The recent move by First Super encouraging fund managers to look more deeply into Domino’s business model is the tip of a very large iceberg, with an ever-expanding list of investor groups set to make or break listed companies behaving well or perceived to be behaving badly.

We’ve entered a new era of ethical investing where risk management is the imperative.

  • Ethical investing has evolved beyond assessing the ‘sinfulness’ of a company to being a risk management tool to analyse how a company interacts with its workers, suppliers and the community
  • Underpayment of labour has garnered significant social commentary over the past 18 months and prompted a government and regulatory crackdown
  • The list of stakeholders impacted by underpayment continues to grow
  • Perception vs reality – the court of public opinion can sway where the investment dollar is spent
  • Question for directors and management: do you have the appropriate measures in place to manage risk?

Risk management is the new black in ethical investing

The recent move by First Super encouraging fund managers to look more deeply into Domino’s business model is the tip of a very large iceberg, with an ever-expanding list of investor groups set to make or break listed companies behaving well or perceived to be behaving badly.

We’ve entered a new era of ethical investing where risk management is the imperative.

Moving beyond ‘sinfulness’

Ethical investing became de-rigueur as the socially responsible millennials entered the workforce in the noughties. It was introduced to the economic market as a lens to decide whether to invest in a company based on its environmental, social, moral and sometimes religious criteria. This traditionally meant companies which derived revenue from tobacco, weapons and environmentally damaging practices were considered personae non gratae to the ethical investor.

This early form of ethical investing, while admirable and a valuable shift, potentially excluded companies from being considered for certain investment portfolios based on their ‘sinfulness’, irrespective of whether they delivered returns and/or contributed to society in a positive way through other means.

As companies continue to become more aware of the importance of strong governance, and being seen to be exemplary contributors to the community, the concept of ethical investing is maturing and broadening.

Investors, superannuation funds, shareholders, suppliers and financiers are voting with their dollar. It is not enough for a company to deliver good economic returns and not be sinful. More often investors are starting to make their investment choices based on additional criteria such as how a company interacts with its employees, suppliers, customers and community. These factors are considered important in determining the risk of the company being involved in expensive disputes or scandal leading to hefty liabilities, business disruption and loss of earnings. There are now a number of companies that specialise in assessing a company’s investment rating incorporating these criteria.¹

Public perception drives investment decisions regardless of reality

A number of organisations have found themselves in the public eye for alleged underpayment of wages to employees. The most high profile instances in Australia over the past 12 months include Domino’s, Bakers Delight, Caltex, 7-Eleven and Pizza Hut.

Unfortunately for any organisation dealing with public scrutiny over its business practices, the court of public opinion is likely to influence investors, particularly if the organisation is slow to respond to allegations, or is not willing or unable to be transparent around its activities.

When financial risk is linked to social responsibility, the market moves towards self-regulating conduct – no organisation wants their reputation tarnished by association or to find out the company they have invested in has significant unreported liabilities for wages and entitlements, and its reputation is battered.

Learning from Sports Direct in the UK

UK business Sports Direct found out the hard way that underpaying workers has dire consequences.

Sports Direct went into crisis in December 2015 after the Guardian Newspaper conducted an undercover investigation which revealed that temporary warehouse workers at its Derbyshire warehouse were paid less than the national minimum wage. The investigation also revealed:

  • Workers were forced to stay longer than their shift to undergo rigorous searches
  • Workers were docked 15 minutes pay for being one minute late
  • Other ethical issues, including staff being berated for not working fast enough, having to show their underwear during searches and a high degree of medical incidents in the warehouse

The scandal prompted a parliamentary inquiry and was branded a “scar on British business”. By June 2016, Sports Direct’s share price had fallen by 11%, sales declined and shareholders began to turn on the company. By December 2016, reported half-year profits had fallen by 57% and the share price had more than halved.

Continued spotlight on the company and concern over corporate governance led to the Chief Executive and acting financial officer leaving the company, while the Chairman
was pressured to resign.

Has ‘flexible’ become a ‘vulnerable’ workforce?

On the labour supply side, while economists, both sides of politics and interest groups have lauded a move towards a ‘flexible workforce’ (the average part time worker spends 17 hours a week at work²) perhaps this masks a deeper issue. With wages growth in the private sector remaining below 0.06% per quarter for the past two years³ considered alongside the prevalence of alleged underpayments across retail, agricultural and services industries, could it be that the flexible workforce is actually a vulnerable workforce?

The implications of underpaying workers extend beyond simply being illegal. For the business owner underpaying staff, while financial benefit may be gained short term, the message is clear: this issue will not be tolerated.

Underpayment of wages impacts not only workers and the under-payer, but also the various stakeholders and financial backers of the under-payer – such as superannuation funds who direct investment.

The Fairwork Ombudsman’s website details organisations who have a track record of underpayment, yet the public attention on this issue has really only gathered steam over the past 18 months, as the number of stakeholders and interested parties examining the risk of being associated with an organisation underpaying its workers grows. The ramifications of being caught underpaying your staff are too severe for many businesses to survive. It just doesn’t make business sense to run the risk of underpaying employees.

Navigating the challenges presented by rapidly changing dynamics around labour market governance requires specialist expertise and agility. PPB Advisory’s Forensics and Disputes team, combined with our Consulting practice, offers a full suite of services from investigations, independent expert reviews, dispute mediation, governance architecture, business strategy and implementation. Our differentiator is the calibre of our practitioners together with our speed, efficiency and discretion in delivering outstanding outcomes for clients.

¹ Sustainalytics, IW Financial MSCI and Morningstar, by way of example.

² http://www.abc.net.au/news/2016-10-24/underemploymentphenomenon-emerges-with-rise-of-part-time-work/7958462

³ http://www.abs.gov.au/ausstats/abs@.nsf/mf/6345.0