With soaring inflation rates and the prospect of widespread industrial action across the UK, along with the increasing materiality of human capital management in the minds of investors around the globe, ShareAction’s shareholder resolution at Sainsbury’s July 7 AGM seemed well timed.

Submitted by ShareAction, a UK-based NGO, with the backing of 10 institutional investors, including Legal and General, HSBC, Nest and Fidelity International, the proposal requested that the company accredit as a Living Wage Employer by July 2023. This accreditation would have committed Sainsbury’s to pay its employees and the employees of its suppliers a Living Wage.

Shareholder proposals are not a common feature at most UK AGMs. That only served to intensify the spotlight on one of the country’s largest grocery chains – and largest employers, with a significant proportion of staff on low wages and an extensive supply chain of third-party contractors.

Though it ultimately failed to secure majority shareholder support, the high-profile nature of the proposal and the considerable AUM of its backers further emphasised the growing importance of ESG issues, and specifically those related to human capital management. It also served as the latest forum for an intensifying debate on how ESG goals should be pursued and how investors should intervene and pressure companies on ESG-related issues, especially in areas that are traditionally the purview of management.

Background: National Living Wage vs. Real Living Wage

The UK maintains several categories of minimum wage requirements, generally determined by age. According to the most current rates, which were announced in October 2021 and took effect in April 2022, the National Living Wage applies to employees aged 23 years and up, and is currently £9.50 per hour, while the National Minimum Wage applies to those younger than 23, and varies by age range.

On the other hand, the voluntary “Real Living Wage” is set by the Living Wage Foundation, and is a recommended rate that is intended to ensure all employees earn a wage that meets the true cost of living and covers everyday needs. The Real Living Wage is currently set at £9.90 across the UK and £11.05 in London. To date, there are over 10,600 employers that have been accredited by the Foundation, including around half of the companies in the FTSE 100. However, no UK supermarket is accredited with the Living Wage Foundation.

Sainsbury’s Response and First Reactions

In May 2022, in an open letter to shareholders, Martin Scicluna, Sainsbury’s chair, argued that the company’s pay rates were already higher than many of its competitors and that, “Accrediting as a Living Wage employer would mean that a third party – the Living Wage Foundation – would decide our colleague pay changes each year… We believe it is right for the Company and our stakeholders to make independent decisions regarding pay and benefits, rather than have them determined by a separate external body.”

The statement followed an announcement in April 2022, that the company had agreed to increase the hourly rate will increase from £10.10 to £11.05 for colleagues in inner London and from £9.75 to £10.50 in outer London. Further, in its most recent annual report, the company stated that it commits to paying above the National Minimum Wage and, when setting pay each year, will consider the Living Wage, the National Living Wage, competitor pay, and the financial performance of its business. Although this policy does not necessarily extend to its third-party contractors, it states that the majority are already paid at or above the Living Wage.

Vote Decisions & Active Ownership

Investor views on this proposal have been split. It was submitted with the backing of 10 institutions, including Legal and General, HSBC, Nest and Fidelity International. On the other hand, investors including Schroders publicly opposed the proposal. The differences, however, have little to do with the broad subject of the proposal. Most institutions are supportive of companies investing in employees. Rather, many opposed to the proposal were more concerned about the targeting and practical application of ShareAction’s specific request, leading to a broader debate on how investors should pursue ESG-related aims and objectives at their portfolio companies.

Specifically, Schroders, one of Sainsbury’s top five shareholders, published a rationale for their “against” vote, explaining this opposition in the context of their overall approach to ESG activism. The asset manager has faced criticism for voting against Living Wage accreditation despite being Living Wage accredited itself. However, Schroders noted that the proposal would leave Sainsbury as the only UK supermarket with wages set by an external agency, which “could inhibit Sainsbury’s ability to remain competitive; for example, making it harder to keep prices of essentials low. This could ultimately be worse for its employees, customers and investors.” The proponent, however, argued that retailers adopting a strategy that includes base rate pay above minimum wages can drive increased service quality, productivity, and a reduction of costs in the long-term. Accordingly, it could be argued that Sainsbury’s could have used its status as a Living Wage accredited employer as a competitive advantage to its peers, making it easier to attract and retain employees, particularly given the current market and labour conditions.

Schroders also emphasized that it viewed engagement and voting as interrelated components of active ownership, noting that expecting investee companies to pay direct employees a living wage already forms part of its engagement blueprint. In its view, the supermarket’s responsiveness to the issue when the proposal was announced, and to prior engagements, reduced the need to take voting action. Moreover, Schroders put the vote at Sainsbury’s into the wider context of a “growing recognition that ESG factors cannot be applied in a blanket way and without due consideration, as “unthinking ESG” is what results, which harms the credibility of sustainable investing”, describing the vote as “a pivotal moment for active ownership”.

Glass Lewis Perspective

Glass Lewis reviews environmental and social shareholder proposals on a case-by-case basis, taking into account the specific request of the resolution, the implications of adopting the resolution, the target company’s responsiveness to the issues raised by the proponent, and whether the company’s management of the issue at hand presents a financially material risk for the company.

With respect to the Sainsbury’s proposal, Glass Lewis acknowledged the shareholder coalition’s concerns. However, we were not convinced that Sainsbury’s’ existing approach to wages represented a material risk, or that the company has a history of underpaying its employees. Furthermore, we were conscious that the adoption of this proposal would have left an external third-party organisation in charge of wage setting, potentially putting the company into a constrained position relative to its peers. As such, we recommended voting against the proposal.

With regard to the risk that the supermarket could reduce its current pay levels or fail to keep up to a rising Living Wage, we noted that Sainsbury’s provided robust disclosure concerning its hourly rates. As it stands, following the most recent increases, the basic hourly rate is £0.10 above the Real Living Wage. Moreover, as outlined above, the company had committed to considering the Living Wage when setting its pay rates each year.

We also noted that, with respect to pay rates for third-party contractors, which appeared to be another key issue, Sainsbury’s stated that, across its UK operations, it spends approximately £500 million on contractors and that the majority of its contractors are already paid at or above the Living Wage. Adopting the proposal would have required that Sainsbury’s expend additional resources to determine which of its contractors are paid below these levels.

In aggregate, since it did not appear that Sainsbury’s had mismanaged its wages, we were concerned that allowing a third party to determine the wages paid to employees and contractors could have bordered on micromanagement – particularly since this was a binding proposal, thus not allowing any flexibility in its implementation.

Outcomes

On July 7, 2022, the resolution was backed by just under 17% of Sainsbury’s shareholders. Although this is a relatively low vote result when compared with other markets, it is notable in the UK context, with most shareholder proposals receiving well below 20% support. Indeed, despite the majority of votes going against the resolution, Rachel Hargreaves, campaign manager at ShareAction, claimed that it “sent a powerful message from shareholders that Sainsbury’s should make a Living Wage commitment to all of its workers”.

The vote also highlights growing debate within the investment community, as well as the difficulty in executing an ESG strategy. That has brought adverse implications for certain investors.  Notably, following publication of its vote decision, Schroders was asked to leave the Good Work Coalition with immediate effect. As reported by Responsible Investor, a spokesman for ShareAction said they “find Schroders’ vocal opposition to the resolution impossible to reconcile with the firm’s membership of the Good Work Coalition, which exists to advance decent work across the UK economy.” Schroders responded that it believes “nuance is critical” and thinks that “as an ESG community, we should be prepared to disagree when ultimately we share the same long-term ambitions.”

While the proposal was not approved, the first UK shareholder resolution on Living Wage nonetheless shows that human capital management practices can have wide-ranging impacts on companies and their investors, and highlights the nuance and complexity of ESG integration. Given the emphasis placed on this resolution, the emerging shareholder divide on how to best execute an ESG strategy, and the rapidly growing number of environmental and social proposals submitted to companies on a global basis, the Sainsbury’s resolution is unlikely to be the last dealing with these matters, or the final word on how to approach active ownership.

Courteney Keatinge also contributed to this report.