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Wells Fargo Takes First Step to End Mandatory Arbitration; Can Berkshire Hathaway Be Far Behind?

Last week, Wells Fargo announced it is ending mandatory arbitration for sexual harassment claims, thus becoming the first bank publicly announcing such. What does this mean for the company, its image and the industry?

Let’s start with the basics. “I’d like to give up my legal rights and have a mandatory resolution of my future conflicts with my employer,” proposed no prospective employee ever. Employers position mandatory arbitration as a speedy resolution, one in which the business will even pay for the services, without the need for both parties to have expensive legal representation. Yet, when agreeing to mandatory arbitration upon hiring, most prospective employees are unaware studies have demonstrated arbitration outcomes are substantially lower than an employee could achieve through other avenues. Even if prospective employees are aware, they have little negotiating recourse because the company decides whether to hire them. Sadly, studies are also showing that in cases of sexual misconduct, an organization can compound the trauma of victims and survivors through unjust, unethical, insensitive or defensive maneuvers, referred to as Institutional Betrayal. Thus, in cases of sexual misconduct resolution, mandatory arbitration can have even worse consequences.

Internally, Wells Fargo's new policy should build trust with employees and prospective employees. As a business attempting to put an ethics and fraud scandal behind it, stepping up to more ethical employment pratices--especially if the company has had limited prior arbitrations--is a low cost, high value signal that leadership is committed to ethics and integrity. Externally as well, it makes for good Public Relations. Wells Fargo is demonstrating it is responsive to shareholders, as the move was initially proposed by Clean Yield Asset Management. It also demonstrates the company is in synch with state and national trends. In September, 2019, the House of Representatives passed a bill to end mandatory arbitration in investment disputes. In October, the state of California passed AB 51 to prohibit all mandatory arbitration in employment contracts. Though the judiciary is still determining the feasibility of AB 51, the California legislature clearly intends to eliminate such practices. Wells Fargo is now ahead of anticipated changes to current legal practices. In turn, competing banks are on notice that the winds of change are blowing. But will Wells Fargo's first step also be its last?

Businesses that are fully committed to integrity in addressing sexual misconduct need to take at least two additional steps. Full transparency only comes with an end to the practice of Nondisclosure Agreements applied to sexual misconduct and its resolution. Misconduct-related NDA’s are increasingly broken, which suggests settlements can’t be kept hidden anyway, and a company seeking damages from the silence-breaker after exposure of its own misdeeds-- especially abetting criminals--just looks bad. In October, 2019, NBC released all former sexual misconduct plaintiffs from their nondisclosure agreements. On January 1st, California’s law banning NDAs in cases of sexual misconduct went into effect. Last week, former Fox News anchor Gretchen Carlson supported a similar bill in the Massachusetts state legislature. A company ending NDAs for sexual misconduct delivers a message that it is fearless in the face of disclosure because its sexual misconduct resolution practices are so thorough and ethical they leave nothing to hide.

Committed businesses should also modify executive compensation contracts to enable termination, based on credible allegations, and appropriate compensation clawbacks. Contracts requiring a higher standard of proof can leave companies handing outgoing executives unnecessary and costly packages, as when Google paid Andy Rubin $90 million upon his departure. A preferred headline would be: “Board fires executive for credible misconduct; millions clawed back on behalf of shareholders.” An executive with integrity and a clear conscience should have no trouble with the agreement, and an employer holding its executives to this standard sends the market an even stronger message about its commitment to leadership integrity and fiduciary responsibility.

Wells Fargo’s policy on mandatory arbitration raises another question. With Berkshire Hathaway holding 10% of Wells Fargo’s shares, could Berkshire Hathaway use its own shareholder influence to catalyze multiple industries to more quickly adopt higher standards of equity, transparency and fiduciary responsibility with respect to sexual misconduct? I’m With Them believes this cultural shift is inevitable; it’s just a question of when and who will lead. Wells Fargo is out of the gate.