CHAPTER 37

• Jurisdiction: United States

CHAPTER 37

How the #MeToo Movement Is Transforming Corporate Governance

Amelia Miazad¹

Introduction

As the preceding chapter reveals, companies and organizations have traditionally responded to sexual harassment by erecting "symbolic structures" that have proven ineffectual.² Relying on her empirical research, Professor Lauren Edelman cautions against these structures and demonstrates how they protect companies and executives at the expense of employees and sexual harassment victims.³ Even the Equal Employment Opportunity Commission (EEOC), which long championed sexual harassment training and compliance programs, has conceded that "training programs from the past thirty years clearly have not worked because they focus on preventing legal liability instead of the actual sexual harassment."⁴ But if sexual harassment training and compliance programs are anemic at best, and potentially counter-productive, what meaningful action can companies take to prevent sexual harassment?

To answer that question we must first examine the root cause of sexual harassment, which social scientists have long identified as a gender-imbalanced culture that encourages men to exploit their power over women.⁵ As Professor Dacher Keltner, an expert on the corrupting influence of power has explained, power leads to "empathy deficits and diminished moral sentiments."⁶ Social psychologists have also found that "power encourages individuals to act on their own whims, desires, and impulses,"⁷ and power-induced disinhibition⁸ may lead to other bad behaviors including "sexual over-perception."⁹ Numerous studies have corroborated that organizations that promote sexism¹⁰ and sex segregation¹¹ are more likely to experience sexual harassment.¹² Importantly, as social scientist Vicki Schultz reminds us, "targeting only sexual misconduct without addressing related patterns of sexism and deeper institutional dynamics has serious shortcomings that risk undermining the broader quest for gender equality."¹³ In summary, social science across disciplines is replete with examples of how an unequal distribution of power between men and women can lead to sexual harassment.

If the social scientists are correct, and gender power imbalances increase the risk of sexual harassment, then we ought not to wonder why the #MeToo movement brought its day of reckoning to corporate America.¹⁴ U.S. companies are teeming with gender power imbalances, and they start at the very top, with the composition of the board of directors, the chief executive officer (CEO), and executive management. These power holders reinforce gender imbalances through unequal pay practices and pay secrecy policies. Contractual provisions in employment agreements, such as mandatory arbitration agreements and nondisclosure agreements, continue to reinforce these imbalances by silencing victims and masking the pervasiveness of sexual harassment. And multi-million-dollar golden parachutes in executive compensation agreements offer plush landings and insulate offenders from accountability.

After #MeToo, however, a chorus of influential stakeholders including investors, employees, customers, regulators, advisors, and NGOs are taking aim at these very power imbalances. This disquiet within the stakeholder community is beginning to cause executives and directors to institute meaningful reforms. While companies are still seeking comfort in training and compliance programs,¹⁵ there is a novel focus on seismic corporate governance reforms, from increasing board gender diversity to tying executive compensation agreements to diversity targets. At this early juncture, it is rash to predict the eventual impact of these changes, and they are still far from widespread. Notwithstanding, as this chapter argues, these reforms are uniquely promising because they address gender power imbalances and may foreshadow a new era of corporate governance that is rooted in gender equity.

Influential Stakeholders Demand That Corporate Boards Address Gender Power Imbalances

Gone are the days when the board of directors was comfortably insulated from external voices. Today, a vocal chorus of stakeholders, which includes investors, employees, customers, regulators, advisors, and NGOs, are attempting to exert their influence on board strategy.¹⁶ While gender equality had been brewing as a concern for many stakeholders by 2017, the #MeToo movement propelled it to the forefront of their agendas and united their disparate voices. As the examples below elucidate, these stakeholders are beginning to draw an explicit link between increasing gender diversity and equity and mitigating the risk of sexual harassment.

Investors

The Big Three

BlackRock, State Street, and Vanguard, referred to as "The Big Three," are the largest asset managers in the world. As the dominant shareholder in 40 percent of all U.S.-listed companies and 90 percent of companies in the S&P 500, their collective impact is massive,¹⁷ and their growing focus on gender is palpable. One visible example is State Street's iconic "Fearless Girl" statue, which it erected in front of the charging bull on Wall Street when it launched its campaign for more board gender diversity.¹⁸ While State Street's efforts began in January 2017, just before the #MeToo movement erupted, it has stepped up its efforts ever since. In 2018, State Street fearlessly voted against the chairs of the nominating committees of 500 companies with all-male boards.¹⁹ State Street went further and announced that beginning in 2020, it would vote against the entire slate of board members on the nominating committee of any company not meeting its gender diversity criteria.²⁰ Also, in 2019 State Street made "corporate culture" its chief engagement priority, arguing that a "flawed corporate culture has resulted in high-profile cases of excessive risk-taking or unethical behaviors that negatively impact long-term performance."²¹

State Street's efforts have perhaps been more visible, but BlackRock and Vanguard have also increased their advocacy for board gender diversity. In 2019, for example, BlackRock identified "governance, including your company's approach to board diversity," as its first engagement priority.²² In its 2019 Investment Stewardship Annual Report, BlackRock confirmed that, during the 2019 proxy season, it voted against 52 directors at Russell 1000 companies that had fewer than two women on their boards.²³ For Vanguard, too, board diversity was one of its two engagement priorities in 2019, and Vanguard went even further to tie its own company's executive compensation metrics to improving diversity in its corporate hierarchy.²⁴

Pension Funds

In direct response to #MeToo, the largest pension funds in California came together to launch the Trustees United Principles (the Principles) which explicitly link lack of diversity and "power imbalances" to an increased risk of sexual harassment.²⁵ On January 19, 2019, the Trustees announced that "Institutional Investor Trustees Representing $635 Billion in Assets Launch Principles Addressing Sexual Harassment and Workplace Misconduct."²⁶ The Trustees who drafted the Principles have emphasized that they are responding to the changing social norms on sexual harassment—"There's clearly an inflection point in our society where we're saying we're no longer going to tolerate this behavior, and that's an important signal to investors."²⁷

The Principles are notable for their focus on engaging directors and top management on addressing power differentials. Principle 1 begins by asking directors to "publicly share due diligence processes used to respond to sexual harassment and violence complaints filed by all employees and contractors."²⁸ While this principle addresses compliance, the demand for board oversight of sexual harassment, which has traditionally been managed primarily by human resources (HR) departments, is a notable shift. Principle 2 blames contractual clauses, such as nondisclosure agreements and forced arbitration clauses, for perpetuating harassment and demands that companies put an end to those policies.²⁹ Principle 3 addresses diversity "at all levels" and correlates an increase in diversity to the ability "to be more attuned to the risks associated with harassment, misconduct, and discrimination."³⁰ By backing board diversity, in particular, these investors have staked their claim that "diverse boards which reflect the racial and gender composition of a company's workforce can help to create organizational cultures that prevent sexual harassment and related risks from materializing."³¹ The most poignant example is Principle 4, which specifically asks companies to address "power imbalances" that lead to discrimination and abuse by implementing agreements, including collective bargaining agreements and responsible contractor policies.³²

Shareholder Activists

The #MeToo movement has also triggered a rise in shareholder proposals addressing diversity and the gender pay gap.³³ Shareholder activist Arjuna Capital has been at the forefront of this movement.³⁴ Arjuna led a successful campaign to pressure seven technology giants, eBay, Intel, Apple, Amazon, Expedia, Microsoft, and Adobe, into upgrading their standards and transparency related to gender pay disparity.³⁵ On the heels of this success, Arjuna Capital next targeted nine financial services companies, resulting in Citi becoming the first U.S. bank to voluntarily disclose that its gender pay gap is 29 percent.³⁶ Six more followed Citi's lead, including American Express, Bank of America, Bank of New York Mellon, Citigroup, JPMorgan, Mastercard, and Wells Fargo, and disclosed their efforts to advance gender pay equity.³⁷ As Natasha Lamb, Arjuna's managing director has argued, "When women hold the lower-paying jobs and in turn have less power in the organization . . . that imbalance breeds an unhealthy culture. The symptoms of that are the power dynamics around sexual harassment"³⁸ (emphasis added).

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