The Impact of Diversity and Inclusion on Management Liability

In recent years, senior leadership teams have been held increasingly accountable for their organisations’ failures by shareholders, stakeholders and the general public. Specifically, organisations’ diversity and inclusion practices have garnered additional scrutiny.

Certain social initiatives—such as the Black Lives Matter and #MeToo movements—have helped elevate awareness on the importance of promoting diverse representation and adopting effective inclusion measures within the workplace. As such, senior leaders who fail to uphold these practices risk severe reputational damages, potential claims and an increased likelihood of directors’ and officers’ liability (D&O) claims.

Keep reading to better understand the ramifications that senior leaders could face from poor diversity and inclusion measures, key legislation regarding such measures, and top tips for fostering diversity and inclusion within the workplace.

Consequences of Lacking Diversity and Inclusion in the Workplace

First and foremost, senior leaders who fail to promote diversity and inclusion are missing out on various organisational advantages. By establishing diverse representation and maintaining an inclusive environment, organisations can benefit from unique employee perspectives, a deeper talent pool, increased innovation and boosted workplace morale. In fact, a recent study by Deloitte found that organisations classified as ‘highly inclusive’ generated 1.4 times more revenue and were 120 per cent more capable of achieving financial goals than their less inclusive counterparts. The most inclusive small organisations performed even better than their larger counterparts, generating 13 times more cash flow than comparable employers.

Apart from missing out on key organisational benefits, it has become increasingly common for senior leaders to face claims due to poor diversity and inclusion practices—namely, shareholder derivative claims. Such legal actions entail a shareholder filing a claim against specific senior leaders on behalf of an organisation for their alleged failures.

These claims have stemmed from allegations that senior leaders breached their fiduciary duties by:

  • Not following through on previously stated commitments related to developing workplace diversity and inclusion initiatives
  • Misrepresenting the diversity of senior leaders or failing to ensure diverse leadership altogether
  • Retaliating against individuals who voice workplace diversity and inclusion concerns

Such claims carry not only severe reputational damages for organisations, but also substantial legal and defence costs.

Additionally, these allegations can lead to D&O claims. As a result, underwriters in the D&O market are expected to ask more questions and seek additional documentation regarding policyholders’ diversity and inclusion practices.

Legislation on Diversity and Inclusion

There are many laws intended to encourage diversity and inclusion within the workplace. These regulations often carry stiff penalties and fines for employers who are found to be non-compliant.

The Equality Act 2010 protects all Britons in workplace settings. When this act was implemented, it replaced and combined 116 different pieces of existing legislation that had covered a variety of smaller subjects. The purpose of the Equality Act is to simplify and strengthen prior legislation regarding diversity and inclusion. The nine primary laws that were combined include:

  1. The Equal Pay Act 1970
  2. The Sex Discrimination Act 1975
  3. The Race Relations Act 1976
  4. The Disability Discrimination Act 1995
  5. The Employment Equality (Religion or Belief) Regulations 2003
  6. The Employment Equality (Sexual Orientation) Regulations 2003
  7. The Employment Equality (Age) Regulations 2006
  8. The Equality Act 2006, Part 2
  9. The Equality Act (Sexual Orientation) Regulations 2007

In combining these pieces of legislation into one act, the Equality Act covers nine different protected characteristics—including age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.

Employers should also familiarise themselves with the Human Rights Act 1998. This legislation clearly outlines the freedoms and rights that all people in the UK are entitled to. It is connected with the European Convention on Human Rights, which has sought to protect human rights and political freedoms in Europe since 1953. This act includes 12 different articles that outline various inalienable rights, such as the right to life, right to a fair trial, freedom of expression and right to marry and start a family.

The Human Rights Act is intended to establish stringent standards for organisations across the UK. This includes public bodies, such as police and schools. Consistency is a key factor for the success of these laws, as it means that employers are held to the same standards, and employees can expect the same rights regardless of where they work.

Ways to Promote Diversity and Inclusion

It may be advantageous for organisations to implement a variety of measures related to diversity and inclusion. Here are some best practices for employers to consider:

  • Take steps to ensure diverse representation within the senior leadership team. Adjusting or expanding existing leadership positions may be beneficial.
  • Require the senior leadership team and the remainder of the workforce to participate in routine training on diversity and inclusion topics.
  • Allocate additional resources towards recruiting, mentoring and promoting employees who belong to underrepresented communities. Doing so may provide these employees with further opportunities related to professional development.
  • Create an annual workplace diversity and inclusion report. Data within this report may help an organisation understand its recruitment, advancement and compensation practices as they relate to employees from diverse backgrounds.
  • Consider establishing a diversity and inclusion officer or department. This individual or department can monitor the organisation’s diversity and inclusion initiatives, while also ensuring that it remains compliant with all applicable laws and regulations.
  • Keep detailed documentation of all workplace diversity and inclusion initiatives. It may be necessary to share this documentation with D&O insurers.
  • Consult a trusted insurance professional to determine specific D&O coverage needs as it pertains to diversity and inclusion concerns.

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