How can we tackle living wages? Episode three


This is a transcript of a discussion about living wages between Schroders Active Ownership Manager Katie Frame and fund manager Roberta Barr.

You can listen to the full conversation by clicking on the play button at the top of the page.

Katie Frame:

Hello, my name's Katie Frame and I'm an active leadership manager at Schroders, responsible for leading our engagement strategy on social issues. Thank you so much for joining the podcast today. This is the third in a series of podcasts that we're recording with guests from a range of organisations around the world on living wages and fair pay… A topic which is particularly pertinent in the current context of the daily cost of living crisis. I'm very excited to be joined today by Roberta Barr, who is a fund manager and head of ESG for our value team. And today we are going to discuss how we approach our engagement on this topic at Schroders. So welcome, Roberta.

Roberta Barr:

Great. Hi. Thank you, Katie. And maybe, actually before we get into detail, I wonder if it might be useful for our listeners if you could explain our broader approach to engagement on this topic.

Katie Frame:

Yes. So in early 2022, we published our Engagement Blueprint at Schroders, which whilst at Schroders we have a very long history of engagement, this document really was our first attempt to be transparent, really in the public domain, about our long-term ambitions for engagement and expectations of the companies we invest in.

In it we set out our six key themes for engagement. So this includes climate, biodiversity, human rights, human capital management, diversity, inclusion, and of course, corporate governance. And for each of these themes, we seek to set out the desired long-term outcomes for our engagements and some of the short and midterm expectations that we might ask companies to undertake when we're engaging them.

Very much the document is quite broad and therefore, for our individual stock level engagements, we consider a range of factors when setting out a plan for engagement such as materiality of the issue, sector specific nuances, geographic nuances, and actually what's realistically achievable by us working with the company on an engagement topic.

But if we perhaps dig into the human capital management theme, which focuses on the issues related to the direct workforce, and so this is anyone really working within the direct operations of an organisation – that includes both employees, so people who might be wearing the uniform directly employed by an organisation, as well as contract workers who will be within those direct operations. And so this often includes security guards or cleaners, people who are subcontracted out for the roles that they do.

And one of the long-term outcomes we're seeking to achieve for our investee companies here when we're thinking about the subtheme of investment in the workforce is that they foster a culture where all workers can afford a decent and secure standard of living for their families. Very much aligned to Sustainable Development Goal 8, which is on decent work and economic growth.

And of course in the Blueprint you'll see there's a range of actions that we set out which we may ask a company to undertake to begin their work towards achieving this long-term goal.

Firstly, we might ask a company to actually do an assessment of the financial wellbeing of workers within their operations, to really understand the challenges that workers may be facing and therefore how, as a company or as an employer, they can help address those issues. So we're really kind of identifying specific actions which will support the workforce better.

One of these actions could be that a company considers paying a living wage for the workers and also extending this to contractors in the future. Or an action could be around addressing other working conditions that could also contribute to in-work poverty such as working hours. Often you see cases of underemployment and that's a big driver of in-work poverty within workforces. And of course a decent standard of living isn't just about pay. There's a lot of other things that companies can do such as improving working conditions, such as providing benefits to their workers as well.

And of course, and I know you'll get into this a bit more Roberta probably in a minute, but there's a lot of nuance that we need to consider. There's clearly a range of things that companies can be doing to improve the financial wellbeing of the workforce. But we need to consider the sector that a company's in. Of course it's easier for a company with a smaller proportion of low-paid workers to pay a living wage. The geography that a company might be operating in. There are, of course, various regulatory frameworks around the world, different definitions of what things mean when it comes to workers, a living wage. And really actually just what the cost of living might be.

So if we take a country like the US we need to think about both the mandated minimum wage, and this may vary by state, as well as how the cost of living might differ depending on the location even within this country. So cost of living in New York City for example, will be significantly different to somewhere else in the US such as the Midwest. So really need to consider these different challenges that a company might be facing, it's operating model, how the business works when thinking about what's an appropriate engagement request.

So Roberta, given some of these challenges, I'm actually very interested to hear about how you think about some of these things within the value team within your fund and how you've been engaging with your holdings on the topic of living wage.

Roberta Barr:

Well firstly Katie, I totally agree with you. There are so many nuances that we need to consider when we're thinking about things like decent work and economic growth and the direct and indirect consequences from different companies’ approaches to managing their human capital alongside other key stakeholders for the companies.

And firstly I think it's worth saying that at Schroders we actually have a number of different ways to assess how a company is managing its human capital. So one of the main tools that we use is actually a Schroders proprietary sustainability tool called CONTEXT, and CONTEXT is a stakeholder analysis tool. So basically it takes each of the main stakeholders of the business, so think things like customers, employees, suppliers and so on, and then it uses a few key metrics for each stakeholder to assess whether or not the company is treating that particular stakeholder better or worse than its industry peers. So, for example, within its assessment of treatment of employees as a stakeholder, it will look at traditional key metrics like employee turnover, the percentage of permanently-employed staff and compensation, say relative to regional averages. But it will then also look at things like stock-based compensation plans, training hours, average Glassdoor reviews, lost time for injury rates and so on. So a really useful tool for us when it comes to setting the scene of the overall human capital management.

Then we also have SustainEx, which is another proprietary Schroders tool. And SustainEx is really looking at the overall net societal impact of a company through its externalities. So it will consider the surplus or the deficit to the regional living wage that the company is paying its employees. So this is going one step further and it's saying that actually salaries not only impact an individual, but actually it has an impact to society in aggregate. So actually a salary being paid below the living wage will create a negative externality that, say, contributes to human suffering or creates a deficit that the state or country then has to pay for. But paying at, or to a certain extent above, the living wage will allow workers to have discretionary income, which can then be used to meet their own basic needs.

And these our two proprietary tools, along with many others, are really useful for us in the beginning of our assessment of a company's management of human capital. But ultimately we are constrained by the amount of data disclosed by a company. And to your point Katie, nuances around the specific company, its activities, its other stakeholders, regions that it's operating in. All of these things need to balance. And that's where active ownership and engagement really come into their own.

So since they've been taking a fair amount of heat at the moment, let's consider the example of UK and European supermarkets. So they have a mammoth job when it comes to balancing the interests of their different stakeholders. And actually we're currently undergoing a large engagement process with each of our holdings, each of our UK and European supermarket holdings to better understand exactly how they're managing that balance. So firstly these supermarkets have a large number of direct employees and a significant proportion of which are low-paid workers. And obviously we want supermarkets that we hold to be paying a fair living wage to all of their workers to ensure a decent standard of living. But then they also have a significant number of contractors, like you spoke about Katie, which classically will do the jobs like dealing with security or so on. And whilst the contracting companies which employ those particular workers will typically set their salaries and benefits, actually the supermarkets do have some level of influence over the companies that they select to provide that contracting work. For example, they could choose to only select to use contractors which pay their workers at or above the living wage. And, where appropriate, we would like our supermarkets to exert that sort of influence. But keeping in mind that as you'd expect, that does in turn have an impact on the pricing of those contracts, so will increase the cost to the supermarkets.

And also actually secondly, don't forget supermarkets have a significant supply chain – so farmers, food pricing companies and so on. And what we like to see there is supermarkets upholding strong relationships with their suppliers. So not overly aggressively negotiating down the price they pay for goods and making sure that they pay the bills to those suppliers, especially the smaller suppliers, on time, like say local farms.

Thirdly, don't forget we're in a cost of a living crisis. Society needs those supermarkets to be able to provide affordable, nutritious food to the population. Low-paid workers, including supermarkets’ own workers, should always be able to afford a healthy diet for themselves and their dependents.

So as I said, supermarkets have this mammoth task when it comes to balancing all these different stakeholders. And keep in mind they're often low-margin businesses. So for each item that they sell, once they've paid off their suppliers and the various costs associated with that sale, actually there's not a lot left over. And now we have these new inflationary pressures added into the mix. So there's really not a lot of wiggle room for companies to be overly-generous or lenient to any one particular stakeholder without that coming at the expense of another.

But what can we do as investors? Well, as I said before, at Schroders we've been engaging with each of our UK and European supermarket holdings so we can assess how they're thinking about these different pools and their businesses and to what extent they're consciously and importantly responsibly balancing them. And when necessary we'll then encourage some of our holdings to make adjustments or reprioritisations within their strategies.

Katie Frame:

Yeah, thanks Roberta. Those are some really interesting examples and I'm sure our listeners will be interested to hear about the outcomes of that engagement as we continue to progress it and better understand some of the challenges as you said, that these companies are facing, the different stakeholders they're trying to balance and really what they're doing about it. Because I don't think, from what you've said, that there is a single easy solution or a quick fix that can be applied in this situation.

But I am interested, so in terms of some of the engagements that have already taken place, so work you've done on this topic in the past, what are some of the pushbacks you hear from companies or that you might expect to hear, if any? And how do you actually tend to respond to those or work with companies to find an alternative solution?

Roberta Barr:

Well we certainly heard a few pushbacks and we faced a few challenges along the road as well. And actually perhaps one of the less glamorous but really important challenges is that it's often really difficult to get the relevant data and it often just turns into a difficult data-gathering exercise. So in the case of supermarkets, getting the exact data for the number of contracted employees, the hours that they've worked, wages that they've earned and maybe other employment benefits offered to them and so on, isn't easy at all because ultimately they aren't direct employees of the companies. So to be honest, poor disclosure for human capital management is a recurring theme across many different sectors and regions. And actually just getting that better disclosure, better data, is often the first and very significant step in the right direction.

And maybe I guess a second pushback around these engagements is that often we are not the best placed people to dictate to a company what they should or shouldn't do. And we're not here to micromanage the companies that we hold. And ultimately what we're trying to do is just to encourage all of the companies that we hold at Schroders to have good responsible management, good corporate governance, and a well-balanced stakeholder approach and for them to ultimately determine the right approach for them in their specific circumstances. And then of course to actually go ahead and give us, as investors, the appropriate disclosure – I guess to prove to us and the market that they are indeed running their business in a sustainable, stakeholder-friendly manner.

But actually Katie, if I may, could I throw that question back to you and maybe ask about any other engagement examples with the challenges and pushbacks you face for those, and how you've approached those different situations?

Katie Frame:

I certainly agree with the point you've made, Roberta, around disclosure. It's a continuing challenge for us. And as you said, we don't have all the information compared to what the company has in terms of understanding its workforce. And so it's very difficult for us to go in and say “do this, do that” without that level of understanding. And so very much often we do need to first push forward disclosure. When you often compare, right now, how much companies talk about workforce issues, even just workforce pay issues in the annual reports, it's rarely more than a sentence, two, maybe a paragraph, compared to the level of disclosure we see for a topic like executives compensation, which there's just more history on, investors have been engaging on it for a longer time and so there's just better disclosure there and it will take time for companies to get up to speed. But as you said, very much pushing for it and trying to work with companies to communicate to them what we'd be expecting them to disclose.

It's really interesting when we discuss the topic of working hours and what a company may be setting in terms of policies for its workers. Actually in some sectors, in some markets, it can be a really strange concept that people don't work enough hours. Often we hear from these companies or these employees that the problems are around long working hours, which can cause a strain on mental health and family life. And so we actually need to be really mindful of the context that we're going into, that a company operates within, and just be open to hearing from companies around their challenges and not be trying to necessarily impose our views about what's right or wrong in certain aspects. Because a lot of it's really cultural.

But I know time's almost up. I think we could talk about this for so much longer. But I would like to thank you for joining us today, Roberta, to talk about your engagement work. It's really been an interesting conversation and it's not the end of our discussion on this topic. So next in the podcast series will be my colleague Angus Bauer and he will be speaking to Caroline Rees at Shift about Shift's recent work around a living wage accounting framework and actually how can we integrate living wage more into our investment analysis using that new framework, which should be a really interesting podcast and hope you can join us for it.

Roberta Barr:

Thank you.

Katie Frame:

Thank you very much.