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Can Shareholders Challenge Corporate Discrimination? A Conservative Nonprofit Is About To Find Out

The National Center for Public Policy Research is taking Starbucks to court, arguing its discriminatory policies put shareholders at risk

Starbucks interim CEO Howard Schultz (Getty Images)
• September 20, 2022 5:00 am

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A Starbucks shareholder is suing the company’s top executives over a host of race-conscious policies that the lawsuit says violate civil rights law and, by exposing the company to costly litigation, threaten the value of its shares.

The policies—all of which are advertised on the coffee giant’s website—include $1.5 billion set aside for "diverse suppliers" and a compensation scheme that ties executive pay to "BIPOC representation" at the company, for which Starbucks has set numerical targets. The corporation also runs a "Leadership Accelerator Program" that is available only to minority employees, as well as a program that reserves 15 percent of Starbucks’s advertising budget for minority-owned media companies.

The lawsuit, filed on August 30 by the public interest law firm the American Civil Rights Project, will showcase a novel legal approach to challenging the race-conscious policies of publicly owned corporations. Typically, the plaintiffs in such cases are employees or job applicants who say the policies violated their civil rights. Here, however, the plaintiff is a conservative nonprofit, the National Center for Public Policy Research, that owns shares in Starbucks.

The group is arguing that the coffee giant’s programs endanger "Starbucks and the interests of all its shareholders"—which the company’s officers have a legal duty to protect—by inviting "nearly endless" civil rights litigation that could force Starbucks to pay out damages.

The lawsuit is part of a broader effort by shareholders to rein in corporate executives, who investors say are wantonly violating the law as they work to burnish their woke credentials. The National Center for Public Policy Research holds stock not just in Starbucks, but in JP Morgan and McDonald's. Over the past year, it has threatened to sue executives at each company who’ve implemented race-conscious policies; the suit against Starbucks’s top brass marks the first time the nonprofit has made good on its threats.

Because the center is suing Starbucks’s executives in their personal capacity, any damages awarded will come out of the pockets of individual officers, not the company’s corporate coffers, a gambit designed to make other C-suites sweat.

The National Center for Public Policy Research is quite candid about its goals. "We want to scare people away from discriminating on the basis of race," said Scott Shepard, an attorney with the group.

Starbucks declined to comment.

The lawsuit asks a Washington State court to declare Starbucks’s policies a violation of the Civil Rights Act of 1866, which prohibits racial discrimination in contracting, and of Title VII of the 1964 Civil Rights Act, which prohibits race discrimination in employment. It does not cite the violations themselves as grounds for damages, however; the claim is that the violations represent a breach of fiduciary duty, which in turn entitles the shareholders to compensation.

The litigation comes as companies across the country are reserving jobs, fellowships, and bonuses for members of certain minority groups. Pfizer excludes whites and Asians from a lucrative nine-year fellowship program. Amazon gives "Black, Latinx, and Native American entrepreneurs" an extra $10,000 to launch delivery startups. At Google, Microsoft, and IBM, prestigious research fellowships have capped the number of non-minority students that universities can nominate.

While some of these companies have been hit with traditional civil rights lawsuits—Amazon and Pfizer, for example—many have not. Such lawsuits would likely succeed on the merits, attorneys told the Washington Free Beacon, but plaintiffs can be hard to find given that suing one’s employer is often a professional death sentence—particularly when the lawsuit alleges anti-white discrimination.

"Finding the legal violation is easy," said Gail Heriot, a member of the U.S. Commission on Civil Rights and the chair of the American Civil Rights Project. "What’s hard is finding people to stick their neck out to say ‘I’m harmed.’"

Heriot’s firm believes that shareholder lawsuits—and the highly publicized threat of them—can sidestep that problem. Groups of stockholders like the National Center for Public Policy Research are "not susceptible to the kind of pressure campaign that any individual is," said Dan Morenoff, the executive director of the American Civil Rights Project, making them good candidates for plaintiffs in reverse discrimination cases.

If shareholder lawfare becomes more common, the thinking goes, then all publicly traded companies will face a credible threat of legal action should they adopt racial quotas. "What this does is change the incentive structure of every C-suite in America," Morenoff said.

Working with the American Civil Rights Project, other investors are now issuing their own threats—some of which have been successful. Last year, the firm sent open letters to Lowe’s and Coca-Cola on behalf of shareholders, threatening to sue the companies’ executives if they didn’t retract their race-conscious policies. Both eventually backtracked: In February, Coca-Cola told shareholders that it had dropped racial staffing requirements for law firms doing work with the company, and in August, Lowe’s quietly dropped a promotional program that was only open to minority-owned businesses.

The lawsuit against Starbucks came after the company’s directors shrugged off a similar threat, telling the National Center for Public Policy Research that it was "not in the best interest of Starbucks" to retract their race-conscious policies. Courts are generally unwilling to second-guess business decisions made by corporate officers, Morenoff said, a potential drawback to his group’s shareholder-led approach.

But even if discrimination did maximize the value of Starbucks’s shares, Washington State law still requires corporations to engage in "lawful business." Starbucks’s race-conscious policies thus constitute a breach of fiduciary duty whether or not they serve the company’s bottom line, the lawsuit argues.

Other state codes include almost identical language. In Delaware, where most companies are incorporated, corporate officers can be held liable for "a knowing violation of law." Once they receive notice that their policies are illegal—the purpose of the demand letters—executives are theoretically on the hook.

Shareholder suits have another advantage over conventional civil rights litigation: An employee or outside contractor can only challenge policies that directly discriminate against them, a legal concept known as standing. "It’s hard to find one person who has standing to challenge all of a company’s racist policies at once," Morenoff said, much less multiple people who are willing to challenge each anti-white policy individually. By contrast, a stockholder can challenge every discriminatory program in one fell swoop, on the grounds that each one represents an independent violation of fiduciary duty.

That makes shareholders an especially useful weapon against a company like JP Morgan, which has nearly a dozen race-conscious policies. The bank offers two different fellowships that exclude whites and Asians, one for black students and another for Hispanic students, as well as three different supplier diversity initiatives that discriminate based on race, according to an open letter from the American Civil Rights Project. It also has three race-conscious lending programs—one of which provides "$2 billion in small business lending to Black, Hispanic[,] and Latino communities"—that the letter says violate the Equal Credit Opportunity Act and the Fair Housing Act.

"Civil rights lawsuits are the retail approach" to race discrimination, Morenoff said. "Shareholders' lawsuits are the wholesale approach."

Implicit in this approach is a political argument: Old-school American liberalism, with its emphasis on free enterprise and colorblind civil rights, has the resources to resist the progressive insurgency that was born within it.

That faith is almost anachronistic on today’s right, where a growing number of commentators see "wokeness" as an unholy alliance between capitalism and civil rights law. Heriot herself has argued that corporations set up diversity bureaucracies in order to shield themselves from discrimination complaints, which can cost businesses millions in damages and legal fees. The bet her group is making is that civil rights law can be harnessed against its own excesses—provided shareholders step up to the plate.

To that end, the American Civil Rights Project has sought to reframe race discrimination as a kind of corruption. In its open letters and now its lawsuit, the group argues that corporate officers are effectively stealing their principals’ money, using it to purchase progressive cachet at the expense of the company.

"It benefits [the officers] personally to pose as virtuous advocates of ‘Inclusion, Diversity, and Equity,’" the lawsuit against Starbucks reads, "even when it harms the company and its owners—a classic example of (admittedly non-pecuniary) self-dealing."

Published under: Discrimination, Feature, Starbucks, woke