A Case Study of the Texaco Lawsuit
THOMAS S. WILLIAMSON, JR.
Chair, Texaco Task Force
I have been asked to address the topic of dealing with lawsuits. First, I will comment briefly on why employment litigation has become a growth industry in recent years. Then I will turn to my major subject, a case study of how a major oil company, Texaco,1 responded to a lawsuit that generated national headlines in late 1996 by dramatically revamping its approach to managing diversity. By focusing on Texaco’s experience, I do not mean to suggest that one size fits all in managing diversity, but the comprehensive nature of Texaco’s response to the crisis the company faced illustrates a wide range of challenges and solutions that could be applicable to a variety of corporate employers, including engineering firms.
It is widely recognized and well documented in the legal community that there has been an upsurge in employment litigation (i.e., various types of employment discrimination lawsuits) in the past several years. In some ways, that trend seems counterintuitive. After all, the principal civil rights laws prohibiting racial and sexual discrimination have been on the books for more than 35 years, and a whole generation of CEOs and managers who had grown up either actively perpetrating or passively accepting racist and sexist traditions in the workplace as “business as usual” have either retired or simply died off. And, of course, virtually all businesses are now operating in a global economy where discriminatory practices seem especially outdated and counterproductive.
Notwithstanding our hopes that enlightenment in employment practices would have fully flowered by now, there are numerous reasons for the trend
toward increased litigation. One factor, of course, is that we have greatly expanded the number of protected groups since the mid-1960s. Women, who were added in the Civil Rights Act of 1964, have become increasingly active in the succeeding decades. The Age Discrimination in Employment Act, which was passed in 1967, defines the protected group as 40 years of age or older. Now that the majority of baby boomers are over 40, the pool of potential plaintiffs has swelled. And we cannot overlook Title I of the Americans with Disabilities Act (ADA), which was passed in 1990 and which protects against discrimination on the basis of disability.
Other factors have also contributed significantly to the rising trend in employment litigation. In 1991, Congress modified the federal civil rights laws relating to racial and sexual discrimination entitling plaintiffs to jury trials and compensatory damages for pain and suffering. Up to then, discrimination cases had been tried by judges, and the damages were largely limited to awards of back pay. Opening the field to larger damages greatly increased the incentives for plaintiffs’ counsel, who are often compensated on a contingent basis determined as a percentage of the plaintiffs’ dollar recovery. Finally, in a number of recent high-profile cases, plaintiffs have been awarded tens of millions of dollars or more. Cases involving Texaco and Coca Cola are among the most notorious cases in this category. In the Texaco case, the total cost of the settlement was about $176 million; in the Coca Cola case, the price tag for the settlement was even higher, $192.5 million. Those numbers sent potent business-opportunity signals to plaintiffs’ lawyers who handle employment discrimination matters on a contingent basis, both at the class level and the individual level.
This trend in employment litigation suggests that the reasons for the upsurge are not likely to diminish or disappear in the near future. Therefore, employers must recognize that dealing with lawsuits that can have a material, adverse impact on their businesses is a long-term threat, not merely a temporary blip on the litigation radar screen.
Now, let’s turn to the Texaco case. My knowledge of Texaco’s experience is based entirely on my experience as a member and chair of the Texaco Task Force on Equality and Fairness during the past four years. Neither I nor my firm was involved in representing Texaco as defense counsel during the course of the litigation that resulted in the task force. However, as a participant in the task force, I have had extensive opportunities to learn about the circumstances that led to the litigation and the strategy Texaco adopted to turn the situation around. As a preliminary note, I want to make it clear that I am not participating in this conference in my official capacity as the chair of the task force. My remarks should be understood as my personal views.
Let me set the stage by describing how the Texaco litigation became a story that made national headlines. The lawsuit was a class action, race discrimination suit brought on behalf of salaried black employees of Texaco. The named plaintiffs were employees in the Texaco headquarters in Westchester County and in
New York City, who were involved in financial management matters for Texaco (investing pension funds). The media explosion occurred when an older, white male employee surreptitiously taped conversations of certain other white male executives who were responding to discovery requests from the plaintiffs. That employee turned the tapes over to plaintiffs’ counsel, and they soon found their way to the New York Times, which published a story claiming that the taped executives had made racially derogatory statements about the plaintiffs, including use of the N-word. What had been poking along as a conventional, not particularly noteworthy discrimination case suddenly became a national cause celebre; and Texaco instantly became the poster boy for corporate racism. The value of Texaco’s stock fell precipitously, and employee morale was decimated company wide.
Within a few days after the news broke, Texaco’s management was facing a critical choice: (1) to defend the lawsuit and try to rebut the discrimination charges through the litigation process or (2) to settle the lawsuit promptly and use the litigation crisis as an opportunity to transform Texaco’s corporate culture to foster and promote diversity. Of course, another option would have been for Texaco simply to settle by paying substantial damages to plaintiffs, thereby “putting the problem behind them,” but Texaco agreed to pay substantial damages and assume responsibility for implementing comprehensive programmatic relief in the future. As I will explain, Texaco’s commitment to prospective programmatic relief signaled that the company was not thinking simply in remedial terms, but was also thinking in terms of making fundamental changes in its corporate culture.
Perhaps the most dramatic evidence of Texaco’s commitment to transforming its corporate culture was its acceptance, as part of the Settlement Agreement, of an independent task force of outsiders who would have the authority to design and oversee the implementation of the programmatic relief in the Settlement Agreement over a five-year period. In addition, the task force was given the authority to determine human resources policy for Texaco relating to fairness and diversity issues covered by the Settlement Agreement. This was a bold break with traditional principles of corporate governance, which abhor the notion of any control over management other than through the Board of Directors and limited types of shareholder initiatives. The new task force was to have a total of seven members, three chosen by plaintiffs, three chosen by Texaco, and a chairman who was jointly selected.
The Texaco case was settled in late 1996, and members of the task force were formally sworn in in June 1997 as special masters of the federal district court. In the interim period of about six months, between December 1996 and June 1997, Texaco publicly committed the company to undertaking a wide-ranging reform program that partly tracked the provisions of the Settlement Agreement, but also included ambitious efforts to promote diversity and hold executives accountable for successful performance on the diversity front. Notably, at the outset, Texaco’s
leadership made it clear that the reforms would not be targeted solely at salaried African-Americans (i.e., the class-action members) but would be intended to address the rights and needs of all employees, including women, white men, and all minority group members employed by Texaco.
By moving ahead with the design and implementation of a comprehensive program of diversity and fairness initiatives, Texaco preempted the possibility, allowed under the Settlement Agreement, that the task force would determine and design human resources policy for Texaco. Instead, the task force was able to carry out its mission and fulfill its responsibilities by acting primarily in an oversight capacity responding to Texaco’s initiatives. This role also appealed to the task force because Texaco was more likely to stay committed in the long term to change that was generated internally than to directives that were imposed externally.
At the first meeting of the task force, the Texaco officials present informed the task force that the company had received widespread criticism in the corporate community for abrogating its management duty and “selling out” to plaintiffs’ counsel. Notwithstanding the chorus of criticism, the Texaco officials announced that they believed the task force provided the company with a uniquely independent resource that they would not have been able to hire to assist them in fulfilling their responsibilities under the Settlement Agreement and achieving Texaco’s broader equal opportunity and affirmative action goals. In other words, Texaco did not approach the task force as a punishment for past transgressions or as a Trojan horse that had been rolled into their midst. In the ensuing months and years, the relationship between the task force and the company has been spirited and candid, but always collaborative and collegial.
I will give you a brief description of five or six features of the Texaco program that struck me as particularly effective and likely to be transferable to other organizations seeking to develop a corporate culture that promotes diversity.
Executive Leadership. The top leadership, specifically including the CEO, must believe that promoting diversity directly advances the business interests of the enterprise and must make the case repeatedly and forcefully to middle management and line staff. Social justice and compliance with legal obligations are laudable and appropriate motives for encouraging equal opportunity and diversity, but there is a growing awareness that a strong business case is the key to sustained corporate commitment.
Expanded Recruitment. Expanding recruitment to include institutions where talented minorities and women are pursuing relevant technical degree programs is one of the most obvious elements of an effective diversity strategy. Texaco had traditionally drawn its engineering staff from Texas A&M and Penn State. Beginning in 1997, Texaco identified schools all over the country where the training of minorities and women in technological fields and business was an institutional priority. As a result, Texaco designated 40 “core” educational institutions for recruitment, including historically black colleges and universities and members of the Hispanic Association of Colleges and Universities.
Competency-Based Hiring and Promotion. Competency-based hiring and promotion procedures have substantially improved the fairness and quality of the job posting and promotion process at Texaco. Like most organizations, the people making decisions about hiring and promotion at Texaco tended to believe that people like themselves would be the best qualified. Texaco analyzed the various jobs in its workforce and systematically developed competencies for leadership and competencies for specific jobs. This process required about two years to complete. Subsequently, Texaco integrated these competencies into the job descriptions and interviewing protocols for assessing candidates for job openings and promotions.
Bonus Compensation. Another component of Texaco’s transformative approach is the incorporation of diversity goals into the bonus compensation system for the 300 top executives of Texaco, whose bonuses are increased or decreased based on whether Texaco achieves its annual goals for increasing the representation of women and minorities in the ranks of the company’s “professionals and managers.” The assumption is that increased representation in those categories of employees will be likely to encourage an increase in the representation of women and minorities at all levels of the organization. The bonus-compensation formula communicates an ongoing institutional commitment to diversity and provides an accountability mechanism for diversity performance. Texaco has not always met its annual goals for increasing the representation of women and minorities, but the importance of remaining engaged in ongoing efforts to improve diversity is consistently reinforced through the bonus-compensation system.
Succession Planning. Texaco’s commitment to diversity is also reflected in the company’s approach to succession planning. Women and minorities regularly participate in the succession-planning process at all levels to ensure that all candidates who have demonstrated the potential for upward mobility into senior positions receive fair consideration. Also, in certain instances where there are gaps in the internal talent pool available to fill key positions, Texaco has retained search firms with the explicit understanding that they (1) must employ women and minorities as principals in their organizations and (2) must have a proven track record of identifying outstanding women and minority candidates.
Alternative Dispute Resolution. Finally, Texaco adopted an alternative dispute-resolution system that maximizes employees’ sense of fairness and flexibility. This system, known as the Solutions Program, permits disgruntled or aggrieved employees to elect to have an outside mediator or arbitrator review their claims. If the employee elects the arbitration option, Texaco agrees to be bound by the arbitrator’s decision that upholds the employee’s position. The employee is allowed to pursue court action if he or she is disappointed with the arbitrator’s ruling. The company has not found that its interests have been prejudiced by this asymmetry, and the program reassures employees that the company is committed to fairness in dealing with them.
As I indicated earlier, these are illustrative examples of Texaco’s approach to diversity, but they do not present an exhaustive inventory of Texaco’s fairness and diversity practices. I hope these examples are sufficient to give you some insight into what has been working at Texaco and what might be applicable to the engineering firms participating in this conference.
Summary of Discussion
Hispanic Engineer National Achievement Awards Corporation
The questions we were asked to address were: How can a company establish credibility in the aftermath of a lawsuit? How can corporate culture be changed? How can you get buy-in from the aggrieved people who were involved in the lawsuit?
At Texaco, some black employees had filed a lawsuit, which was moving forward when the New York Times got hold of a tape recording of a senior manager in an executive meeting allegedly using the N-word and making other disparaging remarks. This became national news, and the Texaco suit became the poster child for discrimination lawsuits across the country, even though it was an ordinary lawsuit much like suits against many other corporations. The Board of Directors decided to negotiate an agreement that would improve the company, change the corporate culture, and earn the buy-in of the litigants. In 1996, the suit was settled.
Six results came out of the settlement. The first was the change in corporate culture. The case was made that diversity was a good business decision for the company. Senior executives and senior managers of the company had to promote diversity. Middle managers had to have a process in place for managing diversity. All employees, minorities, nonminorities, and women, had to go through a diversity learning program.
The second result was the recruitment of minorities into both technical and nontechnical jobs, but especially technical jobs. In research, the majority of people hired at Texaco had come from two universities. As a result of the settlement, the recruiting pool was expanded to include students at 40 universities, including historically black colleges and universities and institutions serving Hispanics.
Three, the core competencies for hiring and promotion were publicized. The company set up a systematic matrix of core competencies for hiring and promotion. These are published on the web site and are open to the public and to employees. If an employee wants to move to the next level, he or she knows the required skills and criteria.
Fourth, bonuses and compensation for managers were tied to diversity. Five percent of the bonus structure was based on meeting diversity targets. If managers
met the targets, they would get the bonus. If not, they would not get the bonus. This structure ensured some accountability and measurements of success.
The fifth result was succession planning. Every single meeting that deals with succession planning must be attended by at least one minority employee and one woman. This is unique, both for hiring and promotion.
The sixth result was an alternative approach to resolving disputes. The company brings in an independent counsel or independent person to mediate the dispute, and the company is bound by the mediator’s decision. The employee, however, can go to court if he or she is dissatisfied with the outcome.
A key factor in the success of the program is the commitment of the Board of Directors. Having minorities and women on the board is important, but the entire Board of Directors must buy in to the program. Another key factor was for members of the protected classes and the litigants to become actively involved in succession planning and company planning. Now that Texaco has gone through this exercise for four years, they feel that what they are doing is good for all employees. The bottom line message is that smart planning and involving people from all backgrounds is good for everyone. I think the court did a good job in this case, as the results show. The real question is if the company would have gone through with this process if it hadn’t been sued.