President & Chief Executive Officer
What does the political environment in many developed nations tell us about the sustainability of two of the major drivers of global economic progress: globalization and technology?
This piece offers a personal perspective on the root causes and implications of the current turmoil and what corporate leaders can do to shape conditions for continued prosperity. Given the tough constraints that CEOs face in attempting to transcend the intense focus on short-term returns, the “how” is at least as complex as the “what.” Nevertheless, we hope that this article will stimulate discussion on the business and society agenda for major corporations in developed countries and beyond.
We have had a great run. The world has never been more prosperous than it is today.1 People around the world live longer, healthier lives than ever before.2 In emerging markets, billions of people have moved out of extreme poverty.3 In the developed world, we enjoy better medicines, education, information, connectivity, and mobility than most of us could have imagined a quarter century ago.
These achievements have many fathers and mothers. Human inventiveness, political leadership, social activism, and entrepreneurship have all contributed to what Nobel Prize winner Amartya Sen described as human freedom.4
Carefully crafted policies for the free exchange of goods, services, capital, and labor—commonly known as globalization—and the march of technology have played essential roles. These two forces have increased productivity, opened up markets, and created opportunities for billions of people to improve their lives.
Societies in the United States and Europe are being fundamentally challenged in ways we have not seen for decades—with nationalistic rhetoric and agendas from the far right and a deep distrust of business, globalization, and technology from the far left. Many worry that such a polarization of public opinion and policy making could introduce new risks and uncertainties that would deter investment (which is already far too low, judging by current interest rates) and undermine the basis for future prosperity.
Why this polarization? While there are many causes, and they vary from country to country, it reflects in large part widespread and growing dissatisfaction with entrenched economic and social inequality and greater personal uncertainty in a fast-changing global economy. It also reflects people’s mistrust of political and corporate elites, who are seen as the architects of this state of affairs.5 Economic inequality within our societies is a byproduct of the way we have managed the past three and a half decades of global economic integration. At the same time, technology—in particular, recent advances in robotics, machine intelligence, and distributed ledgers (blockchain)—could replace human labor in many areas, further compounding dislocation, inequality, and discontent.6
Brexit was a watershed. The British vote to leave the European Union was motivated in large part by frustration with economic stagnation and inequality, and it has created fertile ground for nationalistic, anti-immigrant sentiment. The English West Midlands, the region with the highest “leave” vote, has experienced stagnating median household incomes for nearly two decades.7
The division between those who have captured the vast majority of the benefits from global integration and technological progress and those who haven’t runs between major cities and smaller communities, between young and old, and between people with different levels of education.8 And it’s not just Great Britain—70% of the US workforce has experienced no real wage increase in the past four decades.9 Similar patterns can be observed in Canada, Germany, and other European countries.10 Wealth concentration has also increased globally, with around 1% of people controlling 50% of the world’s assets.11
See, for example, analyses from VoteView, reported by Philip Bump in “Political Polarization Is Getting Worse. Everywhere,” Washington Post, 9 April 2016.
Max Roser and Jesus Crespo Cuaresma, “Why Is Income Inequality Increasing in the Developed World?” Review of Income and Wealth, March 2016.
BCG Henderson Institute analysis based on UK National Statistics, Department of Work and Pensions.
“EU Referendum: Full Results and Analysis,” Guardian, June 2016.
BCG Center for Macroeconomics.
Based on Luxembourg Income Study data for the middle four deciles of income distribution.
Credit Suisse Research, Global Wealth Report 2015.
What if Brexit was only the beginning? In polls, sizable majorities in the United States and key European countries now demand a reorientation around narrow national interests, proclaiming, “Let other countries deal with their own problems.”12 As more people feel left behind by economic progress, this sentiment could grow and percolate into politics and then policy. And such policies could prove to be contagious across nations.
Firms could soon find themselves in an environment of escalating political risk in terms of trade, access to talent, regulatory rules and constraints, and restrictions on new technologies. Political uncertainty could become the major business risk, compromising firms’ ability to innovate, to access markets and talent, and to invest and create wealth.
In short, it appears that many are so dissatisfied with the current game that they are threatening to end it, even at significant cost to themselves, thereby jeopardizing two major drivers of global economic prosperity: globalization and technological progress.
Richard Wike, “Where Americans and Europeans Agree, Disagree on Foreign Policy,” Pew Research, June 2016.
Today’s economic inequality is a result of how we have chosen to manage globalization and technology.13 These two drivers have always been latent fault lines. Wealth creation does not automatically result in a fair distribution of rewards. Freedom of trade, capital, and labor movement creates winners and losers, as does the advent of new technology. Popular support for globalization has always rested on the premise that most would benefit, many could succeed through their own efforts, and a social safety net would protect temporary losers. Traditionally, it has been government’s role to provide equality of opportunity (particularly through education), an effective safety net, societal balance, and political and economic stability. Meanwhile, business could focus on generating growth, productivity, innovation, and, ultimately, societal wealth.
Governments now find it harder and harder to play their role. Reshaping policies to help struggling individuals and communities in times of transition requires political stability and consensus, both of which are lacking right now. Broader economic realities are not helping, either. The ability of governments to intervene is constrained by feeble macroeconomic growth in the United States and Europe, which greatly limits the scope of fiscal and monetary policy.
The cracks are beginning to show. Many people now think the game is biased (two-thirds of Americans say that the economic system is “not fair”).14 Some conveniently blame immigrants and foreigners for their woes. Others appeal to moral notions of fairness and demand distributive justice.15
Moral questions aside, addressing the distributive challenge in our societies is in business’s best interest. It is hard to imagine that business has anything to win from ending today’s game and replacing it with one characterized by restricted trade and access to talent, a backlash against technology, and persistent political and economic uncertainty.
Searching for practical solutions to hard challenges is precisely the forte of business. Yet business leaders have traditionally shied away from controversial societal issues like the sustainability of the current economic system, preferring to entrust them to government. In this environment, we believe that corporate leaders can no longer afford to stand by as observers.
For a deeper analysis, see Branko Milanovic, Global Inequality, Harvard University Press, 2016.
Hannah Fingerhut, “Most Americans say US Economic System Is Unfair, but High-Income Republicans Disagree,” Pew Research, February 2016.
Our societies need the voices and efforts of corporate leaders in order to tackle the inequality and social dislocation caused by technology and globalization. An incremental extension of corporate social responsibility activities will not be sufficient. The growing divide between winners and losers has become a specter that haunts both business and society—and it is time to confront it.
Business leaders need to balance two apparently conflicting objectives. First, they need to secure the sustainability and prosperity of their own companies. This remains a CEO’s prime responsibility, and it has become much harder in an era defined by lower growth, impatient investors, geopolitical uncertainty, and extremely rapid technological change. Second, they need to shape the conditions for continued and more inclusive economic prosperity and, in particular, for global economic integration and technological progress.
To achieve those ends, we propose that business leaders embrace a new agenda comprising seven areas of opportunity. (See the exhibit.) It will not be easy, and it will entail unfamiliar and uncomfortable choices, including, in some cases, deemphasizing short-term returns in order to support economic and societal progress and strengthen the enterprise for the longer term. But we see this as a tradeoff worth making.
Defining what needs to be done is a first logical step, but it is only a start. In conversations with CEOs about their role in supporting economic and societal progress, many pointed out the challenging context in which they operate. Between boards, major investors, activists, and potential acquirers, there is tremendous pressure to focus on short-term profitability and value maximization. The regulatory frameworks in many markets do not make a broader focus any easier.
See “What You Need to Know About Globalization’s Radical New Phase,” BCG article, July 2016.
BCG Henderson Institute analysis based on US Census Bureau, Business Dynamics Statistics; OECD.
See The Private-Sector Opportunity to Improve Well-Being: The 2016 Sustainable Economic Development Assessment, BCG report, July 2016.
See for example a BCG co-initiated one: Joblinge.
“Resist the beginnings, and consider the end.”20 Many business leaders are beginning to see the plausible endpoint of the current political polarization in our societies. Many privately confide that they don’t like what they see, and they are open to considering novel measures to address the new challenges. The opportunities we propose are intended to soften globalization’s and technology’s sharpest edges, thereby perpetuating a more balanced game that creates broader prosperity and greater societal openness to change.
This is not an easy mandate. But if we, as business leaders, don’t step up to shape a more positive future, it is increasingly clear that we risk a backlash that will limit our ability to create value in our own enterprises and for our customers. Now is the time to take on this broader agenda.
Attributed to Roman poet Ovid and to Greek fabulist Aesop. The saying suggests gauging unsettling developments by assessing the ultimate consequences and—if needed—stopping the unfolding of events early.