As pressure mounts to diversify boards, state legislation falters

A bill seeking to require companies to include non-white people on their boards of directors faces an uncertain future with the Legislature out due to the coronavirus pandemic. But a pair of California-based technology giants are getting pressure to diversify their boards on another front: shareholder lawsuits.

Earlier this month, technology giant Facebook Inc. and Oracle Corp. were hit with suits filed by shareholders on the same day in the U.S. Northern District of California by the same firm, Bottini & Bottini Inc. in La Jolla. Ocegueda v. Zuckerberg, Case 3:20-cv-04444-LB and Klein v. Ellison, 3:20-cv-04439-JSC (both N.D. Cal., filed July 2, 2020). Renne Public Law Group of San Francisco is also representing the Oracle plaintiffs.

"What our shareholder lawsuits are all about is having diversity and inclusion as part of the board of directors, as part of the C-suite leadership, because we think that where you have diversity and inclusion, you have a better corporation and it redounds to the benefit of the shareholders," said Louise H. Renne, founding partner of Renne Public Law Group.

Court documents do not yet list any counsel for either company. Neither Facebook nor Oracle responded to emails seeking comment.

The complaints don't cite AB 979, the California bill to require racial diversity on boards introduced on June 29. The bill was amended last week to include references to the relative lack of Black and Latino people working in "management, professional and related occupations" and to cite the a U.S. Bureau of Labor Statistics finding that "90% of chief executives were White.

Nor do they mention the 2018 law, SB 826, requiring female representation on boards, that provided part of the inspiration for the new bill.

Instead, the complaints argue each company has breached its fiduciary duty. Both cite "legal obligations and responsibilities to its shareholders, customers, investors, and the public" and state, "Derivative action is practically the only remedy for calling the management to account for its wrongs against the corporation and to obtain restitution."

Shareholder suits can be very difficult to win, said Ohio-based attorney Kevin M. LaCroix, who has written about the complaints on his D&O Diary blog. This is due to some of the procedural requirements and the variety of defenses rich companies can bring to bear.

But winning in court is not always the whole story, added the executive vice president with RT ProExec, a division of an "insurance intermediary focused exclusively on management liability issues."

"In a vacuum I could say this is social activism in the form of litigation," LaCroix said. "That isn't necessarily the most successful route, but you're not in a vacuum. I think the context matters, the recent racial justice movement, the demonstrations. There's been a lot of things that seemed like they would never change, like the Redskins changing their name, the removal of the Confederate flag from the Mississippi state flag. ... They've changed because the various organizations have found it the best path under the circumstances."

A negotiated settlement appears to be a possibility, at least at this early stage. The court referred both cases to its alternative dispute resolution process. Each complaint makes significant demands, such as Facebook CEO Mark Zuckerberg stepping aside as chairman.

Renne said the Oracle plaintiffs are open to talks. This is despite both complaints explicitly skipping one of the procedural steps LaCroix identified: first making a demand directly to the board.

"Plaintiff has not made any demand on Oracle to institute this action because such a demand would be a futile, wasteful, and useless act," stated the complaint against Oracle. The complaint against Facebook contains similar language.

Each filing details years of attempts to bring in more diverse voices. For instance, the complaint against Facebook names several people of color who said they resigned from the company or its board over disagreements related to company diversity and speech policies. These include former chief information security officer Alex Stamos and board member Kenneth Chenault.

"Mr. Chenault resigned because Zuckerberg himself did not want to hear Mr. Chenault's opinions; he just wanted him on the board as a token Black for appearances, to make it look like Facebook valued diversity," the complaint stated.

The complaint also claimed Facebook's platform has served as a "haven for hate speech." The complaint against Oracle cited several lawsuits against the company alleging race and gender discrimination.

Both complaints also contain something not generally seen in complaints: color photographs, specifically ones showing the senior leadership at each company is mostly white.