Cheryl L. Wade
excerpted Wrom: HSCRTNHGSWZIDREXCAXZOWCONEUQZAAFXISHJ
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 |