Increased focus on corporate culture and implications for workplace investigations
May 2022 | SPECIAL REPORT: BUSINESS STRATEGY & OPERATIONS
Financier Worldwide Magazine
May 2022 Issue
Driven by the #MeToo and racial justice movements, and other demands for societal and workplace reform, there has been an increased focus by a number of stakeholders on ensuring that companies are creating and maintaining cultures that are diverse, equitable and inclusive, and a corresponding uptick in companies initiating investigations into their corporate culture.
Moreover, consumers, employees, shareholders and regulators have increasingly sought to hold companies accountable for alleged misconduct, with allegations about workplace culture issues often leading to public controversies. This article provides an overview of why corporate culture has become a matter of significant interest and describes considerations for company personnel, including legal departments, before undertaking a culture-related investigation.
In addition to reputational concerns, workplace culture controversies can have significant financial consequences on an organisation, including the potential loss of employees and customers, shareholder suits and government investigations. Consumers, employees and shareholders are increasingly making financial and professional decisions based on whether they view a company as a good corporate citizen. Data shows that Generation Z and millennials, which now make up 50 percent of the US population, value diversity, equity and inclusion (DEI) more highly than previous generations.
A 2019 Google study found that 64 percent of respondents favoured buying from companies perceived as inclusive in terms of race, gender, sexual orientation and ability. A 2020 McKinsey study found that 75 percent of Generation Z consumers refused to purchase from companies that ran ad campaigns perceived as perpetuating stereotypes or being insensitive. These studies demonstrate that consumers are likely to seek out brands they view as inclusive.
Similarly, young professionals appear more inclined to pursue employment opportunities with companies that they believe value DEI, and prioritise corporate values over compensation. While it is far from certain whether these priorities will cause a long-term shift in the job market, companies that lack diversity or exhibit an unwillingness to focus on DEI goals may struggle to attract and retain talent. Furthermore, while not new, there has been a noticeable increase in the number and frequency of employees protesting social workplace issues.
For example, in 2021, hundreds of Netflix employees walked out in objection to a Dave Chappelle special based on his comments about the transgender community. A 2021 CNBC and Survey Monkey poll found that 80 percent of workers wanted to work for companies that value DEI, 60 percent wanted their employers to “speak out” on social issues and 50 percent described DEI as “very important” in the workplace. A 2020 Glassdoor survey showed that 76 percent of employees and job seekers assessed the diversity of an employer’s workforce when evaluating the employer. With increased mobility, being a “good company to work for” is an important factor in employee retention.
Likewise, institutional investors, shareholders and proxy advisers are pressuring companies to commit to tangible DEI initiatives, including by increasing diversity of board members and employees. Indeed, in 2019, shareholder proposals addressing social and environmental issues outnumbered governance proposals. According to a 2021 Aon survey of institutional investors, recent social justice movements affected how over half of such investors think about DEI. Two major proxy advisory firms have also announced new voting recommendation polices focused on board diversity.
Companies also have seen an increase in environmental, social and governance (ESG)-related shareholder and derivative litigation. In DEI-related derivative suits, however, courts have consistently found that plaintiffs failed to show that a majority of directors were conflicted from deciding whether to pursue the claims. In Falat v. Sacks (2021), the court found that the plaintiff failed to show the directors of Monster faced a substantial risk of personal liability sufficient to overcome the presumption of disinterestedness and independence. Although these cases have not made it past the motion-to-dismiss stage, litigation relating to these types of allegations draws unwanted public scrutiny.
Importantly, regulators have begun to take steps to promote ESG-related disclosures and ensure that companies are not misleading investors in ESG-related disclosures. The US Securities and Exchange Commission (SEC) has promulgated rules to promote ESG-related disclosures. The 2020 modernisation of Regulation S-K requires registrants to describe their human-capital management resources as a disclosure topic, which includes “any human capital measures or objectives that the registrant focuses on in managing the business”, such as “measures or objectives that address the development, attraction and retention of personnel”.
More rulemaking is expected. In June 2021, the SEC announced that it would propose rules on climate change disclosure, workforce disclosures and board diversity. And in March 2022, the SEC issued its long-anticipated proposed rule on climate change disclosures. As for enforcement, in March 2021, the SEC announced the creation of an ESG Task Force, charged with proactively identifying ESG-related misconduct. The SEC’s focus on ESG issues is only expected to increase.
Companies that mishandle cultural issues face tangible consequences, ranging from financial repercussions, loss of talent and the possibility of burdensome regulatory enforcement actions and shareholder litigation. Accordingly, responding to and managing these issues is increasingly becoming part of any company’s governance framework.
Workplace culture investigations
Given the potential consequences of allegations of workplace misconduct, a company’s reaction to controversy is critical, and the initial mishandling of a controversy can itself form the basis for shareholder suits. A company’s approach should be tailored to the issue at hand and will vary depending on a number of factors, including the seniority of the alleged wrongdoer, the severity of the alleged conduct and the alleged pervasiveness of an issue.
Where an issue is sufficiently serious, a company may turn to outside counsel to investigate the root cause of the controversy, issue findings, and recommend next steps. Investigations, commissioned in response to controversial incidents or public allegations, can serve as a way to rehabilitate a company’s public image and demonstrate that the company is serious about instituting cultural change.
While historically treated as isolated human resources issues, companies have found that the involvement of both employment and white-collar defence lawyers in investigations bolsters credibility and shows that culture is a core business consideration. Based on public disclosures, the frequency with which law firms are retained to conduct workplace investigations appears to have increased over the past few years. Beginning in 2017 with Uber’s law firm-led investigation into allegations of sexual misconduct, the number of publicly reported investigations has exploded, including investigations involving Starbucks and Tyson Foods, to name a few. To date, such investigations have tended to be in the consumer goods space, where brand loyalty is critical.
In addition to investigations undertaken in response to allegations of misconduct or other controversy, companies have also conducted proactive assessments of their workplace cultures, often undertaken in response to shareholder pressure, employee dissatisfaction or trends among peers, for instance mandatory arbitration clauses. Shareholders increasingly are submitting proposals calling for audits to assess the impact of companies’ equity initiatives. Institutional Shareholder Service’s 2021 benchmark survey found that 44 percent of investors believed that “most companies would benefit” from racial equity audits. Such audits are often overseen by third parties, such as law firms or policy experts. Interestingly, financial institutions have recently received a number of such proposals.
Potential considerations
As companies consider whether to undertake reviews of their corporate cultures, they should be aware of potential challenges and risks. Importantly, consideration should be given to the extent to which an investigation and its ultimate findings will be protected by the attorney-client privilege. If counsel is not directing the investigation from the outset, the underlying data and results could be discoverable in subsequent litigation. Even if counsel is engaged, publishing an investigation’s findings risks waiving privilege.
These issues should be discussed with counsel, but companies may be able to argue that statements relating to an investigation were sufficiently broad or high-level to preserve privilege over the underlying investigation. Additionally, given heightened regulator interest, companies should carefully consider how they disclose culture investigations. Proactively reporting on social initiatives can expose a company to enforcement actions or shareholder suits if the statements are alleged to be misleading or if commitments are not honoured.
Despite needing to navigate privilege and potential risks associated with ESG-related disclosures, it is clear that companies are increasingly deciding that the benefits of workplace assessments outweigh the risks, even when not faced with public allegations of misconduct. For example, proactive investigations can improve a company’s customer loyalty and ability to retain talent, as they demonstrate a serious commitment to increasingly valued social norms. They can also help identify patterns of toxicity early on, which can prevent the future revelation of even more damaging allegations levelled at a company for disregarding red flags.
Consequently, even if the results are unpleasant, a company may experience a reputational benefit from proactively investigating and addressing deficiencies. Indeed, the outcome of recent high-profile matters suggests that consumers are willing to reward companies for transparency and progress, even if an investigation’s findings reveal a need for improvement.
Conclusion
Companies can use workplace culture investigations as a tool to establish themselves as good corporate citizens that value DEI. Stakeholders are placing more importance than ever on DEI issues and are willing to reward companies that prioritise them, while at the same time, regulators are beginning to hold companies accountable for alleged cultural deficiencies.
Companies should consider the myriad advantages of conducting an independent investigation to understand vulnerabilities and areas of concern but should also be mindful that investigations may create risks that counsel should carefully consider at the outset. While navigating these many implications can be complex, the recent rise in both reactive and proactive investigations suggests that more companies are making the ultimate determination that corporate culture matters.
Alana Longmoore is a special counsel and Ann-Elizabeth Ostrager and Kamil Shields are partners at Sullivan & Cromwell LLP. Ms Longmoore can be contacted on +1 (212) 558 4473 or by email: longmoorea@sullcrom.com. Ms Ostrager can be contacted on +1 (212) 558 7357 or by email: ostragerae@sullcrom.com. Ms Shields can be contacted on +1 (202) 956 7040 or by email: shieldsk@sullcrom.com.
© Financier Worldwide
BY
Alana Longmoore, Ann-Elizabeth Ostrager and Kamil Shields
Sullivan & Cromwell LLP
Business strategy & operations
The new imperative for uncertain times: supply chain strategy
US business resilience: limiting the impact of the Russia-Ukraine conflict
Human capital transparency: the new competitive advantage
Increased focus on corporate culture and implications for workplace investigations
The returns from a best practices compliance programme