Investing in Industrial Relations

Industrial action over pay and working conditions and increased interest in union membership are bringing employer/employee relations under the spotlight for investors.

The impact of industrial action on companies can be severe. Independent economic analysts at the Centre for Economics and Business Research (CEBR) estimated losses of £91 million across the three days of the recent National Union of Rail, Maritime and Transport Workers (RMT) strikes in the UK.

In North America last year, a dispute at a Cargill meat-processing plant that supplies 40% of Canada’s beef was only narrowly averted after the company agreed terms with United Food and Commercial Workers Canada Union.

As the cost-of-living crisis intensifies with soaring food and energy prices and stagnating wages, interest in unionisation is growing. During the RMT strike, online searches for ‘join a union’ increased by 184%, according to analysis by recruitment company Workello.

A CNBC survey in June found that 59% of workers in all sectors across the US supported increased unionisation in their own workplaces. A ‘pent-up demand’ for more worker representation was reinforced by the Covid-19 pandemic when conditions for front-line workers received greater public scrutiny, MIT Sloan School of Management Professor Thomas Kochan commented about the findings.

With workers increasingly exercising their rights, the impact of poor employee/employer relations is likely to have a more material impact on a company’s financial performance and thus returns to investors. This explainer looks at the questions asset owners should ask to ensure investee companies can maintain healthy industrial relations even in times of stress.

How do investors determine how well companies are handling worker relations?  

Given the UK’s cost-of-living crisis and a strengthening wave of industrial action, determining whether a company takes employment relations seriously is becoming increasingly important for investors, says Alice Martin, Labour Specialist at Pensions and Investments Research Consultants (PIRC).

“Where there are members in the company, we talk to trade unions to hear what issues the workforce is raising and whether the company is listening and negotiating in good faith,” she says. “Reports of potential disruption such as ballots for strikes give an indication of when the relationship has broken down.”

Company self-reporting also gives an indication of how they perceive and manage union relationships, she adds. Examination of 2020/2021 annual reports by PIRC found that only 6% of FTSE350 companies disclosed data on collective bargaining coverage in their operations. This is despite double that number listing labour disruption as a principal risk to their business.

“In areas of the economy where unionisation levels are low, our stakeholder research and engagement can include talking to academics and NGOs such as migrant workers’ rights organisations,” says Martin.

What metrics can investors use to assess the health of employee relations of investee firms? 

Companies routinely disclose employee management scores in annual reports; however these have limitations. “The scores are a useful starting point to gauge relations, but their significance is limited,” says Martin.

The scores tend to exclude indirect workers such as agency hires or self-employed contractors, and so provide only “a partial picture”, she adds. “Moreover, they are employer-led, meaning workforces might not feel able to be honest in their replies.”

Third-party data plays a “very important” role in investors determining the quality of worker relations, says Teni Ekundare, Head of Investor Outreach at food industry-focused investor network FAIRR Initiative. Data produced by FAIRR includes that relating to working conditions. “Data about labour and working conditions help the investors in our network to understand the risks and how to mitigate them,” she says.

Information about how employees are represented at the board level is increasingly sought by investors, but also practical details about issues such as dispute resolution and grievance mechanisms. Granularity of data is also a key issue. “A company might disclose that it has a grievance hotline for employees, but investors need to know whether a company encourages its use, how often it is being used, whether it is independent and how a company deals with issues raised,” she adds.

FAIRR’s research on risks in animal production found that 63% of the 60 largest meat, fish and dairy producers scored poorly across a set of seven vital to preventing future zoonotic pandemics, such as welfare conditions for animals and workers. Following engagement between investors and seven of the world’s largest meat firms six companies temporarily enhanced sick leave during the Covid-19 pandemic to prevent unfit employees from attending work. However, none adopted such policies permanently. “This risks perpetuating a culture where sick workers, who may be exposed to new strains or new diseases, feel financial pressure to come to work,” said FAIRR.

UK non-profit organisation ShareAction operates the Workforce Disclosure Initiative (WDI), which aims to improve transparency and accountability on workforce issues and to provide companies and investors with comprehensive and comparable data.

The WDI investor coalition is made up of 68 institutions, with US$10 trillion in assets under management. Data on work practices is generated via an annual survey and engagement programme. In 2021, 173 global companies took part in the Initiative, a 23% increase on 2020.

Commenting on the need for schemes like the WDI, Frank Wagemans, Senior Engagement Specialist at Achmea Investment Management, says “it is really hard as an investor to see how companies treat their employees”.

The WDI’s report on wage levels and pay gaps noted that companies are being more transparent about pay gaps and have begun to voluntarily disclose ethnicity pay gaps, despite a lack of mandatory reporting requirements.  There are still areas for improvement as the report found the majority of companies are still not paying sufficient wages, disclosure of pay gaps is ‘patchy’ and CEO-to-median-worker pay ratios continue to rise.

Martin says useful metrics for investors include employee turnover rates, voluntary and involuntary, as well as instances of regulatory intervention, industrial action or employment tribunal cases.

“Investors are increasingly becoming attuned to tokenistic gestures by companies to appear to have a positive workforce relationship – such as the use of third-party commercial accreditations that claim they are a good employer,” she says.

How can asset owners and managers encourage good employee/employer relationships in investee companies? 

Engagement and exercising voting rights are the main methods employed by investors. In May, Schroders, which has engaged with Amazon for seven years to improve workers’ rights at the firm, said it would vote in support of three shareholder resolutions on the issue at the firm’s AGM. The resolutions requested a report on worker health and safety differences, additional reporting on freedom of association and a report on warehouse working conditions.

Tim Goodman, Schroders’ Head of Corporate Governance, said, “We believe it is important to support these proposals, which align with our own engagement with the company, call for greater disclosure and promote stronger workers’ rights.”

Workers’ rights is one of six priority themes in Schroders’ engagement blueprint, which sets out its approach to active management. This has been identified as a priority at Amazon, Goodman added, because developing and retaining people within the company is vital if it is to maintain and grow its competitive advantage.

“Our engagement with Amazon also seeks to cover areas such as improving the wages paid to staff and the benefits that they are offered; worker engagement and representation within Amazon; the health and wellbeing of workers; and the working conditions within Amazon’s warehouses.”

At the subsequent AGM, Amazon shareholders voted down all investor-led proposals.

Martin notes that “more constructive” approaches to engagement include being “open and honest” about employee relations in corporate reporting, and communicating with investors about the outcomes of agreements with workforce representatives. PIRC also advocates for involving regular members of the workforce at board level, rather than expecting corporate non-executives to play a representative role.

“Asset owners can bake these factors into their investment practices by, for example, being explicit in policies that worker representation at board level is supported and that they expect companies to be able to demonstrate how freedom of association is respected and upheld,” she says.

“For US companies this might involve the expectation that a position of neutrality is taken by the company if the workforce seeks to unionise. The recent surge of union membership in branches of Starbucks, Amazon and Apple shows why this matters, and why responsible investors should aim to get ahead of the curve on these issues.”

What type of risk does the mishandling of workers’ rights pose to investors?

Tenisha Elliott, Associate Responsible for Investment Team at BMO Global Asset Management, told a UK Sustainable Investment Forum (UKSIF) webinar earlier this year that her firm believes poor management of ESG issues such as workers’ rights will have a “negative impact” on the bottom line of investee companies.

There was a disconnect between the way a company thinks about its employees and company culture and how such issues affect productivity, she added.

Ekundare agrees, noting that companies do not always recognise the value of their employees. “Employees are the lifeblood of a company and there have to be strong relations between employees and companies to ensure profitability is not affected,” she says. “Investors focus on employee working conditions because they recognise the link between a productive workforce and profitability.”

Martin says a breakdown of employment relations represents a material risk for companies and their investors. “Strike action by design has direct economic impacts, for example through halting operations or the fulfilment of orders. In addition, negative media relating to workforce maltreatment may affect a company’s reputation with customers and prospective new hires – the latter being particularly problematic in the tight and highly competitive labour market we find ourselves in.”

While the long-term effects of pandemic and cost-of-living crisis are key causes of today’s industrial unrest and increased unionisation, further challenges are already on the horizon. Employee relations will increasingly come to the fore as industries transition their business models to align with net zero goals, with the concept of a just transition likely to take centre stage. Employees will play a big role here and must be involved, says Ekundare. “There has been a shift in attitude towards employee relations and companies are doing more, and better, but more needs to be done.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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