Wall Street’s Grip on Secret Harassment Hearings Starts to Crack
(Bloomberg) -- Activists seeking to end secret hearings for harassment complaints against banks claimed a victory of sorts last month when they got almost half of Goldman Sachs Group Inc. shareholders to back their proposal.
But their path to ending forced arbitration on Wall Street is seen as long and arduous. Much of the finance industry, including Goldman, remains committed to settling disputes behind closed doors, and change is unlikely to pass easily through a divided Congress.
Investors holding 49% of Goldman’s shares voted for a measure calling on the bank to issue a report on how mandatory arbitration for sex harassment or discrimination claims affects its workplace. Despite the defeat at Goldman’s annual meeting on April 29, critics of the practice saw the higher-than-expected tally as a positive development.
“It still helps to build momentum and build a shared understanding that this practice of forced arbitration is not right,” Terri Gerstein, director of the State and Local Enforcement Project at Harvard Law School, said in an interview. “It’s not fair, and it’s not good for the economy.”
Silicon Valley has been ahead of the curve, with tech giants Facebook Inc., Microsoft Corp. and Alphabet Inc.’s Google all ending forced arbitration for sexual harassment. Bank of America Corp. doesn’t require arbitration for harassment, discrimination or civil rights claims.
Employees who sign contracts that require mandatory arbitration agreements are forced to steer disputes through a private system rather than the courts. The practice, ubiquitous in corporate America, allows companies to largely preserve secrecy around harassment claims. Financial firms adopted it early, and critics say that it helped nurture a noxious culture.
“Wall Street has a long history of harassment and discrimination aided in part by the secrecy that forced arbitration” upholds, said Sonya Dreizler, a financial-services consultant who wrote a series of blog posts about harassment in the industry.
Many financial services firms want to preserve arbitration, saying it’s the best way to resolve conflicts. “Arbitration is in no way used to cover up bad behavior,” Goldman Chief Executive Officer David Solomon said at the firm’s April 29 meeting.
“We share the proponent’s goal of maintaining a safe and inclusive workplace with zero tolerance for discrimination or harassment,” Goldman Sachs said in an emailed statement this week. “At the same time, we think arbitration provides a number of mutual benefits to the firm and our people, including lower cost, additional flexibility and quicker resolution than court proceedings. We understand that a number of our shareholders are focused on this issue and will take their feedback into account as we continue to consider this matter.”
The most likely path to ending mandatory arbitration, according to Gerstein, would be the passage of federal legislation barring it from employment contracts.
President Joe Biden has backed two pieces of legislation that would chip away at the scope of arbitration, according to professors David Noll of Rutgers Law School and Zachary Clopton of Northwestern Pritzker School of Law. The Forced Arbitration Injustice Repeal Act would restore private enforcement of antitrust, civil rights, consumer and employment laws that a series of Supreme Court decisions has scaled back, and Protecting the Right to Organize Act has a provision that addresses a use of arbitration undermining workers’ power to engage in collective action.
Passage of those two bills is far from assured.
“The Biden administration’s support for the FAIR and PRO Acts, and Congress’s potential return to defining the scope of arbitration, are welcome developments,” Noll and Clopton wrote in a University of Illinois Law Review article late last month. “Yet neither act is likely to pass through the budget reconciliation process in its current form, leaving them vulnerable to a Senate filibuster.”
More targeted legislation, on the other hand, could be included in one of the three reconciliation bills Congress is likely to pass, Noll and Clopton said.
Activists, meanwhile, are continuing to focus their efforts on banks requiring arbitration and their shareholders.
Kristin Hull, who runs Nia Impact Capital, has spent the past several years encouraging investors to file resolutions on mandatory arbitration. Overall shareholder support for activist-investor proposals is rising, with about 29% of stockholders voting in favor of social resolutions opposed by companies so far this proxy season, the highest total in at least six years, according to data compiled by Bloomberg Intelligence. The forced arbitration proposal at Goldman did even better, giving further encouragement to those seeking to end the practice.
The death of George Floyd last year and the Covid-19 pandemic helped to galvanize the issue by bringing the issue of inequality to the fore, Hull said.
“The fight against forced arbitration evolved from the #MeToo movement, but it’s also connected to racial injustice,” she said. “Forced arbitration keeps all parties silent.”
Hull, alongside Gretchen Carlson, co-signed a letter in April to Goldman’s board opposing mandatory arbitration. If the bank doesn’t respond, Hull said, she plans to send another with additional signatories in coming weeks. The resolution that won the backing of 49% of shareholders is something that “Goldman cannot ignore,” she said.
“They can’t afford to not respond or engage with stakeholders,” Hull said. “The conversation is now on the table.”
Nancy Erika Smith, a partner and civil rights lawyer at Smith Mullin who represented Carlson in her lawsuit against longtime Fox News chief Roger Ailes -- a case that led to his ouster and a movie -- said she believes federal legislation will be key to dismantling forced arbitration. Shareholder proposals, for their part, will discourage companies from interfering with those legislative efforts by showing that investors are unhappy with the practice, she said.
“This kind of pressure educates shareholders and companies about where people are right now on this topic,” Smith said, adding that she expects Congress to ultimately end mandatory closed-door hearings. “Arbitration will be something that is truly voluntary.”
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