Sunday, January 29, 2012

Reversing Widening Inequalities: A few Suggestions

In this post, I suggest solutions to solve the root causes of the widening inequalities that I identified in my previous article on the subject.

1. Change time horizon (long-term vs. short term) and reallocate shareholder value: Financial markets’ modus operandi presents the biggest obstacle for change. Large investors such as hedge funs, pensions funds, and institutional investors measure results and earn their pay based on quarterly benchmarks, thus their incentive is to maximize profits in the short run. At the same time, as noted in my previous post, the proponents of good governance agree that shareholder value gets maximized if companies focus on the long term. Jack Welch himself, aka Neutron Jack in the days when he conducted fierce restructuring processes at GE, earning him respect of adamant market supporters, has said the same for years.

Not everyone gets it in the corporate world though. Yahoo that has performed so poorly in the past few years and whose previous CEO was fired over the phone (!!) just announced that it paid its new CEO $26m – for what exactly? Probably staying on the job for more than a week…

Thus, there need to be a few corporate leaders enjoying great reputation and credibility in the business world who will come together and say that things should be done differently. This is what Howard Schultz, Starbucks’ CEO, has done with respect to political donations. “A few good men and women” have to step up and show leadership and vision.

A little research would help too. It would be useful to investigate the economic benefits that an additional dollar would bring to a rank-and-file employee vs. a CEO. What would be the macro impact for the economy if someone was paid an additional $10m a year vs. 1000 deserving employees getting an extra $10k? Granted - a corporate board is more interested to keep its leadership happy by paying them bonuses than to contribute to improving the economy. And they’d say anyway that by employing X number of people they provide them and their families with livelihoods and thus play a positive economic role – which is true. But again, the question here is one of allocation of value created. 10 million to one guy or 10k to 1000 people?

In our era can boards afford to focus only on their shareholders and senior leadership and dismiss their companies’ larger economic impact? We are all in this together, aren’t we? In societies where individualism is paramount the notion of “being in it together” does not carry much weight – in the business world maybe. But I bet ordinary people deeply relate to that notion – they feel part of the communities they live in and they care about their neighbors. More broadly, in the US in particular, Americans’ love for their country is a reflection that they feel a sense of belonging to a bigger community (the United States) and as such share a bond and responsibility with their fellow citizens. The corporate world should take note, go back to basics, and reflect the society’s view of the world.

2. Create conditions for bolder public policies: The middle class has little leverage to get politicians to come up with bolder policies that would benefit them. It can voice its concerns through its vote, but because the middle class is not organized its influence is diluted and marginal. We are talking about a large group of individuals that are disconnected from one another.

I am not sure it will be easy to get the middle class to mobilize en masse and become more active politically. Large web-based efforts that are quick and simple like signing petitions on have been successful – but mainly because they required so little effort. Folks out there are busy paying the bills and getting their kids through college. In the US in particular, most know that they will have to rely mostly on themselves as quality education for instance is generally expensive. As a result, they feel pressure to hold on to their jobs but also keep their heads down, thus reducing the likelihood that they will stand up to protest. The level of tolerance of hardship that Americans display is pretty amazing for an industrialized country.

If a broad political involvement on the part of the middle class is uncertain, politicians will have to show courage and leadership by taking measures that may be unpopular or draw a lot of criticism from the opposing party and possibly from their own camp (e.g. come up with a government-sponsored healthcare option or raise taxes). There should be recent examples - visible to all - of politicians who carried out unpopular measures but did not suffer politically.

New York Mayor Bloomberg has been unapologetic about his decisions around the use of eminent domain or around parking in the city. Yet, he has been reelected consistently. If there were more examples of politicians showing courage and not paying the price politically it may inspire more of our elected officials to be bold.

But are political courage and a greater activism of the middle class the only solutions here? Doesn’t the current political funding system encourage inertia since it relies so much on very large donors (e.g. the recently in the news Super PACS, be they individuals and corporations) who may be keen to preserve some form of status quo and also push their specific agendas? Many corporations give to both parties, which is a clear sign that they are content with the system staying the same. Would they be pleased to see a bold changemaker getting to some high office?

What would be the problem of having a political system with much smaller donation amounts? That money buys ads on TV that in general do a poor job of capturing reality. How about a level playing field with smaller donations and thus a much lower aggregate total to spend on political campaigns and ads? A lot of campaigning is done by volunteers, so having a smaller financial base would not affect volunteers’ involvement and the execution of a campaign.

This new campaign financing system would decrease the potential influence of a few large donors and thus potentially empower politicians.

3. Break the cycle of poverty by focusing on needs and results: I identified the lack of enabling context (lack of infrastructure such as public transportation or good education) as a root cause for the continuation of poverty in many areas. What would it take to have this enabling context in every community? How much would it cost? Do we even know? I think it would be very helpful as a starting point to put a number on those needs. Granted, it won’t be a straightforward and easy number to come up with but it should be possible to make an estimate regarding say the cost of a functioning public transportation system or the cost of bringing x number of students to their grade levels in reading and math. The total dollar figure is likely to be scary - but only with a number will we be able to determine how to go about finding the resources needed.

It is encouraging that the corporate community in some instances has understood the need to work hand in hand with city governments when those are not able to pay for the full provision of basic services to their constituencies. For instance, about 80 San Francisco-based hi-tech companies just created an interest group to collaborate with the City on public policies that affect them. The Chair of that alliance, angel investor Ron Conway, said “We have a vested interest in making San Francisco the “Innovation Capital of the World””.

Breaking the cycle of poverty will also be accomplished if concrete and tangible results of programs currently offered to those in need are evaluated systematically. Programs should have specific and concrete goals and objectives before they start. And they must be evaluated along the way and at their completion. There should be no sacred cows and only programs that have demonstrated results given the circumstances and context should continue to receive funding. I mentioned in the earlier post the Office of Social Innovation created by the Obama Administration that has mobilized funding ($50million appropriated by Congress in 2010 supposed to be leveraged 3 to 1) to support the replication of social programs having demonstrated success. The first grants were disbursed last year. We will stay attentive and check if that money does contribute to moving the needle on the fight against poverty.

I am ending this article keenly aware that coming up with solutions is much harder than identifying root causes. But I can’t help but think that if all those who want to bring about social change and make this world a better place contributed ideas using their experience and intellect and if we spoke to one another more, great solutions would surface eventually. We must believe in ourselves and in our capacity to move the needle!!

Wednesday, January 11, 2012

Santorum: Reinforcing Negative Stereotypes and the Two-Party System

I recommend this very interesting NYT article ( that was published late last week and relates how Rich Santorum has made tons of money since leaving the Senate (incl. $1m in 18 months in 2009-10) by working for the very companies that benefited from the legislation he lobbied for when in Senate… Certainly not the first one in Washington to do this but that does not make it alright!!

Two conclusions here - Santorum is the ultimate insider contrary to what he wants people to think. And, how can we expect that a story like this one won’t make Americans even more distrustful of anything government and even angrier at politicians in general?

The US is fortunate to have a two-party system. Given how mad a lot of people are right now there would be a lot of room for extremist parties. The Tea Party chose to join forces with the Republican Party to have representation in the Congress and to potentially put its candidate in the White House.

But had they remained independent they could be the biggest party in the US in a multi-party system, certainly bigger than the Republican Party and potentially than the Democratic Party if a more radical left wing had emerged from the Occupy Movement and other left-wing manifestations of rejection of capitalism gone wild.