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E-MailMichael Peregrine is partner at McDermott Will & Emery LLP. This post is based on his recent article, originally published in Forbes. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).
Proposals and pressures associated with payment of a “living wage” to employees may present themselves on the boardroom agenda much sooner than corporate leaders expect.
Long considered controversial from economic and shareholder perspectives, living wage concepts are receiving more attention in the context of economic policy, social responsibility and ESG investing. As progressive perspectives concerning income equality, and executive and employee compensation, are becoming more mainstream, corporate leaders should prepare for greater engagement in this important conversation.
The concept of a living wage isn’t a new concept; it’s not something that just popped up from the 2020 election cycle. It’s been around for a while, dating back in some respects to the Great Depression, and in other respects dating back to social and labor issues arising from the days of the Industrial Revolution.
There’s no specific, “one-size-fits-all” definition of a living wage. It most frequently refers to that level of income sufficient for a worker to afford the basic needs of life, such as food, housing, clothing and transportation—with a small margin to address unforeseen events. The expectation is that a living wage is a baseline for an income level that allows a worker to achieve an acceptable standard of living through employment, without reliance on government assistance programs. The formula for determining a living wage is constantly evolving based on multiple factors, including family size, location and age.
In their discussions, it will be important for corporate leaders to distinguish “a living wage” from similar concepts such as “subsistence wage” (e.g., that which is necessary to maintain biological functions); “minimum wage” (e.g., a wage level set by government mandate); and “justified wage” (e.g., an income level that reflects market dynamics such as work experience, education, skill and the state of the economy). The potential for leadership confusion is not insignificant.
The current relevance of a living wage can be attributed to the increasing significance attributed to social responsibility concepts and to ESG-focused investing. In particular, both the Business Roundtable and public positions by prominent asset managers such as BlackRock promote the exercise of corporate purposes in favor of a broader scope of constituents, including the organized workforce. Indeed, BlackRock has specifically called on companies to embrace a greater responsibility to help workers navigate retirement, calling it part of a “social compact.” Similar themes of employee income equality are promoted by the Council for Inclusive Capitalism with the Vatican.
The Securities and Exchange Commission (SEC) has recognized the importance of social responsibility themes (e.g., human capital, human rights, climate change) as fundamental to U.S. markets, central to the interests of investors and worthy of greater disclosure. To that end, the SEC is developing a disclosure framework for climate change matters, and is also considering broader standardized ESG reporting beyond those relating to climate risks.
Perhaps more immediate is the Biden administration’s focus on income equality, and efforts to address the issue in the context of its forthcoming economic plan. To that point, the March 20 edition of The New York Times’ DealBook feature was devoted to an extensive discussion of the living wage policy debate. It should also be noted that many prominent U.S. companies have made an affirmative decision to raise their minimum wage to $15 or higher, doubtless some in reaction to the increased federal minimum wage proposal of the Biden administration.
All of which serves as a reminder to corporate leadership of the rapidly diminishing distinction between what is “good” and what is profitable’ and the resulting need to embrace social responsibility as enterprise value. Indeed, many companies are already pursuing a broad array of socially beneficial-oriented policies, such as those relating to employee wellness; digital training; job retention post AI implementation; increased workforce and management diversity; and improving workforce safety. Income equality initiatives – whether through provision of a living wage or some related proposal – would be an entirely consistent approach.
This shift in regulatory and policy focus on social responsibility may be coming more rapidly than some boards anticipated. The oft-articulated linkage between profit and purpose remains hard for many directors to accept. And the concept of a living wage may be inconsistent with corporate financial goals, especially from the perspective of some investors.
But it is incumbent upon the board to confront this evolving social environment and its impact upon the corporation’s workforce. And there are several straightforward ways to accomplish that; e.g. monitor the policy debate; track the evolution of legislative proposals; follow the efforts of other companies to address income equality and retirement planning; engage in direct conversations with corporate human capital executives; develop a menu of possible income/benefits options for the workforce.
The communists are not storming the rampart. Rather, they are legitimate matters of policy and purpose, worthy of board attention. These are not just issues of operations, to be delegated to management. And like the living wage conversation, they have a tendency to sneak up on the unprepared board.
