Why Good Wages Should Matter To All Investors

Some change is slow. Living wage, defined as sufficient to afford a decent standard of living for the worker and his or her family in a particular place, has a storied intellectual history. Plato and Aristotle wrote about the concept of a living wage without defining it, medieval theological Thomas Aquinas called for just wages, Adam Smith and Henry Ford alike recognized the value of rising real wages, and the miner’s wife pictured above was campaigning for a living wage in 1972.

The time has now come 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 US companies to pay a living wage to their workers. 136 institutional investors with US $4.5 trillion in assets, including Nomura Asset Management and Legal & General Investment Management, signed the statement.

This investor statement is timely because research shows that 51% of all workers at Russell 1000 companies, who make up 15% of the employed population in the US in 2021, are not earning a living wage. In addition, because the federal minimum wage has remained constant at $7.25 an hour since 2009, due to inflation, a federal worker earning the minimum wage has effectively received a 28% pay cut.

The investors who signed the statement argue that paying sub-living wages generates significant reputational and financial risks and that paying a living wage is critical to reduce the systems-level risk of social and economic unrest. Let’s first examine the reputational and financial risks to the companies of not paying living wage before we move on to the collateral consequences of increasing systems-level risk.

Corporate Reputational Risk

As Bob Eccles and others wrote in Harvard Business Review,[3] a company’s overall reputation is a function of how it is viewed among its various stakeholders in specific categories. Recent research from independent research nonprofit JUST
Capital and public relations consultancy Edelman drive home why paying a living wage is critical to meeting the expectations of its stakeholders. JUST Capital’s annual survey of 160,000 Americans found that paying a fair and living wage remains the most important business issue across every demographic group. More specifically, 63% of voters believe workers need to earn more than $20 an hour to have a decent quality of life, including 71% of Democrats, 56% of Republicans, and 63% of independent/third-party voters, according to research from the think tank Data for Progress. In addition, in “The Changing Role of the Corporation in Society,” Edelman writes that Americans view CEOs as having a role to play in addressing societal issues, particularly wage inequality and automation’s impact on jobs.

With intangible assets, including brand, rising to 90% of the value of the S&P500, managing reputational risk and maintaining customer confidence in brands is critical for corporate executive suites to drives long-term value creation.

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 drives share price appreciation. JUST Capital’s Workers Leaders Index Concept, which tracks the top 20% of companies that are focused on their workers, outperformed the Russel 1000 by 244 basis points from December 31, 2021 to November 17, 2023 and generated 2.2% higher five-year return on equity. Constituents of JUST Capital’s Workers Leaders Index Concept are 118.5% more likely to pay a family-sustaining living wage.

This relationship between wages and performance is also evident in corporate results: Good Companies/Good Jobs research at the Aspen Institute finds that employees who have benefits, good wages, and opportunities to advance are more productive and stay in their jobs longer. This relationship between good wages and retention and productivity has stood the test of time: Treasury Secretary Janet Yellen and Georgetown Professor George Akerlof found in 1990 that workers proportionately withdraw their effort as their actual wage falls short of their fair wage and that such behavior causes unemployment. This relationship also transcends international borders: similar research in the UK and Canada find that paying a living wage improves worker productivity, retention, and engagement.

While labor practices are one of three issues that have been consistently material across industries since the financial crisis for companies in the Russell 3000, the relationship between living wages and financial risk is clearer today than it has been in decades. Work stoppages are nearing a quarter-century high, and 55% of the work stoppages in 2023 were focused on pay, according to research from Cornell’s School of Industrial and Labor Relations. To illustrate the dynamic of more frequent strikes, Labor Department statistics show that large work stoppages from strikes resulted in 4.1 million missed data of work this past August—the most for a single month since August 2000. This follows a broader trend of growing labor unrest: year-to-date through last week, according to the Senate Committee on Health, Education, Labor, and Pensions, over 450,000 workers in America have gone on strike for better wages, benefits, and working conditions—up more than 900% compared to just two years ago.

Systems-Level Investment Risk

In addition to the corporate reputational and financial risk of not paying a living wage that matter to all current and prospective investors in a company, a growing number of investors go beyond portfolio construction and security selection and focus on reducing the likelihood of broadly occurring destabilizing outcomes. These systems-levels investors may be interested in mitigating the social and economic unrest that not paying a living wage can create. Indeed, wage increases for the lowest 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 living wage as a human right is recognized in multiple international treaties and frameworks such as the Universal Declaration of Human Rights, the Preamble of the International Labour Organization (ILO) Constitution, and the UN Sustainable Development Goals (SDGs).

Calling on All Companies

The investor statement on living wages acknowledges that change can take time and urges companies to take five steps. First, adopt and disclose a policy and strategy that clarifies commitment to paying a living wage and periodically disclose progress toward implementing the policy. Second, stop paying subminimum wages. Third, disclose wage-setting strategies and compensation metrics, including wage gap analysis, median employee wage, lowest starting wage and how many workers earn this amount, percent of third-party contracted workers, median racial and gender pay ratios across all employees, benefits, employee turnover data broken down by worker type, and data on collective bargaining coverage. Fourth, perform and disclose cost-benefit analyses of wage increases, focusing on both the short-term 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 addressing the gap between CEO and median worker pay.

Beyond Signing Investor Statements

Investors say that the statement will be used in engagements to advance worker rights. Although the politicization of sustainable investing prevents some investors from signing the statement, all investors would benefit from reading the statement and considering elements of the statement during their investment research, analysis, and decision-making.

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