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Our Insights 15 Dec 2013

Ten Trends from 2013: Mind the Gap – The Business of Inequality

By Mohammed Al-Shawaf

Beyond executive pay, we’ve seen the inequality conversation manifest itself into ‘living wage’ campaigns rippling through the service sector in 2013. Image by Ari Moore, Flickr

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For over 25 years, companies have valued our ability to serve as their early warning system—to interpret emerging issues and trends in the sustainable development agenda and help them anticipate, understand and respond to shifts in the business landscape. In 2013, SustainAbility re-launched a dedicated function to regularly track and interpret “what’s next”—our Ten Trends of 2013 series is the distillation and public output of our thinking over the year.

“‘How can it be,’ he wrote, ‘that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?‘” That was President Obama quoting Pope Francis in a wide-ranging December speech on income inequality, which he called the “defining challenge of our time.” It also represented a high water mark in what has been a remarkable year in raising the profile of inequality as not only an urgent societal issue, but also a critical business one.

In the US, some prominent investors have started to raise concerns about inequality as a threat to the economy’s ability to expand. Others have expressed fears of an unpredictable blowback from a growing American underclass that feels left behind while an exuberant Wall Street breaks still more records. That fear is perhaps closer to a reality for China, whose new leader Xi Jinping has stated multiple times that closing the inequality gap must sit alongside the goal to raise GDP, certainly a motive behind some of the sweeping political, economic and cultural reforms announced in China’s Third Plenum this November.

Boiling social tension has also produced ballot measures aimed at one of the most visible signs of ‘excess’, namely CEO pay. While a vote to restrict CEO pay to 12 times that of junior employees ultimately failed in Switzerland, voters did approve an initiative that gives company shareholders a binding vote on managers’ pay and blocked golden handshakes and severance packages. Citizen ‘say on pay’ measures are now making their way through Spanish and German legislatures after receiving considerable public support. Whether this growing sentiment will lead to a required shift in pay packages is an open question, but companies should expect more pressure to disclose the difference between what top executives and everyone else will earn. For example, the Global Reporting Initiative’s (GRI) new disclosure guidelines add indicators on remuneration ratios comparing the top executive to the average remuneration for all other employees.

Beyond executive pay, we’ve seen the inequality conversation manifest itself into ‘living wage’ campaigns rippling through the service sector in 2013, particularly in the retail and fast food industries. In addition to the obvious reputational risk, companies may increasingly contend with license to operate issues from major cities attempting to dictate the terms (e.g. employee wages and benefits) of tapping attractive consumer markets.

Ultimately, the rising profile of inequality raises the specter of unequal profit sharing, not just across the employee base, but also across the value chain. Companies that are not only transparent about how value is being shared throughout its business and supply chain, but are also actively working to change the ‘rules of the game’ will position themselves strongly.

If you’re interested in learning more about our trends service for your business, contact Mohammed Al-Shawaf or Michael Sadowski.

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