Erinch Sahan explains why the current reality of mainstream business isn’t cutting the mustard when it comes to tackling inequality.
Inequality is spiralling to absurd levels. Our economies are generating vast wealth but it is channelled to a tiny minority of people. Since the turn of the century, the poorest half of the world’s population has received just one percent of the total increase in global wealth. Meanwhile, half the new wealth has gone to the richest one percent. As a result, the richest eight people now own as much wealth as the poorest half of the world. Something is not quite right in how we have structured our economies.
This has not only meant entrenching global poverty (according to World Bank projections) but also rising political and economic instability. Inequality creates conditions in which crime and corruption thrive. In more unequal societies, rich and poor alike have shorter lives, and live with a greater threat of violence and insecurity. Rising inequality is a problem for us all.
Returns to capital vs returns to labour at a micro level
how can we tell if a particular business is part of the problem, or part of the solution when it comes to inequality?While income and wealth inequality have a multitude of drivers, according to Piketty, first principles tells us that it’s the relationship between returns to capital vs returns to labour that drives inequality. At the simplest level, it’s a similar observation to that made by Fay Lewis in 1914, through the political performance artwork noting “Everybody works but the vacant lot”, highlighting the growth in value of an unproductive investment in land in Illinois. This is the macro picture. And business can be a central part of efforts to reverse the trend of growing inequality. But how can we tell if a particular business is part of the problem, or part of the solution when it comes to inequality?
Unfortunately, it’s not necessarily a simple equation. A regular worker may be both an investor benefiting from growth in capital returns, as well as a waged worker. So in understanding the inequality impacts of business, it matters who the investor is (e.g. a pension fund for regular workers) and where the wages go (e.g. a senior executive salary). Untangling both sides of this equation and looking at how these are distributed will be important.
Encouragingly, economists, activists, NGOs and business leaders are now beginning to take this macro lens, and apply it at a micro level. Though the result will mean we need to ask some fundamental questions about the design, structure and DNA of business.
Mainstream business is designed to maximise returns to capital
When we look under the bonnet of mainstream businesses, we see that they’re designed to maximise returns to capital. This seems to be the overarching principle driving business priorities, commercial decisions and even sustainability efforts. Efforts to behave ethically or sustainably must wear the straight-jacket of also being the path to maximising returns to investors (by demonstrating they reduce risks, create market opportunities, provide a reputational advantage etc).
In other words, mainstream business is hardwired to maximise returns to capital above all other priorities. This obsession seems inherently inconsistent with the need to rebalance returns to capital vs returns to labour, a critical question in tackling inequality.
How do we apply the macro lens at a micro level?
one key factor that does distinguish company impacts on inequality is their ownership and governance structureIt isn’t simple to ‘separate the wheat from the chaff’ and compare the inequality impacts of businesses. This is because businesses within a particular sector end up being pretty similar in terms of their commercial footprint. Their supply base, operating model, tax structure and wage levels don’t differ radically enough to paint a clear quantitative picture. And there is little disclosure of economic value distribution that allows us to easily compare the inequality impacts of businesses. The Global Reporting Initiative does have one standard that sheds some light on this (GRI 201-1: Direct economic value generated and distributed) but there are few mainstream businesses who report on this (the Cooperative Group is one, see page 30).
Critically, one key factor that does distinguish company impacts on inequality is their ownership and governance structure. This determines who gets their profits, how they prioritise investments, how they shape relationships with workers and suppliers, and the overall purpose driving their business. In other words, to get to the core of whether a business is able to truly tackle inequality, the question to ask is whether a business bucks the norm of prioritising returns to investors above all else.
A new breed of businesses
Businesses are emerging around the world that show it is possible to prioritise a broader range of stakeholders, and purposes, than just the returns of investorsBusinesses are emerging around the world that show it is possible to prioritise a broader range of stakeholders, and purposes, than just the returns of investors. These range from employee and farmer ownership, to hybrid ownership structures and fair trade businesses, to social enterprises and cooperatives. Divine Chocolate and Cafe Direct are two such examples, where the cocoa and coffee farmers own a share of the company and have meaningful representation on the board. It goes beyond transactional relationships with farmers, as power and value are deliberately shared with farmers in more equitable way. Such models ensure that the business is owned and managed in the best interests of those farmers, which also includes commercial success. Farmer-owned processing in agriculture (e.g. KTDA tea in Kenya) and worker-ownership of electronics factories and brands (e.g. Huawei in China) are also bucking the trend, and channelling more of the value generated by the business to their farmers and workers. Meanwhile, mission-led businesses like Fairphone are demonstrating that business governance models can be shaped to prioritise a mission other than profit maximisation for investors, which in Fairphone’s case is to “bring a fair smartphone to the market – one designed and produced with minimal harm to people and planet”.
In her book Doughnut Economics, Kate Raworth describes the need to “design to distribute”, and doing so through the complexity of market systems. Recognising that returns to capital are driven by a range of factors, she emphasises emerging drivers of inequality, such as ownership of ideas and robots. Understanding how business models can lead to broader ownership of such assets seems key to tackling inequality.
Transforming business to tackle inequality
If we want to reduce inequality, we need to rebalance the share of value going to capital vs labour. And to do this, we need more businesses equipped to rebalance how value is distributed. This means businesses that are structured to distribute value, risk and power in favour of workers, farmers and communities. The current reality of mainstream business isn’t cutting the mustard.
This is why Oxfam, Social Enterprise UK, New Economics Foundation and others are working together to better understand the implications of business structures on inequality. This means looking harder at the ways business can tackle and drive further inequality, and trying to weigh up these impacts to get a better understanding of whether companies are, on net, part of the problem or solution when it comes to inequality. Together, we will test and try different methodologies to answer this question. Through this, we hope to help shed some light on how business can evolve to create more equitable economies and societies. Because we can’t sweep inequality under the rug.
First posted by Social Enterprise UK