Diversity and Inclusion – Return on Investment, part 4: Litigation, Fine, and Payout Reduction

Harassment litigation represents a catastrophic failure of an organization’s diversity and inclusion program. In these circumstances, the organization not only fell short of excellent performance but realized such aberrant behavior as to be non-compliant with applicable laws. Such occurrences not only represent large one-time costs associated with reduced productivity, heightened distraction, and elevated attrition.[wcm_restrict plans=”75959, 25542, 25653″]

Diversity and inclusion litigation events are acute occurrences unlike the more typically chronic workplace conditions resulting in diminished productivity, increased distraction, and elevated attrition. Subsequently, even the most diverse and inclusive organizations can be subject to this type of litigation – it only takes one ill-fated event.

Cost of Litigation

Unlike productivity and attrition costs, litigation expenses are difficult to calculate and are far more subjective. Categorically, litigation costs can be divided into direct (quantitative) and indirect (qualitative) groupings that include such costs as:

Direct

• Attorneys’ fees and court costs
• Executive, manager, and employee litigation related time costs
• Settlement payouts
• Fines and fees assessed
• Media and public relations costs
• Internal training costs (training courses and employee time)
• Internal communications costs (development, delivery, and reception)

Indirect

• Reputational costs (diminished sales)
• Executive, manager, and employee litigation related distraction costs (productivity loss)
• Employee productivity reduction
• Employee attrition

Common diversity and inclusion litigation costs have been found to be:

• $6.7 million is spent by the average large corporation for each sexual harassment lawsuit (Texas Bar Journal, November 1997)
• $350,000 is the average court verdict for a sexual harassment plaintiff; not including defense costs or intangible costs the employer incurs as a result of bad publicity and diminished productivity
• $150,000 per plaintiff is the average cost an employer faces to defend against a sexual harassment lawsuit¹

Some high profile harassment litigation settlements include:

• Coca-Cola: $192 million
• Texaco: $176 million
• State Farm Insurance: $157 million
• Shoney’s: $105 million
• Home Depot: $104 million
• Publix Markets: $81 million²

Calculating Diversity and Inclusion’s Return On Investment – Litigation Reduction

Workplace harassment litigation can have a material financial impact. Subsequently, actions taken to reduce and eliminate such harassment provide a significant return on investment opportunity. The calculation of this return on investment focuses on the reduced frequency or probability of event occurrence.

1. Estimate the per incident cost of a harassment-based lawsuit. The total per incident cost is determined by summing the estimated itemized direct and indirect costs (listed above). Note that if multiple plaintiffs are likely to be involved, higher settlement payouts will result. In this case, multiply the estimated settlement payout by the assumed number of plaintiffs when determining this portion of the per incident cost.
2. Determine the organization’s estimated annual diversity and inclusion litigation event occurrence rate (events per year if more than one event per year is expected) or probability (percent likelihood and event will occur if less than one event per year is expected). Factors to consider are those indicating the existence of stress points within the organization such as:
   • Frequent organizational change (people, processes, and/or technology) especially if concentrated within one part of the organization
   • Significantly negative feedback on a particular executive, manager, or employee from culture surveys, 360 degree feedback instruments, etcetera
   • Frequent employee concerns/complaints filed against a particular executive, manager, or employee
   • Introduction of a new hire executive, manager, or employee from a company with known diversity and inclusion issues
   • An organization’s lack of diversity and inclusiveness especially when an individual representing any minority group (age, race, gender, national origin, sexual orientation, religion, political affiliation, education, etcetera) relative to the organization is introduced
   • The larger the organization (by number of people) the higher the risk of a harassment incident
   • The organization’s historical pattern of harassment cases
3. Project the annual cost of harassment litigation by multiplying the per event cost identified in Step 1 by the event occurrence rate or probability estimated in Step 2.
4. Identify the initiatives to be implemented in order to improve workplace civility – Expert advice from individuals/organizations specializing in the field of diversity and inclusion should be consulted to identify those initiatives best suited to address the organization’s unique needs and circumstances.
5. Estimate the cost of implementing these initiatives on an annual basis – Use standard project management cost estimation methods to determine the expected monetary cost of all resource expenditures expected to be made during implementation of these initiatives on an annual basis. Alternatively, expert advice from individuals/organizations specializing in the field of diversity and inclusion could be consulted to determine this variable.
6. Estimate the reduction in annual harassment litigation event rate or probability – This will vary based on the nature of the initiatives undertaken. Expert advice from individuals/organizations specializing in the field of diversity and inclusion should be consulted to determine this variable.
7. Calculate the new annual cost of harassment litigation by multiplying the per event cost identified in Step 1 by the event occurrence rate or probability estimated in Step 6.
8. Determine the benefit realized by improving workplace civility as the difference between the current annual cost of harassment litigation and the new annual cost of harassment litigation.
9. Determine the component of Diversity and Inclusion’s return on investment value to the organization resulting from the reduction in harassment litigation events – Subtract the cost of the workplace civility initiatives determined in Step 5 from the annual value of improving workplace civility through harassment litigation reduction determined in Step 8 and divide the result by the cost of implementing the workplace civility initiatives determined in Step 5. Multiply this value by 100 to convert to a return on investment percent.

Example Return On Investment Calculation for Employee Turnover Reduction

Background

Harassment Litigation Events per Year: 1 / year

Calculation (Illustrative)

1. Per Incident Cost of Harassment Litigation: $6.70 million
2. Harassment Litigation Events per Year: 1 / year
3. Current Annual Cost of Harassment Litigation: $6.70 million
4. Several workplace civility enhancing initiatives identified
5. Annual Cost of Implementing Workplace Civility Initiatives: $300,000 / year
6. Estimated Annual Reduction in Harassment Litigation Events: 10 percent or 0.90 events per year
7. New Annual Cost of Harassment Litigation: $6.03 million
8. Harassment Litigation Reduction Benefit: $670,000
9. Annual Return On Investment of the Workplace Civility Initiatives: A 123 percent return on investment!

Final Thought…

This diversity and inclusion return on investment calculation is more subjective than those previously presented because of its risk-based factoring that attempts to estimate the value of a non-occurring event. The calculation presented is not intended to be extended to estimate an annual harassment litigation budget line item. Budgets and reserve funds for adverse events, such as harassment lawsuits, should developed as a part of the organization’s overall business risk and continuity management programs and not in isolation as a part of an individual initiative’s business case.

References

1. “One Sexual Harassment Lawsuit Can Devastate Even the Largest Employer,” Momkus McCluskey LLC, March 2011 (http://www.momlaw.com/one-sexual-harassment-law)
2. “The Price of Discrimination: The Nature of Class Action Employment Discrimination Litigation and its Effects,” Michael Selmi, Texas Law Review, 2003 (http://www.utexas.edu/law/journals/tlr/abstracts/81/81selmi.pdf)

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