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Written by: Vanessa Allen, Vice President, ESG Research & Engagement, TD Asset Management; Jordyn Graham, Intern Associate, ESG Research and Engagement, TD Asset Management

Something to watch in 2023 as shareholders think about the upcoming proxy season is the heightened focus on human capital issues. One interesting aspect of human capital management that garnered attention in the U.S. during 2022’s proxy season were the risks around certain concealment clauses within employee contracts, particularly those that look to keep controversial issues – such as workplace discrimination, harassment and retaliation – under wraps.

Concealment clauses in employment contracts can include language that prevents employees or contractors from speaking publicly about certain matters that occur in the workplace. Concealment clauses may also be implemented for competitive purposes that restrict employees from revealing proprietary information to protect a company’s plans, strategy or competitive advantage.

Risks of Concealment Clauses

Furthermore, concealment clauses in employment contracts may be exploited by companies as a means to silence employees who have endured harassment, discrimination and other unlawful behaviors to avoid public controversy. Mandatory arbitration clauses and non-disclosure agreements that keep matters out of the public domain may perpetuate company failings and undermine the company’s trajectory. Possible risks stemming from concealment clauses in employment contracts may include perpetuating poor workplace practices, creating a problematic corporate culture, legal action, regulatory investigation, penalties and negative public perception – all of which may impact a company’s bottom line.

Government Response

Some governments have implemented laws restricting the use of concealment clauses for certain issues. The combination of emerging laws, regulations and public perception in this area may create potential risks for companies where they continue to enforce overly broad concealment clauses.

For example, in the U.S., Silenced No More acts were recently passed in California and Washington state, which restrict the use of certain concealment clauses related to harassment, discrimination and retaliation. At the federal level, President Joe Biden signed the Speak Out Act into law in December 2022 and the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act in 2021. The Speak Out Act prevents the enforcement of non-disclosure agreements in instances of sexual assault and harassment, while the latter gives individuals asserting sexual assault or sexual harassment claims under federal, state or tribal law the option to bring those claims in court even if they had agreed to arbitrate such disputes before the claims arose.

In Canada, Bill C-65 introduced a number of amendments to strengthen the existing framework for harassment and violence prevention in federally regulated industries and workplace. At the provincial level, Prince Edward Island has been the first Canadian province to limit the use of non-disclosure agreements in cases of discrimination and harassment. Nova Scotia and Manitoba have also recently proposed legislation to limit the use of non-discourse agreements in certain instances.

Shareholder Proxy Proposals

In last year’s proxy season, proposals regarding human capital management came down to a total of 76 in the United States (more in line with the 2020 count) after spiking in 2021 by 70%, to 133 proposals.¹ Despite this, the broader topic of human capital management remains one of the more prominent issues advanced within proxy proposals. The elevated interest in human capital practices may stem from various factors, including the pandemic’s impact on employees (particularly in 2021), record low unemployment levels, high quit rates, and a corporate need to navigate these realities to attract and retain talent.

Proposals requesting further transparency on concealment clauses received significant support in the U.S. While the number of human capital proposals filed came down in 2022 following the heat of the pandemic, shareholders still voted for a healthy fraction of the human capital proposals that made it to the ballot – seven or 25% in 2022 and eight or 22% in 2021. The average support rate of human capital proposals continues to tick higher, moving from 15% in 2020 to 34% in 2021 and 37.4% in 2022.² Of the seven proposals that received majority support in 2022, four involved requests for further transparency around concealment clauses.³ This level of support relative to other human capital proposals demonstrates the focus shareholders now put on the need to mitigate risks associated with concealment clauses.

Continued Corporate Progress and Investor Engagement

Companies and investors should continue to support the employees who drive company value, ensuring that management puts forward policies and practices which build an attractive corporate culture that will keep the talent necessary to thrive and grow. Companies should revisit their concealment clauses, ensuring their implementation respects employee rights. Continued use of these clauses should be mindful of the concerns levied by lawmakers and the concerns echoed within the well-supported proxy proposals that sought transparency around such clauses. Going into the 2023 proxy season, shareholders may continue to push for greater transparency by supporting proposals that look to better understand the risks a company might face around concealment clauses. Investors can also further their engagement discussions with companies on the topic by inquiring about their use of such clauses and the associated risks, where relevant. Investors may also ask questions about the mechanisms in place to allow employees to voice concerns and to ensure those concerns are properly addressed.

Notes:

_{¹ ISS (October 2022) Shareholder Resolutions in Review: Labor Issues; ISS (October 2021) 2021 United States Environmental & Social Issues Proxy Season Review.}

_{² ISS (October 2022) Shareholder Resolutions in Review: Labor Issues; ISS (October 2021) 2021 United States Environmental & Social Issues Proxy Season Review.}

_{³ ISS (October 2022) Shareholder Resolutions in Review: Labor Issues.}

_{The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.}

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