NASDAQ also offers additional recruiting resources for companies that need help recruiting a variety of senior executives.
Best practices for promoting diversity and inclusion
Organizations should implement the following steps to promote diversity and inclusion among their senior leadership teams and the workforce as a whole.
- Take steps to ensure diverse representation on the senior management team.
- Require the senior management team and the rest of the workforce to participate in regular training on diversity and inclusion topics.
- Allocate more resources to recruiting, mentoring, and promoting employees from underrepresented communities.
- Create an annual workplace diversity and inclusion report. This report should provide information about the organization’s hiring, promotion, and compensation practices for employees from underrepresented communities.
- Consider establishing a diversity and inclusion officer or unit. This individual or department is responsible for ensuring that the organization adheres to diversity and inclusion initiatives and complies with all applicable federal, state and stock exchange laws regarding such initiatives.
- Keep detailed documents of all workplace diversity and inclusion initiatives.
- Consult a trusted insurance professional to determine specific D&O insurance needs regarding diversity and inclusion issues.
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