Netflix is in the middle of a diversity crisis. Here's how experts say it could've avoided it.

• Dozens of Netflix workers walked out over the company's handling of a Dave Chappelle special.

• Netflix's CEO now says he made a mistake in how he handled complaints of transphobia.

• Leadership and diversity experts say there are key takeaways from the uproar.

With its array of titles that highlight the experiences of people from underrepresented backgrounds, Netflix has positioned itself as a pioneer of representation and a rival to Hollywood.

But the company's reputation for championing diversity has now been called into question by its handling of the controversy that followed the release of Dave Chappelle's hour-long comedy special "The Closer."

In the stand-up act, which premiered on October 5, Chappelle asserted opinions many viewed as inflammatory, particularly when the LGBTQ community bore the brunt of his jokes. Chappelle compared the genitals of trans people to Beyond Meat or Impossible burgers while later saying he's a friend of the LGBTQ community. The special prompted swift and widespread backlash.

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In an internal emailed response to the controversy, Netflix's co-CEO Ted Sarandos defended "The Closer," citing the company's commitment to creative freedom. He wrote, "We do not believe this content is harmful to the transgender community." Dozens of Netflix employees and a handful of top talent, including "Queer Eye's" Jonathan Van Ness, staged a virtual and in-person walkout in response on Wednesday.

Fortune 500 leadership and diversity consultants said Netflix's leadership could have de-escalated or avoided this crisis altogether by working with trans and queer communities as opposed to positioning itself at odds with them. There are two major lessons other companies can learn from this crisis, the diversity consultants said: how to lead with empathy and how to seize the opportunity to make a positive difference moving forward.

Netflix's response showed a lack of understanding of what it means to be transgender in America today, said Sean Coleman, a DEI strategist who is a Black transgender man.

"The CEO's response shows why representation matters, because there clearly needs to be a bit more diversity when it comes to the LGBTQ and trans community in his circle," Coleman said. "It would stand to reason that the people who are connecting with him on this topic aren't in harm's way. They aren't the most marginalized."

Engage with employees on sensitive issues

Coleman said the employee outrage and walkout at Netflix showed that the company's leadership hadn't been engaging in enough conversations with employees or consumers from marginalized communities.

"Talk to these people," Coleman said. "It's not just at Netflix. I think other leaders should see who's represented in their circles and who's not, and make sure they have those voices at the table."

Coleman said that if he were consulting with the streaming giant, he would establish a national advisory board of all trans and gender-nonconforming people to partner with the company's leadership.

Jon Henes, the CEO of the leadership consultancy C Street, said Netflix missed a chance not only to avoid conflict, by talking with employees and community members prior, but also to establish itself as a leader in the trans community.

"Imagine if Netflix had embraced the opportunity to engage the LGBTQ+ community," Henes said. "The dialogue could have brought people together and strengthened their brand."

Lead with empathy

Susan Harmeling, a professor of DEI at USC Marshall's School of Business and the founder of Equitas Advisory Group, a DEI consulting firm, said Netflix's leaders should have led with more compassion and understanding for the transgender community and for employees.

"These people are hurting. Their lives are threatened on a daily basis," Harmeling said. Research by the nonprofit Human Rights Campaign found that 2021 was on pace to be the deadliest year yet for trans and gender-nonconforming Americans.

"Since Netflix has this broad audience, let's come up with solutions," Coleman said. "Those solutions could be donating time and money to an organization that is directly working to deal with trans and gender-nonconforming folks. It could be working with people who are doing policy work around all the laws that are being passed that impact trans children and trans athletes."

Learn from your mistakes

In the wake of the backlash, Sarandos told The Wall Street Journal he "screwed up" in how he handled employee complaints that the special was transphobic.

Both Henes and Harmeling said an apology was the right move since it showed a willingness to change and created an opportunity to move forward.

"But it was probably a little too late, quite honestly," Harmeling said. She added that she thought Netflix should do a review "from top to bottom" of its culture to assess whether employees felt seen and heard.

A Netflix spokesperson shared this statement with Insider: "We value our trans colleagues and allies, and understand the deep hurt that's been caused. We respect the decision of any employee who chooses to walk out, and recognize we have much more work to do both within Netflix and in our content."

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