Fairness is Cool

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“A nation is strong when it cares for the weak. It becomes rich when it cares for the poor. It becomes invulnerable when it cares for the vulnerable. That is what makes great nations.”

Rabbi Lord Jonathan Sacks

We have been conditioned to believe that people want to know “what’s in it for me” before they will accept a new or changed situation. This is no longer always true. There are winds of change in what people want and expect. This change impacts each of us as leaders and society as a whole. It will change the way we lead and allocate resources.

Last month’s referendum in Chile is one of many indications of the titanic changes ahead in how leaders will need to behave and make decisions.

Chile has experienced decades of rapid economic growth, declining poverty, low inflation, and stable politics. By 2018, Chile’s growth had risen to 50 percent above Argentina’s and Mexico’s, 40 percent above Brazil’s, and 150 percent above Peru’s. Nevertheless, this year saw the eruption of civil unrest and widespread protest in Chile, leading to a significant referendum last month. The referendum was about whether to rewrite Chile’s constitution adopted in 1980, which protected basic freedoms and encouraged the development of free market economics that drove the country’s development. Why in a country that was doing so well was there such a high level of dissatisfaction and why would 78 percent of its citizens vote to rewrite the constitution?

Clearly, wealth and sustained economic growth are no longer sufficient to satisfy people’s expectations. Money alone does not assuage the anger of people who feel exploited or unfairly treated.

The issue in Chile is not the rate of its economic growth or the size of its GDP. The issue is an incongruence between its economic growth and the inequality with which that prosperity has been shared.

There is an index, developed in 1912 by Corrado Gini and used still today, that serves as an accurate measure of income inequality. The Gini coefficient ranges from 0 to 1, with 0 representing perfect equality (where everyone has the same income) and 1 representing perfect inequality (where one individual gets all the income). According to data from the World Bank and the OECD, the inequality of wealth distribution in Chile is greater than any other South American country. Its Gini coefficient of 0.46 places it in the lowest position of equality of income distribution among all 37 OECD nations, lower even than Mexico. For 10 years, Chile’s Gini coefficient has not improved despite its growing wealth.

When rapid or consistent economic growth is not accompanied by improvements in the equality of income distribution narrowing the income gap between the highest earners and the lowest, people experience the growth as unfair. The have-nots feel exploited, or at least marginalized by the haves. This feeling of unfairness applies even in the USA, whose Gini coefficient is around 0.39. This is because its Gini index has remained constant for the past 10 years, despite that America’s GDP has grown at between 2.5-3 percent almost every one of these years.

The yearning for fairness goes beyond “what’s in it for me”. Protestors are not only demanding more for themselves; they are also demanding a better and fairer society for all. And it is not only the have-nots who are demanding this fairness. With such a large majority in the Chile referendum, even the beneficiaries of Chile’s wealth want change. In the USA too, a cross-section of more than half the entire nation voted for change despite the undeniable economic achievements (until the pandemic) of the previous administration. Included in that cross section were titans of commerce and industry. Economic prosperity is no longer sufficient to woo a population. People want moral prosperity as well; they want a fairer society.

The same trend can be seen in the current evolution of corporate governance and culture. Ethical and societal issues are no longer seen as  non- or pre-financial matters but rather as integrated into a firm’s strategy, resource allocation, risk management, performance evaluation, and reporting policies and processes. Investors are looking for more than economic returns; they are also starting to demand ethical returns. In January, BlackRock CEO Larry Fink announced that his firm has made a dramatic change in investment philosophy, emphasizing Environmental, Social, and Governance (ESG) criteria to all their asset allocation and valuation decisions.

All stakeholders have expanded their demands from self-interest to an expectation of broader fairness. Employees want to know that their companies are doing social good and not just making profits even when they are partial beneficiaries of those profits. Customers are rallying to more ethical companies and abandoning those perceived to display poor ethical behavior even if they need to pay a little more. Providers of capital and other resources are increasingly trying to partner with companies whose values align with their own.

As leaders, we must now focus not only on how much money we are making, but also equally on what we are doing with the money we are making. We need to allocate resources fairly, not just wisely. Investors are not the only stakeholders who take a risk on our enterprises—in different measures, all stakeholders do. We need to increase the sense of fairness that all of our stakeholders experience in the way we share our prosperity and in the leadership decisions we make.

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