Friday, November 24, 2017

Cheryl L. Wade

excerpted from: and the Relationship Between the Directorial Duty of Care and Corporate Disclosure , 63 University of Pittsburgh Law Review 389-440, 389-394 (Winter, 2002) (220 Footnotes)

Two corporate employers paid settlements of seismic proportions to minority employees alleging race discrimination in recent years. In 1996, Texaco settled a class action alleging race discrimination for $176 million, and in 2000, Coca-Cola settled race discrimination litigation for $192.5 million. The terms of both settlements required the insertion of outside auditors into typically internal and private corporate governance decisions, and the creation of governance processes designed to investigate and monitor compliance with laws prohibiting race discrimination. In this article I conclude that the settlements mandate managerial and directorial conduct that should have been undertaken when the charges of pervasive race discrimination were first made-long before the litigation was filed.

I will analyze the conduct and official responses of corporate executives when facing race discrimination allegations to show that boards and executives breach their fiduciary duty of care owed to shareholders when they fail to investigate and monitor their employees' complaints of racism. The terms of both the Texaco and Coca-Cola settlements ask managers and board members to take the steps they should have taken immediately upon receiving notice of racial discrimination. The settlements mandate conduct that would have satisfied fiduciary obligations.

Duty of care breaches such as the ones that occurred when Texaco and Coca-Cola managers ignored allegations of pervasive race discrimination are antithetical to profit-maximizing conduct. Fiduciary duty breaches such as these lead to significant litigation andsettlement costs that affect the short- term interests of shareholders. "Race discrimination cases can be both costly and time-consuming." These costs, however, are most significant for smaller companies. Larger companies with significant earnings are not noticeably affected by such losses even when they have to pay huge settlement amounts.

The locus of the potential damage to shareholder wealth, however, extends beyond the short-term pecuniary costs of racial discrimination. The damage may advance beyond the depletion of corporate resources to a company's public reputation. Inadequate corporate responses to allegations of racial discrimination have tarnished the public images of major corporations. "[A]ny race discrimination suit is a blot on the [company's] name." This is cause for shareholder concern because it is possible that this damage to corporate reputation will significantly affect a company's long- term profitablility.

The recent decision of the United States Supreme Court in Circuit City Stores v. Adams potentially curtailed the significance of the settlement value of discrimination litigation and its potential for changing workplace realities for minority employees who face widespread discrimination. "[L]itigation can spur corporate action when other avenues have failed." Under Circuit City, however, employers may enforce employment contract provisions to arbitrate workplace disputes. If an employer enforces an employment contract provision that requires the arbitration of workplace disagreements, employees covered by such a provision will not be able to litigate an employer's allegedly discriminatory conduct. The Court's holding may diminish the economic incentives to monitor discriminatory conduct for employers who may now enforce agreements to arbitrate workplace disputes under Circuit City.

Some commentators conclude that the enhanced ability of employers to enforce agreements to arbitrate workplace disputes will undermine the effective enforcement of employment discrimination law. This is because the employer-the accused discriminator-controls the arbitration process. Also, the arbitration process is criticized because it is a private resolution of disputes that relate to the public interest in deterring discrimination.

Circuit City, however, does not eliminate all economic incentives for employers to monitor workplace racism. First, employees who are not covered by arbitration clauses may litigate. The threat of class action litigation that may involve significant settlement costs should inspire managerial and directorial satisfaction of fiduciary obligations to monitor compliance with anti-discrimination law. Second, Circuit City does not affect the ability of the Equal Employment Opportunity Commission (the "EEOC") to file claims against employers that discriminate. Third, increased arbitration may have an effect on shareholder wealth that is similar to the threat of litigation and settlement costs. One commentator concluded that because arbitration is less costly than litigation, more employees will seek resolution of workplace disputes. Circuit City may mean greater access for more employees to employer- financed arbitration processes. Pervasive discrimination similar to that which infected the corporate culture at Texaco and Coca-Cola would require significant expenditures. More money may be spent to arbitrate more claims. Employers that are forced to devote financial and human resources to the arbitration of a significant number of disputes threaten shareholder wealth.

Inadequate corporate responses to race discrimination allegations harm minority employees in ways that are likely to attract the kind of publicity and community activism that may negatively affect shareholder wealth. Increased activism on the part of shareholders, the public, and attorneys may increase the costs of discriminatory conduct. Shareholder activists may divest. Community activists may organize boycotts. One attorney activist hired a public relations firm. Class action litigation alleging pervasive and widespread race discrimination damages corporate reputations. The excessive arbitration of race discrimination allegations that would result if employers fail to investigate and monitor employment practices would similarly harm corporate reputations if shareholder and community activists publicize allegations of persistent and pervasive racism.

One of the questions explored in this article is whether corporate officers and directors are able to avoid the negative publicity, the damage in reputation, and the drain of corporate time and resources that accompany allegations of racial discrimination by avoiding duty of care breaches. If the Circuit City decision impedes effective judicial enforcement of anti- discrimination law, the threat of shareholder derivative litigation alleging duty of care violations when corporate officers and directors ignore pervasive racism may preserve the public interest in deterring workplace discrimination. Shareholder derivative suits that allege violations of the duty of care may be brought by employees who own shares in the companies that employ them. Non- employee shareholders may bring these suits to stop duty of care breaches that may minimize shareholder wealth. In this article, I argue that derivative litigation alleging duty of care breaches when managers fail to investigate and monitor race discrimination allegations provides shareholder activists with a potentially significant strategy for improving workplace realities for minority employees.

In Part II of this article, I describe typical corporate responses to allegations of race discrimination. I focus on the race discrimination suit brought against Texaco. Because much has been written about the Texaco incident, the details leading up to the settlement and its aftermath provide a useful case study. In Part III, I describe shareholder activism that attempts to encourage corporate behavior that is socially responsible. This activism, and the increased willingness of minority employees to litigate injustices suffered as a result of race discrimination, makes the ignoring of discrimination allegations an act of fiscal irresponsibility on the part of corporate managers. Professor Marleen O'Connor has written about the potential value of forming alliances between shareholder activists and employees in order to improve workplace realities. I suggest that corporate attorneys join this alliance in order to help to accomplish the goal of racial equity.

In Part IV of this article, I analyze the reaction of Texaco's managers to allegations of race discrimination before and after the suit was filed, and conclude that the corporation's response was a breach of the fiduciary duty of care owed by Texaco's directorate and management. In Part V, I describe the color-blind approach of the Securities and Exchange Commission (the "SEC" or "Commission") to mandatory corporate disclosure and the reasons why it should change. The discussion of voluntary corporate disclosure in this Part is relevant for managers when responding publicly to race discrimination charges.

In Part VI, I distinguish the problem of race discrimination from other types of discrimination that occur in the workplace. I offer examples of the confused, superficial nature of the current discourse on race among corporate managers. Also provided are examples of the occasions when corporate managers inappropriately avoid discussions of race. I distinguish race discrimination from other types of socially irresponsible corporate behavior.

In Part VII, I focus on critical race theories such as the unconscious nature of racism and its seemingly indefatigable presence in American life. I describe the phenomenon of legal storytelling. The stories of minority employees who allege discrimination are not told in mandatory disclosure documents, and for reasons examined herein, should not be. Their stories are told when they file complaints with corporate managers, the EEOC, or in court. I observe that the value of this type of storytelling is in the corporate response it inspires before the employee resorts to the courts or the EEOC. The potential power of these stories is in the impetus they may provide for corporate managers to perform the type of monitoring that will uncover racism, even when it is subtle, covert, or unconscious. Increased arbitration of workplace disputes under Circuit City would provide a process that enhances the nature of legal storytelling. Employers and employees will be able to tell their own stories during the arbitration process.

Much has been written about workplace race discrimination, and the social and moral implications of corporate activity. Until now, the discourse on race, and considerations of corporate responsibility and lawfulness have occurred in disaffiliated contexts. In this article, the two considerations intersect. This is a discussion of the reasons why corporate officers and directors should pay careful and prompt attention to allegations of race discrimination. In this article, I explore the importance of avoiding explicit and implicit denials of such allegations before they have been diligently explored, and the importance to corporate managers of hearing the concerns of race discrimination victims as something other than a barrage of empty complaints not to be taken seriously. This article explores the possibility that audit and compliance committees may eliminate the duty of care breaches that typically occur when race discrimination is alleged.

Even after the Texaco and Coca-Cola settlements, companies continue to offer premature and often irrational denials in the face of race discrimination allegations. More often than not, when race discrimination is alleged, the corporation's public response is one of denial-"we did not discriminate." In this article, I examine the reasons why the more appropriate response would be "we will investigate." Of course, officers should be ready to defend against allegations of corporate wrongdoing, but the irrational defensiveness that is typical when corporate managers respond to race discrimination allegations is costly and inappropriate

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