Income Inequality Is A Sustainability Issue (Demo)

But it’s a false dichotomy to separate business issues from social issues. Peter Drucker wrote: “One is responsible for one’s impacts, whether they are intended or not. This is the first rule. There is no doubt regarding management’s responsibility for the social impacts of its organization.” Even as a pure “business issue,” engagement with social problems is justified. The business community has learned over the past three decades that, sooner or later, a company’s track record on social issues will affect its business. Consumers will demand that Apple’s Chinese workers be treated fairly, that P&G’s post-consumer waste not end up in landfills, or that Tyson’s chickens be hormone free, well beyond what is required by regulation. Meanwhile, the world’s largest companies have begun to understand that their viability depends on a healthy world. As The New York Timesreports, Coca-Cola and Nike have come to see climate change as a threat to their ability to source the materials they need cost-effectively and reliably. Business by now has a well-developed playbook for dealing with such sustainability issues.

It’s time to recognize that income inequality is a sustainability issue, too.

What does the inequality of income have to do with sustainability? First, income inequality has negative effects on society that leave subsequent generations worse off. Among advanced economies, studies show close correlations between a nation’s degree of income inequality and its rates of homicide, imprisonment, infant mortality, teenage births, and obesity. Beyond blighting many lives, every one of these “social” problems imposes a huge tax on society by increasing the costs of security and healthcare and allocating resources to unproductive uses, like prisons.

Second, the bimodal distribution of incomes is inimical to the consumption behavior businesses depend on to thrive.  The evaporation of the middle class, like the disappearance of fish stocks or forests, will be the end of many companies. Henry Ford understood this, paying the workers at Ford more than their counterparts at other industrial companies, reasoning that helping to expand the new middle class was a way to expand the market for Ford’s product. As with other sustainability issues, the social and business consequences are inseparable.

And directly, the trends are literally unsustainable. Between 1976 and 2012 the share of US income earned by the top 1% almost tripled, rising from 9% to 24%. (While this measure fell to 19% in 2009, it has since recovered.) As the economist Herbert Stein once observed, “If something cannot go on forever, it will stop.” It cannot happen that income continues to concentrate until the entirenational income is earned by the 1%. If by nothing else, the process will be ended by social uprising. With corporate profits and the stock market booming, business risks becoming a target — of Occupy Wall Street, Congressional scrutiny, or whatever political movement decides it must put a halt to this trend. As an example, last March, 68% of Swiss voters approved a measure giving shareholders the right to block executive and Board pay packages, outlawing “golden parachutes,” and increasing transparency regarding loans and retirement packages, according to the Wall Street Journal.  Yes, Switzerland.

As more people begin to see income inequality as a negative “externality” — an unintended but damaging consequence of decisions that businesses make to boost profits  — how should managers respond?

We have argued previously in HBR that companies can choose among three levels of embracing externalities. They can …

• Take Ownership. This means accepting that you have played a clear part in creating a problem, and resolving to fix it. Procter & Gamble did this when it recently set a goal that, by 2050, zero per cent of its packaging would wind up in landfills.
• Take Action. Short of “owning” the problem, this still acknowledges that others associate the problem with you, and you are in a position to make a difference. After a terrible fire killed many workers in Bangladesh apparel factories, European retailers Primark and C&A worked to establishlong-term compensation funds for victims and their families.
• Take an Interest. At this level, an organization realizes there is a problem in an area resonant with its brand, and that it has relevant strengths to offer.  Shell Oil doesn’t sell cooking oil, but its Shell Foundation contributes to making cleaner, safer cook stoves available in the developing world.

How does this framework apply to the issue of income inequality? Business could work on all three fronts. Ownership is a fair thing to take for the income inequality a business promotes with its own compensation and hiring approaches. Some have gone so far as to cap the highest salaries they will pay in terms of ratios to the lowest. But there are many ways to increase the economic mobility of employees. The companies regularly voted among the best places to work are generally known for increasing their employees’ skills and value on the labor market.

Action could take the form of supporting worker skills training in broader communities. The fact that over a hundred companies have already joined a network called Change the Equation is a good example. The initiative is designed to improve the science, technology, engineering and math (STEM) education that will make more students employable and fuel a new generation of job-creating innovation.

Interest is simplest to express, and often takes the form of philanthropy. But it also involves speaking out. Let’s give James Gorman credit on this front, then, for voicing his personal support of a minimum wage hike. JP Morgan may not employ a lot of minimum wage workers — for them, it’s an interest, for MacDonald’s more like ownership — but its CEO has a bully pulpit and can be influential. Whether or not you agree with his stance, admit that he is courageous in talking publicly about inequality. In a recent conversation with another Fortune 100 senior executive, we were assured no statements would be forthcoming from her shop: “They’re scared to death of the issue,” she told us.

That should be a sign that it’s a topic that matters to the public. People’s expectations are growing that the businesses they regard as responsible will step up in some way. At the very least, business should recognize that narrowing the income gap will translate into higher consumer demand and faster growth. Some will recognize how their standing in the society can benefit from being on the right side of a troubling issue. A few will embrace the fact that, in a political climate where State of the Union speeches can do little to inspire cooperation, they have the luxury of being able to make decisions that make a positive difference.