Corporate culture and income inequality

The country has recently been experiencing phenomenal economic growth.

However, there remains, in the words of the Atlantic’s Jillian Keenan, one lingering “grim reality,” and that is the fact that the distribution of wealth in the country remains to be among the worst in the developing world.

The income gap between the wealthiest and the rest in the country appears to be ever widening.

The SWS survey results for the fourth quarter of 2014 show that more respondents considered themselves poor compared to those who did for the whole 2013. This observation stands in stark contrast with Forbes Asia figures cited by Inquirer columnist Ciel Habito who noted that the total increase in the net worth of the richest 40 families alone accounts for well over 75 percent of the increase in the country’s gross domestic product.

Through the years, the overall annual increases in wealth of an expanded list of, say, the 100 or 200 richest families in the country could easily exceed the total yearly increases in the country’s national economic output.

This would leave the rest of us, on the average, with a net decline in our wealth positions.

There is plenty of blame going around for this so-called non-inclusive growth.

There is no question that the bulk of it should be borne by the government for its half-hearted efforts at implementing pro-poor economic policies.

However, income inequality, and social inequality in general, is the outcome of a complex set of inter-related economic, political, social and cultural factors, and to single out one or two main “causes” of inequality is not only unfair but wrong.

Institutional factors

I have elsewhere noted that the disparity in income opportunities in the country is partly the outcome of institutional factors that are deeply rooted in our society.

A number of these factors are embedded in the country’s business sector where economic goods and services are produced and where the bulk of income is generated.

A good number of the institutional arrangements that lead to income inequality are ingrained in our corporate culture.

There are three interrelated aspects of corporate life that materially affect the distribution of income in the country: governance, strategy and social responsibility.

By long-standing tradition, corporate governance (CG) in the Philippines consists merely of routine compliance by corporate entities with prescriptions laid down by the Securities and Exchange Commission (SEC) Code of CG.

These guidelines are mandated by the SEC Act of 1995 which defines CG in terms of the responsibilities of corporate managers to their stockholders.

This legal definition of CG is too focused on the interests of stockholders and fails to take into account those of the other groups that have a legitimate stake in the corporation, such as its workers, its customers and the larger community of which it is a part.

In today’s highly interconnected world of business, CG should be defined more broadly to encompass the interests of all groups in the organization and in society that contribute to the process of wealth creation by the firm.

In the modern corporation, CG should comprise all aspects of corporate life that govern the way things are done in an organization, such as those that specify the decision rights of all members of the organization, and those that provide appropriate incentives to insure that all activities undertaken in the organization are consistent with the attainment of legitimate corporate objectives.

CG should provide the mechanisms by which all activities in the corporation are coordinated, and should seek to co-align the conflicting interests of the owners of the business corporation and those of the other groups in the organization and in society who provide valuable inputs in the process of value creation.

Being too focused on the narrow business concerns of corporate stockholders prevents the corporation from active participation in enhancing the broader and more enduring interests of society, which indeed is the essence of corporate citizenship.

Misplaced focus

Corporate strategy encompasses all decisions made and activities undertaken in the organization that are intended to achieve long-run corporate goals.

The generally accepted ultimate goal of the business corporation is the maximization of shareholder value (SV).

We subscribe to this long-accepted goal of business firms.  We believe, however, as do an increasing number of management practitioners and academics, that the most effective way of maximizing SV over the long haul is to create value for ALL stakeholders.

Paying wages that are higher than market rates, a prominent American economist wrote, ensures greater labor productivity, an observation which we are sure Google’s Larry Page will hardly dispute.

The late Apple CEO Steve Jobs has amply demonstrated that the best way to ensure a continually expanding market base is to generate customer value through creative and innovative products.

Even known free enterpriser Gary Becker of the University of Chicago had to admit that under certain conditions, corporate altruism may actually be good for business.

In practice, however, corporate managers, acting on behalf of their employers, tend to focus on the naïve and single-minded pursuit of immediate corporate profits or measurable operational results—which they are amply paid to do so!

This so-called “bottom-line orientation” leads to a number of unwanted consequences that may result in the failure of corporations to achieve their long-run (i.e., sustainable) financial objectives.

These “unwanted consequences” include emphasis on cost effectiveness (aka “cost cutting”) rather than on value creation, neglect of investment in human capital and environmental degradation.

The end result of this dogged pursuit of immediate financial gain is the creation of economic value for corporate owners (and those who do their bidding), but at the expense of economic value for the many others who contributed to the production process. In a word: Income inequality.

Getting one’s act together

By long standing tradition, CG, strategy and social responsibility have been treated as separate and distinct spheres of corporate life.

This is a gross mistake. We believe that all activities that take place in a corporation, be they decisional, operational or administrative, should fall under a common strategic framework that ties everything together.

Lest we forget, the ultimate goal of strategy is the maximization of SV.

Everything that takes place in any business organization should be aimed at creating the most value for the firm.

Particularly distressing is the great disconnect between strategy on the one hand, and CSR on the other.

Commonly regarded as “doing well” and “doing good,” respectively, the former supposedly has to do with efforts to maximize the economic value of the firm, while the latter with acts of sharing part of that value with society.

But do businesses have the moral responsibility to provide material benefits to their communities? We believe not.

In modern societies, all forms of social organizations and institutions have specialized functions. That of business firms is to create material wealth.

Doing charity work is not in their social mandate, unless, we hasten to add, doing so contributes to the firm’s overall strategy of maximizing its economic value.

This can only be achieved if CSR projects are judiciously chosen, and not merely by picking one philanthropic or event-driven initiative after another without thought of their overall strategic impact.

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is a Professorial Lecturer of Economics in the University of the Philippines. Feedback at <[email protected]> and < [email protected] >. For previous articles, visit www.map.org.ph.)