#timesup for mandatory arbitration

vintage alarm clock

Amidst the onslaught of news stories about sexual harassment – from Uber to News Corp to the Humane Society – one story caught our eye. In December, Microsoft announced that it was supporting legislation addressing sexual harassment and would end its own use of mandatory arbitration for sexual harassment claims. Why was this such big news? Mandatory arbitration has been identified by sexual harassment activists as a significant part of the sexual harassment problem. With this announcement, Microsoft became the first company to publicly commit to ending the use of mandatory arbitration in sexual harassment cases.
Unpacking arbitration
Arbitration is a form of private dispute resolution, an alternative to resolving matters via lawsuit. It is considered advantageous by many companies because it often leads to quicker resolutions and less money spent on legal fees. It is also attractive to companies because it keeps complaints and their resolutions confidential, thereby limiting reputational risk. Given these benefits, it is not surprising that many companies require that employment-related claims go through arbitration. It is estimated that more than half of private-sector non-union employees are subject to mandatory arbitration clauses in their employment agreements.[i]
But arbitration has drawbacks – particularly for victims. The first issue is that many employees are unaware that their employment agreements require that disputes or claims be resolved through arbitration; the language tends to be deeply buried in employment agreement boilerplate. If an employee is even aware of the mandatory arbitration clause, they are likely to overlook it as a condition of the job or promotion, and it is rarely a feasible point of negotiation.
Arbitration also tends to favor companies, not victims. A 2011 empirical study from Cornell University found that employees are less likely to win in arbitration than litigation. It also found that awards to victims were meaningfully less in arbitration than litigation.[ii]
The third issue, and perhaps the most important one in instances of sexual harassment, is that arbitration can keep real problems hidden from view and silence victims. Because arbitration is often confidential, victims are not allowed to share or talk about their experience, which can alert other employees and the greater community to potentially pervasive problems.
This is not to say that arbitration should not be used. It still has a place in resolving a range of employment matters. However, in cases of sexual harassment, we believe arbitration should be at the victim’s discretion and not mandatory.
Our thinking on mandatory arbitration
The reason the Microsoft announcement jumped out to us is because we’ve been thinking hard about the issue of sexual harassment from two angles: how we can assess which companies may have issues with sexual harassment that aren’t yet apparent and what are the best practices that we should be advocating for with our portfolio companies. Our goals are to mitigate risk exposure and raise the bar.
Initially, we thought making arbitration optional for sexual harassment allegations (at the victim’s discretion) might be the solution. If companies stopped requiring that these issues be settled through private arbitration, the public (including investors) could have insight into the sexual harassment issues plaguing companies. The increased accountability and transparency would be a natural incentive for companies to get serious about prevention. In a world of carrots and sticks, it is a stick approach to getting companies to own their exposure to sexual harassment. Microsoft had done it. Who would do it next?
While asking companies to end the practice of mandatory arbitration makes sense in terms of addressing sexual harassment, it raises some challenging questions from the investor perspective. By asking companies to make arbitration optional, companies would be exposing themselves to more lawsuits. As investors, we wondered, could asking companies to end the practice of forced arbitration result in greater costs to companies (and shareholders) and greater reputational risk in the near-term?
Opening the curtain
So, what are shareholder advocates to do? We’re working on a few things. With these questions top of mind, we shifted focus to transparency. Our goal is to understand how much of an issue sexual harassment is at a given company. Getting companies to report on the number of sexual harassment claims made and how frequently these types of matters are resolved through mandatory arbitration will give us some insight on this.
Of course, asking for transparency around mandatory arbitration isn’t a perfect solution. While some sexual harassment claims get sorted through arbitration or even lawsuits, many allegations never make it that far or, worse, never even get reported. A company could have a culture where sexual harassment is so pervasive that arbitration and lawsuits don’t even show the extent of the problem. The problem could be manifest in the form of high employee turnover or low employee morale. Sexual harassment can bubble below the surface for a long time before it becomes headline news.
Diversity and inclusion
We also plan to continue to focus on a range of diversity-related efforts that we already support: disclosure of workforce diversity data, pay equity, and promoting women and minorities to the board and senior management. It’s fair to assume that a company that is thinking about inclusion and effectively increasing the diversity of its workforce top to bottom is probably fostering a culture where sexual harassment is less likely to be tolerated.
But we also think there is more to it. We will continue to work with our peers in the socially responsible investment industry, reach out to academics and NGOs that are focused on these issues, and ask companies for their perspectives. Our hope is that this process will surface best practices which will help us nudge companies in the right direction. The bottom line is that sexual harassment is complex, and effectively addressing it will require a mix of old and new strategies, as well as collaborative efforts and one-on-one dialogues with companies.
The impact of our advocacy can sometimes feel slow and incremental, but every now and then we catch a wave that hastens change. We think the #metoo and #timesup movement has created a wave that has the potential to spawn real change in how seriously companies take sexual harassment. We think the Microsoft announcement added some energy to it. While we have yet to see other companies lining up to end their own use of mandatory arbitration, rest assured we will be asking companies about their use of mandatory arbitration as we work to figure out the right mix of asks to end sexual harassment.
[i] https://www.epi.org/publication/the-growing-use-of-mandatory-arbitration/