As a part of the SOCAP365 year-round explorations into topics in impact investing, Transform Finance organized and moderated a panel on "Human Capital: Investing in the Future of Work." This conversation was a natural fit given our current analysis of investor approaches to the changing dynamics of labor.
Joining Transform Finance Executive Director Andrea Armeni on the panel was NYU Stern's Tensie Whelan, our thought partner on the project, along with Vonda Brunsting from the SEIU Capital Stewardship Program and Cornerstone Capital's Sebastian Vanderzeil.
The panel started with the consideration that workers used to be seen as critical to the functioning of business and to a prosperous economy. Increasingly, however, the workforce is treated as a liability, as a cost to be contained. This new dynamic is not merely an effect of the “creative destruction” of automation, and it extends to the confluence of several trends, from the primacy of returns on capital over labor to global economic forces.
The discussion covered the case of Walmart, which in 2015 raised the wages of its employees (to a level still much below the demands of labor advocates) amid public scrutiny and had its stock plummet, causing a subsequent slashing in hours and benefits for its workers. It also reviewed the 5.2% immediate decline in stock price when American Airlines agreed to give a salary increase to pilots and flight attendants two years before scheduled contract negotiations, negating, from an investor perspective, the recognition that an increase in wages would make the AA workforce stronger and the company a better value in the long run. These cases reveal the perverse relationship between a company's (somewhat) pro-labor policies and its stock price in the eyes of short-term investors.
This fraught relationship is threatened even more by trends in automation and a shift to contingent employment; i.e. an increase in gig economy jobs and part-time work. With robots able to replace more and more service jobs – according to Vanderzeil, it is only the humanistic, "judgment and ethics" jobs that are safe from being automated – companies face the decision of either contributing to unemployment and underemployment or potentially facing the wrath of quick-to-sell investors. From an investor perspective, and particularly for a “universal owner” such as a pension fund, there ought to be a concern that at the systemic level the reduction in overall workforce may well reduce the purchasing power for the goods and services its portfolio companies produce: if Walmart, capturing over 30% of a local retail market share and 20% of local employment as it does in many parts of the US, continues to automate, who will be left to buy products if non-automators fold under competition and locals lack savings from their gig economy jobs? Vanderzeil acknowledged that Walmart, to its credit, is recognizing its role in these scenarios - but in what direction will investors push it?
Vanderzeil further highlighted, based on the Cornerstone research, the difference in scenarios across different industries. Some companies such as Panera Bread have successfully used automation to free up resources and create more jobs. Whether job creation through automation can happen systemically, rather than at the single-company level, remains to be seen.
Also entering the conversation was the issue of a labor pension fund's fiduciary duty to workers, and how they can think about workers in relation to broader economic trends. How can pension funds, in Canada's tar sands-reliant Alberta, for example, consider a long-term investment strategy that leans toward renewable energy when so much of the regional economy is dependent on fossil fuels? On the one hand, a labor pension fund has at its core the well being of workers, and as such should be concerned about their overall fate – today and in the future – well beyond the simple consideration of maximizing investment returns. On the other hand, pension funds are subject to strict fiduciary rules on maximizing financial returns and do not quite enjoy the flexibility of, say, a family office, in deciding to invest in a way that fosters overall social benefits beyond the simple financial returns. One solution proposed by Vonda Brunsting is more state support of union pension funds, which would allow the flexibility to invest with a more long-term approach for its beneficiaries by moving both capital and jobs from failing industries to growing ones. Brunsting cited the Dutch pension funds as a model for how to do this – unfortunately, the US political context is not one fostering support for such a model.
The following questions were also touched on, by both panelists and audience members, and led to a fruitful discussion:
- How does this changing role of labor at the firm level affect the economy as a whole? How do the changes affect wealth inequality and how should investors be thinking about the risks brought about by the change? The considerations touched on the fact that increasing wealth inequality constitutes a risk for investors, going well beyond its social implications.
- How can workers, and not only investors, benefit from the change, and how can investors play a role in ensuring that the change does not lead to further erosion of the fabric of society? The panelists noted that during past periods of automation, there was a social safety net in place to ensure that workers could weather the change and be adequately retrained. This is no longer the case, and the social risks are higher. Whelan highlighted how wages and jobs have become decoupled from growth and “productivity.” While between 2002 and 2012 U.S. productivity grew by 30%, the bottom 70% of workers’ wages were stagnant or in decline.
- Who ought to bear the costs of the displacement of workers, low wages and benefits, and the move from jobs to gigs? This is a major consideration given that “work” no longer looks like it used to. 34% (53 million) of the total U.S. workforce is currently freelance. By 2020, over 50% (82 million) will be contingent workers with no job security and no benefits. This is an issue that requires significant policy interventions that go beyond a traditional investor’s role, but that can nonetheless be influenced by investors committed to fairness across society.
Interested in Transform Finance and NYU Stern's Center for Sustainable Business's project on this topic? Please reach out at firstname.lastname@example.org.