How companies manage their employees is increasingly seen by investors as material to long-term performance and risk mitigation. It is also a key aspect of integrated business reporting that unifies financial and non-financial risk disclosures. As long-term investors, we will continue to advocate for robust human capital practices and improved disclosures.
Human capital management issues are particularly pertinent in certain sectors and geographies, and we have targeted engagements in key sectors accordingly. Human rights considerations have also led us to engage companies around the needs of their wider stakeholder base, including their customers.
2021 engagement case studies
We believe the recruitment, development and retention of the right personnel are critical to the successful execution of a company’s overall strategy – and there is growing evidence a diverse workforce is key. We engage with company management across a range of sectors around workforce gender diversity reporting, including remuneration policies, which are important tools to further these objectives.
Daikin is a Japanese manufacturer of air-conditioning equipment. Despite the CEO’s emphasis on diversity, we noted its low female representation at the managerial and executive level.
We engaged the company in 2021, to express our concern that despite the CEO’s stated intentions and a number of female advancement projects since 2011, female managerial representation had increased from 2.1% in 2011 to only 6.0% in 2020, remaining low. We wanted to understand the company’s plans to increase female representation at senior levels.
Daikin shared that they have established new targets to promote female participation, including committing to appointing one or more female executives and to increasing the number of female managers. We felt that this target was a good start, but also wanted to encourage the company to have strategies in place to achieve its new targets.
While acknowledging that there are still few female senior management members, the company explained that they appointed their first female executive in May, who has been a member of the women advancement project from the start, to lead human resource development. They also appointed a female independent director on the board. Daikin explained their efforts to expand the female employee base by increasing the number of female hires and developing the total pool of female students who will pursue careers in science and technology fields. The company has been promoting STEM education among female students, not only at universities but at high schools as well. We emphasized the importance of building a pipeline and appointing young professionals to managerial positions at an early stage.
Outcomes and next steps
We will continue to monitor the company’s progress on its female representation at the managerial and executive level as well as ratio of new male to female hires in 2022.
We are expanding our discussions to encourage a broader scope of diversity considerations, including race and ethnicity, across all levels of an organization to ensure diverse viewpoints are heard and incorporated. We encourage companies to create an environment in which employees at all levels feel valued and can bring their own diverse experiences and perspectives.
Rio Tinto, Australia/UK
In 2020, the expansion of Rio Tinto’s iron ore mine at Juukan Gorge resulted in the destruction of a 46,000-year-old sacred site to the Traditional Owners. Concerns were raised over certain internal processes, including the representation of indigenous professionals in the company.
We engaged extensively with the board and senior management at Rio Tinto over 2021. We engaged the newly appointed CEO in July to request that the company strengthen its governance practices and internal processes, as well as its cultural heritage program. The CEO described engagement with indigenous people to understand their views and how he has set diversity as a key goal for the company as part of its reform measures, pledging to place women and indigenous people in leadership roles.
Outcomes and next steps
Over the course of our continued engagement with management teams in 2021, we believe the company has strengthened its policies in the following areas: 1) renewed mine plans with revised cultural heritage assessments, 2) new consultation procedures around mine expansion and development, 3) ongoing engagement with indigenous groups and, with a focus on diversity, and 4) increasing employment opportunities for indigenous groups at all levels of the company. The company has invested USD 50 million to increase the number of indigenous professionals in the company, aiming to employ 50 managers from an indigenous background. We will continue to monitor progress on further reform implementation of these aspects in 2022.
Companies should report transparently on human capital management. We consider the Sustainability Accounting Standards Board (SASB) materiality framework to be a helpful tool for companies considering enhancing their disclosures on industry-specific human capital metrics. Our engagements with companies therefore focus specifically on enhancing disclosure in these areas, particularly in emerging markets where disclosure is typically lacking.
Workplace diversity data provides useful information for investors, but also for companies’ own analysis of their performance. However, disclosure of this information has typically been lacking for Emerging Market companies, partially because of the lack of regulatory requirements and peer pressure in the past. This is a key aspect that we have encouraged companies, including Tencent, the Chinese internet company, to improve on.
We engaged the company after reviewing their updated ESG disclosures in its 2020 annual report. We provided feedback to the company on their updated disclosures. We commended the company for disclosing significantly more human capital data than before. They include gender (29% female), age (40% under 30) and turnover (12%). Going forward, we asked that the company consider our feedback and report back on their conclusions and next steps. We also highlighted to the company best practices in ESG reporting we have seen at other companies for their reference.
Outcomes and next steps
The company acknowledged the importance of human capital management, and we will monitor how the company’s reporting improves next year.
The USD 2.4 trillion garment and footwear industry employs millions of workers worldwide and has a history of poor working conditions and unfair treatment of workers. This is complicated by the lack of living wages in many garment-producing countries. These issues can result in reduced morale and productivity, worker attrition and reputational damage to companies and their long-term value.
Concerns have been raised around a number of labor allegations at online clothing retailer Boohoo over the last 18 months. Specific “failings”, found by an independent review that was conducted by a senior external lawyer, included the identification of low pay and poor working conditions for its employees.
We have engaged with the company multiple times over the last 18 months, both one-to-one and through collaborative engagements via the Investor Forum. Collaborative engagement enabled us to advocate a strong and consistent message to the company as an industry, in addition to continuing our own in-house engagement with management and board members. The collaborative engagement included engagement meetings as well as formal letters detailing the reforms that investors required from the company. We asked the company for: 1) A supply chain review and a review of its purchasing practices; 2) Disclosure of full findings of the independent review; 3) Report on ESG in a sustainability report; and 4) Refreshment of the board with independent directors and to appoint a director with relevant experience on key ESG issues. We asked the company for these changes as well in our one-to-one engagements with the company, where the same message was reinforced to the company.
Outcomes and next steps
Boohoo has laid out six steps it is taking to improve governance, including the formation of two committees to oversee risks to the business and its supply chain compliance. In early 2021, Boohoo published a list of its 100 UK and international suppliers on their website. In addition, it has developed new tech solutions, adapted processes and invested resources and funds to support garment workers. They announced they are launching a ‘manufacturing center of excellence’ in Leicester to demonstrate best practice within their warehouse spaces. Boohoo has appointed a non-executive director with ESG expertise.
Voting on human capital management
We directly engage with companies on human capital management and also express our views by voting proxies in the best interests of our clients.
2021 voting case studies
Voting issue: Diversity and inclusion
Union Pacific Corporation, US
Concerns were raised that the issuer’s reporting was insufficient for investors to determine the effectiveness of its human capital management programs. As a result, two shareholder proposals were filed at the company requesting annual disclosure of Equal Employment Opportunities (EEO-1) data and an annual report assessing diversity and inclusion efforts.
The company has made commitments around its hiring practices and provides information on its recruiting partnerships and steps to achieve diversity goals. However, the company currently does not articulate how these efforts are overseen by the board and integrated into strategy, and the company had not shared recruitment, retention, and promotion data by gender, race, or ethnicity.
Outcomes and next steps
We voted in support of both proposals with the view that such reports, including quantitative details, would allow shareholders to better assess the efficacy of diversity and inclusion efforts. The proposals received 86% and 81% shareholder’s support respectively, and UNP subsequently disclosed EEO-1 data and shared. We will continue to evaluate UNP’s disclosures and improvement in workforce diversity over time.
Voting issue: Human rights risk
Tyson Foods, US
The issuer struggled to contain the number of cases of workers getting COVID-19 at its Waterloo facility in Iowa. As a result, a shareholder proposal was filed at the company’s February AGM requesting the company to prepare a report on its human rights due diligence.
The company has had to contend with large numbers of Covid-19 cases at its Waterloo facility in Iowa, which has many immigrant and refugee workers. The facility has had over 1,000 cases and six deaths due to COVID-19. The Waterloo plant has around 2,800 employees in total. It faces a lawsuit that includes allegations that its management lied to interpreters for those workers about the risks related to the facility and falsely claimed that nobody had tested positive while confirmed cases had appeared as early as March 2020. In December, seven managers at the plant were fired for running a cash betting ring over the number of cases that would occur at the facility.
Outcomes and next steps
As a result of these concerns, we supported the shareholder resolution on human rights risk assessment at Tyson Foods in order to better ascertain how the company is handling its human rights-related risk. While the resolution ultimately did not receive majority shareholder support, we will continue to engage on this topic.
Certain client strategies invest on the basis of sustainability/Environmental Social Government (ESG) criteria involves qualitative and subjective analysis. There is no guarantee that the determinations made by the adviser will be successful and/or align with the beliefs or values of a particular investor. Unless specified by the client agreement or offering documents, specific assets/companies are not excluded from portfolios explicitly on the basis of ESG criteria nor is there and obligation to buy and sell securities based on those factors.