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Capitalists for Inclusive Growth

LONDON – In 2012, the Pew Research Center found that 85% of self-described middle-class adults in the United States believe that it is more difficult now than it was a decade ago for people like them to maintain their standard of living. The share of Americans who say that they are in the lower-middle or lower class has risen from a quarter of the adult population in 2008 to around a third today. And Pew’s research found that only 63% of those surveyed believe that hard work leads to success, down from 74% in 1999.

These statistics, which represent popular sentiment in the world’s largest economy, should raise significant concerns for governments and business leaders elsewhere, particularly in countries challenged by stagnant growth and rising levels of youth unemployment. Indeed, in January, the IMF revised its near-term outlook for eurozone growth downward, to -0.2% in 2013. Meanwhile, official data from Spain indicate that the jobless rate rose to 26% (almost six million people) in the last three months of 2012, the highest figure since the mid-1970’s, with the rate of youth unemployment reaching 55%.

The need for growth – specifically, the kind of inclusive growth that can provide jobs for the vast number of out-of-work young people and combat rising levels of income inequality – has never been more vital. Nevertheless, today’s debates about how to achieve sustainable, inclusive growth are too narrowly focused on the role of governments and policymakers. The role of the private sector – with its multinational reach, vast piles of cash, and ability to innovate – has been neglected.

There are three main areas to which business should turn its attention if capitalism is to function in a more inclusive way and meet society’s most pressing needs. First, companies should work to overcome skills/jobs mismatches by investing in vocational training and apprenticeships. Companies like Rolls-Royce and British Gas operate impressive apprenticeship schemes that add value for their businesses by creating a pipeline of talented recruits. Other initiatives have been established to scale up these efforts by engaging multiple companies to create entry-level positions for the significant number of young people who are currently unemployed.

Second, just as a collective effort is needed to strengthen the skills of national workforces, so, too, an industry commitment is required to support small and medium-size enterprises (SMEs) as part of the wider business environment. In its 2011 fiscal year, Hewlett-Packard used more than 600 SMEs in its supply chain in the United Kingdom, representing nearly 10% of its spending on suppliers. HP aims to increase this share to more than 15% by the end of 2013 with the addition of a further 150 SMEs, thereby fueling what it rightly regards as the engine of UK economic growth.

Similarly, in March 2012, a consortium of large corporations led by IBM created the web-based Supplier Connection to make it easier for small businesses to become suppliers to large companies. Currently, the members of Supplier Connection purchase more than $150 billion in goods and services annually through their global supply chains.

Finally, public corporations must be managed for the long term, and should be rewarded by investors for being more inclusive. For example, Unilever has rejected the short-term pressures of capital markets by ending quarterly earnings reporting and broadening its focus to advance greater social interests, rather than just the interests of its shareholders.

But enlightened companies require enlightened investors. The Ontario Teachers’ Pension Plan is exemplary in its commitment to supporting the best governance practices in the companies in which it invests, and it has reaped large benefits from this approach: the Plan has earned average annual returns of 10% since its inception in 1990.

The idea that underlies all of these initiatives, and the notion of inclusive capitalism itself, is that companies must be managed for the long term. Companies that follow this approach are concerned with the skills of their future workforces; seek to build loyal and productive supplier bases; and make investment decisions based on sustainable value creation, not short-term profitability.

There is no contradiction between delivering high returns and adopting a long-term approach. Furthermore, as companies begin to adopt these practices, a rising tide will lift all boats: with greater support, SMEs, which currently account for 99% of businesses and two-thirds of private-sector employment in the European Union, will be able to invest in research and development, and to hire more employees.

In turn, large companies will receive the benefits of faster innovation, rates of youth unemployment will fall, and the hollowing out of the middle class – and its faith in future living standards – will be reversed. It is this type of profoundly positive influence on prospects for shared prosperity and inclusive growth that currently eludes national governments.