Exploring the broad impact — from K-12 schools to corporate DEI initiatives

By Heather Navo, director of Legal at Ethic

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Key Takeaways

• The Supreme Court struck down race-conscious admission policies at the University of North Carolina and Harvard College in June 2023, effectively banning affirmative action as part of the college admissions process (the “SFFA Decision”).
• The SFFA Decision was limited to higher education and has no direct legal impact on private sector employers’ corporate diversity, equity, and inclusion (DEI) initiatives. 
• However, the SFFA Decision will cause heightened scrutiny and increased legal challenges of similar initiatives beyond higher education, including at high schools and private sector employers’ corporate DEI initiatives.
• Corporate board diversity requirements are being challenged on the state and federal levels. The SFFA Decision may impact a pending challenge to a Nasdaq rule set to go into effect December 31, 2023, requiring Nasdaq-listed companies to appoint at least two “diverse” directors or explain why they have not done so.

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In June, the Supreme Court effectively banned affirmative action in college admissions, holding that the race-conscious admissions programs at the University of North Carolina and Harvard College violate the Equal Protection Clause of the Fourteenth Amendment (the “SFFA Decision”). The watershed opinion overturned more than 40 years of legal precedent and will reshape college admissions at both public and private higher education institutions. 

This decision is important to the legal landscape and the implications of the decision are  important to us here at Ethic. At Ethic, we believe race-conscious admissions practices are an effective tool to achieve racial justice in higher education and that a more inclusive economy is a stronger economy. 

As Ethic’s director of Legal and a Supreme Court enthusiast who has been following the Court’s decisions closely, I believe the SFFA Decision — which on paper is limited to higher education — will likely cause heightened scrutiny and increased challenges to race-conscious initiatives beyond higher education, including corporate diversity, equity, and inclusion (DEI) initiatives and diversity-related initiatives at K-12 schools. 

I’d like to take a moment to explore the potential impact on some of these initiatives, but first, let’s review how colleges and universities are adapting now that affirmative action has been effectively disbanded in higher education. 

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How Will Higher Education Adapt?

While affirmative action has been an important and effective tool to create a diverse student body, promote integration on college campuses, and create an inclusive educational environment at higher education institutions, it’s not the only tool. At a minimum, higher education institutions must continue to comply with federal and state civil rights laws that require them to provide educational opportunities on an equal basis. 

But many institutions of higher education will likely want to implement initiatives beyond the minimum standards. For example, some institutions, such as Stanford University, look holistically at a student’s accomplishments both in and out of school — in other words, they aim to look beyond academic success to better understand how the “whole person” might grow and thrive at their institution. 

Another initiative that two-thirds of four-year colleges have already implemented is to eliminate requirements to submit college-entrance exam scores, which the institutions hope will address socioeconomic disadvantages and underrepresented students. Yet experts believe that eliminating college-entrance exams will not, in and of itself, result in more diverse classes, and, therefore, the elimination of college-entrance exams should be coupled with increased investment in recruiting, financial aid, advising, and mentoring for low-income, first-generation, Black, and Hispanic students. 

American Civil Liberties Union president Deborah Archer suggests additional alternatives, such as “evaluating academic achievement in context; giving credit to students who have attended underserved and underrepresented schools; considering socioeconomic status and English language learner status; considering group or community demographics; and expanded outreach and recruitment efforts.” 

It is worth noting, however, that there is not yet an alternative strategy as effective as affirmative action, according to Zachary Bleemer, assistant professor of economics who studies college admission policies at Yale. 

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Beyond Higher Education

The SFFA Decision was solely deciding the constitutionality of affirmative action in the context of higher education; its impact, therefore, should be limited to higher education. Notwithstanding that fact, educational institutions beyond higher education may be forced to reckon with the increased scrutiny of their affirmative action policies. 

Let’s look at a magnet high school in Virginia as one example. In 2020, the Thomas Jefferson 

High School (consistently ranked among the top 5 best high schools in the country) revised its admissions policy, in part to increase the diversity of the student body. The revised policy eliminated standardized admissions exams and replaced them with a holistic evaluation of the students. While the revised policy increased enrollment among Black and Latino students as well as more lower-income students, English-language learners, and girls, it also lowered Asian American admissions from about 70 percent to 50 percent, ultimately resulting in a lawsuit by parents backed by a conservative legal foundation alleging that the new admissions policy was discriminatory against Asian Americans. 

The U.S. District Court for the Eastern District of Virginia determined that the admissions process was discriminatory and unconstitutional. But in May, the U.S. Court of Appeals for the Fourth Circuit reversed the lower court’s decision, finding that the admissions process did not discriminate against Asian American students. Fast forward to August 23, when the challengers filed a petition with the Supreme Court, asking the Court to determine that the admissions policy is unconstitutional. 

Time will tell how the Supreme Court handles the petition, but I suspect that the SFFA Decision, coupled with the current composition of the Supreme Court, will increasingly cause people to feel emboldened to bring legal challenges to education institutions beyond higher education.

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What Does This Mean for Corporate DEI Initiatives? 

The SFFA Decision has no direct legal impact on private sector employers’ corporate DEI initiatives or affirmative action policies. Private sector employers are not required to make any changes — and they may retain diversity as a vital component of their operations and mission, just as we do at Ethic. 

But while there may be no direct legal impact, private sector employers will certainly feel the ramifications of the SFFA Decision. One signal of its importance to companies is that major private sector employers got involved in the SFFA litigation and voluntarily filed a brief with the Supreme Court. Over 60 big companies, who collectively employ more than 4 million people globally, said that “promoting the benefits of diversity — specifically including racial and ethnic diversity — among their workforces is essential to meet client needs, achieve business goals, and strengthen relationships both internally and with the communities.” They also warned the Supreme Court that ending affirmative action in higher education would make it harder to build diverse workforces.

Although the SFFA Decision did not address private sector employers, it carries with it the threat of increasing legal challenges to private sector employers’ corporate DEI initiatives. Why would this be the case? For starters, I suspect the SFFA Decision will result in more focus on DEI initiatives in general. We’ve already seen shareholders exerting pressure to ensure continued progress on DEI initiatives and bring lawsuits challenging DEI policies — and employees are testing the limits of employer initiatives through reverse discrimination suits. This is, therefore, an increasingly fraught legal landscape for private sector employers.

Corporate board diversity requirements are similarly fraught. Over the last few years, there have been efforts to encourage corporate board diversity. At the state level, a handful of states introduced legislation designed to increase board diversity in terms of gender, race, or other characteristics. At the federal level, the SEC approved a board diversity rule by Nasdaq that will require Nasdaq-listed companies with boards of more than five members (subject to certain exceptions) to “satisfy the diversity objective with one female director and one director who is an underrepresented minority or LGBTQ+.” The Nasdaq rule, which goes into effect on December 31, 2023, is a “comply or explain” rule, which means that Nasdaq-listed companies will either have to comply with the rule or explain why they have not done so. 

Corporate board diversity rules faced legal challenges prior to the SFFA Decision. For example, in May, a California law mandating racial, ethnic, and sexual orientation diversity in corporate boards was found unconstitutional. The Nasdaq board diversity rule is also facing challenges and is currently on appeal before the Fifth Circuit. The SFFA Decision could call the Nasdaq diversity rule into question and impact the pending appeal. If the Nasdaq rule is eliminated, Nasdaq-listed companies would not be required to report on board composition, which would be a major setback to improving board diversity and could impact investors’ ability to measure company progress and make informed investment decisions.

In sum, the SFFA Decision could have vast implications and consequences beyond higher education. Therefore, we believe it’s vital that companies committed to racial justice keep a close watch on the evolving legal landscape. 

Ethic will remain diligent in keeping abreast of DEI and affirmative active legal landscape to identify cases that may impact companies. In the meantime, contact your relationship manager to learn more about our Racial Justice Sustainability Pillar and how you may use it to build more sustainable investment portfolios.