In recent weeks, a debate has played out across the pages of the Australian media regarding the role of superannuation trustees in maximising retirement savings for their fund members.
Treasurer Josh Frydenberg has stated “Australia’s $2.7 trillion super system is not a plaything for union bosses or a platform for their IR agenda. Trustees have legal obligations to act in the best interest of members not union bosses.” Listening to one side of this debate, it would be easy to conclude workers’ rights are a niche issue, external to the core business of super funds.
Yet the vast majority of super funds, both retail and industry, will tell you the opposite is true. Active ownership and engagement on a range of workforce issues is a core part of responsible investment stewardship and growing retirement balances for members.
Workforce issues are material business issues. Funds ignore this fact at their peril. As a growing number of wage theft and underpayment scandals makes clear, workforce issues can be a harbinger for broader issues that impact materially on the short and long-term financial performance of a company. Conversely, corporations which value their workforce show better shareholder returns than those which don’t.
Recent inquiries and media investigations highlighted how businesses have used franchising arrangements, sham-contracting and labour-hire arrangements to circumvent established working conditions and avoid responsibility for illegal working conditions. However we are now seeing legislative and regulatory changes that increase the responsibility and liability for companies at the top of the chain, for exploitation and underpayments by their contractors and franchisees.
In 2017, the Fair Work Ombudsman held 7-Eleven responsible for wage theft by their franchisees. The estimated bill to the parent company was $168 million in backpay — not including the substantial fines and costs associated with redress and compliance. In 2018, Foodora left the Australian market after a court case found Foodora riders had been wrongly classified as contractors. In 2019, the share price of Retail Food Group collapsed after the franchising inquiry found its business model was not viable if it paid legal wages.
In 2018, the Skene decision found a mine worker had been wrongly classified as casual, and was owed leave entitlements for the period of his employment. A subsequent class action against BHP involving workers in a similar situation could see an award of $50 million against the company. In each of these cases, active engagement by institutional investors with companies on workforce composition, wages and working conditions, would have highlighted major structural issues at the heart of these business models.
This would have provided the opportunity to mitigate a number of reputational, political, regulatory and compliance risks, before these risks developed into massive financial payments that translated into large losses in shareholder value.
Just as the poor management of a workforce can be a risk to long-term company performance, judicious management of a workforce can directly improve company performance. In the US, the Human Capital Management (HCM) Coalition now consists of 26 institutional investors representing over $3 trillion in assets. The HCM coalition sees workers as a significant company asset. They understand that treatment of the workforce can have long term impacts on value creation and operational performance of companies. They engage with companies on a range of workforce issues, including fair labor practices, health and safety and responsible contracting.
Similarly 79 asset managers with almost $8 trillion in investments have signed onto the Workforce Disclosure Initiative, which calls on companies to provide better reporting on a range of workforce issues to allow for better, active engagement. More broadly, clear, deliberate and systemic wage theft and underpayments are just one element of broader industrial dynamics that have seen real wages stagnate since 2009.
The International Monetary Fund, OECD and the Reserve Bank of Australia have sounded warnings about this stagnation and associated increases in inequality, and the impact that this will have on economic growth. Funds and asset managers should heed these warnings — the risks caused by downward pressure on wages will impact on funds’ ability to grow their balances by slowing investment returns.
More immediately, this downward pressure on wages directly impacts on workers’ contributions to their superannuation balances. By 2030, Australian superannuation funds will collectively manage $4.2 trillion and own 36% of the Australian sharemarket. They must take a broad view of fiduciary duty and active ownership if they are to provide responsible stewardship on behalf of their members.
Katie Hepworth is the Director of Workers’ Rights for the Australasian Centre for Corporate Responsibility (ACCR). Tim Kennedy is the National Secretary of the National Union of Workers (NUW). The ACCR and NUW co-filed a shareholder resolution against Woolworths in 2017 regarding the treatment of farm workers in Woolworths’ domestic food supply chain.