Leveraging Investors to Boost Employee Financial Security

October 3, 2018 • Timothy Flacke

This post is the sixth in a series of reflections from participants of the Economic Security Summit. This article was originally posted on buildcommonwealth.com, and was partially inspired by conversation had in a breakout group on incentives at the Summit.

At Commonwealth, we are exploring the role employers can play in the financial well-being of their employees. Our publication Financial Security in the Workplace: Making it Work for Financially Vulnerable Workers makes the case that businesses can support the financial security of their workers in ways that improve employees’ lives and drive business success. While we continue to explore specific ways business leaders may strengthen the financial security of their workers, we are also exploring the role investors could play in influencing business leaders’ decisions.

Business leaders tend to report first and foremost to company shareholders, who traditionally choose to invest in companies based on the company’s earnings. More and more voices are drawing attention to the dangers associated with short-termism: a focus on reporting quarterly earnings and short-term profits to investors over long-term strategy and sustainability. Larry Fink, the CEO of BlackRock, articulated the need for businesses to have a long-term strategy that takes into account both financial performance and societal impact:

Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends – from slow wage growth to rising automation to climate change – affect your potential for growth.

While the pressure to focus on short-term profits may come from some investors, there is a group of investors who are interested in the long-term value of a company and can be allies in the work to increase employee financial security. These “intrinsic investors” who prioritize the long term over quarterly earnings hold 75% of all US stocks and can influence a company’s strategy and vision. Impact investing is also growing in popularity as a way to generate social benefits alongside financial returns. More investors are making decisions based on a company’s values in addition to its bottom line.

A major barrier for investors who want to prioritize employee financial security is a lack of standardized financial security metrics. Investors interested in other causes, such as climate change or board diversity, can find clear, public data on how companies compare and can even invest in cause-specific funds that make impact investing simple. These types of comparable metrics are not yet available to interested investors. At Commonwealth, we are exploring collaborating with investors to develop a set of worker financial security metrics. For example, practices already exist to measure the CEO to worker pay ratio and some benefits offerings, such as access to a retirement plan. As we think about other standards, we are asking:

Who in the workforce has access to benefits that may increase financial security? Are these only for full-time or salaried employees, or hourly employees as well?

Beyond just the offering of benefits, are these benefits having an impact? Are employees enrolling?

How might we account for offerings that are currently considered “fringe” benefits, such as sidecar savings accounts, student loan repayment, or small dollar loans?

In the coming year, we will continue to explore how we can make it easier for investors to put their money in companies that go beyond compensating workers fairly to supporting their financial security.

Tim Flacke is the Executive Director of Commonwealth, a nonprofit that strengthens the financial opportunity and security of financially vulnerable people by discovering ideas, piloting solutions, and driving innovations to scale.