Pressure Mounts on Tesla Over Arbitration

EV pioneer faces further scrutiny from investors on workplace practices. 

Despite a third failure to achieve majority support for a resolution calling for greater transparency around Tesla’s employee disputes, investors are digging in for the long term. 

Companies which handle employee disputes through arbitration – and therefore out of court – are limiting investors’ ability to understand “true workplace conditions”, warned Charlotta Dawidowski Sydstrand, Head of ESG at Swedish pension fund AP7 (€91.4 billion in AUM). 

US-based automotive and clean energy company Tesla has a mandatory arbitration clause in its employment contracts. This prevents employees from taking legal action against the company, enforcing use a of process which relies instead on third-party decision-makers to resolve the issue. 

“When disputes are handled through arbitration, the underlying facts and the outcome of the case often remains secret. This both prevents other employees from learning about and acting on shared concerns and restricts investors’ ability to understand the true workplace conditions, as they are not publicly disclosed,” she told ESG Investor. 

Investors therefore have less visibility of instances of racial or gender discrimination, for example. 

Last week, shareholders voted on a resolution co-filed by women-led asset manager Nia Impact Capital and AP7, which called for Tesla to report on the impact of the use of mandatory arbitration. The report should include an assessment of the effects of arbitration on Tesla’s brand, employees and workplace culture, the resolution said. 

It secured support from 38% of shareholders.  

This is the third year Nia Impact Capital has filed this resolution. In 2020 it received 27% of the votes and in 2021 45%. 

“It is not uncommon that support for a certain resolution fluctuates over time. AP7 is a long-term owner in Tesla and consider this a long-term process,” said Dawidowski Sydstrand. 

Bad publicity 

As a high-profile firm, media coverage of Tesla’s track record on social-related controversies has had a negative reputation impact, which has the potential to adversely affect investors. 

In February, a gay Black female employee sued Tesla following an assault at a company factory and being subjected to racial and homophobic slurs. In June, 15 Black former and current employees decided to sue Tesla over racial abuse by colleagues. Tesla was also removed from the S&P 500 ESG index in May, prompting CEO Elon Musk to label ESG a “scam”.  

Musk sold Tesla shares worth more than US$6.9 billion this week ahead of his legal battle with social media platform Twitter, following his decision to walk away from the agreed US$44 billion deal.  

Dawidowski Sydstrand said AP7’s support for the resolution follows ongoing engagement with the Tesla on workplace issues. “AP7 is concerned over the lack of action from the Tesla board, despite extensive allegations of poor workplace conditions. Over the past couple of years AP7 has discussed these issues with Tesla but so far the outcome of the dialogue has not eased concerns. That is why we have chosen to actively support and co-file on this shareholder resolution,” she said.

Policymakers are beginning to make changes to use of arbitration mechanisms by employers. In March, US President Joe Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act into law, prohibiting US employers from forcing employees into arbitrations if the dispute involves sexual assault or harassment. 

“However, the ban does not cover other forms of arbitration, such as racial discrimination or harassment,” Dawidowski Sydstrand pointed out. 

While Tesla is being targeted through escalated engagement, Dawidowski Sydstrand made clear that “this case is not just about Tesla”.  

“As an owner of over 3,000 companies, AP7 needs to direct our active ownership measures to companies and issues that we think might enforce responsible corporate practices across the market. AP7 is committed to contribute to uphold international norms on human rights, labour rights and anti-corruption.” 

Other shareholder resolutions voted on at Tesla’s recent AGM include calls for annual reporting on board diversity, reporting and investigation into child labour in Tesla’s supply chain, and additional reporting on the company’s water usage.  

“Tesla is an innovative company that has made great contributions to the climate transition, and we are optimistic that it can catch up to its peers in the human resources department as well,” said Dawidowski Sydstrand. 

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