The DEI Dilemma
The DEI Dilemma
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March 3rd, 2025
Thanks to David A. Katz and Elina Tetelbaum
We wrote recently about regulatory and policy developments that are ushering in a retreat from ESG at public companies, proxy advisors, and investors. As companies head into proxy season, the appropriate manner and scope of that retreat has been particularly fraught for Diversity, Equity and Inclusion (DEI)-related issues. Companies are grappling with key judgment calls on how to adapt DEI policies to make them legally compliant and consistent with business imperatives, as well as how prominently to feature disclosure on those topics, if at all.
For years, in response to investor feedback and proxy advisors’ corresponding focus, proxy statements and companies’ websites have highlighted the results of efforts companies have made in diversifying boards of directors, management teams, and employee bases on gender, racial, ethnic and other grounds. Following the January 21, 2025 Executive Order, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, and the issuance of the Justice Department’s report “encourag[ing] the private sector to end illegal discrimination and preferences, including policies relating to DEI,” many companies and boards have evaluated the extent to which such practices and disclosures continue to be advisable.
Companies are seeking to understand the extent to which DEI continues to be valued by investors and proxy advisory firms who are themselves backing away from voting recommendations centered around DEI disclosure and practices. This evaluation is made particularly challenging by the fact that institutions are not taking a consistent approach, as evidenced by the differing ways in which ISS and Glass Lewis, the two major proxy advisory firms, are approaching the changing landscape. While ISS announced it would “indefinitely halt” consideration of gender, racial, and ethnic diversity of U.S. company boards when making its voting recommendations, Glass Lewis put out a statement explaining that it would like to avoid making “a hasty and sweeping decision.” Glass Lewis recognized that “many of [its] institutional investor clients, both in the United States and especially outside of the U.S. market, remain committed to the value of diversity,” but sought understanding that the “hardline position of the current U.S. Administration,” may make that “not be fully possible in the end.” The institutional investor clients will also have the extent of their commitment tested, as they too move to eliminate proxy voting guidelines tied to boards’ gender, race, and ethnic diversity, as recently implemented by Vanguard and Blackrock, among others. We have always emphasized the importance of understanding the perspectives of stakeholders, but companies are finding themselves in a moment where those perspectives are evolving in real time and not easily communicated or determinable.
In such times, it is particularly important that boards work with management to set a “tone at the top” as to the manner in which the company would like to position itself on these issues. For example, if a company decides to make changes to its proxy statement reducing the disclosure of DEI measures—for example by deleting the board diversity matrix or lightening disclosure surrounding DEI practices—such a decision should be part of an intentional and comprehensive company strategy, rather than a decision made in isolation by a company’s legal team. Similarly, if the company updates its investor relations page to deemphasize words such as “diversity,” and “equity,” in favor of “inclusion,” “belonging,” and “talent,” it should be aware that such changes may get the attention of animated third parties, both pro- and anti-DEI, that are searching the Internet seeking to make examples of companies seemingly taking a stance in either direction.
Unquestionably, there is now a particular spotlight on companies in terms of how they are handling this particular set of issues—from employees, the media, customers, and communities. Yet this spotlight is not new and echoes the pressures companies faced in 2020, in the wake of George Floyd’s murder and the protests that followed. Now, as then, companies should avoid knee-jerk or piecemeal actions that fail to reflect the values and purpose of the business enterprise. As we recently wrote, companies should continue to articulate the ways that the company’s talent practices reinforce the nexus between “values” and “value.” There is no one-size-fits-all approach to how to edit proxy statements or update company policies other than having sustainable business value as a guiding star.
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