Income Disparity: Corporations Need to Act Now or Feel Pain Soon

Switzerland Davos ForumAs Seen In… The Huffington Post

“A problem well put is half solved,” said the great pragmatist John Dewey. But a problem ignored is an imminent crisis.

That seems to be the case with the pervasive problems that flow from income disparity. The crisis is near, but perhaps with pragmatic and courageous leadership we can change that.

First, though, there’s Mr. Dewey’s point of attacking the right problem. Despite the dramatic attention paid recently to wealth disparity, the primary problem we need to solve is not that a small number of people have a great deal of wealth. It matters much less that there are 1,600 billionaires in a world of 7.3-billion people than that there are 3 billion people who live in poverty, and almost as many who have no access to even rudimentary financial tools. And that real wages in developed nations are declining and youth unemployment is at record levels.

The problem is poverty and exclusion from opportunity. Framing it as a zero-sum problem of inequitable wealth distribution creates a simplistic us-versus-them sound bite with no practical solution. Do you redistribute wealth? Assuming you are able to separate billions of dollars’ worth of assets from those extremely wealthy people, how do you distribute it to those who need it most that does not create dependency?

The fact a few people control immense wealth while so many struggle in poverty may be galling. But who or what is the enemy? Is it fair, or just, that the value of a family home in many developed economies has risen from one generation to the next, and that that value is passed along from one generation to the next? Is it fair or just that those who can afford to invest in the equity markets over the long term are likely to get sizable returns several years from now?

It’s hard to find the injustice in that. But it’s certainly not fair or just for the working poor to be lured into buying homes they cannot afford with misleading enticements. Or something we are seeing more of now that sub-prime mortgages are more tightly controlled – sub-prime car loans. It’s indecent to exploit the poor with financial products that ultimately deepen personal debt. It’s also unfair and blatantly wrong for companies to exploit labor in order to maximize profit – to squeeze margin out of the poor.

The issues are complex and interconnected, but the real enemies are the structural problems that maintain the cycle of poverty. Wage erosion, tax evasion, education gaps, isolation, corruption, and to some extent fiduciary requirements that mandate shareholder return above all else.

The solution is courageous and pragmatic leadership. If you are not motivated by the amorphous concept of social justice, or by a personal “do-the-right-thing” credo, then be motivated by the cost of exclusion. Eroding the middle class for short-term gain is a fool’s game – a futile, ultimately profitless endeavor.

The good news is that income inequality is now at the top of the political agenda of many Western public sector leaders, from Barack Obama to Angela Merkel to David Cameron.

But I see very little evidence it’s a top private sector priority. A few companies are beginning to get it right, but many more brands and companies need to make it a priority. Why? The growing anger and despondence among the marginalized poor and lower middle class is an issue too pervasive to be solved by government alone and the violent uprisings already underway, born of frustration, will become an issue for most companies and their brands sooner than you may think.

Don’t believe that the sputtering of the minimally-organized Occupy movement signals clear sailing. All that anger didn’t go away. It was real, even if not backed by professional organization. And now it is looking for and finding expression elsewhere.

The tragedy and unrest in Ferguson, Missouri, was ostensibly about race; the attack on Charlie Hebdo in Paris was ostensibly about religion. In both cases the situation may have been exacerbated by economic desperation. Desperate people will do desperate things, as we’ve seen before literally every revolutionary movement in history.

Perhaps wide-spread social upheaval seems too far-fetched for successful business leaders and brand managers? Then think like a pragmatist. What happens when your market shrinks? Brands focused on marketing to the middle-class will suffer as more middle-class people drop below the poverty line. They will sound painfully off-key as more and more of their market struggles to pay rent and buy groceries.

Business leaders may be reluctant to tackle this issue as we are often pointed to as part of the problem — indeed frequently as Exhibit A when identifying villains. But business has been perceived to be the villain before (the environment, climate change, racial and gender equality) and eventually figured out that it has to act or suffer the damaging consequences. The smart ones make the “the-right-thing-to-do” a business and leadership opportunity.

Failure to act, on the other hand, failure to keep pace with evolving societal expectations, is invariably the precursor to regulation.

How do we turn the tide, then? What solutions might the ever-pragmatic Mr. Dewey embrace? Exploring the ways to achieve a livable wage that keeps pace with inflation is an obvious starting point. There’s a direct correlation between wage erosion and the shrinking middle-class. Shrinking middle-class equals shrinking marketplace, negative economic growth, and all the bad things that come with these conditions.

Along with that, education, job creation, skills development, and universal access to financial tools and the banking system.

Income inequality is a root cause of many of the global risks we face. It is the problem defined. We need to resist the divisive bumper sticker rhetoric, overcome the status quo inertia and work together — public and private sector — to create jobs, provide skills training and education and enable economic opportunity, or face the very real consequences in short order.