An Illustration of Wealth Inequality in America

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Powerful data visualisation illustrating the point below. While the principle of inequality is not problematic in itself, the actual position today is toxic – and not just in America

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Inequality, Happiness and how Economics got us lost

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It’s increasingly obvious that one of the issues that emerges from our current social set up is growing inequality. No longer the domain of marginal voices on the far left, talk of a crisis in capitalism and inequality that is economically inefficient is now firmly mainstream. This post will look at why equality is a worthy goal to pursue in its own right.

Economics’ focus

Orthodox economics tends to focus on growth (and to a lesser extent, employment) as the primary goals of economic policy. This wasn’t always the way however.

Jeremey Bentham, a pioneer of the discipline in the Eighteenth century argued the goal of economic policy should be to bring about the greatest happiness of the greatest number of people. What happened next is crucial. Typifying the best and the worst of economic thinking, there was a move to produce a simpler, intellectually more elegant model. Rather than attempting to measure all the intangible inputs to societal happiness, it was assumed that people would spend their money in a way that maximised their personal happiness. Following this logic, giving people more money to spend increases the amount of happiness each individual can buy, and thus the most efficient way in increase total societal happiness is to increase total societal income.

As with any classical reductionist model, it is contingent on a number of assumptions. The passage of time has made these assumptions less and less tenable.

1. Increasing income will increase happiness

This was difficult to measure initially, but advances in neuroscience and survey methods have given us reliable measures of happiness. While increasing income leads to increasing happiness initially, beyond a certain point the relationship breaks down – as argued by Richard Layard – and demonstrated in the graph from the World Values Survey below.

Graph of income against happiness from the World Values Survey

The upshot of this is that increasing the wealth of the wealthiest has minimal impact on their own happiness.

2. If a country maximises income, wealth will trickle down and questions of distribution will take care of themselves

This assumption has its basis in the work of Simon Kuzntes. Kuznets completed a study showing an inverted u-shaped relationship between GDP and equality. As countries grow, they become less equal initially. Kuznets suggested that a tipping point is reached however, and wealth is redistributed. Kuznets completed his study at a time when data was not available for any country over time. Instead, Kuznets used a cross-section of countries at one point. Despite being well received, the theory has failed to predict what would actually happen.

More importantly as time series data has become available,for individual countries the “Kuznets curve” has failed to manifest itself.

While Kuznets’ hypothesis is now widely discredited, the orthodoxy of focusing on growth and ignoring equality remains.

3. Happiness comes from growth in absolute income – not growth in our own income relative to peers

While this initially seems logical, there is a range of research showing the rivalrous nature of income – again excellently outlined in Richard Layard’s book, “Happiness“. Habituation and social comparison mean that beyond a basic level, absolute income is less important than income relative to peers.

4. The market will lead to a fair distribution of resources

Fairness matters to people’s happiness; and acting in a fair and cooperative way has been shown to activate neurotransmitters in the brain associated with happiness. For reasons discussed in the next post, inequality is growing, and increasingly there is a sense that the way the market distributes income is not fair. The last two points taken together mean that current policies that increase the wealth of the wealthiest can actually have a detrimental effect on societal happiness.

Taken together, we are pursuing happiness by maximising GDP, allowing the market to determine a relatively fair initial outcome and trusting the Kuznets curve to correct this initial distribution as necessary.

But maximising GDP is increasing the wealth of the wealthiest – whose happiness is largely unaffected by this increase; the initial market outcome is no longer perceived to be fair, decreasing everyone else’s sense of happiness; and the mechanism by which we thought society would correct this distribution turns out not to exist. These are clear signs of a failing and a need to intervene to ensure a more equitable outcome.

While classic economic theory might have produced seemingly fair outcomes up until now, that is less and less the case. The reality is the middle is being squeezed, the rich are becoming ostentatiously wealthy and the poor are being left behind and isolated as never before. Whether that is down to social dynamics, crony politics or something entirely random, its not good for us as a society. We have to recognise that a laissez-faire approach is no longer producing a fair, equitable or happy result.

Employee Engagement – Still talking about the same thing, right?

 

An obscure “Blade of Glory” quote popularised recently by Jay-Z and Kanye But while Chazz Michael Michaels was talking about “lady humps” the same conversation might just make sense in the context of employee engagement.

As a concept, engagement has its roots in the work of Iban Mayo and the human relations movement. Contrary to the prevailing scientific management wisdom at the time, Mayo stumbled upon the somewhat obvious fact that merely treating employees like humans (with a gesture as small as adjusting the lighting in the workplace) can have a significant impact on productivity.

The concept has evolved over time, with notable input from survey based interventions and organisations like Gallup. But while the numerical focus has undoubtedly helped the idea to mature and guided organisations toward specific interventions, it is hard to avoid the conclusion that the real meaning of engagement has got lost in its practical application. Just about every employee will recognise the phrase, but try asking for a definition and see what you get. Provocative? Gets the people going?

Most research into the topic comes to the firm conclusion that the biggest driver of “engagement” is employees finding meaning in their work. This can be traced through:

  • Organisations having a greater purpose and vision,
  • Employees connecting with this purpose,
  • Understanding how their personal job contributes to this larger purpose
  • And having the tools, resource and mandate to complete their job effectively.

This is all very sensible. The difficulty when it comes to practice, however, is that organisations tend to focus on “quick wins” and easily measurable improvement plans – because we all know “what gets measured, gets managed”.

Many organisations focus on the bottom two points, with the result that to many, employee engagement has become a confusing mish-mash of making sure everyone has a pen, letting people wear jeans on a Friday and holding strictly scheduled briefings, where a corporate powerpoint presentation is recited to uninterested employees.

So what would focusing on a purpose and an individual employee’s relationship with that purpose look like? Here are three thoughts:

Define the organisations larger purpose (beyond enriching shareholders)

There are plenty of good examples, including Unilever, Melotte and Puma. Wal-Mart, suffering some particularly bad press in 2005, made an extra effort in its response to Hurricane Katrina. In the process, CEO Lee Scott noticed a massive increase in employee engagement. Attributing the increased engagement to a sense of purpose, and deciding he wanted a work force as enthusiastic as that all the time, he decided to do some thinking around Wal-Mart’s larger purpose. Scott set a target in 2005 to produce zero waste, have an energy supply that is 100% renewable and only produce products that sustain our environment and resources. This has been Wal-Mart’s sustainability mantra ever since.

Give employees the opportunity to create their own meaning around that purpose – and encourage two way dialogue

To make their sustainability mantra meaningful for their 1.3 million employees, Wal-Mart created a tool called My Sustainability Plan. This allowed employees to take the concept of sustainability and create meaning for the idea that was relevant for them. Regarding two way dialogue, Brighter Planet have produced research suggesting organisations where employees are able to make suggestions are six times as likely to have a very effective engagement programme.

Enable all employees to contribute to the larger purpose – and not just in a token way

Beyond personal sustainability plans, Wal-mart have used their Sustainability goals to re-invigorate their lean six sigma thinking. Engaging entire teams in sessions to re-design packaging and reduce waste has led to dozens of implemented ideas and millions of dollars saved.

Organisations looking for that magic bullet of discretionary effort, productivity and on-fire-employees would do well to look at their role in society and how their employees are able to engage with that. I don’t know about you, but more than having pens, or dress down Friday, I find that provocative. It gets me going.

Joining HR Dots… Corporate Social Responsibility and Employee Engagement

 

Image from sustainabilityadvantage.com

The above is the result of valuable piece of research conducted in Canada by Hewitt and Canadian Business for Social Responsibility. It looks at the link between employee engagement and employees’ perception that their employer is socially responsible.

It’s one of those relationships that makes perfect sense but is too often overlooked: The most powerful driver of employee engagement is people finding meaning in the work that they do. If an employee’s work is their cause, then of course they are going to go the extra mile to do it well!

So compelling were the above results that Hewitt have since included perceptions of CSR as an item in their engagement survey.

Hopefully this is symptomatic of a move to incorporate ideas about the social impact of an organisation in the employee engagement debate.

Sustainability in our time

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I read a piece this week using Neville Chamberlain’s “peace in our time” speech as an analogy for the “Future We Want” document that emerged from the Rio +20 Conference. It seems apt. The final paper at the summit suggested that “sustained development” (not the blue economy; not sustainable development; not even an end to fossil fuel subsidies) is the solution to climate change. That our political leaders met to find a solution to climate change and committed to the myopic course of action that has brought us into peril in the first place is the most shameful and dangerous abdication of collective political responsibility since failing to ask Hitler what he planned to do with all those Panzer tanks.

Many have pronounced a multilateral solution to climate change as dead. One of the more interesting developments at this summit was the increased engagement of big business. The profoundly disappointing efforts of government to produce anything relevant has re-focused many on the role of business in tackling climate change. So what might that role be?

Jeffry Sachs has quite concisely articulated the benefits and drawbacks of business’ current role in society; and it seems a sensible place to identify the particular areas business can engage in. First, the core strength of business over the past century has been in getting things done. Nobody is better placed today to create solutions to the climate challenge than organisations like Shell, Siemans and GE. Not only do they have the financial capital to make things happen, but they have some of the smartest, innovative minds in the world, and world class R&D processes designed to produce tangible results.

The most positive development in this space at Rio was the emergence of the Friends of Rio group, looking at multi-stakeholder collaboration and whole systems change. Combining business’ funding and delivery focus with Civil Society organisations’ values and experience with non-monetary deliverables, the possibilities are intriguing.

Secondly, there is the question of separating business from politics and stopping business from writing its own rules. In the words of Peter Bakker, we need to “change the way we think about business performance and align the business with the world we want to create”. At the moment, this charge is being led by an “enlightened few,” including the likes of Unilever and Puma. Businesses need to start thinking this way themselves and must be open to regulation in this space.

Tragic as the failure of the multinational process at Rio is; if the scale of the shortcomings is enough to force a “crowding in” effect from big business, Trade Unions and other non-traditional stakeholders, then perhaps all is not lost.

Sachs on business

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“I deal with a number of businesses that I admire because they are better diplomats than the state department as they are actually doing things rather than talking about them. They are getting real things done.
“The other face of businesses is that they are too powerful in our societies. They write the rules, they pay the politicians, sometimes illegally and sometimes, via what is called legal, which is financing their campaigns or massive lobbying.
“Billions of dollars are spent and this is horrendous because if business writes the rules, it is not true their shareholder value is their value to society. It can reflect highly destructive practices which the politicians turn their eyes away from because of the political power companies hold. This has got completely out of control and is leading to the breakdown of modern democracy.”

– Jeffry Sachs

A concise summary of the potential and barriers to business’ current role in society. Its pertinence is highlighted by Barack Obama’s current messaging about his fundraising. The quote comes from an interesting article by Jo Confino in the Guardian. Whether you love or hate Jeffry Sachs, its worth a read.

Profit – an end to a means?

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In 2011, Bob Diamond laid out his view of what organisational culture means, and what it should look like at Barclays:

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

Much has been made of these comments over the last couple of days, and how the LIBOR-fixing scandal has made a mockery of his words.

While there can be no doubt that Barclay’s behaviour in fixing LIBOR rates has not put their customers and their clients at the heart of their decision making, I find myself more depressed at the limited scope for good – even in this, what should have been Diamond’s most aspirational address. Diamond gave plenty of good examples of CSR, and ways that Barclays could contribute to society while also continuing a relentless drive for its own profitability; but surely there must be a real debate at this stage about the viability of organising society around businesses driven primarily by profit.

It’s a concern that is not limited to Barclay’s by any means – indeed most blue chip companies would take a similar view of their purpose: Delighting customers and producing value for shareholders. The traditional argument says that the role of business to fuel economic growth, and this helps society by creating jobs and wealth.

There is truth to this – and it is not surprising that the financial system has produced hermeneutic knowledge to justify its behaviour. What is left out of this narrative however is that in pursuit of growth, this capitalist system has also produced a range of negative unintended side-effects whose consequences now significantly outweigh the positives produced by economic growth.

Klaas Van Egmond has articulated the obvious, in highlighting capitalism’s “tendency to reverse ends and means”. He suggests the financial system has become an end in itself, rather than being the means it should be to further human happiness and social value.

What is truly frightening is how embedded this topsy-turvy capitalist narrative is. Even this week Bob Diamond has been praised for masterminding a “British corporate success story”. National newspapers are peddling the argument that he should stay because he would be too difficult to replace.

Just why are we putting such value on his job?

Barclays exists today, to enrich itself, and by so doing (it would say), improve society. We need to re-imaging Barclays, and every major business so that they exist to improve society, and in so doing enrich themselves in a sustainable way.

If Diamond was leading on organisation that thought and acted in that way; then maybe, just maybe you could begin to fathom his £17 million annual pay packet. As it stands, I find myself slack-jawed as people formulate arguments for continuing to pay a man 649 times the average wage in Britain so that he can continue to increase the profitiability of an investment bank without thinking beyond his immediate “customers and clients”.

The Twenty First Century Organisation

I was introduced to the Business as an Agent of World Benefit project yesterday. Rather than follow the current discourse of bashing capitalism and corporations for the damage they do to the world, the project takes a refreshing approach and inquires into how business can act as an agent for positive change in the world, while also sustaining its own profitability.

Sounds crazy – I know, but step back for a second and think about how much sense it makes. Big corporations are usually full of intelligent people; and intelligent people know that destroying the environment and squeezing an ever increasing proportion of the population into relative poverty is not a strategy for sustainable growth – or even survival. Moreover, who is better placed to make a difference on an issue like climate change than a company with the brightest engineers, billions of dollars to back them, and the selfish motive of healthy profits if they succeed?

David Cooperrider has outlined the three characteristics of model organisations he sees for the twenty first century:

  • Organisations provide a domain for the elevation of strengths – they provide the processes, tools, and mission for individuals to realise and grow their own strengths;
  • They enable the concentration of strengths – connecting different strengths in what Ken Gergen calls “an ever-expanding domain of relatedness”. Cooperrider argues there is a multiplier effect to connecting diverse strengths, and organisation offer a platform for more and more strengths to be connected with increasing potential and novel results;
  • Organisations should refract strengths outward into society. In a dawning age of collaboration, knowledge has no owner and the days of hoarding intellectual property are coming to an end. The twenty first century organisation will pride itself on sharing its ideas and designs in a collaborative way, acting as a lightening rod for further innovation.

Sound far fetched? It might be closer than you think. Melotte, a Belgian manufacturing firm is making waves with its digital 3D printing technology. Led by Mario Fleurinck, the company is using cutting-edge technology to rapidly scale down costs of manufacturing. The result is an eightfold decrease in carbon emissions (numbers to impress any environmentalist) and a revenue growth of 20% per quarter (something for the businessman too). Rather than pursuing a classic balanced scorecard however, Melotte has defined a new set of metrics. These not only highlight the root causes of the company’s success, but provide a framework for the company’s continued growth to benefit society in a much larger way.

Ilja Heitlager, Information Officer at Schuberg Philis told of an inquiry into what drove his company’s success. It led to the IT provider bucking the trend and doing away with a generalist call centre, in favour of employees building deep knowledge of the systems of a small number of clients. Giarte, an Outsourcing survey provider has found Schubert Philis to have the highest customer satisfaction rating in the Netherlands for the last six years, with an incredible 100% of clients saying they would recommend the company to others. By connecting the knowledge within the organisation Schuberg Philis came up with a model that made redundant the challenges they faced previously. Interestingly, the same approach to change has led them to agree a mission to build an organisation that, rather than focusing on shareholder value, “will make their children proud”.

Diana Whitney earlier suggested that “Appreciative Inquiry draws people who’s values are in-congruent with the old methods”. If Schuberg Philis’ and Melotte’s financial results are anything to go by, we may see a lot more organisations discovering the power of a new set of values. Welcome to the 21st century!