In this fourth installment on D&O liability from Fox Rothschild’s Stephanie Resnick and John Fuller, the authors explore the importance of having a diverse board to address the challenges posed by various social issues.
Why Is Diversity Important?
As with the social issues discussed in prior articles, diversity is quickly evolving from an aspiration for equality to a corporate necessity with an increasingly discernable impact on the bottom line.
At the organizational level, a lack of diversity along gender, racial, ethnic, sexual orientation and/or age lines can open the company to complex and unsavory litigation. For instance, tech giants have been rocked by the publication of internal memoranda regarding diversity practices and numerous lawsuits resulting from the termination of certain individuals who attacked or defended the existing corporate processes. Increased diversity and improved practices for promoting diversity can help avoid such litigation.
At the board level, recent studies have shown that diversity – in particular gender diversity – can have a direct impact on the corporate liability. For example, researcher Chelsea Liu studied 1,893 environmental lawsuits brought against 1,500 companies listed by Standard & Poor’s between 2000 and 2015. Liu found that for every additional woman on company’s board, there was approximately a 1.5 percent reduction in the risk of litigation. Liu also determined that the average environmental lawsuit cost 2.26 percent of an organization’s market value, meaning that the addition of a female board member equated to an average savings of $3.1 million of organizational value each year.
These findings support the widely accepted understandings that adding diverse perspectives to a board improves decision-making by among other things, refreshing core skill sets and challenging potentially complacent board culture.