28 January 2019
Investing in inequality
Investment for Inclusion series: Part 2 of 6
In the last 20 years, millions of glossy pages of “sustainability reporting” have been unleashed on the world. But it is clear from the state of our society that Milton Friedman’s maxim, that the social responsibility of business is only to increase its profits, is still of paramount importance for most of our corporate leaders. From their perspective, all stakeholders supposedly benefit if executives are free to do whatever is necessary to generate maximum profits: these profits will “trickle down” into the hands of shareholders and employees, ultimately benefiting society at large.
Decades of implementation of this doctrine have instead radically deepened global inequality. “Trickle-down economics” has failed particularly spectacularly in South Africa. The World Bank’s 2018 report Overcoming Poverty and Inequality in South Africa found that wage inequality increased significantly between 1995 and 2014. At the same time the Palma ratio (the share of the top 10% of earners’ wages to the share of the bottom 40%) has almost doubled, from 5.11 to 10.13.
Most of the blame for our failure to address poverty and inequality is laid at the door of government’s ineffectiveness and corruption. But the people who run the companies listed on the JSE, and the institutional investors which own them, are among the most powerful actors in our economy. The contribution that their behavior has made to this lack of progress, and to the increase in angry populism that dominates our headlines, is seldom acknowledged. These players recognise the crises that surround us, but their response is to do more of the same.
Dis-Chem Pharmacies, which listed on the JSE in 2016, provides a telling recent example. Dis-Chem employees went on strike in November 2018, demanding a “decent living wage” of R12 500 per month. In a statement, the company said that it had “made it clear that the wage demands are unreasonable given the current economic climate and that agreeing to them would severely impact the company’s future operations”.
The current economic climate does not, however, appear to have had any impact on the salaries of the company’s 9 executive directors, who together took home R42.6m in 2017 (an 18% increase from 2016). On average, they each earned more in one day than the striking workers were demanding as a monthly wage. Non-executive directors earned between R20 000 and R65 000 per meeting, and special committee members earned R6000 per hour.
These are not even particularly outrageous numbers in the context of executive remuneration at listed South African companies. But in every case, “the market” happily accepts that it will be very bad for the company to pay workers a decent living wage, and simultaneously, that it is necessary for the company to make senior management very rich. It does not consider what the implications of this doublethink are for our broader society. This is the logic of the current iteration of shareholder capitalism.
In many instances, the savings generated from low worker salaries are not used for productive investments, but to fund generous dividend payments and share buybacks. The month before the strike, for example, Dis-Chem reported a 9% rise in revenues to R10.5bn for the 6 months to end August 2018, and 12.3% growth in after tax profits, to R460m. The company’s CFO told shareholders that it aims to increase its dividend pay-out ratio from 40% of net income up to 50% of earnings over the medium term. Shareholders will get richer, but at the expense of the workers who play an essential role in generating that wealth.
All around the world, people are increasingly questioning how this system can possibly be sustainable, especially when we add to the mix the climate crisis and an environment ravaged by centuries of extraction and destruction. Inequality impacts every single South African every day. Do we really want to live in a society where the increasing wealth of the “winners” is mirrored by the increasing height of their walls?
The drive for change must also come from the shareholders who have a stake in the future prosperity of our country. Shareholder returns must be balanced against impacts on people and the environment. This means that investors cannot simply take the claims in sustainability reports at face value and ask no questions. They must interrogate what management is telling them, and ensure that there are consequences for behavior which harms society at large. Until they do, “responsible investment” will continue to be used as simply another empty marketing tool, rather than a pathway to better decision-making by executives and investors.
The need for a frank and courageous cross-sectoral conversation about corporate citizenship and responsible investment has never been more urgent.
REGISTER NOW for the Investment for Inclusion Forum on 6 March 2019 and be part of the conversation!