Income inequality: where do business executives stand?

Citation

Ali, A.J. (2012), "Income inequality: where do business executives stand?", International Journal of Commerce and Management, Vol. 22 No. 3. https://doi.org/10.1108/ijcoma.2012.34822caa.001

Income inequality: where do business executives stand?

Article Type: Editorial From: International Journal of Commerce and Management, Volume 22, Issue 3

Across history, resentment of the wealthy and superrich has taken different forms; it has occasionally expressed itself in violence but is more often mute. Since the 2008 economic crisis, the depth and scope of resentment has increased and has been transformed into organized activities that transcend gender and social class. This has been manifested in the Wall Street protests and other types of protests in different parts of the world. What fuels resentment and energizes members of the protest groups is their belief that the wealthy have disproportional power in society to the detriment of the interests of the poor and middle class. Furthermore, protesters articulate their concerns pertaining to drastic increases in income inequality and the deterioration of living standards of various social segments in different parts of the world.

Traditionally, income inequality has been perceived as a part of class conflict and social fragmentation. In many current studies, researchers have focused on productivity issues, general improvement in the wellbeing of the society, and human rights concerns. In their study of wage and income distribution in the USA, Hsieh et al. (2012) suggest that income disparity among individuals and among regions could explain the negative trends in aggregate productivity and the fortunes of less-skilled Americans over the last decades.

The McKinsey Quarterly (2007) reported that high income inequality in Latin America has been instrumental in exacerbating social tensions, increasing poverty, and lessening the impact that economic development has had on the reduction of poverty levels. This applies regions in a nation/regions in the world. While both Hsieh et al., and the McKinsey Quarterly studies underscore the role of income inequality in deepening societal problems, holding back societies from moving forward and effectively tackling urgent economic issues, public policy makers and their government agencies cannot adequately deal with income inequality problems without the private sector’s and business executives’ involvement.

Business executives in their normal business conduct have the skills and resources to reduce income inequality. Certainly, income inequality is a serious problem but not beyond human control. In fact, the ingenuity of human beings and their creative capacities are destined to narrow the gap in income inequality and effectively curtail its expansion. This is where business executives and their companies can play a vital role not only in narrowing income inequality but in expanding opportunities for acquiring needed market skills and gaining high wage jobs.

However, as in many other social and economic matters, executives are faced with personal and professional challenges. Primarily these challenges center on the executives’ understanding of their roles in the business world and in society. That is, executives are guided by different philosophies regarding where they stand relative to the function of their corporations and themselves in the community and society. There are those who are driven by self interest and the necessity of narrowing the corporate role in society to the economic sphere, while others espouse a broader role and promote the notion that the economic role of corporations are impossible to differentiate from social and political responsibilities. Other executives may situate themselves between these two competing views.

Recently, Edward Conard, former managing director of Bain Capital, stirred a heated debate when he suggested that income inequality is good for the society. Conard made two major points. First, he argued that “Most citizens are consumers, not investors,” and thus they “don’t recognize the benefits to consumers that come from investment.” The second point revolves around risk. He stated:

I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements, but a shortage of people and investors willing to take those risks. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.

By arguing that investors and risk takers are not rewarded enough, Conard articulated his philosophy that rich people should get richer and that people who are not wealthy are simply not taking risks and are mere consumers. Conard made a powerful argument that individuals should focus on furthering their interests and promoted the idea that corporations should primarily care about making profit.

There are many who share Conard’s basic philosophy. For them, it is easy to understand, practical, and valid. However, there are others who do not agree with this philosophy. Many have pointed to Henry Ford and Ben and Jerry as having views that are inconsistent with Conard’s. Ford was a pioneer in giving decent wages to employees and advocated that people should not be burdened with debt as it would impede their independence and prevent them from having control over gaining and allocating wealth. Ben Cohen and Jerry Greenfield as entrepreneurs focus on serving the society while conducting their economic activities. Their involvement in community-based projects and their call to eradicate poverty and improve living conditions for farmers are strikingly different from Conard’s model that justifies wealth accumulation and promotes the indispensible role of the rich.

The Wall Street Journal (April 26, 2012) recently presented a profile of Yvon Chouinard, CEO of Patagonia, who views success not by how much wealth is accumulated but by how society is served (Stevenson, 2012). Chouinard asserts that he is staying in the top position at Patagonia “because it’s my resource to do something good. It’s a way to demonstrate that corporations can lead examined lives.” Chouinard’s philosophy is in a sharp contrast to that promoted by Conard and normally espoused by the classical school of economics: “companies must focus only on the cold, hard bottom line – and that capitalism itself depends in part on this unwavering focus.” Indeed, Chouinard seeks to change such views by influencing how the marketplace should function while offering quality goods and contributing to societal welfare. The latter includes institutionalization of flex-time policies to give employees more flexibility in deciding their work schedule at Patagonia.

Conard’s philosophy in its emphasis on the passivity of consumers and the pivotal role of the wealthy may not be in line with current developments in the global marketplace. Both technological advancements and economic globalization enable consumers to survey and monitor the marketplace and companies and formulate views accordingly. Furthermore, there are a few issues that might have been overlooked by Conard. Chief among them is the fact that investors do not exist independent of consumers – consumers serve both as a stimulating market factor for innovation and renewal and as a user of goods and services that eases the survivability and growth of investors and companies.

More importantly, by focusing on the wealthy, risk taking, and the necessity of income inequality, Conard misreads market evolution, the essence of free market economy, and differences in capabilities among people. Market players are not totally confined to the rich. In fact, the rich’s share of market activities is minimal relative to the rest of the population. Likewise, players in the market, be they customers, capitalists, employees, etc. have different functions and each reinforce the other.

For a free market economy to expand and thrive, the role of each market player should not be discounted. In fact, discounting the role of consumers and their needs in the Soviet Union was instrumental in the ultimate demise of that nation. By placing primary emphasis on investors, Conard ignores the significant role that managers, workers, customers, and the state play in the development and growth of the market. In a free market economy, inclusiveness and access to opportunities is an important safety valve that strengthens innovation and keeps the market expanding, while restraining selfish interests and fraudulent behavior.

Mankind is endowed with different capabilities and can be inspired to pursue different activities. Some are risk takers and others might be risk averse. To credit the first while neglecting the role of the latter does disservice to humanity and society. Those who are students of human nature know that individuals, depending on various factors, are inclined to engage in those activities which fit their capabilities, resources, and opportunities. Furthermore, in many other societies, political and social conditions can severely temper risk taking. Wealth in many of these societies is often accumulated through deceptive behavior and connections to political elites and is only remotely linked to creative involvement and productive activities.

In the discourse on income inequality, there are those who argue that wealthy people opt to work hard, take risks, consume less, and accumulate wealth. Those who make such arguments are often motivated by the notion “Free choice is a fair choice.” However, a deeper reflection of this proposition reveals that it does not condone or suggest that inequality is a destiny. Rather, free choice acknowledges that people can seek different professions and economic engagements and that the consequences of such choices are not predetermined. Furthermore, in matters related to choices and preferences, commoditization and quantification can deprive life of joy, non-materialistic rewards, and the sense of being a vital actor in society.

There is no doubt that in the business world there are many executives who fully agree with Conard’s philosophy. In intellectual and philosophical arenas, it is a healthy situation to have and espouse conflicting ideologies. However, treating each ideology as a dogma or ignoring societal progress can lead to dangerous obsessions. Certainly, income inequality cannot be considered a virtue. It paralyzes various social segments, frustrates economic progress, leads to social tension, obstructs human growth, and disturbs the customary improvement in societal wellbeing. In today’s globalized world, working toward narrowing income disparity demonstrates a civility and enlightenment. Indeed, the ultimate goal of policy and decision makers is to make economic benefits and opportunities available for those who are capable and willing to engage in productive endeavors.

Abbas J. Ali