While business leaders are increasingly aware of the need to preserve competitiveness and growth orientation even during a downturn—as articulated in the Harvard Business Review article “How to Grow Your Top Line in a Down Market”—we continue not to pay enough attention to the social impacts of our decisions.
With layoffs continuing to be one of the most common responses to economic downturns, decisions focused on short-term cash or earnings improvement continue to perpetuate long-term negative impacts on social outcomes that persist long after economies recover and growth is restored.
After more than 40 years of financial and social interests being at cross purposes, we have a choice: Continue the old patterns and risk destroying whatever trust remains in our institutions, or reinvent our approach to restructuring and turnarounds to be more people-based and community-centric.
THREE STRIKES AND WE’RE OUT
The inflated expectations of a post-COVID economic boom have given way to ongoing angst about an impending recession in most major economies. By the purest measure of quarterly economic growth, we in the United States entered a recession in July 2022 and expect a further downturn this year. The rosy projections of late 2021 have given way to the harsh reality of slowing growth, persistently high inflation, increasing interest rates, and pressures on corporate earnings. While the circumstances of this recession are unique, this continues a near-decennial pattern of boom and bust since the 1970s. It also follows the millennium meltdown and the financial crisis as the third major systemic shock in a century that is barely out of its teens.
Far beyond the technology companies that dominate media coverage, layoffs have been prevalent across industries regardless of whether they have been permanently disrupted by new socioeconomic patterns (such as commercial real estate, office equipment and supplies, retail, and food and beverage) or they mistook short-term economic and social realignment as a harbinger of secular long-term shifts (such as residential real estate, construction, building materials, home improvement, warehousing, and manufacturing), and are continuing into the new year.
This time, however, there is a difference in how impacted workers are responding. The layoffs related to this latest downturn are happening in the context of close to record-low unemployment and continued labor shortages. We saw a similar dynamic at play on a much smaller scale in the 2007–2008 financial crisis, where “a recession is a good time to go back to school” was a common refrain among workers in financial services, law, and consulting who were facing early-career setbacks and uncertainty in the context of family assets, university or postgraduate education, high incomes, and strong social capital. In 2022–2023, the mood seems to be one of “another recession caused by the 1% is a good time to push back or check out of it all” among people who do not have the same privileges.
Workers, instead of making finding new employment a priority as in every previous downturn, are holding off to negotiate better wages and work conditions, leaving traditional work to become gig economy entrepreneurs, considering going back to their native countries, and even exiting the workforce completely.
The economics of demand and supply in terms of continued labor shortages explain only part of this paradox. The broader issue is that workers—worn down by close to half a century of increasingly perilous employment, ever-narrower pathways to success, increasing inequality, and frequent economic resets caused by forces they do not understand and do not control—no longer trust institutions to meet their needs. Workers are increasingly questioning the nature of employment itself and deciding not to be part of a system they see as fundamentally unfair and flawed.
THE BROKEN SOCIAL CONTRACT
The last four decades have seen real wages of the bottom half of Americans by income grow by 0.2% a year—essentially, remaining flat. Years of this stagnation have led to even sharper disparity in wealth, where the top 1% by wealth holds 15 times more wealth than the bottom 50% (in other words, they are on average 750 times wealthier). The two generations—Generation X and Millennials—most caught in these economic cycles have amassed the greatest aggregate and per capita private debt in history, with the debt of the latter rising 60% in the last five years alone. We live in a time where economic inequality has never been greater, and opportunities for progress for anyone outside the established elite have never been smaller.
Workers understandably blame their current predicament on the institutions—governments, corporations, markets, academia—that have promoted an idealized vision of “free markets” and “meritocracy” while simultaneously and purposefully marginalizing the vast majority for Americans.
As a result, trust in institutions is at an all-time low, ranging from 11% for Congress to 18% and 24% in television news and newspapers, respectively, to 23% in big corporations and 30% in banks. And this was before COVID-19 and January 6!
It should not come as a surprise to government and corporate leaders that workers are rejecting this flawed socioeconomic model and the institutions that underpin it.
UNINTENDED (BUT VERY PREDICTABLE) CONSEQUENCES
This loss of trust also reflects the growing realization of the tangible and measurable negative social impacts of job loss, inequality, and lack of opportunity:
- Unemployment has a direct impact on depressing home prices and home ownership, impacting the single-largest asset and source of financial stability that American workers have. Home prices fall by 3.5% for every percentage point increase in unemployment, and while close to 80% of Americans with incomes above the median in their geography own homes, that falls to only 50% of those with less than median incomes.
- The opioid addiction crisis tripled the number of Americans killed from 2010 to 2020 with over 2% of Americans self-reporting abuse of drugs other than marijuana. It counts working-class Americans as 90% of its victims, driven by the lack of affordable health care and the inability to treat chronic pain that is often a by-product of poor work conditions.
- There has been a 30% increase in violent crimes—murder, manslaughter, rape, and aggravated assault—in American cities from 2010 to 2020, a decade bookmarked by two economic downturns, even as property crimes have dropped by a third. Social and economic marginalization does not lead to romanticized “loaf of bread” crimes, but rather those that reflect a fundamental indifference to the humanity of fellow citizens.
- Domestic violence has risen with the sharp contraction of female workforce participation. During the peak of job losses driven by the COVID-19 shutdowns, intimate partner violence increased by 8.1% from February 2020 to February 2021, with women literally being trapped in violent and even life-threatening relationships due to lack of economic autonomy.
THE THIRD SOVEREIGN
It should come as no surprise that companies and institutional investors have failed to address the negative social impacts of their decisions. The view of corporations as economic entities serving an economic purpose is deeply ingrained in how we conceptualize, design, and operate businesses. Every MBA program teaches that shareholder value maximization is the primary purpose of a corporation. Theories of the firm focus on transaction cost efficiencies as the basis of sustainable companies, and share markets are defined as mechanisms for the optimal allocation of capital. Even revisions of these theories focus on maximizing utilities for managers while providing satisfactory returns to investors, with limited consideration of the social impact on individuals or communities impacted by the company.
The reality is that corporations are, and have always been, political and social entities in their own right.
We are familiar with foreign policy, trade relations, and even military actions being influenced by corporate interests—from the early crown-backed colonial enterprises to transatlantic human trafficking and the destabilization of democracies not supportive of specific corporate interests. We have, however, not fully reckoned with how these behaviors also impact American society.
The American approach to social structures and relationships is unique in the world in defining these as a series of negotiated contracts between two sovereign entities—the people and the government—with the latter deriving its legitimacy from the former. This approach was idealistic even in 1776, with the American Revolution being driven by commercial interests of American landholders conflicting with the sovereign interests of colonial rulers. It is definitely not relevant today, where corporations are the primary source of employment and income for American workers with 70% of people working in companies with at least 100 employees, over 20% of U.S. government debt and almost all personal debt held by corporations, and, after removing state-owned and state-controlled companies or funds, over 85% of all portfolio and direct investment being made by corporations.
It is time we realize and accept that corporations represent a third sovereign entity, independent of the other two, with the potential for social impact equal to or greater than that of sovereign governments. As the saying goes, with great power comes great responsibility. However, we have continued to focus on economic and financial objectives and left it up to governments and people to pick up the slack on the negative social impacts of our decisions.
RESTORING THE SOCIAL CONTRACT
The erosion in institutional trust and social cohesion caused by the last half century of boom-and-bust cycles has almost reached a tipping point from which there may be no recovery. We have seen socioeconomic pressures lead to civil unrest, violence, and even insurrection in other countries, and are witnessing these play out in real time in countries as diverse as Turkey, Nigeria, Chile, Peru, Sri Lanka, Pakistan, and the Bahamas. For those of us who believe that civil unrest happens only in “countries far far away,” even Germany, France, Switzerland, and the Netherlands have seen a rise in levels of civil unrest similar to that in Iran and the Philippines, albeit from a much more stable base. Of course, we in the United States are slightly more than a year removed from the attempted insurrection aimed at preventing a peaceful transfer of power to a new democratically elected executive.
To prevent further erosion of the social contract, restore trust in institutions, and rebuild our societies based on shared values, there are three things that we can business leaders must do as we address the latest economic downturn:
1. BUILD SOCIAL IMPACT OBJECTIVES INTO CORPORATE STRATEGIES AND OPERATIONS:
While companies are improving their consideration of UN Sustainable Development Goals and ESG objectives, these remain focused on environmental objectives with less attention on social goals. Companies and institutional investors need to clearly articulate what social impacts their operations and investments will drive, in terms of tangible impacts on employment, income, living standards, opportunities for socioeconomic progress, and intergenerational benefits for both individuals associated with the company and communities in which the companies have an operational footprint. Critically, there needs to be a clear articulation of how strategies and operations support the delivery of not just financial and valuation objectives, but also these social impact objectives. The achievement of these objectives needs to be measured and reported in the same manner as financial and valuation results, and compensation for leaders linked to the achievement of these balanced sets of objectives.
2. INCORPORATE SOCIAL IMPACTS INTO THE BUSINESS CASE FOR CHANGE:
With significant operations transformation to drive cost reductions and free up cash being a key response to any economic downturn, it is critical for business leaders to identify the social impacts of their decisions and build these impacts into the business case for change. Social impacts are treated as externalities based on traditional theories of the firm and traditional approaches to corporate management, but when these impacts jeopardize the stability and sustainability of the societies that corporations operate in, they can no longer be seen as someone else’s problem. In an ideal scenario, the anticipated cost of the social impact will be explicitly added to the transformation costs to drive a more realistic calculation of return on investment. While this may be too disruptive an approach for many companies and investors, a more realistic and achievable goal is to clearly identify the social impacts of transformation, and define and execute mitigation actions to reduce their negative impact.
3. BUILD PARTNERSHIPS WITH CIVIC SOCIETY, COMMUNITY, AND RELIGIOUS
While companies have ignored social impacts and governments have failed to address them, people have increasingly organized to become more resilient and self-sufficient. Much of the work to address social impacts is done by civic society, community, and religious organizations, partially based on historical roles in social justice and partially as a response to the vacuum created by lack of trust in other institutions. We currently treat these organizations as external to our strategy and operations, and with a level of noblesse oblige reflected in sporadic donations and charitable activities. We need to realize that the most efficient and cost-effective way to drive positive social impact is to work within the framework of relationships and programs that have already been developed, and make participation in and support of these a core part of our approach to social impact.
These changes require leaders who realize that stable and sustainable societies are part of the “enlightened self-interest” that is central to market economies and capitalist societies. The three characteristics of these leaders, which set them apart from those focused on quarterly earnings and annual bonuses, are seeing themselves as a part of broader communities, being focused on long-term value creation, and wanting to leave an intergenerational legacy. There are leaders of this bent in every organization; it is time for us to step up, speak up, and save our society from our worst excesses.
Edward Wilson-Smythe is a Director in the Digital Consulting practice of AlixPartners and Head of Research at TechPACT. They are an author and speaker on topics related to innovation, disruptive change, emerging ecosystems and broader socioeconomic impacts of innovation.