In-house Corporate ADR – Corporate Dispute Resolution Policy

September 15, 2016

Internal corporate issues may create huge difficulties in the management of a corporation. Although not as apparent as external disputes involving third parties, these internal disputes may be very harmful to the proper functioning of a corporation. These are disputes, which more likely than not needs to be nipped in its bud as it directly affects the people who are making decisions for the corporation.

Alternate dispute resolution (‘ADR’) is poised to be the best form of resolution of such disputes. The benefits of ADR includes the fact that it is voluntary and amicable, two essential features to ensure that disputes are resolved without any collateral damage to the company or its activities. There is now sufficient evidence to establish that resorting to litigation is disadvantageous in more ways than one and hinders the company’s performance, reputation and value.

One study in the United States (Anup Agrawal & Mark Chen) on internal disputes in publicly traded U.S. companies over 1995-2006 reached the following conclusions:

  • Share prices decline upon news of departure of directors, more so if an insider.

  • Decline is sharper in magnitude if related to perceived ‘agency‘ related problems, corporate strategy or financial decisions.

  • Companies with boardroom disputes experience poor operating performance in years following the same.

  • Diverts corporate & human resources.

  • Obstructs the company’s operations.

  • Delays strategic decision-making.

  • Undermines reputation.

  • Weakens internal and external stakeholders’ trust, leading to resignation of key officers and personnel.

Resolution of disputes within the boardroom thus require a perspective that is neutral and outside the company. It is for this reason that countries all over the world are now actively adopting corporate dispute resolution policies within the framework of the company. Promoting the ADR culture within the fabric of the company at all levels definitely increases the possibility of amicable resolution of disputes.

Conflict in complex settings, particularly commercial setting is inevitable. However, conflict can be destructive too, as happens many times. Its ability to damage individuals and relationships confronts. In this regard, boards of directors can be a fertile ground for conflict because they may tend to involve people with high expectations, share leadership that ends up with problems in the hierarchy, struggle with being unified in their organizational mission. Further, not only conflicts come up in big corporations, but also in small business, as in the trendy start-ups. A feud between co-founders is one of the most common causes of failure in these businesses. Startups are usually very stressful and will test the best of relationships. Often there will be arguments over who controls what, who gets paid what, and which risks should be taken or avoided.

It is therefore essential to resolve these disputes not just expeditiously but with utmost confidentiality and privacy. The benefits of an efficacious solution are multi-fold as many inter-personal issues also tend to add to the complexity of the dispute. Given the need of a continued and sustained relationship, an adversarial option such as litigation is most disadvantageous. In bigger corporations or listed corporations, this comes with the additional burden of disclosure requirements and loss of reputation to the corporation.

Courts may not also be the most effective arbiters of rights as often times the remedy is not merely compensatory in nature. A tailor made solution is the need and such a solution is most effectively provided by a tailored ADR mechanism, particularly one that involves mediation and arbitration.

ADR as we easily appreciate refers to a variety of processes that aim to settle a dispute through different ways apart from conventional litigation. During the last decades, ADR have grown significantly, especially due to the following aspects:

  • Enforceability of the decision with specific reference being made to arbitration. The New York Convention provides the users a significant advantage to go for arbitration instead of litigation to settle their disputes. The enforceability of an award in any of the signatory countries is a huge improvement in securing commercial activities globally.

 

Other ADR fields, such as mediation, or negotiation, have maintained its growth, especially in common law jurisdictions. Even though the decision between the parties does not have that national and worldwide enforceable component, the parties have realized that the option of solving a dispute within a short period of time is very beneficial plus the confidentiality and privacy element.

 

  • Confidentiality – an ADR process is usually carried out in a confidential and private environment.

 

  • Time effectiveness – the control over time and money owing to the fact that parties have a right to choose the arbitrator(s) and the process.

 

There are many other benefits of ADR from the corporate perspective:

  1. Resolution of internal disputes may be kept confidential and may be carried out in private.

  2. Enables the board members and other management members of the corporation to address and proceed to resolution of conflict at an early stage without much disclosure to the rest of the employees of the corporation. By applying suitable internal mechanism to incorporate ADR, it enables an organization to work on the culture of accepting or dealing with the healthy presence of conflict, drawing the lines of acceptance and when its crosses the line, to provide a forum to manage the conflict accordingly. This in turn will entrench a culture of effective conflict resolution in an organization and ensure that it focuses on the business objectives.

  3. Incorporation of ADR within the internal structures of an organization would directly mean applying a cost effective measure to resolution of conflict or dispute within the corporation. As briefly stated earlier, a company could financially suffer if conflicts are not managed timely and leaked to public.

  4. Less formal methods are applied when managing a conflict ADR means. It involves informal meetings and discussions. It could easily be carried out in the boardroom. The flexibility of time and venue is in itself a huge advantage.

  5. Where resolution requires the involvement of a third party either as mediator or arbitrator, it will be a professional within the required field, with years of practical experience in the specific area of conflict or dispute.

It is easy to appreciate the benefits of ADR for resolution of corporate disputes or boardroom disputes, what remains challenging is formulating and incorporating the appropriate ADR mechanism within the structures of an organization or a joint-venture vehicle company or even a large conglomerate. Each company will have its own unique circumstances which becomes relevant while creating a sustainable ADR mechanism.

It is to address these issues, that evolution of an independent Corporate Dispute Resolution policy unique to the organisaiton is the need of the hour. In order to solve internal corporate issues in a win-win situation, a Corporate Dispute Resolution (CDR) policy should be implemented in each company, to be applicable when core conflicts shown, since it eases to settle the disputes. The alternative methods could be applied and the parties could arrange a solution quickly.

Senior Management and Directors of various companies face a plethora of disputes on a day to day basis. The range of disputes include management disputes, employment disputes and shareholders dispute. Most of these disputes can be resolved at an internal level with appropriate training and by possessing the necessary skill set. Failure to resolve these disputes end up being cumbersome, time consuming and expensive to the organisation and its Directors. It also affects the reputation and productivity of an organisation.

The Dispute Resolution policy of an organisation may encompass many forms and methods of ADR. ADR embraces a myriad of mechanisms, approaches, and techniques. It could involve, for example, just going in the door to try to work things out with the employee’s supervisor, working up the chain of command, or discussing the issue with the Human Resources office. On the other hand, ADR could involve a committee set up within the company, mediation, peer review, and arbitration. These mechanisms may be viewed individually or as group.

In short, the dispute resolution policy of every organisation should be tailor made, however the skill set and knowledge training should be imparted first to ensure that the organisation’s policy is tailor made by the people who understand the organisation best, the Directors. The key to the success of the policy will also rely on the imparting of training of the necessary skils including the soft skills required.

The following are some of the accepted benefits of having a Corporate Dispute Resolution policy which is tailor made to meet the needs of an organsation or the corporate climate of a country.

  • Cost savings to both organization and the parties.

  • Time savings to both  the organization and the parties.

  • Reduction in costs and time spent in managing complaints.

  • Participation rates of the parties in the ADR process.

  • Participation satisfaction with the fairness of the ADR processes.

  • Settlement rates.

  • Quality of settlement in terms of durability and creativity.

  • Time required to resolve disputes using ADR versus rights-based means of dispute resolution.

  • Reduced workplace conflicts.

  • Reduced rates of dispute recurrence.

  • Impact on dispute environment.

  • Impact on relationships between parties.

  • Reduction of the number of grievances and harassment complaints.

The corporate policy of this nature has already been implemented in different countries, such as New Zealand, where it has been an absolute success. Keeping in mind, the rapid growth of companies and corporations in Malaysia, the KLRCA has sought to undertake various initiatives to succesfully implement the same in Malaysia. As Malaysia’s premier ADR dispute resolution provider and being a mission based organization, we have currently taken lead in promoting the implementation of ADR within corporates and to disseminate knowledge relating to the same too.

It is further pertinent to note that a study by ACCA and KPMG shows that Malaysia is surging ahead in
implementing corporate governance requirements. There is a consensus that the guidelines, framework and legal infrastructure are comprehensive, but, there is still room for improvement. Malaysia is leading other developing countries in corporate governance requirements, focused on the clarity, degree of enforceability, number and type of instruments used by different markets. All this is clearly indicative of the fact that Malaysia is ready to take the next step forward in implementing a smooth mechanism for resolution of corporate disputes.

Further, in 2012, the authorities of Malaysia passed the Malaysian Code on Corporate Governance (MCCG) that superseded the previous code of 2007. The new code sets out principles and recommendations on corporate governance, explaining how corporate governance should be addressed to become an integral part of their business.

This code follows the Securities Commission’s Malaysia’s five-year Corporate Governance Blueprint of 2011, that provides the action plan to raise the standards of corporate governance in Malaysia. Some of the key elements this document focuses on includes enhancing the internal discipline, promote internationalization, and be more transparent are the pillars of such document.

The Malaysian Code on Corporate Governance, it sets out 8 principles to be taken into consideration:

  • Establish clear roles and responsibilities

  • Strengthen composition

  • Reinforce independence

  • Foster Commitment

  • Uphold integrity in financial reporting

  • Recognise and manage risk

  • Ensure timely and high quality disclosure

  • Strengthen relationship between Company and shareholders

While these serve as a reference point, implementation of an internal policy is an initiative that has to stem from within the echelons of the organization or Corporate itself. It also requires awareness and promotion of awareness within its employees to build trust in the system and increase usage. Culturally sensitive issues such as gender disparity should also be addressed. To bring out a change of work ethic and change in attitude is a long-winded process, but something that is imminent and has to commence at a more grass root level.

All change it is said must come within. As a first step, research has indicated that before even setting up a Corporate Dispute Resolution Policy, the following steps are to be identified:

  1. Clarify of roles and responsibilities.

  2. Seek or develop a skilled board chairperson.

  3. Encourage a job evaluation.

  4. Implement a grievance procedure.

  5. Establish a code of conduct for directors.

  6. Deal with conflict openly when it arises.

  7. Discuss good interpersonal communication practices.

  8. Frame conflict as an exercise in “win-win” negotiation.

  9. Celebrate agreements and new understandings.

  10. Look to gender and cultural differences as a way out of a mess.

  11. Seek outside help early.

As management are involved in obtaining a bird’s eye view of the happenings of an organisation, it would also be incumbent upon managers and senior personnel to identify the following:

  • understanding what is happening for example by checking on whether an actual conflict exists or it is only a dissent; and

  • determining the nature of the conflict itself.

Usually at this stage of conflict, an independent, third-party mediator is the most feasible and viable option available. This could also result in the speedy and effective resolution of disputes. The focus of ensuring the dispute itself remains confidential remains true during the entire course of the process.

The trend across the world within companies is no longer dispute resolution, but effective conflict management. In-house counsels and practitioners will play a key role in the success of ADR. ADR for corporate disputes has evolved beyond the realm of arbitration or mediation into more sophisticated forms. The ultimate success of this initiative is long term and will ensure a litigation free organization with effective conflict resolution.

Malaysia has been no stranger to innovation. In due course, the corporate fraternity in Malaysia will evolve to develop niche dispute resolution mechanisms that create a litigation free atmosphere within organisation. As a corollary this will ensure that stable development of companies, corporations and the economy of Malaysia. This cannot be achieved without the support and co-operation between all relevant stakeholders.

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