Time to Break Down Closed Doors
Tesla is under pressure from investors, as former employees strain against arbitration ties.
Multi-billionaire Elon Musk has never been one to shy away from the spotlight.
In recent weeks, he dominated headlines again as shareholders in his US-based automotive and clean energy company Tesla gathered for its annual general meeting (AGM) on 13 June to vote on the CEO’s proposed historic US$56 billion pay package, and on plans to move the company’s legal home from Delaware to Texas.
Just as important – albeit with less air time – were resolutions focused on deep-sea mining (DSM) and tying sustainability metrics to executive remuneration.
In parallel, there has also been mounting investor scrutiny on the company’s social-related performance.
“We are concerned about the lack of action from Tesla’s board, despite extensive allegations of anti-union activities, poor workplace conditions, discrimination and harassment,” Charlotta Dawidowski Sydstrand, Head of ESG at Swedish government pension fund AP7, tells ESG Investor.
These issues have been compounded by Tesla’s use of arbitration – an alternative form of dispute resolution. Unlike litigation, arbitration doesn’t involve a judge or a jury, but a third-party arbitrator chosen by the parties and paid for by the employer. The arbitrator decides the case, the outcome of which is legally binding.
Tesla has a mandatory arbitration clause in place in its employment contracts which prevents employees from taking legal action against the company.
“The concern for investors is that arbitration and non-disclosure agreements – or any concealment clause – prevent outsiders from seeing what’s going on,” explains Meredith Benton, Founder of consultancy firm Whistle Stop Capital. “We can see the advantage that concealment clauses have for company management, but it’s very hard to see what the advantages are for investors or prospective employees.”
Over the last decade, Tesla has been at the centre of allegations spanning sexual harassment and racial discrimination.
Last September, the US Equal Employment Opportunity Commission sued Tesla for racial harassment and retaliation, citing concern that Black employees were routinely exposed to racial abuse, pervasive stereotyping and hostility.
“A sizeable proportion of Tesla shareholder have taken notice of such controversies and believe that better information on how the company uses mandatory arbitration for departing employees would give them a better view on the type of risks it is exposed to regarding workplace practices,” says Lindsey Stewart, Director of Stewardship and Policy at data and research provider Morningstar Sustainalytics.
2024 marks the fifth year that US-based asset manager Nia Impact Capital has engaged with Tesla on this issue. While in previous years the firm has filed and led the charge, this time, it was co-filed by Amalgamated Bank and the New York State Common Retirement Fund (NYSCRF).
The investors asked Tesla’s board of directors to oversee the preparation of an annual public report describing and quantifying the effectiveness and outcomes of the company’s efforts to prevent harassment and discrimination in the workplace. Specifically, they demanded disclosure of the number of pending harassment or discrimination complaints the company is seeking to resolve through arbitration, and the retention rates of employees who raise harassment or discrimination concerns.
“All investors want transparency around how a company is working and how it manages its people,” says Kristin Hull, Founder and Chief Investment Officer of Nia Impact Capital. “There is little to no transparency around forced arbitration.”
Nia Impact Capital has tried other modes of engagement with Tesla on the issue of arbitration – including open letters – but never received a response, according to Hull.
Hidden in the fine print
Tesla isn’t the only US company to rely on arbitration to settle disputes with employees. Roughly 60 million American workers are currently thought to be bound by forced arbitration clauses – up from 2% of the workforce in 1992.
At the time this study was published, 81 of the largest 100 companies in the US had put legal clauses in the fine print of their customer agreements, barring consumers from suing them in federal court.
Arbitration was formally established in the country through the United States Arbitration Act of 1925 to expedite and better facilitate the settlement of workplace disputes, eliminating the expense and delay of extended court proceedings.
“While arbitration can streamline the process of reaching an agreement, there is often a perception that mandatory arbitration benefits the company at the expense of employees, who have lesser knowledge of the process and have waived their right to sue,” Stewart explains. “For companies with a high number of employees who depart in controversial circumstances, this practice can add to the reputational damage suffered as a result.”
The use of arbitration also restricts investors’ ability to understand true workplace conditions within their portfolio companies. Its use has often been linked to social harms such as sexual harassment and racial injustice, which can leave investors exposed to reputational and legal risks.
In 2018, the mismanagement of harassment claims at Google led to mass protests and a global walk-out at the company.
“This caused harm to the company and ultimately we [AP7] sued Google’s parent company Alphabet for causing financial damage to shareholders by failing to address these issues,” says Dawidowski Sydstrand. “The lawsuit resulted in a settlement between AP7 and Alphabet that imposed extensive governance reforms on Google, including an end to the use of mandatory arbitration.”
Recognising the contribution of mandatory arbitration to “toxic” workplace culture, US legislators banned its use in sexual harassment cases in 2022.
“Unfortunately, we haven’t seen a similar sentiment toward employees with diverse characteristics, such as ethnicity, sexual orientation and gender identity,” says Whistle Stop Capital’s Benton.
Last year, over 200 Black factory workers called for a class action lawsuit against Tesla, pointing to the rampant racism and discrimination they had experienced as existing and former employees at the company. They were forced to seek a public injunction in court due to the limitations that mandatory arbitration has imposed on them.
In 2021, a report from the American Association of Justice noted that arbitrators at the largest arbitration service providers in the US were mostly male and overwhelmingly white. Less than a third of the overall arbitrators employed by the three largest firms were female, and less than one in five identified as other than White.
CEO or messiah?
Investors who attended Tesla’s AGM described it as being like “no other”. Nia Impact Capital’s Hull, for instance, describes the meeting as being more akin to a “rock concert” – heavily produced and branded – as opposed to a serious business meeting.
“Food trucks were parked up outside and individual investors turned up in their Tesla gear, excited to see their hero – it was pretty intense,” she recalls. “Many individual investors are so devoted to Musk that they feel he can do no wrong, and so they are willing to just vote with management. That’s an issue because there’s no such thing as a perfect CEO.”
Hull claims that many individual investors she spoke to at the meeting had little to no knowledge as to the contents of shareholder proposals filed at the company and chose to side with management without reviewing the materials.
As such, it was unsurprising when ESG-focused resolutions on the ballot failed to pass – including the proposal asking for Tesla to commit to a moratorium on DSM, which received just 7.7% of the overall vote.
On the plus side, the resolution on arbitration got around a third (31.5%) of voter support, including backing from the likes of AP7.
“More than 30% of investors saying that they are concerned about how much Tesla is spending on defending harassment and discrimination is a huge percentage,” says Hull. “If a third of investors agree, and the company isn’t going to pay attention to that, then that’s mismanagement. The board is not doing its job, [and neither is] the CEO.”
This has been a pretty consistent outcome at Tesla. A shareholder resolution co-filed by Nia Impact Capital and AP7 in 2022 on mandatory arbitration received 38% of the vote.
According to Morningstar Sustainalytics’ Stewart, lack of action on such issues by Tesla’s board is a big governance concern. It has resulted in shareholder support for Tesla’s directors being consistently well below average at 70% – a stark contrast with the 97% average for S&P company directors recorded by Morningstar last year.
Securing that sort of support is always more challenging when the company in question has a large amount of insider ownership. In Tesla’s case, Musk owns around 13% of the company shares.
“We will continue to engage,” says Hull. “We’re going to continue raising our voice and encourage other investors to speak out, too. We see it as both a right and responsibility to speak up and hold companies accountable when there are human capital issues at stake.”
Several investors, including AP7, see this type of engagement as a long-term process.
“Tesla is an innovative company that has made great contributions to the electrification of the auto industry,” says Dawidowski Sydstrand. “We want to remain optimistic that it can catch up to its peers on human resources management.”
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