Investor brief for First Service Corporation  ( NASDAQ: FSV):

Labor disputes may lead to risk for shareholder investments

March 31, 2023

FirstService Corporation

FirstService Corporation (FSC) is a company that operates primarily in two main segments: FirstService Residential (FSR) and FirstService Brands (FSB). As North America's largest manager of private residential communities, FSR relies heavily on its 15,000 employees across Canada and the U.S. to provide a wide range of services.

We are writing to bring attention to Human Capital Management risks at FSC and its US affiliates.  As a leader in their industry, FSC has the ability to not only continue its steady market growth in the company’s residential sector but also to create industry standards, both for Home Owners Association (HOA) contracts, and for the residential workforce. However, widespread labor disputes may put the company’s growth potential at risk.

The Importance of Human Capital Management for Institutional Investors

In November of 2022, the Committee on Workers’ Capital published a report “Shared Prosperity: The Investor Case for Freedom of Association and Collective Bargaining,” which highlights why It is critical for institutional investors to consider labor practices and support freedom of association when considering investments. Factors such as these can have significant impacts on a company's long-term financial performance and reputation. Companies with strong labor practices and respect for workers' rights are more likely to have higher employee morale, productivity, and retention rates, resulting in lower turnover and training costs. Additionally, companies with positive labor practices are less likely to face legal and reputational risks related to labor disputes or violations of workers' rights.

The aforementioned report introduces case studies that exhibit shareholders and investor discontent towards companies practicing union avoidance. A group of more than 70 Amazon investors, with over US$6.4 trillion in assets under management, called for the company to stop interfering with unionization efforts by its workers. Similarly, a group of investors with over US$1.3 trillion in assets under management wrote a letter to Starbucks, raising concerns about their anti-union campaign and urging them to accept the results of an election where workers voted to join a union.

In recent events, Howard Schultz, the founder and former CEO of Starbucks, attended a Senate hearing on Wednesday, March 29th where he was questioned by U.S. Senator Bernie Sanders regarding the company's record of union-busting. The hearing came after a National Labor Relations Board judge's ruling that Starbucks had engaged in "egregious and widespread misconduct" in its efforts to prevent workers from unionizing, which led to the reinstatement of illegally fired workers and the reopening of closed stores. Despite this, nearly 300 Starbucks stores have still voted to unionize, highlighting Schultz's negative impact on the company's labor practices.[1]

Investment Risks Associated with FirstService

  1. Labor-related risks: Reports indicate that FSC may have interfered with employees’ rights to form and join a union. Workers have also reported human capital related issues, including poor working conditions[2], wage theft[3], low wages, inadequate health benefits[4] and the implementation of unfair non-compete “agreements.”[5] Failure to uphold these rights may represent important reputational, legal, and operational risks for the company and negatively impact shareholders’ long-term value. For instance, in 2022, employees of FSC’s Minnesota affiliate filed an unfair labor practice (ULP) charge with the National Labor Relations Board (NLRB) against the company[6] following the implementation of a new policy restricting employees ability to publicly speak about their working conditions. The charge also alleges that management discouraged workers from speaking to union representatives and fired workers for participating in union activities.[7]
  2. Regulatory risks: Companies that do not comply with labor laws and international labor standards may face regulatory risks. FSC's failure to adopt and publicly disclose a policy on its commitment to respect the rights to freedom of association and collective bargaining in its operations, as reflected in the International Labor Organization Core Conventions, may attract regulatory scrutiny and put the company at risk of legal action. In addition, FSC has allegedly already violated US Labor law in several ways, as reflected by the ULP charges in which the NLRB has found merit.[8] 
  3. Reputational risks: Companies that are known to have poor labor practices may face negative publicity, which can damage their reputation and brand. In turn, this can lead to customer dissatisfaction and loss of business. Negative media coverage and social media backlash may also harm the company's relationship with stakeholders and make it harder to attract and retain employees. FSC was recently the focus of a Minneapolis Star Tribune article highlighting a NLRB complaint and the firing of a building manager and the removal of him from his company-controlled home.[9] In addition, a 2020 investigation by CTV News revealed a former property manager of FirstService Residential was accused of stealing millions from condo associations in Calgary[10]; this alleged embezzlement reflects poorly on FirstService Residential and may lead to loss of trust and business from customers and stakeholders.There are also social media accounts, including a dedicated “FirstService Residential SCAM REVIEWS” twitter account, that highlight widespread displeasure with the company[11].
  4. Operational risks: Companies that do not prioritize their employees' well-being may face operational risks, such as low employee morale, high employee turnover, and lower productivity. FSC's business model relies heavily on the quality of service provided by its employees; any labor-related issues may have a direct impact on the company's operations and financial performance.

Although we have outlined potential risks to investors, it's essential  to remember that these risks go beyond capital investments.  Also at stake are the real lives of those employed by FSC and its affiliates. For example the Minnesota affiliate fired long-time employees Kevin Borowkse and his wife who, were high-profile adn vocal union supporters.[12] When the Borowskes were fired, they also lost their home in which they lived throughout their tenure with the company. That the company had a non-compete “agreement” with them made it difficult to find other employment and another place to live.

As institutional investors, it is important to consider these issues when evaluating FSC as a potential investment. Companies that fail to respect labor rights and human rights are exposed to potential negative publicity, litigation, and operational disruptions that can harm their financial performance and long-term sustainability.[13]

In this context, we recommend that major institutional investors engage with FSC and urge the company to adopt and publicly disclose a policy on its commitment to respect the rights to freedom of association and collective bargaining in its operations, as reflected in the International Labour Organization Core Conventions. The policy should include a commitment to non-interference when employees exercise their right to form or join unions, should prohibit any member of management or agent of FSC or its affiliates from undermining the right to form or join unions or to collectively bargain, should prohibit any member of management or agent from pressuring any employee from exercising these rights, and should describe the ongoing due diligence process FSC will use to identify, prevent, mitigate, and account for any violations of these rights, including how it will remedy any misaligned practices.

A public commitment from FSC to uphold adequate work practices, including freedom of association and collective bargaining, would help address the risks mentioned above and clarify management's stance on these issues. As investors, you have the power to advocate for better labor practices and to promote sustainable investments that benefit both the company and its employees.

Investors should be aware of the potential financial and reputational risks associated with investing in a company with deteriorating labor relations and violations of international labor standards. It is essential to engage with FSC and encourage them to improve their labor practices and to protect the rights and well-being of their workers and ensure long-term profitability for investors.