February 17, 1972: Margaret Dobb, wife of a Nottinghamshire miner, held up a sign reading … [+]
Some changes are slow. The living wage, defined as sufficient to provide a decent standard of living for the worker and their family in a particular location, has a rich intellectual history. Plato and Aristotle wrote about the concept of a living wage without defining it, Thomas Aquinas, a medieval theologian, called for just wages, Adam Smith and Henry Ford recognized the value of increasing real wages, and the miner’s wife pictured above was campaigning for a living wage. in 1972.
Now is the time for all investors to take a closer look at living wages. The Interfaith Center on Corporate Responsibility (ICCR), a coalition of faith-based and values-based investors, last week released a statement calling on American businesses to pay their workers a living wage. 136 institutional investors with assets of US$4.5 trillion, including Nomura Asset Management and Legal & General Investment Management, signed the declaration.
This investor statement is timely as research shows that 51% of all workers at Russell 1000 companies, which represent 15% of the employed population in the United States. in 2021, do not earn a sufficient salary. Additionally, because the federal minimum wage has remained constant at $7.25 per hour since 2009, due to inflation, a federal worker earning the minimum wage has effectively received a 28 percent pay cut.
Investors who signed the statement say that paying below-living wages poses significant financial and reputational risks and that paying a living wage is essential to reducing the risk of social and economic unrest at the community level. systems. Let’s first look at the reputational and financial risks to businesses of not paying a living wage before moving on to the collateral consequences of increased systems-level risks.
Corporate reputation risk
As Bob Eccles and others wrote in the Harvard Business Review,[3] A company’s overall reputation depends on how it is perceived by its various stakeholders in specific categories. Recent research conducted by JUST, an independent non-profit organization
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With intangible assets, including brand, accounting for 90% of the value of the S&P500, managing reputational risk and maintaining customer trust in brands is essential for business leaders to generate value. long-term.
Corporate financial risk
Investors face two forms of financial risk: changes in valuation multiples and changes in the underlying economics of companies. Research shows that investing more in workers leads to stock price appreciation. JUST Capital’s Workers Leaders Index Concept, which tracks the top 20% of companies that focus on their workers, outperformed the Russell 1000 Index by 244 basis points between December 31, 2021 and November 17, 2023 and generated a higher five-year return of 2.2%. equity. Components of JUST Capital’s Worker Leaders Index construct are 118.5% more likely to pay a living wage to support their family.
This relationship between pay and performance is also evident in company results: The Aspen Institute’s Good Companies and Good Jobs research finds that employees who enjoy benefits, good salaries, and opportunities for advancement are more productive and stay in their jobs longer. This relationship between good wages, retention, and productivity has stood the test of time: Treasury Secretary Janet Yellen and Georgetown professor George Akerlof discovered in 1990 that workers give up their efforts proportionately when their real wages are less than their fair wages and that such behavior results in unemployment. . This relationship also transcends international borders: similar research from the UK and Canada finds that paying a living wage improves worker productivity, retention and engagement.
Although labor practices are one of three issues that have been consistently important across industries since the financial crisis for Russell 3000 companies, the relationship between livable wages and financial risk is clearer today than ever before. it hasn’t been for decades. Work stoppages are nearing a quarter-century high, and 55% of work stoppages in 2023 were focused on pay, according to a study from Cornell’s School of Industrial and Labor Relations. To illustrate the dynamics of more frequent strikes, Labor Department statistics show that significant work stoppages due to strikes led to 4.1 million missed data last August, the highest figure for a single month since August 2000. This follows a broader trend of growing social unrest. : since the beginning of the year through last week, according to the Senate Committee on Health, Education, Labor and Pensions, more than 450,000 American workers have gone on strike for better wages, benefits and working conditions, an increase of more than 900% compared to just two years ago.
Systems Level Investment Risk
Besides the financial and company reputation risk of not paying a living wage that matters to all of a company’s current and potential investors, a growing number of investors are moving beyond portfolio construction and security selection and focus on reducing the likelihood of large-scale destabilizing outcomes. . These systemic-level investors might be interested in mitigating the social and economic unrest that not paying a living wage can create. Indeed, wage increases for lower earners can address income inequality and gender and racial disparities in the labor market; this can have long-term societal and economic impacts.
Beyond investment risks, the concept of a decent wage as a human right is recognized in numerous international treaties and frameworks such as the Universal Declaration of Human Rights, the preamble to the Constitution of the International Labor Organization (ILO) and the United Nations Sustainable Development Goals (SDGs).
Calling all businesses
The Living Wages Investor Statement acknowledges that change can take time and urges businesses to take five steps. First, adopt and disclose a policy and strategy that clarifies the commitment to paying a living wage and periodically disclose progress in implementing this policy. Second, stop paying sub-minimum wages. Third, disclose wage-setting strategies and compensation metrics, including wage gap analysis, median employee salary, lowest starting salary, and the number of workers who earn that amount, the percentage of third-party contract workers, median pay ratios by race and gender for all employees, benefits. , data on staff turnover disaggregated by type of worker and data on collective bargaining coverage. Fourth, conduct and disclose cost-benefit analyzes of salary increases, focusing on both short- and long-term costs and benefits. Fifth, expand the scope of the board’s compensation committee to include oversight of compensation practices for all levels of employees and contract workers and disclose how the company is closing the gap between the median CEO salary and that of workers.
Beyond signing investor declarations
Investors say the statement will be used as part of commitments to advance workers’ rights. Although the politicization of sustainable investing prevents some investors from signing the declaration, all investors would benefit from reading the declaration and taking its elements into account when researching, analyzing and making investment decisions.