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Combatting Corporate Tokenism

The Role of Shareholder Derivative Litigation in Board and Executive-Level Diversification

In the wake of several social justice movements, including the #MeToo movement in 2017 and the Black Lives Matter Movement in 2020, corporations increasingly emphasized their commitments to diversity, equity, and inclusion (DEI) in a variety of ways. Amid shifts in both public attitudes and the corporate landscape, a new trend in shareholder derivative actions emerged: shareholders began suing boards of directors for corporate failures related to DEI shortcomings. As a result, major corporations like Meta, Cisco, and Gap have faced suits brought by shareholders seeking to hold boards accountable for corporations’ public pledges to DEI values and initiatives.

Although these actions have experienced limited legal success so far, this Comment argues for a reconceptualization of “success” in shareholder derivative suits related to board and executive-level diversity that recognizes these actions may carry value in serving a deterrent purpose, inducing corporate action through public shaming, and acting as a positive social force that demands industry attention on matters of DEI accountability. Next, this Comment proposes a modification to the substantial benefit doctrine that recognizes benefits may be derived from diversity-related derivative suits for the corporation or broader class of shareholders based on a fact-intensive inquiry as to whether the action resulted in changes which reduce the risk of reputational harm and future litigation or increase investment opportunities. Further, as regulators and state legislatures consider novel strategies to encourage leadership diversity, these suits may also complement public sector initiatives as a private enforcement mechanism.