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Inequality and Social Unrest – a new risk profile for UK companies

This blog was written by Bobby Reddy, University Lecturer in Corporate Law at University of Cambridge and fellow of Churchill College, Cambridge.

Last week, Nick Hanauer was interviewed for the BBC current affairs programme, HARDtalk<1>.  Nick Hanauer is a US billionaire entrepreneur and venture capitalist, but has opinions and a progressive capitalism outlook that is often anathema to many of his peers. In Hanauer’s opinion, if capitalism is not modified fundamentally, wealth and income will be concentrated in fewer and fewer hands, with the rising levels of inequality fueling anger and violence in society – with a lack of opportunities, there has been a shift from aspiration to resentment. Hanauer believes that the feedback loop between businesses and customers is distorted if customers and workers are impoverished.  He is an advocate of raising the minimum wage and further maintains that the empowerment of the middle class is the key to long-term profitability of companies.  This strikes a resonance with Henry Ford’s extolments in the early 20th century that he wanted his employees to be able to afford the cars that they were manufacturing.  Hanauer may have a point, since the greater the spending power of the middle class, the greater the opportunities for companies to sell, innovate and develop products.  On the other hand, we may, in fact, be seeing a paradigm shift in the business models of certain companies - focusing on corporate customers and high net worth individuals, pricing-out the middle class.  This attitude is surely short-sighted. Tomorrow’s Company will be holding a roundtable discussion on the World Economic Forum’s Global Risks Report 2015<2> (the “Risks Report”).  Social instability scored highly as a perceived risk factor in the short and long term<3>; in fact, 23.3% of survey participants saw profound social instability to be among their five risks of highest concern in the next 18 months<4>.  The Risks Report opines that a major driver of social fragility is rising socio-economic inequality within countries.  The resulting polarization would make governance challenging, increasing the risk of prolonged economic stagnation, and thereby creating the potential for a self-reinforcing downward spiral into social chaos<5>. So why is such social instability a risk factor for business?  Strikes, a decreasing customer base, supply chain disruptions and inflated prices for resources and raw materials will negatively impact economic activity.  Traditionally, the public sector has played the dominant role in combating inequality; however, with the onset of austerity budgets in a plethora of jurisdictions, the private sector must also take heed of any fragility in the fabric of society which can lead to the collapse of trust and mutual commitment between stakeholders.  Companies can mitigate the risks that have been presented by focusing on long-term thinking, including voluntarily paying employees at least a living wage, promoting employee benefits, investing in infrastructure projects, and focusing on the education and training of the workforce.  Paul Polman, CEO of Unilever, for example, insists that it is imperative that companies play an active part in the investment in infrastructure to build a sustainable economy to fight climate change<6>. Whether the true “purpose” of a company is merely profit generation has long been debated in the realms of academia and business.  Although the concept of a “moral purpose” of a firm may be relevant to the corporate governance policies and ethical decisions that drive risk management<7>, if Hanauer, Polman et al are correct in their assertions, a willingness of companies to collaborate and invest in order to mitigate risks, such as acute inequality, will also necessarily correlate with long-term profitability. The Futures Project by Tomorrow’s Company will further examine the role of business in society, and the link between ethical and sustainable behaviour and long-term profit generation. The Risks Report outlines numerous other social and environmental risks to business, including climate change, technological evolution, extreme unemployment, water shortages and unplanned urbanization, all of which company boards will need to factor into decision-making.  In what is a new and rapidly changing world, the most successful companies, long-term, will be those that identify, mitigate, and instil resiliency to those risks. <1> BBC’s HARDtalk on 24 March, 2015 - “Stephen Sackur speaks to the American dotcom billionaire businessman Nick Hanauer.” <2> Global Risks 2015, 10th Edition, published by the World Economic Forum <3> In a survey of 896 leaders in government, business, academia, and non-governmental and international organisations <4> “High structural unemployment or underemployment is seen as the risk for which Europe is least prepared, followed by large-scale involuntary migration and profound social instability.” – the Risks Report, page 23. <5> The Risks Report page 16 <6> The Telegraph 28 January 2015, “Unilever boss Paul Polman slams capitalist obsession with profit” - <7> e.g. The Institute of Directors report – “Responding to Global Risks, a practical guide for business leaders 2014” page 21

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