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Long-term Matters: Human capital dilemma

Institutional investors are being asked to take sides in corporate/union disputes, the latest being National Express – or, more accurately, its US franchise – and Teamsters. Both sides present convincing arguments, so how can investors choose?  

Before considering specific cases, investors should ask some macro-economic and investment belief questions.

First, should investors care about rising inequality? Yes. It damages growth, reduces consumer spending and polarises society, resulting in electoral gridlock. And it also harms members’ interests. If there is something investors can do about this at a reasonable cost, as fiduciary capitalists or universal owners, they should.

Second, is there a connection between de-unionisation and inequality? The IMF says yes. If investors really want to see inequality addressed, they should have a bias in favour of appropriate union activity, or they need to explain how inequality can be solved without unions. 

Third, what is appropriate union activity? The contrast between otherwise similar countries – Canada and the US, for example – is stark. Is polarisation only because of unions?  Everyone knows corporate America is particularly anti-union, but what is less well known is that this is fundamentally about mental models – that is, ideology. The evidence comes from the well-respected management theorist Jeffrey Pfeffer.

Fourth, is it just about bargaining rights or is there a wider human capital management (HCM) issue? The answer is the latter. Management and investor neglect of HCM is documented in the UK and the US. Many companies simply do not value loyal employees. Of course, there are exceptions such as the health insurer Aetna, but it proves the rule.

Put simply, investors – and, this includes pension funds that have union-nominated trustees – are a powerful driver for de-unionisation and inequality. 

OK, they are not conscious of doing it because it is the consequence of shared norms and the aggregation of signals down the investment supply chain. But this does not shift their responsibilities.

So what can enlightened asset owners do?

First, they can bring HCM into their mandates. They could ask investment consultants to investigate the HCM culture of the fund managers they use. Investment is a knowledge business, and HCM is key, as Gartmore showed. And they can ask their fund managers to evaluate HCM performance in stock decisions and demonstrate this.  

Having launched the first European HCM fund, I know how hard it is to get asset owners, even those who have signed up to the Principles for Responsible Investment, to engage on this issue, even when integration of HCM adds to the alpha. And it is shocking that unions and their nominated trustees have moved so slowly on this agenda – their immunity to change on this issue seems as deep-rooted as that of investors and corporates.

Second, asset owners could tell their fund managers they should have a bias towards “democratic labour relations” as France’s public service additional pension scheme (ERAFP) has done. Freedom of association is a human right, but it is also good business practice. 

Will there be exceptions? For sure. But just as investors do not distrust all management because of scandals at Enron, Barclays and Vivendi, so there is no reason to have a knee-jerk anti-union bias either. 

Third, investors should tell management that, where there are national arbitration bodies, companies should abide by those results. 

National Express appears to be taking a dangerous, litigious approach to a recent ruling by the US National Labor Relations Board, and companies that paint a target circle on themselves are risky bets. 

Raj Thamotheram is CEO at Preventable Surprises and a visiting fellow at the Smith School, Oxford University

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