How business firms perpetuate poverty

Benito Teehankee
The View from Taft, BusinessWorld
February 5, 2020
https://www.bworldonline.com/editors-picks/2020/02/05/277134/how-business-firms-perpetuate-economic-inequality/

Our Constitution says that all economic agents, including corporations, shall contribute to the common good in order to achieve our country’s vision of a rising quality of life for all. More than 30 years after the ratification of the fundamental law, easily one-third of Filipinos are poor despite the official poverty rate now falling below 20% and healthy economic growth at nearly 6%. The World Bank reports that the country has one of the most persistent poverty problems in the region. And the concentration of wealth among the very rich continues to worsen every year.

A major aspect of the problem that almost never gets close attention is the role of business management practices in causing and perpetuating the economic gap. While entrepreneurship is an important option for some people, a big chunk of Filipinos hope to improve their lives by working in companies. But troubling questions need to be answered. How can people who work full-time in organizations that are growing and profitable still be poor? Why has the massive economic growth fueled by corporate value creation left so many behind?

The problem is rooted in prevailing management myths and non-inclusive management practices. The first myth is that organizations are essentially driven by a concern for greater efficiency. The notion that markets are efficient has been debunked by many studies. Still, companies often justify the vast differences between the pay packages of top managers and ordinary workers by claiming that there is a neutral market for talent.

The second myth is that organizations operate based on merit; that is, the way people advance and get rewards is based on capabilities and performance rather than connections, seniority, class, and other personal characteristics people are born with. This is far from the reality. For example, a professional service firm may emphasize high university grades as a reason for hiring one individual over another. However, the cultural and social capital that led to gaining acceptance in the university, provided access to advantageous internship opportunities, and allowed the applicant to identify with interviewers through shared interests are usually powerful reasons why the applicant was accepted.

These myths support non-inclusive management practices especially in hiring, promotion, and compensation. Hiring determines who gains access to business organizations and the benefits in them. The most important, and recurring, hiring mechanism that reproduces inequality is when managers hire people based mainly on cultural similarity. When business leaders hire people who look and talk like them, know the same people, or have had similar lives and cultural experiences, they effectively lock out diverse individuals who can bring in needed talent and ideas while improving their own lives.

Even inside a business organization, unequal access to opportunities for promotion can be an important source of inequality. When this happens, moving up an organization is no longer a simple matter of performance. The help of mentors, powerful networks, and a display of the “right” behaviors all come into play in who gets to advance. In family-controlled businesses, for example, gaining the trust of key family members is often more important than performance itself. Jack Welch, the famed former Chairman and CEO of General Electric under whom the company’s share price rose by 4,000%, started as a junior engineer in the company in 1960 and became CEO 20 years later. How many Philippine companies can offer this possibility to those who start at the bottom?

Probably the worst non-inclusive business practice is in the area of compensation. Pay is the biggest income source for most employed Filipinos. However, some companies compensate senior management — through salary, bonuses, and equity — hundreds of times more than low-level workers. How can a company, no matter how financially successful, claim that its CEO creates 300 times more value than an average worker who directly serves paying customers? The market argument is conveniently used to support this practice when, in fact, senior positions are often not subjected to free market competition. Thus, the compensation structure in some companies resembles a feudal system, where workers toil at the bottom while the very few at the top enjoy the lion’s share of the fruits.

Professional managers have a role in making businesses more inclusive. They can hire people from more diverse backgrounds based on capabilities and the drive to contribute. They can make development opportunities and merit-based promotion available to all. Finally, they can make the gap between the compensation of senior management and that of the majority of workers smaller while enabling more workers to own equity.

This is what management for the common good looks like.