Income inequality has long been a commonly observed outcome of the capitalist system. As more countries adopt capitalistic constructs in how they do business, unequal distributions of wealth is something seen with increasing regularity across countries. This distribution is not inherently bad; in fact, it can be easily argued that much of the growth and prosperity experienced over the past century is in part related to the benefits of just such a system. We know that a system where everyone gets the same (communism) destroys the incentives for people to work hard to get ahead. Inequality encourages hard work, rewards taking risks, and incentivizes individuals to invest in activities that may be value creating in the long run.
Despite these and other benefits of a capitalistic system, there is growing evidence that suggests levels of inequality are growing to a point that is becoming detrimental. We intuitively know that a society where all the wealth is concentrated with a few will not grow at the fastest rate possible. Current research supports this, indicating that from a social perspective if you look at a variety of measures of health and social function (e.g. mental illness, violence, levels of trust, educational performance) you see less dysfunction in societies where incomes are more evenly distributed1. This has a direct effect on the ability of the society to successfully grow as a result of these damaging side-effects of too much inequality.
It is interesting (and encouraging) to note that the findings about the detrimental effects of inequality, while clearly observed within a given society, are almost absent across societies with different levels of average incomes2. The takeaway from this is that it is not the absolute level of prosperity that impacts the social health and ultimately growth prospects of the society, but rather that the difference in income of members within a society (or a given country) that can have a negative impact. With globalization it is likely that individuals will begin to compare themselves across countries and these differences will have a more direct impact as world becomes smaller (e.g. Philippines compares themselves with Thailand, Malaysia and Indonesia), but for the time being this finding is encouraging for several reasons. It means that each society can control to some extent its own situation and growth within the country, which will also ultimately have the impact of reducing cross-country inequality.
The imperative for any society is thus to find the right balance of inequality that motivates people to work and drive growth/development in their country while not destroying motivation and opportunities because of barriers put in place through inequality. If we accept these general findings and agree that it is desirable to reduce the levels of inequality and increase mobility, there are numerous actions governments could take to directly redistribute wealth (e.g. taxes, social welfare programs, restructuring of incentives, etc.) or to change the social context (e.g. regulations, communications, education, etc.) to minimize the psychosocial elements of inequality that cause negative effects impacting growth. However, it is not just the government who can have an impact on the levels of inequality within a society. Changes driven by the private sector acting in their own ‘enlightened self-interest’ can meaningfully reduce inequality and the negative effects of perceived inequality while directly benefiting the interests of the business. The private sector can change how capitalism drives inequality by investing in and empowering their workforce, rethinking their business partnerships, and envisioning new models for doing business, all methods that can also have direct positive impacts on the business.
Investing in and empowering the workforce Private companies can reduce inequality by investing and empowering their workforce. By taking a focus on individual employees, providing them with more direct support, and encouraging them to better their lives the company can create more skilled employees who are able to contribute more to the company’s success while also supporting an increase from the bottom of the social structure reducing the income gap. Three basic examples of this approach, (a) increasing the basic salary, (b) improving working conditions, and (c) providing skills training are worth examining to understand just how both the company and the workforce benefits.
Increasing the basic income level of the workforce is the most direct way for a company to help reduce the inequality, but it is not immediately obvious how this effort will also benefit the company. At the higher end of the scale it is true that it is unlikely to have much impact, but for lower income workers, the increase allows the workers to purchase higher quality goods and partake of additional ‘luxuries’ thanks to a higher disposable income. This change can also lead to an increase the overall standard of living which can bring about a change in mentality and perception ultimately reducing the real and perceived differences within a society. According to Walter Robb, the co-CEO of Whole Foods, the company puts a premium on employee morale and to help ensure they are true to this core value, they pay their employees more than they have to, give them stock options, and invest in employee healthcare plans. By putting a lot of value on their employees, they reap the benefits through increased productivity, lower turnover rates, reduced absenteeism, and a union free workforce.
By improving working standards and strictly enforcing them, companies can directly create value for both the company and their workers. Implementing policies like overtime pay, medical benefits, wellness programs, car loans, etc. protects the workers and allows them to improve the quality of their lives. Compdata Surveys, a company that provides HR professionals with data and tools they need to be successful, reports that many employers are experiencing a positive impact on their bottom line as a result of greater employee productivity and reduced absenteeism due to well-implemented wellness programs such as these3. While these benefits shift value from shareholders to the wage earners and help redistribute the income to reduce the underlying structural inequality, the company also creates value for the business more productive and engaged employees4.
One final approach is for companies to invest in specialized training for their workers. These skills have a dual purpose of providing the company with a greater selection of skilled workers while at the same time improving the position of the individual worker. This training can be seen as a significant investment by the company in their workers and can ultimately improving overall employee morale. Although non-tangible, these skills become a valuable asset for the worker and improve his market value. This increase empowers these workers to bargain for higher wages, more benefits, and better jobs. The effect of this is a more sophisticated and skilled workforce that can help companies compete more effectively in their markets while also reducing the income inequality between different levels of the income bracket. As these initiatives become common in the competitive marketplace, it will further improve the situation of workers in other companies further reducing perceived and real inequality.
Rethinking business partnerships In many market contexts (especially in developing markets), the bias of big business is to play it safe and interact with known partners. While this approach initially appears to provide a level of security for the company it often leaves value on the table compared to working with smaller, local organizations and minimizes the potential value that can be created through broadly transforming the business ecosystem. The impact a business can have through general market transformation as a result of the partnerships it develops flow not only to the society, but also directly back to the company as it continues to operate in the region. Two major benefits of how companies think about their interaction with the regions they operate in are: stabilization of the political environment in post conflict-regions and empowerment of locally owned enterprises. Both of these lead to increased growth in the region which disproportionately favors those who are less advantaged with opportunities thereby providing another means to reduce inequality
The private sector can play an important role in easing tensions and encouraging economic growth in countries and regions that have experienced or are at risk of conflict5. Currently, the potential impact that private companies can have in this role is not recognized by local communities, NGOs or other organizations, nor do private companies themselves realize the impact they can have for their benefit and the benefit of the region even though they uniformly concede that conflict is bad for business. Conflict has notable economic costs for business including destroyed infrastructure, emigration of skilled labor force, weakened institutions and/or decreases in investment. It is thus in the companies’ self-interest to contribute to conflict prevention or post-war recovery.
The most observable contributions of the private sector to recovery and economic growth include direct investments in infrastructure, generation of higher GNP per capita, or employment generation. However, the private sector can also play a potentially more important indirect role in easing tensions in conflict prone regions. Through their inevitable involvement with the communities in which they operate companies can help facilitate more productive interaction between different sub-groups of people. In many developing or under-developed countries discrimination across different groups within communities is often prevalent, but through the common mandate to run a business successfully, private companies can improve relations by building understanding across these different groups, e.g. generate “bridging” social capital, as foreign companies typically operate in ethnically neutral and profit-maximizing ways.
Two primary ways of “bridging” social capital can be distinguished. Different groups can be brought to trade with one another. If the groups have equal status and the trade is mutually beneficial, this will have a positive impact on relations between the groups. Second, within a company, employees from different groups are often required to work together and the formal and regulated environment that a company provides helps facilitate the creation of normalized interactions and personal contacts between representatives of different groups. This repeated interaction gradually fosters a greater sense of equality creating in turn an increased ability for those with the least to move up and a more equal society.
An example can be found in the partnership between Elf Petroleum Nigeria Ltd., an NGO (Pro Natura International Nigeria) and local communities. The partnership is a foundation named Eastern Obolo Community Development Foundation (EOCDF) and its activities are mainly focused on community development projects6. The foundation is managed by a body with wide representation from the different groups and communities in the region so that trust through cooperation is built over time between the groups. This “bottom-up” approach contrasts with the more traditional “top-down” approach where MNCs invest in infrastructure, health programs or education. Taking a “bottom-up” approach can be more effective as it can connect various groups and provide equal chances and access to group members who traditionally may be excluded based on local discriminatory basis. Hence, taking Nigeria as an example, private sector players have the potential to reduce inequalities in conflict prone regions. By focusing on this new approach and providing room for sufficient community participation in social investment projects, bottom-up corporate foundations can serve to empower local communities. By stimulating the growth of the local labor market, the reduction of inequality in the area becomes the eventual outcome.
In a similar manner to how partnering and working across cultural groups can help stabilize a region by providing more equal opportunities to a broader group and building understanding, companies can look at their whole value chain and think about which companies their choose to partner with. By working with local companies or with those companies owned by smaller entrepreneurs private companies can directly reap benefits from interacting with partners who are locally based and can more quickly respond, not needing to pay for costly shipping and logistic, receiving a more affordable product often tailored to the local market, etc. Additionally, these partnerships help increase the income to local and smaller organizations in the society. Not only will they reduce income inequality, it will often create a broader potential customer base and better general environment that the private enterprise will benefit from as well.
There are numerous examples of companies taking this approach in how they do business that have been successful. One successful example of this is can be taken from &Beyond’s experience running luxury safari experience in Africa. Much of the furniture, drapery, cloth, etc. as well as much of the service that they provide could be provided by local sources. Using local sources they realized could be cheaper and would likely enhance their customers’ experience by providing a more local feel and experience. However, as a luxury provider service quality was of utmost importance and they could not afford to have partners who did not deliver as expected and promised. Initially they were unable to get the quality that was required, but by working with local venders they were able to train them and help them understand the imperative for service quality ultimately being able to form a solid business partnership with these local vendors. As a result the local vendors now have another customer for their services and have increased prosperity while the &Beyond is able to more confidently make claims to its sustainability and positive impact in its community (a key marketing message), received quality products/services needed for its operations, and has the added ambiance that comes from locally sourced items.
In both of these scenarios, the way private companies choose who they partner with have numerous benefits. The society as a whole benefits from increased stability, more job opportunities and better resulting social structures and the individual partners benefit from increased wages and learning that comes from their increased partnership. These factors will have a direct impact on the income inequality in a given region, and at the same time the private company benefits from these advantages. Directly the company can see these benefits from reduced costs direct sourcing, increased knowledge of the local market that comes from this involvement, as well as benefits stemming from working in a better business environment characterized by less conflict and broader involvement of local participants.
Envisioning new models for doing business In addition to rethinking how business is done on a daily basis, businesses can look to fundamentally new business models in how they do business. Identifying unique needs of previously underserved markets can represent meaningful business opportunities for the private sector to capture. As companies identify these opportunities and create solutions to meet the needs they represent, they provide value to members of society who may have been previously underserved.
There are myriad examples of companies developing business models along these lines. One relevant example comes from, Fenix International, a company that has created a business around selling solar powered cell phone charging stations. In east Africa, cell phones are very common, but the infrastructure is not universally developed to allow users to charge their phones. Fenix discovered a number of problems that users in this market faced as they looked to use their phones. First, they discovered that a typical rural user would spend about as much per month charging their phone from vendors with primitive generators as they spent on the phone service. Second, they discovered that users had a desire to use their phone more than they were able to because their phones were often without power. Fenix was able to meet these needs with the creation of their solar powered charging station. From a development point of view, these stations were beneficial from three different perspectives. The charging stations met the most basic needs of the local populace allowing them to charge their phone and giving them connectivity they needed. Furthermore, Fenix created a business opportunity for small scale entrepreneurs to start businesses providing power for the community. In both these ways, the business Fenix created helped bolster the local community and move the bottom up further reducing inequality. At the same time, the model allows Fenix to generate a profit for themselves.
Enlightened business behavior can reduce inequality and drive business success Capitalism and business are inextricably linked in today’s market environment with all the benefits and risks that that means for our society. But as they are linked, it means that businesses have a potentially very meaningful role to play in creating a society in which we would like to live. Fortunately as just discussed, there are numerous ways in which business can act that not only creates a social environment with less unrest and fewer problems, but that also contributes to their growth and the growth of the economy at large. Business are well positioned and with many of the right incentives to assess and identify the optimal level of inequality that will lead to a well-functioning economy and society.
The challenge is for business to take a longer-term, big picture perspective which will facilitate the identification of approaches that lead to positive social and business outcomes. Examined above are several examples of how the private sector, acting in light of this ‘enlightened self-interest,’ can rethink some of the traditional behaviors supported within capitalistic system and achieve these dual benefits. Empowering workforce, rethinking business partnerships, and envisioning new business models are just three ways that business can achieve these results. There are likely many more ways for businesses to create a more equal environment that in turn benefits everyone, but only with a constant eye to identifying these opportunities and a long term perspective will business find the motivation to act knowing that it is in the best interest of shareholders and not just a CSR initiative.
1 http://www.equalitytrust.org.uk/docs/social-dysfunction.pdf 2 http://www.ted.com/talks/richard_wilkinson.html 3 http://www.collegerecruiter.com/blog/2012/09/20/wellness-programs-reduce-medical-costs-increase-productivity-and-reduce-absenteeism/ 4 http://rabble.ca/blogs/bloggers/behind-numbers/2012/06/how-fix-income-inequality-experts-weigh 5 http://www.peacebuildinginitiative.org/index.cfm?pageId=2087 6 http://www.unrisd.org/80256B3C005BD6AB/(httpAuxPages)/C838FCBB3E0001B2C1257219004BEFB3/$file/Idemudia.pdf