Are Shareholder Actions A Plea For Boards To Improve Employee Relations?

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Companies that drag their feet on addressing workplace issues risk shareholders intensifying efforts to effect change—and some of those efforts could take other forms, which would not be welcomed by board members.

Recent shareholder actions against Tesla and Activision Blizzard are reminding corporate boards that employee relations and workplace culture still matter. Shareholders are continuing to use lawsuits and shareholder proposals to pressure companies into reforming policies dealing with workplace harassment, discrimination and misconduct.

Negative publicity from investigations generated by the “Me Too” movement, the battle for pay equity, worker safety complaints during the pandemic, a lack of diversity, efforts to block workers from unionizing and other employee-related matters have elevated employee relations into a higher risk category for companies than in prior years. Recent history has shown that the material risks for companies that show a willing disregard for employees is substantial.

For example, Tesla CEO Elon Musk and its board of directors are being sued by investor Solomon Chau for breaching their fiduciary duty to investors by allowing a toxic workplace culture to exist. The lawsuit alleges that “Tesla has created a toxic workplace culture grounded in racist and sexist abuse and discrimination against its own employees,” which “has caused financial harm and irreparable damage to the company’s reputation.” The lawsuit also notes that Tesla currently has numerous pending lawsuits from former employees for sexual harassment and discrimination.

The potential financial damages sought by the Chau lawsuit, damages from the former employee lawsuits, and an additional discrimination lawsuit filed by the State of California could amount to hundreds of millions of dollars lost to litigation costs, financial judgements and fines. Additionally, Tesla’s ability to attract the best employees would likely be damaged if they felt they had to endure racial discrimination or sexual harassment to work there. Tesla, of course, denies wrongdoing, but the controversy is still hurting the company.

Similarly, complaints about workplace discrimination and harassment at Activision Blizzard motivated one of its largest shareholders, the New York State Common Retirement Fund, to file a shareholder proposal requesting the company release an annual “misconduct report.” This report would include executive compensation data, the total number of pending sexual abuse, harassment or discrimination complaints against the company, the amount of money Activision spent settling misconduct claims over the previous three years and the number of pending misconduct complaints the company currently faces.

Activision Blizzard has been dealing with accusations of sexual misconduct and discrimination since last year. The shareholders hope that this type of transparency would motivate the company to speed up its efforts to address problems with workplace discrimination and harassment. Although Activision says it did not ignore misconduct at the company, shareholders approved the misconduct report proposal on June 21.

The developments at Tesla and Activision might serve as an incentive for corporate boards to consider reviewing their “code of conduct” and workplace policies and updating them to reflect changing attitudes about employer/employee relations. Beyond the financial losses a company could suffer from these shareholder actions, they can also lose their best and brightest employees who will leave for the competition to escape sexual harassment, unequal pay, discriminatory promotion practices and outright racism.

Lawsuits and prolonged shareholder cries for change could also begin to corrode a company’s reputation to the point of branding it as an enabler of sexual harassment and discrimination. That could have significant negative financial ramifications. Additionally, companies that drag their feet or blatantly disregard addressing workplace issues are risking that shareholders may intensify their efforts to effect change in workplace culture. Those efforts could take other forms which would not likely be welcomed by corporate board members:

• Efforts to oust board members. Shareholders have become much more willing to vote against board members who are slow to make changes they are in favor of. Votes against the re-election of board members who have opposed climate change have been increasing recently, and similar activity around board members who are slow to curb misconduct appears to be building. While the efforts were unsuccessful, there were noticeable votes against specific board members on both the Tesla and Activision boards this year.

• Efforts to place employees on boards. While shareholder proposals asking that an employee representative be placed on the company board are rare, proposals have been filed by several companies, including Activision, within the last year. This seems to coincide with increasing efforts by employees to establish unions at different types of companies. None of these efforts has been successful, but they merit watching because employee concerns represent a growing area of risk for corporate boards. Boards may want to consider developing ways to broker better communication between management and employees in order to prevent these proposals from gaining traction. These proposals appear to be a plea for boards to become more engaged. Discord with employees is not conducive to sustainable long-term growth.

• Lawsuits seeking board member liability for corporate misconduct. As the Tesla lawsuit shows, shareholders are no longer shy about blaming corporate directors for problems with company corporate culture. Corporate board members do not want these lawsuits to begin seeking personal liability for corporate misconduct. Boards should do everything possible to avoid these types of lawsuits, because now that shareholders have begun filing them, expect to see more seeking harsher punishment.

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