- 16th April 2018
- Posted by: Manolis
For all of the uncertainty and anxiety in headlines today, the world is a much better place than it has ever been. In emerging markets, billions of people have moved out of extreme poverty. In the developed world, we enjoy better medicines, connectivity, and mobility than most of us could have imagined even 20 years ago. The promise of global progress has become a reality for many — but not for all.
Our global narrative of progress, the implicit case for embracing change in exchange for its fruits, is being increasingly called into question by economically marginalized groups and populist politicians across the globe. This narrative has rested on three propositions: that globalization is a major driver of growth and prosperity; that technological progress enriches our lives; and that shareholder returns reflect businesses’ contributions to societal progress.
Those who question the continued applicability of this narrative have a case. While globalization has increased aggregate prosperity and reduced inequality across nations, it has also created winners and losers within nations
Rising income inequality has become a driver of the widening trust gap between the elites and everyone else, which has helped fuel the rise of populism.
Where Did the Existing Narrative Break Down?
Popular support for globalization has largely rested on the premise that most people would benefit, many could succeed through their own efforts, and a social safety net would temporarily protect the disadvantaged. Traditionally, it has been government’s role to provide equality of opportunity (particularly through education), an effective safety net, and social, political, and economic stability.
Meanwhile, business was free to focus on generating growth, productivity, innovation, and, ultimately, societal wealth. This approach was credible as long as economic inequality was kept within reasonable bounds. Persistent and growing income inequality in many Western societies and elsewhere around the world suggests these bounds have been passed. While we can disagree about how to fix the problem, we must acknowledge that globalization is a hard sell if it doesn’t address these distributive issues.
The same goes for technology. At the current moment, enthusiasm about the new possibilities opened up by artificial intelligence is increasingly tempered by fears of unequal gains and potential job losses. The focus on the functionality of new technology and the absence of an inclusive narrative that emphasizes equality of opportunity is already stoking a backlash. Here, again, the case for technological progress can be a hard sell if wider criticisms are answered mainly with historical analogies purporting to demonstrate that everything will work itself out in the end.
Lastly, the corporate focus on maximizing shareholder value has certainly advanced productivity and created growth, wealth, and employment, but now it needs to contend with slow productivity growth, stalling global trade, and a growing awareness of unintended social and environmental side effects. So far, corporations have mainly reacted by increasing share buybacks, accumulating corporate cash mountains, and driving dividends toward historic highs. Meanwhile, investment rates are in decline, despite prevailing low interest rates.
Our research shows that many companies are increasingly geared toward the short term. Such companies tend to generate less growth and value in the long run.
What’s required for a new narrative to be credible? “Business as usual” will not be sufficient, even with an increased emphasis on corporate social responsibility. Cosmetic course corrections will not restore trust and credibility. We believe a compelling story will require reworking both the plot and the roles of the key actors. Business leaders, along with the companies they lead, will need to take an active stance, shaping the conditions for future success, rather than merely reacting to twists in the plot.
To preserve global progress, this new narrative will need to place increased emphasis on equal access to economic opportunity. But a better narrative alone will not be enough. Business leaders will need to visibly embrace and take action on a new agenda to shape the future, both for the direction of our societies and for the sharing of benefits and opportunity within them.
Toward a New Leadership Agenda
To do so, business leaders must balance two apparently conflicting objectives. First, they must secure the prosperity of their own companies. This remains a CEO’s prime responsibility, and it has become much harder in an era defined by lower growth, impatient investors, geopolitical uncertainty, and rapid technological change. Second, they must secure the conditions for sustained prosperity, which requires a more inclusive model for global economic integration and technological progress.
To achieve those ends, we propose that business leaders support a new agenda, comprising seven areas of opportunity. The agenda goes far beyond political activism; it attacks root causes by committing to sustaining an inclusive model of economic growth. This action will entail making unfamiliar and uncomfortable choices, including balancing short-term returns with supporting economic and societal progress to strengthen enterprises for the long term. These are the seven areas:
1. SHAPE THE NEXT WAVE OF GLOBALIZATION. While the last wave of globalization centered on accessing foreign markets and creating low-cost global supply chains, the next wave could follow a very different pattern. In his 2016 commencement speech at New York University, Jeff Immelt, the CEO of GE, described what it could look like: globalization that is less centralized, more geographically differentiated, more digitally interconnected, more cognizant of social impact, and focused on building local capabilities rather than exploiting labor cost differentials.
Business leaders can take an active role in shaping the next phase of globalization by looking beyond cost-based offshoring and emphasizing the benefits of trade and technology across a wider geographic and demographic base. Advanced manufacturing technologies, for example, are starting to reshape the supply chain road map that’s been in place for the past few decades by reducing the importance of scale in production, increasing flexibility, and enabling production to move closer to end markets. Software, sensors, and analytics are shifting value creation from stand-alone products to combinations of products and services.
Businesses can use these trends to reconnect with their customers and their communities. We already see companies localizing time-sensitive and highly customizable forms of production to move closer to customer demand, particularly in the fast apparel (Adidas, Zara) and automotive (Tesla) industries, thus turning global supply chains into two-way streets.
2. SUPPORT ENTREPRENEURIAL BUSINESS GROWTH. Several decades of economic progress have resulted in a concentration of economic activity in larger enterprises and a decline in startup activity. Depending on how we harness it, further technological progress could either exaggerate or ameliorate this divide.
The emergence of platform businesses, which facilitate the collaboration of thousands of individuals and enterprises in dynamic ecosystems, could help restore balance and sustainability. Such ecosystems even the playing field for individuals and small firms to participate in technological progress, catalyzing both employment and innovation. As corporations rethink their global supply chains and business models, creating ecosystems of suppliers and aspiring entrepreneurs could be part of the solution.
Take, for example, providers of cloud-based web services, which give young companies access to scale benefits and flexibility previously unavailable to them. These services are effective examples of long-term investments, which some companies, notably Amazon, undertook and upheld even in the face of criticism from impatient investors. Yet such ecosystems are not just the purview of web companies. Leading energy companies are investing in decentralized energy grids, demonstrating the broad feasibility of such approaches. Toyota’s integrated and highly collaborative supply network, celebrated for its leanness and resilience, illustrates that such ecosystems can be built by traditional manufacturing companies.
3. LEVERAGE TECHNOLOGY FROM FRONT TO BACK. The effects of technology on humans depends on how we choose to develop and use it. If businesses leverage it from the back office forward, focusing mainly on increasing efficiency and optimizing internal processes, then our use of technology will result in the displacement of labor. We will miss opportunities to enhance value for customers and to create new jobs and improve people’s lives. Businesses should start from the front, with a clear focus on solving unmet customer needs and delivering tangible new value.
Using technologies to spur innovation and help people make their lives more fulfilling is an opportunity in nearly all sectors of the economy. But this inclusive approach may require some uncomfortable choices. Take emerging blockchain technology applications, which could have vast potential in financial services (currency, payment solutions, digital assets), insurance (contract and identity management), entertainment (performance rights management), and many other sectors. The benefits could be extracted either through internal efficiency enhancements — by eliminating intermediaries, probably shedding many jobs in the process — or by creating valuable services and markets, which could lead to new opportunities for jobs and growth.
Could we imagine that those who originate and develop new technologies take some responsibility to apply them in an inclusive manner, creating new benefits and services while addressing transitional frictions? Business leaders are starting to confront these questions. Microsoft CEO Satya Nadella recently said: “How do we create AI to augment human capabilities and enhance the human experience? What are the things we need to do so that human welfare is front and center? And that means building in trust, transparency, the ability to take back control, and infusing technology with human values and empathy.” Definitive answers are scarce, but business leaders are advised to start addressing these questions.
4. INVEST IN HUMAN CAPITAL. An increase in the dynamism and diversity of business environments means that people must adapt their skills more quickly. This includes their ability to take part in the production as well as the consumption of new goods and services.
Finding effective and affordable ways to help people acquire transferable skills during their careers, not just before they start out, is a large social challenge. Education is critical in creating career mobility and equality of opportunity, which are at least as important as, and closely tied to, income gaps. But it takes too long for new work skills to become codified and for the education system to deliver them.
Firms can help close the loop. As an example, look at the digital skills gap. In 2014 AT&T was among the first companies to experiment on a large scale with targeted online education in data science and computer programming. In addition to offering the program to its own employees, AT&T offered fully funded scholarships to the public. As new tools become available to build or rebuild human capital more effectively and efficiently, corporations could seek to broaden their mandate in this area, both with their own staff and in the communities where they operate. We also see it as paramount that business leaders be consistent, passionate advocates for improving access to high-quality education for all ages and income levels.
5. BROADEN ACCESS TO BASIC GOODS. We produce in order to consume. Yet access to some fundamental goods or services in our economies is too restricted because prices are prohibitively high. Housing, education, and health care are just three well-known examples of basic goods that have substantially increased in price over the last few decades, leading to unequal access. What’s more, the poor in our societies often face higher prices for comparable goods and experience higher inflation. Access to basic goods could be improved to broaden access to economic opportunities.
Providing access to such goods is often a consequence of competitive business activity and disruptive innovation, which starts with someone creating a simpler, more affordable version of a product. Low-cost airlines, for example, brought access to their services into previously underserved regions and customer segments, and by providing such access helped sustain public transportation infrastructures. Such disruptive innovation is also needed in areas such as health care, where outcomes are standardized, measured, and resources allocated accordingly through the adoption of value-based approaches. Broadening access to basic goods and services can be a winning strategy for investors, companies, and society.
6. REBALANCE AND ALIGN REWARDS. People’s sense of self-worth and happiness is closely linked to the nature of their work and their relative earnings. This is especially true when we consider not only wages and benefits but also career mobility, merit-based recognition, and the intangible value of people’s purpose in work.
Mismatches between rewards and performance along the entire pay scale, from entry-level workers to leaders, undermine perceptions of fairness and faith in the system. Bringing rewards into a healthy relationship with performance presents an opportunity for corporate leaders to directly shape people’s perceptions of self-worth, fairness, and access to opportunity.
On executive compensation, leaders can move ahead by increasing transparency of compensation levels (absolute and relative) by being open about the criteria for performance-based pay, and by ensuring that executive remuneration is governed effectively. On rewards for employees, look at Walmart’s example. The global retailer has recently increased its base salary for a substantial share of its workers. Equally important, Walmart in parallel invested in opening training academies, rolling out training programs, including career mentorship opportunities, and linking participation in these programs to career progression. Rebalancing rewards and aligning them with access to opportunity can be the right thing to do in addition to being good for business.
7. REVITALIZE SOCIETY THOUGH A SOCIAL BUSINESS MINDSET. Business needs to remain deeply embedded in society to positively affect it. In fact, business can create solutions to society’s most fundamental problems. Take long-term and youth unemployment as an example. In Europe, numerous business-led initiatives address this hard-to-crack issue, working closely with public agencies and thousands of volunteers and employers. These initiatives offer structured labor market reintegration and skill-building programs. Some programs do this very successfully, creating a three to four times higher chance to bring unemployed youth back into the labor market and helping small and medium firms tap into new pools of talent. Such social business initiatives, if kept close to the core, also help build strategically relevant capabilities such as the external orchestration of people and assets, a key skill in executing a shaping or ecosystem approach to strategy.
The case for renewing the narrative of progress and global businesses’ role within it needs to start with the end in mind. It does not require a degree in modern history to imagine the ends that await us if we accept deep political polarization in our societies as the new normal. In private discussions with us, many business leaders have shared this sentiment, irrespective of their political views. Many are willing to take pragmatic steps toward more actively shaping society, to not only sustaining economic progress but also helping to bring about broad-based prosperity. Now is the time to act.