It’s been common in recent decades to see a direct relationship between public companies and the stock market when it comes to wages and layoffs: shares go down when wages go up and shares go up with layoffs. That may seem perverse, but in the world of Milton Friedman shareholder capitalism that has dominated since the 1970s, it was commonly enough the way the world of financial performance was viewed.
But that’s changing, especially as labor’s share of profits, which had been in decline ever since the 1970s, has begun to climb again.
As stakeholder capitalism makes it claim on the market, the idea that workers — especially frontline and lower-wage workers — are interchangeable is being reevaluated and workers are finally getting their due as being as materially important to the financial performance of companies as any other factor.
A significant sign of this shift came earlier this week when Securities and Exchange Commission Chair Gary Gensler said he is asking SEC staff to begin thinking about a “human capital” disclosure requirement for public companies.
“Investors want to better understand one of the most critical assets of a company: its people,” Gensler said in a tweet.
The human capital disclosure he has asked SEC staff to consider could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety, Gensler wrote.
“Investing in the workforce is the No. 1 issue in the public mind and it is increasingly top of mind for companies,” said Martin Whitaker, CEO of ESG specialist JUST Capital.
Whether the specific issue is wages or benefit such as preparing for retirement and stock ownership and options, “that group of issues is going to be a defining one, as defining as climate,” Whitaker said. “If they are not investing in their workers then the value creation for shareholders will be affected long-term. It’s inherently a business case. … I haven’t met with a CEO who doesn’t believe it part of the path to success. It will keep coming back. It’s a massive issue.”
Workers and long-term shareholder value creation
The idea of measuring a company based on treatment of employees is not new. The SEC already requires companies to disclose CEO pay in relation to median employee pay as a way to hold C-suites accountable for their own compensation versus their workforces. Worker safety, too, has long been a component of environmental, social and governance metrics.
But ESG and labor experts say that worker conditions have long been lumped within the “S” in ESG (or the “G” when it comes to CEO pay), and these are overly broad categories, and is time for companies to be more narrowly and transparently held accountable for workers, and for the market and investors to understand treatment of workers is a major factor in a company’s long-term prospects.
“There is so much work to be done in ESG around employees,” said Sarah Kalloch, Good Jobs Institute executive director. “Putting them [employees] under the S is a little convoluted. S becomes this monster of super important metrics, from safety to supply chain data security to worker pay.”
The most basic argument made to convince companies, and their shareholders, that, investing in employees is part of long-term shareholder value creation is turnover. Experts say turnover, especially in low-wage industries, is deeply material to financial performance, as is the ability to retain staff.
The current tight labor market is convincing many more companies of this truth.
“We are seeing companies go under or reduce hours significantly because they can’t keep employees,” said Kalloch.
Some major companies already are taking a lead, whether it is Walmart and Target expanding education benefits, or a broader embrace of the “good jobs” philosophy. The Good Jobs Institute started the Worker Financial Wellness Initiative, in conjunction with ESG specialist JUST Capital, to encourage companies to assess their worker financial health. Five companies, including Chipotle and PayPal, have joined, “which is awesome,” Kalloch said, but she added that given it is only a handful of companies it’s also indicative of how challenging it is for companies to dig into wages and financial health.
PayPal and Chipotle team up on combating worker financial security
The movement is occurring not only at the SEC but the state level as well.
The California State Controller is working with the Drucker Institute on worker metrics and currently has a bill in front of the California legislature to require companies with more than 1,000 employees to disclose human capital metrics.
How to measure worker wellness
The three top metrics that the Good Jobs Institute measures are turnover, internal promotion and a wage assessment, or how many employees are making a living wage.
The recent focus on education benefits, which some have argued may be even more important than wages, is key, but Kalloch says the equation has to be a lot broader.
“We all know how expensive college is, and it is great that companies can offer this as a benefit. That said, many companies have high turnover. If they have 70%-100% turnover, a four-year degree is unlikely to be a path many of the team can walk down,” she said.
But there is a relationship between upskilling workers and promotion, which Chipotle has pointed to through its work with Guild Education. The fast-food company has said frontline employees who participate in the Guild programs are 7.5 times more likely to move into a management role than peers not enrolled, while it has also seen a 3.5 times higher retention rate among employees enrolled as students in Guild programs.
Internal promotion is key to creating career paths for workers, and companies like Costco and midwestern convenience store chain QuikTrip are examples of companies already committed to 100% internal promotion. That should be key for all companies, in Kalloch’s view, rather than companies emphasizing training and upskilling current workers as a way for them to eventually move on from jobs when retail and other essential jobs, like care jobs, are not going anywhere.
or “In fact, they are growing,” she said. “The food and beverage segment is growing. In the next decade we need people to do these jobs, and these jobs need to be good for people.”
Research shows why it’s critical for workers to be treated well. Being financially unstable can impact physical and mental health. Studies have shown there is actually a bandwidth tax of 13 IQ points if you are more financially stressed.
Especially for low-wage workers working multiple jobs, the research suggests that their performance on the job will suffer. “It is a vicious cycle and companies can end up understaffed and with operations problems and service challenges,” Kalloch said.
Many companies recognize they need to invest in wages first as a way to attract and retain teams, and that’s happening from Amazon to McDonald’s. It’s only after that increase, and based on what else the company offers, where the equation encompassing both pay and benefits can be measured to see what is driving turnover in each case.
While workers need health insurance, if they can’t pay the rent or feed their kids, making use of that benefit will come second, or may not be at all affordable. Similarly, many companies offer 401(k)s but frontline workers have nothing saved. “The benefit doesn’t mean much to them if they are not being paid enough to save for their future,” Kalloch said. “We encourage companies to look at benefits uptake, disaggregated by race and gender, to understand if the benefits they think they offer are really benefiting their workers.”
In some sectors where the need is greatest for better worker conditions, the names of the major players are not as well-known as major retailers or food companies. One example is the direct care sector, such as workers in senior homes and home health aides, which remains a very fragmented industry, but one that is critically important to society. There is massive growth of jobs in this sector, but lots of private equity roll-ups, and for some of these companies, it is a real estate investment not a care investment. The economics of the industry are also challenging even for owners who want to offer workers more.
“Better jobs that drive better care doesn’t always drive better profits because of Medicare and Medicaid reimbursement rates that are not based on quality of care,” said Kalloch. The nursing assistant median wage in 2020 was just under $15.
Long-time ESG shareholder advocates say what is occurring is for real and it is here to stay rather than a function of the current tight labor market or a short-term, more compassionate capitalism triggered by Covid.
In recent years, both the World Economic Forum and Business Roundtable, pre-Covid, embraced stakeholder capitalism over shareholder capitalism to the exclusion of every other interest. Andrew Behar, CEO of As You Sow, which has taken on many companies over the years in proxy battles focused on ESG issues, says the tide it not turning back to Milton Friedman’s view of the world.
“The No. 1 cost for a company is losing a new employee and having to retrain, and companies are realizing it’s the implementation of this new philosophy of stakeholder capitalism,” Behar said. “There is really return on investment here for companies, and that continues into the community,” he added. “This is not greenwashing. This is the most fundamental shift in corporate governance and philosophy ever. Uncle Milton [Friedman] has been thrown under the bus.”
The last year and a half made it clear to many individuals, companies and politicians that society depends on workers who often do not make enough to make ends meet. The tight labor market is a factor in the current increase in wages and benefits, and there is some uncertainty about the labor momentum if the current labor conditions change. But it was tight before Covid, and there was some movement in workers getting higher wages. “This has catapulted it, and it is pretty hard to roll back wages, employers could roll back hours and other things, but if they do this right, they can see financial improvements from offering good jobs and strong operations” Kalloch said.
And if there is any slowing or reversal in actions being taken by companies on behalf of worker wellness, ESG shareholders will be pressing the issue more in future proxy seasons. And that is because shareholders are convinced they will suffer, too, if workers don’t get their due.
“We will see companies that don’t do it start to fail, and lose employees and market share, and that’s where if the board doesn’t step in and intervene, the shareholders do,” Behar said. “We hope the boards do it and incentivize executives to get on this path, and if not, you will see more proxy resolutions.”
Whitaker said this has not been a major battleground for proxy voting and engagement yet, “but I think it will be,” he said.
“We’ve seen leadership from PayPal to Verizon, Walmart and Target raising wages. It is starting to happen, but it can’t be a bunch of outliers. It has to be the norm. If companies are not doing an assessment of their workforce and how many employees are at a living wage, they will be behind the curve,” he said.
