Moving from Words to Actions: What is Social Justice Due Diligence and How Does it Add Value to the Investor?

The tumultuous events of 2020 and 2021, most notably the COVID-19 pandemic and the global outcry for racial justice, have created new challenges and opportunities for diversity and inclusion. (Kenji Yoshino and Fenimore Fisher, Bloomberg Law). Many companies are grappling with the concept of privilege for the first time. These companies are also rethinking the financial rationale behind engaging in the work of educating about privilege and diverse experiences and are struggling to transform good ideas into practical outcomes. Id. While kind words and acknowledgment of privilege serve as a discussion launch point, the question becomes: what can corporations do in practice to advance social justice and diversity in order to add value to the investor? Social justice due diligence is becoming a standard component in the due diligence process of mergers and acquisitions (“M&A”) transactions. Id.

Due diligence in M&A is the gathering and analysis by the acquiring company of pertinent information of the target company. (Haft, Westlaw). Due diligence is a risk mitigation effort by the acquirer that ensures that the company being bought in theory is the company being bought in practice. Id. While due diligence involves multiple steps, the acquirer generally creates a due diligence checklist of information that it is requesting from the target company to help ensure that the target company’s claims about its business and operations are materially accurate. Id. While due diligence focuses on a multitude of areas, social justice due diligence is increasingly impacting both the reputation and financial risk of the transaction. (Kenji Yoshino and Fenimore Fisher, Bloomberg Law).  

M&A industry insiders have noticed that two market imperatives have merged. (Kenji Yoshino and Fenimore Fisher, Bloomberg Law). While consumers have long exerted market pressures on corporations relating to issues such as environmental sustainability, consumers are now increasingly considering a corporation’s commitment to diversity and inclusion when deciding how to spend their money and considering which companies to support. Id. For years, “the ‘market horse’ and the ‘moral horse’ were often not running in the same direction”, but the increasing consumer emphasis on social justice has merged these separate initiatives into one horse for consumers. Id. This increasing merger of social and financial imperatives into one is why social justice due diligence has become an ever-increasing part of the M&A deal process.

Leading social justice due diligence experts recommend two courses of action for corporations in light of emerging market imperatives: changing structures and new corporate culture habits. Id. Changing structures can include, for example, documented reporting processes for sexual harassment and utilization of formal benchmarks. Id. For example, the Mansfield Rule is a benchmark that forces the consideration of a certain percentage of diverse candidates. Id. New habits in corporate culture can include and promote allyship amongst employees by encouraging conversations relating to different life experiences through increased recognition and knowledge of unconscious biases. Id. New corporate governance and leadership standards were recently adopted by Nasdaq. (Jeffrey S. Hochman, William J. Stellmach, and Todd G. Cosenza;  Bloomberg Law).  Nasdaq announced a new rule requiring the boards of directors of corporations registered on its exchange to either meet a minimum level of diverse representation or explain why the board does not meet that threshold and provide disclosure to stakeholders about the makeup of its board. Id.

How do these recommendations and efforts add value in the M&A industry? By proactively ensuring that target companies have taken actions to promote social justice as part of their value proposal, companies can ensure that the goodwill of their brand is kept whole after the transaction. Additionally, proper due diligence prevents unfavorable surprises to acquiring companies including rampant workplace sexual harassment or toxic workplace culture, which can significantly affect the value of the brand before potential benefits are realized. Because consumers are becoming concerned with more than the financial “bottom line” of a company, corporations engaging in an M&A transaction should make social justice due diligence a key component of the M&A process to ensure that the deal is consummated with the minimal amount of risk while allowing the moral and market horse to run together for all stakeholders.