When I started my working life (in the early 1970s) the corporate environment in the Western world was very different from today. Risk taking was discouraged and change occurred at a glacial pace. There were three main reasons for this. Tax systems bore down heavily on high earners; in the UK at one-point unearned income attracted a rate of 98%. Trade unions held huge power and were generally opposed to change, especially if it might result in job losses. Finally, the corporate culture encouraged steady progress, keeping your nose clean, rather than pushing for radical change.
Under the Thatcher and Reagan governments in the 1980s the tax system changed, union power was restricted by legislation and entrepreneurial risk taking was encouraged. Private equity capital increased dramatically, bringing with it much more generous incentive arrangements for senior executives. To prevent a loss of talent other corporations followed suit, even those that had previously been sleepy public sector utilities. This led to an acceleration of growth and initially the benefits were felt broadly across the population, as long as you were in work.
In the US the ratio of CEO pay to the average production worker was around 20 in the 1950s and 1960s, rose to over 40 in the 1980s and is now around 200. In contrast, the standard of living of the median employee stagnated after 2000, or even fell. The concept that increased wealth would trickle down to the masses hasn’t worked. Furthermore, the incentive to reap massive, short-term rewards has encouraged a disregard for long term damage to the environment.
Consequently, there is a growing sense that capitalism is not working. That’s driving a polarisation of political views as people search for extreme solutions. These are dangerous times in which business as usual is not the answer. EQ’s investment processes and culture are designed to reflect this.
We want to invest in businesses that have sustainable operating models and to press for change where necessary. I’m proud of the work that we are doing in conjunction with organisations such as ShareAction and ClientEarth in this regard.
The Benefit Corporation (B Corp) movement (of which EQ was an early UK member) is another attempt to address systemic failures of capitalism by broadening the remit of corporations beyond profit to include having a positive impact on society and the planet. It’s growing fast with membership now exceeding 7,500 companies in more than 90 countries but if it’s going to have a real impact that reach needs to be extended. I encourage everyone to favour B Corps with your business wherever possible.