Company directors should be put under a new legal duty to turn rising profits into increased wages and training for staff, a think-tank says today.
The Social Market Foundation said that corporate governance laws should be tightened to increase pressure on bosses to help workers increase their pay over time.
The cross-party think-tank also called for pension funds and other big investors to make a reality of their promises to support “responsible” business by investing in companies that deliver long-term raises in wages and training budgets.
The SMF, in a report supported by the Joseph Rowntree Foundation, called on executives, investors and politicians to make a reality of recent talk about socially-responsible approaches to capitalism.
American business leaders and campaigners are increasingly challenging traditional ideas of the purpose of a company, arguing for corporate leaders to do more to share profits with workers and others. British firms and politicians should learn from that example to help workers escape low pay, the SMF said.
The national minimum wage is gradually increasing, and ministers have announced another rise, to £10.50 by 2024. But for many workers, the minimum wage is acting as a ceiling, as they remain stuck at the bottom of the payscale. Only a sixth of workers who were on low pay in 2006 had managed to consistently escape low-paid employment a decade later.
The SMF set out recommendations for how the government can encourage business to do more to support workers climb the ladder of wages and skills. Keeping staff for longer and investing in their training is good for business, the report said.
Among the recommendations:
- New Duties for directors
A new requirement in the Companies Act requiring Directors to ensure workers’ share in the proceeds of growth in a company. Section 172 of the Act should be amended tomean that company directors have an obligation to ensure and demonstrate that employees, at all levels of the company, are sharing in the proceeds of company growth.
The Government should also consider making it easier for courts to examine whether directors have followed appropriate processes when ensuring they adhere to Section 172.
- Encouraging investors
Many big investors, who handle pension savings for millions of British workers, say they want to back firms that meet high standards for on the environment, society and governance (ESG) and assess companies partly on whether they pay the minimum wage and comply with labour laws.
The SMF said that such ESG analysis should set a higher standard, judging firms on how pay and train their staff. To help guide investors towards companies that support worker progression, the government should work with business to develop a new “kitemark” for firms that offer good wage and career progression, and training. Accreditation to this scheme could form a key benchmark for ESG investment, the SMF said.
- New reporting requirements
Companies should have to publish data on wages, progression, training budget and HR practices, to put them under social pressure to support staff better.
The Government should require firms to draft a narrative report that explains their decisions on wage-setting and provides a strategy for supporting pay and career progression, including key targets for the future. From this year, big companies have had to publish “S172 reports”. These should include pay and training provisions.
The Government should publish league tables by sector, identifying the firms with the largest pay ratios and worst records of pay progression and training.
Nicole Gicheva, SMF researcher and one of the authors of the report, said:
“The best employers already know that paying and training staff well is good for business: they keep workers for longer and get more out of them. Corporate governance laws should be updated to encourage all firms to meet the standards set by the best.
“Investors have a vital role here too. It’s not good enough to offer warm words about supporting responsible business. People want to know their pension savings are invested in a way that encourages firms to look after their staff properly.
“ESG investing can produce good returns and social benefits, but investors need to aim higher on labour standards. Just complying with labour laws isn’t enough – responsible investors should back companies that deliver rising wages and equip their staff with skills for the future.
“Too many British workers are still trapped in low pay. Sensible policies can help all businesses take responsibility for helping staff out of that trap through better-paid work and more training.”
Louise Woodruff, policy & partnerships manager at the Joseph Rowntree Foundation, said:
“In a country with record levels of employment, it is unacceptable that four million workers are trapped in poverty. Work should provide a route to a better life, but low pay, insecure hours and lack of progression opportunities are holding people back. Employers and government must work together to find ways to redesign our jobs market.
“Low-income voters are likely to play a key role at the next election. They want to see their leaders delivering better-paid and more secure jobs that boost their living standards; and opportunities to improve their skills. All the political parties would be wise to make this a priority, if they want to win enough support to form a government.”
For more information or to arrange an interview, contact the SMF:
Barbara Lambert, SMF media officer: firstname.lastname@example.org and 020 7222 7060
James Kirkup, SMF director: email@example.com
The new SMF paper, Pay progression for low-paid workers Research Paper 2: The role of corporate decision-making, is part of an SMF-JRF project exploring ways to encourage long-term wage-growth. An earlier paper, published in June, is here: https://www.smf.co.uk/wp-content/uploads/2019/06/Pay-Progression-for-Low-Paid-Workers-Paper-1.pdf
1 US examples:
The US Business Round Table in August issued a statement backed by 181 CEOs arguing that the purpose of a public company is about more than just passing on profits to shareholders. Business should do more for other stakeholders, including by “investing in our employees”, the CEOs said. “This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world.”
Leo Strine, Chief Justice of the Delaware Supreme Court, recently published a paper called Toward Fair and Sustainable Capitalism, which calls for an EESG (Employees, Environmental, Social, and Governance) approach to business and investing. https://corpgov.law.harvard.edu/2019/10/01/toward-fair-and-sustainable-capitalism/
About the SMF:
The Social Market Foundation (SMF) is a non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this.
The SMF retains complete editorial independence of its publications.