Can Walmart make a business case for raising the minimum wage?

walmartWalmart’s decision to increase the pay of 500,000 full-time and part-time U.S employees to $9.00 an hour, with a further increase to $10.00 an hour by February 2016, has received a mixed reaction from investment analysts. With the $1 billion price tag this fiscal year, is this decision in the interests of shareholders?

We think it is.

Walmart is pre-empting what we think is inevitable — the U.S minimum wage will increase. Congress may resist this, but in the end a political and commercial reality will apply because the current minimum wage is simply not a living wage. As one of the largest employers in the country, Walmart is a poster child target for minimum wage campaigns. By increasing wages, executive management will be able to get on with the job of actually running Walmart, rather than defending its wage structure — a campaign that would have otherwise damaged the brand of Walmart in the public’s eyes.

But there are broader issues to consider. The decision is also in the long term interests of the business.

How many times have we read an annual report with glossy photos of happy employees accompanied by well-worn phrases that “people are our most important asset”?

If a company fails to manage its people, then it is simply failing to utilize all the assets at its disposal

We actually believe that these statements are correct — people are the most important asset for business in a changing, globalized business environment. In Inflection Point parlance, we call that resource “human capital,” and we take it extremely seriously. If a company fails to manage its people, then it is simply failing to utilize all the assets at its disposal. If a company were to leave a commercial property unoccupied for years, then investors would question the competence of the management.

The same is the case with people management. If a company fails to harness its people, investors should also question how well the company is managing its business.

But how can we tell if a company is actually managing its people assets well?

We need to get beyond the rhetoric and look under the bonnet. At IPCM, there are a number of factors that we look at to understand what is actually happening. Within the company itself, we look at the quality of the recruitment process, how work and teams are organized and rewarded — indicators that a company has a collaborative culture and is committed to knowledge development for its employees, and a number of other factors. Outside the boundaries of the company itself, we also pay close attention to what we call “stakeholder capital,” an increasingly critical resource for companies’ competitiveness, and even survival in the 21st century. For us, companies’ relations with stakeholders, such as their trade unions, are a critical indicator of their management quality.

Social media is in fact making this job a lot easier. Websites such as Glassdoor provide a mechanism for employees to provide anonymous reviews of what it is like to work at a company. Prospective employees can utilize reviews to understand what it will actually be like to work with a particular company. For investors who take the trouble to look, these websites provide an ability to analyze company culture from the inside. It’s admittedly an incomplete view by itself, but in combination with other indicators, helps provide a more complete picture of the company.

Walmart does understand that increasing wages is inevitable — either through regulation or community expectation

In our view, Walmart’s potentially game-changing decision to increase its minimum wages is an indicator that the company does understand the changing political, social and business environment. It understands that increasing wages was inevitable — either through regulation or community expectation.

The key to Walmart’s future will be whether it is able to harness this decision to stimulate its employees’ performance. The fact that the increases in wages are accompanied by changes to shift structures and training is a further positive indicator that Walmart is focused on harnessing its most important asset — its people.

In the end, the way that Walmart implements its decisions will influence the future economic success of the business. But the decision is unquestionably the right one, and is in the interest of long term investors.

This article was originally published on Huffington Post
Dr. Kiernan is founder and Chief Executive of Inflection Point Capital Management, a specialist, research-driven investment management boutique based in London, New York, Paris, and Melbourne with roughly $1 billion under advisement.