Adobestock 190031926

Q&A

Rebalancing Business to Address Economic Inequality

  • May 20th 2019

Peter Georgescu is Chairman Emeritus of the global marketing communications company Young & Rubicam. Georgescu is currently Vice Chairman of New York Presbyterian Hospital and Director of Just Capital. He spoke in the 2019 session Capitalists, Arise!

We caught up with him about economic inequality and why CEOs should rethink pay and benefits for their employees.

In your book, Capitalists, Arise!, you posit that one of the main causes of economic inequality in America is that business leaders are singularly focused on maximizing the returns of their shareholders, at the expense of their employees and communities. What do you think caused this shift in priorities?

Before we focus on the shift in priorities, I believe it’s critically important to focus on one important concept — free-market capitalism. Free-market capitalism has proved to be the most powerful generator of prosperity and growth that mankind ever created. Between 1945 and the early 1980s, it was responsible for building America into the most important economic and military force in the world. It created a large and prosperous middle class and it lifted hundreds of millions of people out of object poverty to a higher standard of living. We need only look to China, Asia, and other countries that are now modeling this system in order to create wealth for the masses to understand the power of free-market capitalism.

This version of capitalism was defined by a very specific governance principal that required companies to optimize results to benefit five critical stakeholders — stakeholders who are relevant to that era, that are relevant to this era, and who will remain relevant tomorrow. They are the customers, the most important stakeholder because without them business will collapse; the employees, who are responsible for the creation of value; the shareholders, who provide the capital that the corporation relies on to remain vibrant and strong over time; the corporation itself, which needs to be reinvigorated and reimagined as external forces change and develop; and the community. During that era, free-market capitalism had an implicit agreement between society and business. Businesses were provided with a favorable tax rate and their shareholders were not held liable for any criminal actions of the corporation. In return, the corporation committed to doing two things. First, to create jobs in society and to invest a share of the profits in the corporation itself, in the form of research, development, and other initiatives that enabled it to expand its current franchises and its related businesses. The second obligation was to pay people fairly. That was a very critical point of corporate responsibility.

The most seminal example of corporate thinking was Johnson & Johnson’s credo, crafted in 1943 by its former chairman Robert Wood Johnson. It states quite clearly that all five stakeholders — customers, employees, shareholders, the corporation itself, and the community — must all be considered as the company operated and made critical decisions. This exemplifies a company that even today is working to the benefit of all five of the critical stakeholders.

Then, in the late 70s and into the early 1980s, the environment changed; there were economic challenges, competitive challenges, and the world of business became much more difficult. In the mid-1980s, in response to this new landscape, an entirely new governance principal emerged. It was an agreement between the ownership class, management, and government, and it was supported by court decisions that began to diminish the power of the labor unions. The courts became very anti-labor throughout this period, working to diminish the power of labor to negotiate. At the same the labor unions themselves became corrupt and criminalized, asking business to give them more no matter the performance of the business. At the end of the day, this was unsustainable. The result was a broken sense of cooperation between businesses and the employees who created valued for them.

At the same time, new competition from other nations began to make life difficult as well. Globalization, outsourcing of production, and the rise of technology forced corporations to weather a difficult climate. In response, they cut jobs and began to regard employees solely as costs. Corporations resorted to this simple reality driven by the powerful forces of ownership and management, by the diminutive notion of the labor unions, and by economists who posited that the role of business was to simply create shareholder value — a goal that ignored the four other critical stakeholders. 

This was the birth of a new governance model that was focused on shareholder primacy. The other four constitutes became second-class citizens. Maximizing short-term shareholder value became the sole guiding principal. We began to ask free-enterprise capitalism to produce better results and more profits in the short-term, every quarter. This version of free-market capitalism has been in effect for the past 40 years, basically from the early 1980s through today. While the first 40 years of free-market capitalism provided benefits for all five stakeholders, this new model, with a new guiding mantra, has been asked to create value solely for the shareholder. As a result, today nearly 90 cents of every operating dollar go to the shareholder. This is proof, with profit margins at an all-time high, that the shareholder is doing extraordinarily well. But it happened at the expense of the other stakeholders. Employees have had 40 years of flat wages, meaning that they were at or below the inflation rate. Corporations cut research and development which made them less innovative and competitive. Business mightily contributed to the creation of this other America, where income equality is rife and our great nation is now reduced to one where the extraordinarily wealthy sit one zip code away from a struggling middle class, 60% of which must borrow each month to put food on the table.

This zip code America, as it’s been called, is a land that bears no resemblance to the country where opportunity, education, and the ability to work hard and improve one’s financial position was once the norm.

Charles Murray, in his 2012 book Coming Apart, vividly describes this breakdown. He makes it clear that this is not a racial issue, but rather a demographic issue. And it began when the implicit promise between business and society was broken. What we desperately need is a reimagined version of free-market capitalism that will produce growth and restore opportunity for the entire nation.

You’ve stated that in order to solve the above problem, CEOs need to adjust their priorities again, this time to focus on ways they can share their wealth and benefits with their employees in order to ensure their economic stability. What do you think it’s going to take for the people in charge of making these decisions to give their employees a “piece of the pie” when it comes to benefits and wealth?

Understanding the challenges of free-market capitalism today, as it conforms to the demands of shareholder primacy, is one of the most critical next steps. Businesses must begin to understand that employees cannot and should not be viewed as a cost on the income statement but rather as a potential huge investment when it comes to increasing productivity and innovation.

For the past 40 years, corporations have looked at the income statement and seen that the largest item is labor. So, this is where they have cut or outsourced. 

This perspective must shift. In the 21st century, the keys to success are the employees; they are the only ones who can innovate, generate growth, and create prosperity. Capitalists at one point in time were the major differentiators for business, but now capital is cheap and easily available to corporations. Value must come from what employees do — this is the only way for today’s corporation to maintain differentiation and relevance in the market. Only the employees can do that. But Gallup research suggests that two-thirds of American employees are disengaged, and 16% are working against the corporation. So, most employees come, collect a paycheck, and leave.

If American businesses want to lead in the global arena, companies must take care of their employees and reward those who produce prosperity and growth.

If you look at the some of today’s most successful companies, like Costco, Home Depot, Delta Airlines, and the FANG companies — Facebook, Amazon, Netflix, and Google — you can see that they are doing this. These organizations are doing everything we are talking about — they are investing mightily in people, they are taking care of their customer, they are investing for the long term. They do what’s right for all the stakeholders.

The irony in all of this is that when this version of free-market capitalism is used, everyone benefits. Over time, the shareholders do better along with the other four constituencies. Business leaders must begin to embrace this long-term view and government must work with them to make sure our country’s governing principles reinforce that type of corporate behavior.

You’ve said that you’re not in favor of simply redistributing wealth. Why not? What do you think is a better solution?

Let us understand that inequality is part of the human condition. The objective is not to have equal income for everybody — that was a communist driven idea. All of us are different. Instead, let’s consider what happens when income inequality becomes too large — at that stage, it creates an inequality of opportunity. That’s why wealth redistribution doesn’t work; to give a one-time benefit to that lucky segment of the population does not solve the problem. Historically, wealth redistribution may placate short term rebels and anarchists, but it simply doesn’t work. What’s needed is a process that creates a system of opportunity for all. 

I believe a big part of the solution in creating an equality of opportunity in America begins with our educational system. We know that early education is critical, yet in 70 to 80% of the American population there is no access to quality early education. It is critical that we restore this, from preschool through kindergarten. Financial pressures together with a lack of access to quality education have helped create a socioeconomic crisis for families. This is the “zip code America,” because inequality is really driven by zip codes. Within three miles of anyone’s home, you will find a zip code in which divorce rates are high, breakdown of families is real, and households are often led by a single mom holding more than one job to put food on the table. The home teaching of ethics, morality, and civics is gone because the parental figures are fighting simply to stay afloat. Instead, these children are being fed a steady diet of social media, drugs, gangs, and a future where unemployment looms. It’s a socioeconomic disaster.

Are there any ways in which having been born and raised outside the US impacts how you consider the state of the American economy today?

I was forced into hard labor in Romania from the ages of 10 to 15 when the Iron Curtain fell while my parents were on a business trip in America. When I arrived here after my parents waged a long battle to secure my release, I was an immigrant who didn’t speak English. What I found was a place with a sense of deep compassion and caring for most immigrants and particularly those who were in need. Because I was lucky enough to obtain a good education, I could live the American dream and today I can look in the mirror and know that I have made the most of that opportunity and lived up to my personal potential.

I have four granddaughters and I want them to have the kind of opportunities that I had. I want generations that follow to fulfill their own promises to themselves to become all that they can be. Everyone should be allowed to use their own gifts and, if they work diligently, to succeed.

It is the duty of us in roles of leadership to allow all our kids to inherit a world in which hard work, education, and a will to succeed truly matter.

Somewhere along the way, America has lost its sense of compassion. In my opinion, one of the challenges confronting America is that over the last 40 years we have carried a sense of individualism to the extreme. It has morphed into you, yourself, and what you can do for yourself. We have collectively forgotten the simple reality — that all of us succeed and thrive and prosper because we have had parents, angels, and teachers who have helped us along the way. We need a dose of humility to reawaken our compassion. We are not wired to be solo operators. We need one another. We can become full human beings when we again become grateful for what we’ve been given. This lack of appreciation is creating not only a gross inequality of income and opportunity, but also a disregard for the gifts of the environment which we must protect for future generations as well. 

Business needs to play a major role in this area, but it must partner with government to achieve success. Government can support business by enacting governance principles, taxation, and incentives that will encourage business to create an equality of prosperity and growth. Until we address this wide disparity in compensation to provide support to those who are so grossly disadvantaged, we cannot all prosper.

What’s your advice to people who immigrate to America hoping to find economic prosperity?

American will find its way. Our compassion, our humanity, our desire to create a country that is fair and equal to all still exists. But it needs to be reawakened within us. When it is, we will turn the corner and begin to again see the power of a proper balance between business and society. 

The views and opinions of the author are his own and do not necessarily reflect those of the Aspen Institute.

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