Accounting for fissured workforces: Why we need workforce disclosure that accounts for the entire employment footprint

By June 15, 2018News

This article was first published in responsible-investor.com on June 14, 2018.

By Shannon Rohan, Director of Responsible Investment Leadership, SHARE, and Michael Musuraca, Co-Chair, Verite, and Board Member, Sustainalytics

“Our people are our greatest asset” is a phrase commonly used by business leaders, and one that might be floated by senior management after a major health and safety or other incident involving a company’s workforce. But it is often difficult to ascertain how companies are protecting this asset. And, it is often impossible to ascertain whois actually responsible for protecting this asset.

Part of this obscurity is the result of a radical restructuring of global labour markets – what former US Secretary of Labor, David Weil, calls the fissured workplace.[1]

What does a fissured workplace look like? Picture a computer programmer arriving at the same office, at the same company, on a schedule set by a supervisor for periods of several months or years but they are not considered an employee of the company where they work. Instead, they are hired as independent contractors – essentially a self-employed business provider.[2]

Or what about the cleaner you see in the hallway as you leave your hotel room. You might assume that she is an employee of the Marriott or Westin where you are staying. However, this is unlikely the case. In fact, more often than not, there are several layers of business relationships that can obscure who the cleaners’ employer actually is. The hotel may be owned by a global real estate company or a large institutional investor such as a pension fund who hires a hotel management company to operate the hotel. The hotel management company may hire a cleaning firm that employs the cleaning staff, although her uniform bears the name of the hotel brand.

These kinds of practices are occurring across industries and occupations. Truck drivers transporting consumer goods, internet installers, office security guards, warehouse workers, taxi drivers and factory workers have all seen their employment relationships change significantly over the past twenty years. But it isn’t only happening in low wage and blue-collar workplaces. It is also happening in accounting, compliance, software development and IT.

These workers are part of a growing fissured workforce. Often, they face deteriorating labour standards, unsafe working conditions, instability and stagnant wages.

Responsible investors have been advocating for improved labour standards across companies’ operations – in some cases for many decades. Much of these efforts have focused on the supply chain, where complex contracting relationships and non-existent labour standards enforcement in developing countries allow for terrible working conditions and in some cases deplorable labour practices, including child labour, unpaid overtime, unsafe working conditions and exploitative recruitment practices, to name just a few.

In some ways, the complexities and hidden problems that continue to exist in global supply chains are being replicated in the new kinds of employment relationships that we are seeing in companies’ direct operations. For example, there are some striking similarities in the conditions leading up to the Rana Plaza factory collapse in Bangladesh and the BP Deepwater Horizon disaster in terms of the role that complex contracting relationships at each site played in obfuscating who was ultimately responsible for the safety of those operations. In both cases, these complex business relationships may have also contributed to safety being jeopardized in order to meet short-term performance targets and deadlines set by the lead companies – in the case of the Deepwater disaster, BP and in Rana Plaza, major global clothing brands.

Investors are grappling with trying to understand these complex business relationships and the impacts they might have for individual companies, for portfolios and for the social and financial systems upon which their investment returns ultimately depend.

One of the key challenges that investors face is a lack of meaningful disclosure from companies about their workforce – particularly those parts of the workforce that are falling through the cracks of a fissured workplace.

Let’s look at the recent pay ratio data that is being disclosed for the first time from companies listed on the NYSE. While the pay ratio metric can provide valuable information about how companies are rewarding different types of human capital, we also need to make sure we are analyzing this information in the context of broader trends, including the fissuring of the workplace.

For example, if companies are pushing out lower wage functions to third party providers, using independent contractors or temporary agencies, then the pay ratio metric may not be telling the whole story. It won’t shed light on the level of intra-corporate income inequality (which would still exist) if the lowest paid part of the workforce is being taken off the lead companies’ balance sheet.

In order to appreciate the scale and impacts of the fissured workforce, we need additional information on the company’s entire employment footprint. Currently, for most companies, instead of seeing the employment footprint, the publicly available data is only giving us the toe print.

Recognizing these significant challenges, investors are taking steps to seek better public disclosure from companies.

For example, the Workforce Disclosure Initiative (WDI) was launched in 2017 with the support of over 100 institutions with $10 trillion in assets under management. The WDI is asking global companies to disclose better quality and more standardized data across their employment footprint including each company’s use of part-time, temporary and contract workers; how it maps and identifies risks in its direct operations and its supply chain; and how it exercises its leverage in business relationships to establish strong labour practice standards and expectations, including related to living wages, occupational health and safety, and training.

In the US, the Human Capital Management Coalition (HCMC) submitted a petition for rulemaking to the Securities and Exchange Commission (SEC) asking that issuers be required to disclose information about their human capital management policies, practices and performance.[3]The petition argued that current disclosure from companies was not sufficient to assess adequately a company’s business risks and prospects for investment, engagement or voting purposes.

There is a growing consensus among investors that getting better quality data from companies is an important first step to facilitate a broader understanding of the implications of fissured workplaces for individual companies and across portfolios. But perhaps the bigger task, and one that investors need to become better equipped to address, is the degree to which fissured workplaces are impacting the broader social and economic systems upon which overall investment returns depend.

 

Shannon Rohan is the Director of Responsible Investment Leadership at the Shareholder Association for Research and Education (www.share.ca). She leads a joint initiative of SHARE and the Atkinson Foundation in Canada called Valuing Decent Work, which is mobilizing Canadian investors to advocate for robust decent work practices by Canadian companies. SHARE is a partner of the Workforce Disclosure Initiative.

Mike Musuraca is semi-retired and currently serves on the boards of Verite (www.verite.org) and Sustainalytics (www.sustainalytics.com), and as an advisor to Blue Wolf Capital and the Investor Alliance for Human Rights, as well as a consultant to a number of US labor unions.

[1]David Weil (2014). The Fissured Workplace.

[2]See for example, https://www.thestar.com/news/gta/2018/05/11/this-temp-agency-worker-shows-up-at-the-same-office-every-day-but-his-agency-says-hes-not-a-real-employee.html.

[3]https://www.sec.gov/rules/petitions/2017/petn4-711.pdf