More than six months ago, a group of 108 individual shareholders, as well as ten institutional investors, submitted a resolution to the UK’s second largest supermarket, Sainsbury’s, asking the company to become a Living Wage employer. On Thursday, at the company’s AGM, that resolution will go to a vote.

Sainsbury’s initial response to the resolution was to raise pay for its direct employees in outer London, who were below Living Wage rates. But it stopped short of signing up to Living Wage accreditation, so the real Living Wage is not extended to vulnerable and low paid sub-contracted workers and there is no reassurance that any workers at Sainsbury’s will earn enough to meet the cost of living in the future.

We knew this shareholder resolution—the first of its kind in the UK—would focus attention on how companies provide decent work. However, the vote on Thursday also puts the spotlight on Sainsbury’s biggest shareholders, notably the UK’s big asset management firms and pension funds, many of whom claim strong credentials as responsible investors.

ShareAction works to drive change in the investment system, so that system supports—and does not undermine—our planet and its people. In the midst of a cost-of-living crisis and growing income inequality, which threatens social stability, it has never been more important for investors to take responsibility for the impact of their investments, including through addressing low pay and precarious work.

An increasing number of asset owners and asset managers have pre-declared their intention to vote in support of the resolution, including Coutts & Co and Aviva Investors. Others have confirmed their backing in private.

Unfortunately, not all investors will support it.

How investors vote will expose their true colours

We’re disappointed that, last week, Schroders, a large UK asset manager, publicly declared its intention to vote against the resolution. According to the firm’s own Engagement Blueprint, a document which sets out the basis upon which it will engage with companies on environmental, social and governance issues, Schroders’ “desired short/mid-term actions” include that companies should “commit to pay all direct employees a living wage (or equally valued equivalent) and in the mid-term, commit that all workers (including contractors in direct operations) are paid a living wage (or equally valued equivalent).”

This was precisely the ask made by the shareholder resolution at Sainsbury’s.

In apparent contradiction to its Engagement Blueprint, Schroders now says it “strongly believe[s], in this environment particularly, [Living Wage accreditation] could inhibit Sainsbury's ability to remain competitive.”

We disagree—as do many other investors. We see strong company-level and system-level arguments for the real Living Wage at Sainsbury’s and across supermarkets. But, as one of Sainsbury’s top five shareholders, Schroders perhaps has a greater incentive than most to prioritise shareholder return.

In this case, it seems that decent work and a Living Wage came at too high a price for Schroders and caused it to compromise its own engagement goals.

Investors have a mandate to address environmental and social issues

Also last week, former PWC partner, executive pay advisor and London Business School executive fellow, Tom Gosling, published his view that investors do not have a mandate to tackle low pay at Sainsbury’s.

Gosling's view that investors who are supporting this resolution have not considered their fiduciary duty is flawed. In our view, proper and thoughtful application of fiduciary duty requires investors to engage not just with Sainsbury’s but also with the other supermarkets and employers across sectors to address the pernicious impacts of low pay. Through our Good Work coalition, a group of investors have been doing this for nearly 10 years.

Gosling applies three tests and argues that our Living Wage resolution fails on all counts.

There is a strong company-level and system-level case for Living Wages

Gosling’s first assertion is that there is insufficient evidence of a firm-level and system-level financial case for living wages. Research by the MIT Sloan School of Management, by Cambridge University, and by Cardiff Business School, which we’ve cited throughout our campaign, suggests the opposite. Business leaders themselves are recognising the case. A recent paper by the CEO-led Business Commission to Tackle Inequality, highlights how inequality undermines social cohesion, erodes trust in institutions, and fuels unrest.

Gosling argues that Sainsbury’s management is most attuned to evidence around pay and performance and that they know best how to set wages. But its management is incentivised to maximise shareholder return in the short-term. Sainsbury’s executive remuneration strategy for its Chief Executive includes an annual bonus, worth up to £1.9 million, which is determined 50 per cent based on profit, 20 per cent based on free cash flow, 10 per cent based on cost savings. A mere 10 per cent is based on “colleague engagement.” The long-term incentive plan, worth up to £2.2 million, is again determined 80 per cent based on purely financial measures, with just 5 per cent based on workforce-related metrics.

In contrast, investors who are focused on long-term value creation at the company-level and managing system-level risk of inequality have a strong incentive to address low pay.

Far from making Sainsbury’s uncompetitive, the company could be positioning itself as a leader

Like Schroders, Gosling asserts that Living Wage accreditation might make Sainsbury’s uncompetitive. In making this argument, some, including Sainsbury’s Board, have suggested that they would “lose control” of their wage bill to a third party.

The Real Living Wage is simply a floor—a safety net. It is an attainable benchmark for employers committed to ensuring their workforce earns a wage that meets the real cost of essential goods and services. It is overseen by a group including employers, trade unions, civil society, and independent experts. If Sainsbury’s Board was aligned with the principle of Living Wages for its workforce, it would not be losing control. The management of more than 11,000 other UK businesses, including more than half of FTSE 100 companies, have got comfortable with this.

If all of Sainsbury’s direct employees are already paid a real Living Wage and, as the company claims, so are most of their subcontracted workers, then the increased cost to uplift remaining members of the workforce must be marginal—a small percentage of their overall wage bill. Unfortunately, since Sainsbury’s won’t disclose data about contractor pay, it’s impossible to calculate the exact cost.

Sainsbury’s have argued that they need to have the flexibility to be able to take a balanced approach to all stakeholders, particularly in an inflationary period. But in the middle of a cost-of-living crisis, the company has announced profits that doubled last year to £730 million and it plans to distribute a dividend to investors of £300 million. The dividend is 24 per cent higher than in 2021 and the largest since 2015. It would seem there is ample financial capacity to protect Sainsbury's most vulnerable stakeholders in the workforce.

We would argue that it is short sighted of the Board not to recognise the reputational and competitive benefits of taking a leadership role in this area.

Gosling also questions whether change at Sainsbury’s would lead to change elsewhere. We think it would.

Grocery retail in the UK is a highly competitive sector. We saw first-hand, through collaborative shareholder engagement on healthy food sales last year, that when one supermarket leads, others quickly follow. We have also seen this dynamic for Living Wage accreditation in the housebuilding sector. Since Barratt Developments accredited in 2020, half a dozen other large UK housebuilders have followed suit.

Government’s duty to set policy doesn’t absolve business and investors from their own responsibilities

Gosling argues that government is best placed to tackle low pay by setting minimum wages. We agree that, in an ideal world, governments would set minimum wages that meet the cost of living. In the UK, the Government has set a target for minimum wages to meet 67 per cent of median incomes by 2024, but there remains no link between the minimum wage (based on a negotiated figure) and the real cost of living. We have seen the Government increasingly criticised for failure to tackle the cost of living. Many have called for an Employment Bill to tackle low paid and insecure work, but one is yet to materialise.

Business decisions are not a substitute for democratic government and public services. But the reality is that the UK's largest employers wield significant influence, they are responsible for their own workforce, and they can also often act more decisively than government. We have seen on climate change, for example, that leadership from players in the business and finance communities on climate reporting and target setting has allowed government to move in and “level up” through regulation. Alongside action from government, business leadership is much needed to address the increasing systemic risk posed by income inequality.

While we welcome debate with critics of our shareholder resolution, the issues of low pay and inequality in our society are not just academic

On Thursday, we joined Organise and 38 Degrees in handing over to Sainsbury’s a petition with more than 100,000 signatures supporting the call for Sainsbury’s to become an accredited Living Wage employer. This is a clear demonstration of the importance people in the UK attach to addressing low pay for the most vulnerable workers in the midst of a cost of living crisis.

Organise, a workers’ network, also handed over a report containing testimony from Sainsbury’s workers. One worker wrote:

“When I change the price tickets every day, I know I will be getting hungrier for food because it's only the expenditure figures that keep rising massively while the wages are not moving. The rise in theft in the store and the fight we are waging against thieves, my leg is still hurting after the injury I suffered 3 months ago because a shoplifter hit me when I was trying to stop them from stealing.”

This says a great deal about how thin the UK’s social fabric is stretched just now. Thursday’s vote at Sainsbury’s AGM offers a chance to restore and repair the damage. Prudent and responsible investors will take that chance.