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Rotman Insights Hub | University of Toronto - Rotman School of Management

Tackling inequality: the role of business

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Anita M. McGahan

Increasing economic inequality has emerged as one of the defining issues of our time. Describe how it is affecting people.

Inequality polarizes populations and concentrates power, threatening social stability and democracy in both direct and subtle ways. Oxfam recently reported that 42 individuals now have the same wealth as the bottom 50 per cent of the world’s population. Furthermore, 82 per cent of all economic growth created in 2017 went to the richest one per cent of the population, while the poorest 50 per cent saw no increase at all. In the U.S., things have been even more extreme, with 95 per cent of the income growth between 2009 and 2012 going to the wealthiest one per cent.

The U.S. is not even the most unequal country: Chile and Mexico having the highest levels of inequality in the world, while Estonia has shown the most rapid recent increase. Societies with higher levels of inequality have higher levels of both social and health problems, including higher crime and violence rates, greater degrees of mistrust and increased levels of obesity and mental illness.

Researchers have demonstrated that it is not income levels per se that predict health and social problems. What is it, then?

Differences within countries are as important as levels of income. In other words, there are two major ways for health and social problems to deepen. The first is poverty; and the second is inequality. This means that, even in relatively wealthy countries such as Canada, big differences in wealth between the rich and the poor can cause societal distress and unrest.

You believe that businesses and other institutions play a key role in perpetuating inequality. How so?

In any organization — whether it is public, private or not-for-profit — internal processes create power dynamics, and those dynamics foster cultures where gender-based discrimination, racial discrimination, and discrimination towards other vulnerable populations proliferate. Organizational practices — many of which have become taken for granted — perpetuate inequality by privileging some groups over others in hiring, promotion, reward and other decisions. This is only being amplified in the current environment as new technologies make our systems more efficient, effective and stronger. For example, artificial-intelligence algorithms derived from big data only reinforce the biases that are baked into old ways of doing things, because all data is about the past.

In your work you have argued that four sets of contemporary practices increase inequality. Please describe them.

In the paper you are referring to (co-written with John Amis, Kamal Munir, Tom Lawrence and Paul Hirsch), the four practices are shown to be compensation arrangements, dividend payments to shareholders, avoidance of tax payments, and philanthropic choices. But, as we reported, the first of these, compensation, has the biggest direct impact.

With the emphasis on shareholder return and distributed ownership across many shareholders, many firms use stock options and performance-related compensation to resolve the principal-agent problem. As a result, we have seen extraordinary growth across industries in salaries and bonuses for senior executives. This was once associated predominantly with executives in financial services, but managers in other types of organizations are now being compensated on a similar scale. UK house-builder Persimmon, for instance, paid its Chief Executive a £110 million bonus in 2017.

I don’t believe that such extraordinary incentives make any sense. After all, who would want to hire someone into a CEO role if that person was motivated only by money to do the job? I do think, though, that there is a market for CEOs, and that companies must be competitive to attract talent in some situations. Even if one believes these extraordinary payments generate shareholder wealth by aligning incentives, these practices still create dramatic inequality, with CEOs being paid up to 300 times more than some of their firms’ employees.

You have found that these economic inequalities exacerbate social and occupational inequalities. How so?

Women and ethnic minorities, for instance, are less likely to occupy lucrative positions; and investment bankers tend to earn many times what a nurse, teacher or retail associate makes. Recent trends in the private sector that reward large cash holdings have also played a role in exacerbating inequality, as they result in larger dividends to shareholders at the expense of other claimants — especially employees. Similarly, corporate tax-avoidance strategies lessen the redistribution of wealth in societies, effectively reducing funding to education, health and the social safety net.

Describe how inequality has created hourglass organizations.

Inequality has only been deepened by outsourcing and cost reductions, as well as the broader transformation of many Western economies from a basis in manufacturing to services. Cost reduction strategies worsen inequality because lower paid employees face stagnating wages and the prospect of job loss. These disparities have been exacerbated by the shift from manufacturing to services, resulting in hourglass organizations: Large numbers of high-status professional and managerial jobs requiring formal credentials and qualifications occupy the top half of the structure and equally large or larger numbers of uncredentialed, low-status occupations inhabit the bottom half, with relatively small numbers of technical jobs in between.

Put simply, contemporary organizations have become bifurcated systems in which senior managers and some jobs requiring professional expertise are well-rewarded while those on the front lines, such as nurses, retail assistants and call-centre operatives, are not.

What are the implications for society?

When we treat people like robots and lose a sense of the whole person — when there is no sense of humanity in our interactions with each other and we just view each other in analytical terms — the very legitimacy of the corporation in society comes into question.

What was the original purpose of the corporation in society? It was to allow people to come together to accomplish things that they couldn’t accomplish apart, and to allow for risk sharing and coordination of activity that couldn’t be accomplished any other way. But today, organizations have started to treat people who are not in the dominant power group as somehow not fully human participants in the activity of the organization. They treat them like dehumanized robots, and this threatens the legitimacy of the corporation in society both by creating job crises and by diminishing civility. In the U.S., these problems have led to a national crisis.

How is the growing gig economy affecting all of this?

In the gig economy, individuals who would previously have been employed as delivery or taxi drivers are now hired as independent contractors, without access to many of the benefits required under employment laws, thus dramatically lowering costs for their employers. Arranging work in this way also minimizes workers basis for social comparison that tends to maintain parity of wages across positions.

The economic, physical and psychological effects on those engaged in such tasks can be disastrous; with costs kept low, replacement of workers is easy. Workers are fined for failure to complete assignments fast. And under close monitoring made possible through surveillance technologies, many workers not only earn less than they would under traditional employment arrangements, but they also suffer physical and mental illnesses.

Such dynamics can lead to catastrophic outcomes — as in the widely reported case of UK delivery driver Don Lane who died after missing several scheduled health checks because he felt unable to take a day off from his delivery rounds. Led by charismatic entrepreneurs and hyped up by exuberant market analysts, firms in the gig economy often hide new, oppressive power relations privileging the credentialed elite over workers on the other side of the digital divide.

You have argued that a lack of access to powerful networks can be a big problem. Please explain.

The difference in opportunities and advantages enjoyed by those at the tops of organizations is reinforced by the knowledge, networks and resources that their roles provide. While some independent entrepreneurs and professionals benefit from the extra capital organizations free up from job outsourcing and tech substitution of jobs, the people left working in low-level jobs are almost inevitably less fortunate. The tasks they are employed to perform prevent them from accumulating the varied experience that workers in other positions can accrue, making a career ladder almost impossible.

These jobs provide very few opportunities to meet and develop relationships with senior members of the organization, and thus to cultivate organizational mentors and sponsors.

Even simple job performance measures, such as punctuality, can create difficulties for those who are unable to afford reliable transportation or childcare, potentially jeopardizing employment and definitely limiting career progression.

On top of that, low-level jobs have become more and more demanding socially. People in these roles often are required to be pleasant and engaged, and are evaluated on that. All of these factors prevent those disadvantaged by their organizational positions from climbing out of them, perpetuating and amplifying economic inequality.

What steps can an organization take to address these complex issues?

Every organization, large and small, should be adopting best practices in terms of remediating inequalities. For example, by using gender-blind reviews of resumes when hiring, or by rethinking job design to make low-level jobs more meaningful. The broader opportunity at the most senior levels of the organization is to really reflect on the aspiration of the firm for creating value over the long term. The key is to examine whether or not that aspiration is aligned with the core values of the people who are engaged by the organization.

For example, if your aspiration is to become the best at something, what does that mean for all the people who can’t afford the best? What does it mean for those who haven’t had the required educational opportunities and can’t tap into the systems that are creating the best of something?

On the one hand, the depth of inequality has been increasing, but on the other hand, there has never been a greater opportunity for leaders to intervene and do something about it.

I am so inspired by my students. Most of them are in their mid to late 20s, and they truly do not care about consuming stuff as much as my generation did. They care much more about things like equity and humanity and quality of life, and they are only interested in working for companies that seek to do something important and valuable and constructive for society.

You believe that a big part of the answer is for organizations to embrace Stakeholder Theory. Please explain.

In the traditional view of a company — the shareholder view — only the owners or shareholders are important, and the company has a binding fiduciary duty to put their needs first and increase value for them. Stakeholder Theory instead argues that there are multiple parties involved, including employees, customers, suppliers, financiers, communities, governmental bodies, political groups, trade associations, and trade unions. Even competitors are sometimes counted as stakeholders. Stakeholder Theory stresses the interconnected relationships between a business and all of these groups, arguing that a firm should create value for all stakeholders, not just shareholders.

Cornell professor Lynn Stout is considered the pioneer of modern Stakeholder Theory, but the ideas are developing fast. For example, Utah professor Jay Barney argues that seeking to maximize shareholder value in the short run is guaranteed not to maximize it in the long run because workers and other stakeholders won’t contribute their best efforts if they’re not part of the system of rewards.

The idea here — and Rotman professor Sarah Kaplan (who is also my partner) has written a book about it called The 360˚ Corporation — is to think of social responsibility as a massive opportunity for innovation. She argues that massive breakthroughs can arise from creating value collaboratively with stakeholders of all kinds, including, for example, distributors and suppliers in the value chain and local communities where the company has operations. In this mindset, the key challenge for executives is to create as much value as possible for stakeholders without resorting to trade-offs. In the book, Kaplan argues that great companies endure because they manage to get stakeholder interests aligned.

When you look at strategy through the lens of co-creating value with our stakeholders and tackle it as an innovation problem, you get to really tap into the unique identities of the people who engage with your company and unleash their creativity and capabilities. And when you do that, you can pay everyone decently.

Can the average company really influence the practices of, say, its suppliers?

I would argue that there is no such thing as an average company anymore. We are living on a planet where we are consuming something like eight times more than what is sustainable, and as a result, leaders who seek to represent the next generation of corporate activity will have to take on the most important challenges of our time.

This is a significant opportunity for leaders everywhere to ask, what is our aspiration? How are we creating prosperity for society? And, is this framing of what we aspire to accomplish satisfactory, given what we know to be true about the world around us? The challenge for every leader today is to act with the kind of humanity, responsibility and integrity that aligns with their personal values as human beings.

Anita M. McGahan is a professor of strategic management and the George E. Connell chair in organizations & society at the Rotman School of Management, with cross-appointments to the University of Toronto’s Munk School of Global Affairs and faculty of medicine. She is a past-president of the Academy of Management (2016-17).