In-Depth Report: Mandatory Arbitration
Why are public companies facing shareholder proposals on topics related to mandatory arbitration?
In recent years, there has been an increase in the number of companies using mandatory arbitration as a tool to resolve disputes. One report found that the number of employees subject to mandatory arbitration agreements rose from just over 2% in 1992 (following a series of Supreme Court decisions dating back to 1991) to almost 25% in the early 2000s to more than 55% in 2018.
Historically used as an alternative to litigation, arbitration is a process in which two or more parties agree to settle disputes through an arbitrator rather than through a traditional court process. Arbitration may offer more convenience than a trial in that it is less formal, time-consuming, and expensive. However, parties often are not required to follow state or federal rules of evidence and, in some cases, arbitrators are not required to apply governing law.
While the prevalence of mandatory arbitration has increased, there has also been increasing concern regarding the impartiality and effectiveness of such proceedings. According to a report on the need for meaningful judicial review in arbitration proceedings, because the less formal process is not held to the same standard as judicial proceedings, there is an increased risk that laws may be misapplied or ignored. Currently, arbitrators are not required to be neutral and are not required to document their opinions in writing, which can make it difficult for employees to know the track record of arbitrators or to understand the reasoning behind their decisions.
In the past few years, companies have started to face shareholder proposals on this topic. This proxy season, boards and management will once again be asked to address their approach to arbitration in employment-related claims. Investors will be asked to vote — and will need to understand the issues involved. Glass Lewis’ new Mandatory Arbitration report provides crucial context, from background on the growing prevalence of the practice, to an explanation of the challenges it presents in relation to sexual harassment and discrimination, to federal and legal responses. The report is part of Glass Lewis’ “In-Depth” series, a growing library of ESG-focused literature that illuminates the topics at the top of the agenda for investors and public companies.
In-Depth: Mandatory Arbitration is available now. Glass Lewis customers can access the report on Viewpoint via the Help & Resources menu, or Governance Hub, or contact their Glass Lewis Representative for more information.
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