Even Risk Managers Care About Inequality

Risk Management’s  take on income inequality is a must-read for risk managers. It is also a sign that income inequality is close to hitting home for corporate America. January 1, 2017 ushers in new SEC rules for public companies, mandating they disclose the ratio of their CEO’s total compensation as compared to that of the organization’s median worker.

It won’t be pretty. According to the Economic Policy Institute, the CEO-to-worker compensation ration was 20:1 in 1965, but has grown steadily to almost 296:1 in 2013. CEO’s now earn roughly 300X what their workers do.

Workers might have an axe to grind. Perhaps lay-offs, restructurings, and stagnant wages will not have boosted morale or won CEO’s any love. With an improving economy, maybe workers will shop around for a new employer.

Consumers, who buy products, might also think twice about supporting oligarchies. Harvard Business Review surveyed consumers about their thoughts on this topic and this is what they found:

“Consumers would prefer to purchase from firms with relatively low CEO-to-median-worker pay ratio such as 5:1 or even 60:1, as opposed to firms with high ratios such as 1000:1.”

HBR advises firms, “Besides advertising fair prices for your products, try advertising fair wages for your employees.”

Consumer disenchantment aside, an even larger, looming concern for risk managers is the thing they hate the most: the unknown.

How far will the public take their frustration?

Inequality was discussed as the number one global risk at Davos. The backdrop was OxFam’s sobering news that the richest 1% will own more than the wealth of 50% of the global population in 2016. 85 billionaires have the same wealth as the bottom half of the world’s population. These wealthy few influence tax policy in their own favor, shorting society of tax dollars that could be used for infrastructure investment, education, and other vital public services.

Highly unequal societies are toxic, unstable, and unsafe for everyone, rich and poor alike. That is not good for people and not good for business.

Companies can mitigate these risks by establishing transparent and fair pay structures for all employees and paying their fair share in taxes.

Risk managers already have a hard job. Companies can help them out by thinking more broadly about the way they do business. Besides being the right thing to do, it is the only way to avoid the risk of public backlash.