Income gap

Dear Fortune 500: Worker woes are at home, too

May 30, 2013: 1:29 PM ET

Companies like Wal-Mart and McDonald's will need to pay attention to working conditions at home and abroad if they want their business models to survive.

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FORTUNE – In the wake of the tragic factory fire in Bangladesh, a group of Wal-Mart investors sent a letter to the retail giant expressing concern about worker conditions, proper risk oversight, and transparency at the company. While the letter focused on conditions abroad, the company ought to focus on what's happening at home as well.

Federal reserve governor Sarah Bloom Raskin said recently that "The net decline in housing wealth since the recession has had particularly acute effects on the balance sheets of lower- and middle-income households ... [and]households at the bottom of the income distribution have also had a harder time than others finding jobs during the recovery and their wages have continued to stagnate." Indeed, wages for workers in sectors like retail and food services are particularly low.

McDonald's (MCD) workers have been protesting around the country in recent months. Approximately 100 workers and supporters from Chicago, Detroit, Milwaukee, and St. Louis went to the McDonald's shareholder meeting to "ask shareholders for decent pay," according to a press release issued by a community, labor, and clergy coalition that is supporting fast food workers' campaign for higher pay and the right to form a union without retaliation. Many fast food workers earn wages below the poverty line, according to a report by CNNMoney.

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At the end of April, workers at 150 Walmart (WMT) stores confronted managers about unfair scheduling practices, according to a report by The Nation. And on Tuesday The Nation reported that, "striking Walmart employees ... held protests outside the Palo Alto mansions of two members of Walmart's Board of Directors: Yahoo! CEO Marissa Mayer and Greg Penner, a Walton family member" and have launched "what organizers promise will be the first 'prolonged strikes' in the retail giant's history."

When it comes to working conditions, one size does not fit all. Conditions differ dramatically from location to location. Bangledesh is one example, of course. But even in the U.S., labor supply chain issues can differ from place to place. At Alaska Airlines, Seattle airport workers in its supply chain are protesting their wages and working conditions, which do not equal those of L.A. workers in its supply chain, says Thea Levkovitz, communications specialist at community organization coalition Working Washington. "The Washington State Department of Labor & Industries has launched an investigation into charges of illegal violations of health and safety standards brought forward by more than 50 airport workers," she wrote in a statement.

Struggling efforts to rein in executive pay

Alaska Airlines CEO Brad Tilden, who Levkovitz says knows of workers' concerns, saw his pay more than double to over $5 million last year, according to company filings. Its proxy this year included a shareholder proposal to limit "acceleration of executive equity" if the company has a change in ownership. The company recommended shareholders oppose the requirement.

Wal-Mart CEO Mike Duke earned over $20 million last year, according to its company filings. The giant retailer's filing this year includes shareholder requests for an independent chair and an "annual report on recoupment of executive pay" so shareholders could, for example, know whether Duke was dinged related to the company's alleged FCPA violations. The company opposes both measures.

At McDonald's, former CEO James Skinner made over $27 million for the six months in 2012 he was chief executive, and current CEO Donald Thompson made $13 million for his six months beginning July 1, for a total annual CEO pay exceeding $40 million. The company had two shareholder proposals this year on executive pay and one on human rights. One of the proposals requested McDonald's to produce a report comparing CEO to worker pay, a requirement under Dodd-Frank that the SEC has been dragging its feet on. The board opposed all of the shareholder requests.

The shareholder proposal at Alaska Airline (ALK) won 41% of the vote, and McDonald's shareholders did not muster a majority vote to get any of their proposals approved. The Wal-Mart vote is pending. Stuart Shaw, co-founder of Mine the Gap, a U.K. firm that provides social (i.e. labor and supply chain) audits of firms, puts it well to companies: "Consumers are weighing up the eco and ethical credentials of your brand," and "employees are also weighing up whether your brand connects with their values." How long can companies resist these trends?

Paying your workers enough to be good customers

But let's say we have no compassion for workers and need more convincing. Do low wages help companies like Wal-Mart and McDonald's?

The chickens seem to be coming home to roost on that score. For massive establishments like Wal-Mart and McDonald's to succeed, people who fit the economic profile of their own workers must have the wherewithal to shop and eat out. Fortune recently reported that McDonald's has decided to eliminate its big Angus burger, in part, because of the high cost. "You can't price it outside [the] range of people coming into McDonald's," Howard Penney, managing director of Hedgeye Risk Management, told Fortune. Many other changes will be needed if U.S. middle-income workers continue to have meager disposable income and low-wage workers have none.

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Further, to attract new customers (like millennials, a group Wal-Mart is targeting) and retain existing customers, retail and fast food establishments not only need to provide products that customers want, they need to also provide an experience that at a minimum won't turn customers off.

McDonald's is wrestling with that issue now. Last month, the Wall Street Journal ran a report on the chain's efforts to repair its "broken service;" McDonald's executives said "the top complaint [w]as 'rude or unprofessional employees.'"

"McDonald's and our franchisees continue to look at ways to improve our customer service experience," a spokesperson wrote me in an email.

You can blame the workers if you like. But if you hold down multiple jobs and don't know how you will afford to pay your rising rent or gas costs or buy your child shoes, or if you are forced to witness family members skipping meals, it might be a challenge to be pleasant if someone yells at you because they didn't get their ketchup. Even a hard-hearted capitalist will recognize that squeezing workers in this way will affect customer service.

Wal-Mart is facing similar issues. Bloomberg reported that the company is having trouble keeping shelves stocked following staff cutbacks -- and workers and customers are not happy. Wal-Mart has disputed Bloomberg's findings. The company says it's focusing on technology and its online business as possible solutions to its operational challenges.

But the company's business model hasn't moved completely online, and educating unhappy workers will only go so far. I learned this lesson when I took a public speaking workshop almost 20 years ago given by communications expert Stephanie Hendrie, who has a background in both psychology and theatre. To give a speech well, Hendrie said that it was important to become conscious of the emotion you feel related to the words in your speech and, through awareness and practice, to change that emotion consciously to the emotion you want to convey. But while it's helpful in speechmaking, for workers who are living lives of instability and distress, this is a nearly impossible feat no matter how hard they try.

Corporate boards, this is your cue

Right now, economic inequality is a very serious risk for discount retail and fast food firms. As any good board member will tell you, the first thing a company needs is a business model that works. And if you don't have people who can buy what you sell or the right relationship with the people at your company, your company is headed downhill.

On Wal-Mart's recent quarterly conference call, CEO Mike Duke discussed his efforts to get out and talk to customers in different geographies. But he's missing the boat by not reaching out to what the retailing behemoth calls its associates.

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Whether the current management at Wal-Mart and McDonald's are able to create sustainable business models is up for grabs. CEOs are short-timers, and they know it. That's why it's important for boards to make sure these issues receive the attention they deserve. In the meantime, investors, who represent about 50% of the wealthiest adult population according to Fortune, have a lot of thinking to do. Firms like Wal-Mart and McDonald's aren't disappearing from investors' index funds any time soon.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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