IN-DEPTH: Q&A with Arjuna Capital
An interview with Julia Cedarholm, senior associate, ESG research and shareholder engagement at Arjuna Capital.
At Arjuna, pay equity has been a focus area for some time now. What are your main areas of concern?
We have engaged companies on pay equity since 2015 - for almost a decade now. We have been really concerned about racial and gender pay gaps within companies because we recognize how pervasive of a problem they are. Unfortunately, pay inequities continue to persist across race and gender in the U.S. Recent data show that black workers’ median earnings are only 81% of white workers’ and women’s earnings are only 84% of men’s earnings. We have a systemic issue of pay inequity within the U.S. that companies must be willing to examine and resolve.
As investors, we’re particularly concerned about pay inequities because we know that they are bad for business. Many research studies show that when companies pay employees equitably and give employees equal opportunity to higher-paying positions, their retention rates improve, ultimately leading to companies’ financial outperformance.
When Arjuna started engaging companies on racial and gender pay equity, no companies were transparently disclosing pay gaps, which assess how much minority/female employees earn compared to non-minority/male employees. Over the years, investors have continued to push companies for greater transparency into pay equity audits, highlighting the performance benefits of this practice. Today, about 53% of companies in Arjuna’s recently published seventh annual Racial and Gender Pay Scorecard, disclose pay gap metrics. While many companies make qualitative statements about believing in pay equity and diversity, the companies actually disclosing racial and gender pay gap metrics are proving to investors that they are doing the important work of identifying gaps and closing them over time.
In the U.S. in particular, we have seen more investors concentrate on living wage demands. Have you observed this trend?
This is incredibly important, as we’ve experienced a significant period of inflation that has reduced the real wages of workers. In the U.S., federal minimum wage has not increased since 2009 even as the cost of living has significantly increased, placing significant pressure on low-wage workers to meet their basic needs. Not only is a living wage a basic human right, it also positively impacts businesses and our economy in the long run, as it supports lower employee turnover and ultimately lower costs to society.
Companies should work to provide greater transparency to investors around the actions they are taking to ensure all employees are paid a living wage. Pay gap analyses are a huge part of this, as they provide greater transparency into a company’s wage-setting and adjustment practices.
Do you feel there is more momentum behind such campaigns and the way in which companies are responding?
I would say we are pleased to see more companies being willing to report on their pay gap analysis work. When Arjuna began engaging companies around pay gap reporting nearly 10 years ago, almost no companies were disclosing a racial and/or gender pay gap analysis. Today, that number has increased significantly with the majority of the largest U.S. companies disclosing pay gap metrics. This practice has become an expectation from shareholders and employees and as more companies are disclosing these metrics, other peer companies follow suit. When companies refuse to disclose such data, investors are making their voice heard as there have been a handful of majority votes at annual meetings requesting these data, including at Disney, Kroger and Lowe’s in recent years.
We’ve also seen increasing pay gap reporting mandates around the globe. The EU and Ireland now mandate companies to disclose gender median pay gaps. More and more U.S. states are also mandating reporting around wage gaps and wage transparency. As companies adhere to global pay gap reporting requirements and feel the pressure from state regulation, we’ve also seen a rippling effect on companies’ willingness to go ahead and publicly disclose pay gaps for their U.S. operations.
Do you see this form on disclosure as likely to become more formally standardized and what standards do you favor?
As the U.S. does not mandate this type of reporting like in other countries, investors have worked hard over the last 10 years to establish a standard for conducting and reporting racial and gender pay gaps. This ensures that all companies are reporting in a similar way year-over-year, providing greater comparability and accountability of companies. As we’ve worked with various companies over the years, we realized there could be significant differences in pay gap reports depending on the methodology used and process conducted.
We consider best-practice pay equity reporting to be disclosure of both statistically-adjusted and median-unadjusted racial and gender pay gaps. Statistically-adjusted pay gaps assess the pay between women/minorities and men/non-minorities when adjusting for job grade, geography, experience, etc. Many people refer to this measure as “equal pay for equal work”. Median-unadjusted pay gaps assess the median pay of women/minorities versus men/non-minorities without any adjustments. This metric measures whether women and minorities are equally represented in higher-paying positions. We also think it’s crucial that companies disclose the underlying methodology of their pay gap assessments to ensure they are including 100% of employees, all forms of compensation, and that they are performing these assessments on an annual basis.
Looking at 2024, what level of activity are you anticipating in this area?
This year, we are aware of 15 proposals that were filed at companies across various sectors requesting racial and gender pay gap disclosures. Of those proposals, one was withdrawn as the company committed to begin reporting, two already went to a vote (with 31% of investors backing such a proposal at Apple and a resolution at Applied Materials securing 21% support from investors), and the remaining should go to a vote shortly. All of these proposals request comprehensive pay gap reporting of statistically-adjusted and median-unadjusted gaps on an annual basis.
What are you hoping to achieve through your remaining engagements this season?
Our goal is always that we can work alongside our portfolio companies and encourage them to adopt best practice pay equity reporting. We engage companies on the performance benefits around these types of disclosures and attempt to provide education on how to go about assessing and reporting pay gaps. If we find a company is reluctant to provide this transparency to investors, we’ll take the issue to the annual meeting to allow other investors to weigh in. Historically, we’ve found that many companies are responsive to engagements around racial and gender pay equity. We hope that more and more companies will recognize the performance benefits of conducting these assessments annually, and how disclosures provide important transparency and accountability to shareholders.
