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A Former CEO Says it’s Time Business Leaders Did Something about Income Inequality

Peter Georgescu, former CEO of Y&R, has teamed up with Home Depot co-founder Ken Langone to urge CEOs to raise employee wages to grow the middle class—and save capitalism from itself.

“Opportunity has disappeared because free-market capitalism has been hijacked. At one time, the most successful companies felt an allegiance to a variety of stakeholders—employees, customers, the corporation itself, communities and the nation. By operating with an imperative to strengthen all of these constituencies, our system thrived in the late 1940s through the 1970s, when America organized itself into the greatest engine of prosperity in the history of the world. In the late 1970s, all that began to change. We narrowed our vision to focus solely on rewarding shareholders. As a result, we are now seeing in our economy and our society a loss of opportunity for all but the wealthy segment of our nation.”

One can be forgiven for thinking that this indictment comes from the likes of Elizabeth Warren, Bernie Sanders or some professor at name-any-university that comes to mind. That would be wrong. In fact, it was written by Peter Georgescu, former CEO of Young & Rubicam from 1993 to January 2000 who also served on the board at Briggs & Stratton for many years. His career spans 38 years, with top management experience both in the U.S. and Europe. He emigrated to the U.S from Romania in 1954 to escape the Communist dictatorship. (His father had been a general manager of Standard Oil—now Exxon Mobil—in Romania.) He has been the chairman emeritus of global ad agency WPP Group since January 2000. His board directorships have included IFF Corp., Toys R Us, EMI and Levi Strauss, among others. He graduated cum laude from Princeton and earned an MBA from Stanford Business School—not the usual CV of an anarchist bomb thrower.

However, Georgescu is not the first to point to shareholder primacy as a villain (see “From Autocrat to Catalyst: How CEOs Have Changed, Along with the Businesses They Run,” Chief Executive magazine, Jan./Feb, 2017). Among others, Lynn Stout at Cornell Law School and Judith Samuelson of the Aspen Institute have been criticizing this philosophy for years, and even the legendary Jack Welch famously called shareholder primacy, “the dumbest idea in the world.”

But in his soon to be published book, “Capitalists Arise!, Georgescu goes further. He charges that shareholder primacy is “one of the major drivers of income inequality and the dearth of economic opportunity for many in America.” Some time over the last four decades, he argues, globalization, technology, tax policy and shareholder primacy have fed off one another amplifying conditions that have led to near zero wage growth for average workers and record high compensation for CEOs. “We refused to succumb to protectionism but we never bothered to solve the riddle of how to create high wage jobs…Instead, we kept boosting profits by cutting jobs here at home,” he contends. Worse, he argues that “business is simply amassing more wealth without risking it by investing in expansion, innovation and the sort of new ventures that employ more people.”

“BUSINESS IS SIMPLY AMASSING MORE WEALTH WITHOUT RISKING IT BY INVESTING IN EXPANSION, INNOVATION AND THE SORT OF NEW VENTURES THAT EMPLOY MORE PEOPLE.”

Another way of looking at this is to put the size of the tech workforce, for example, in perspective: IBM, a company founded over 60 years ago has more employees than Microsoft, Intel, Dell, Cisco, Apple, Amazon and Google together. HP has more than four times as many employees as Dell. Tech firms that emerged more recently in the 1990s such as Amazon, Google, eBay and Adobe are not major employers. The U.S. economy today simply doesn’t generate the number of jobs it once did.

The current system is facing a dead end, thinks Georgescu. How else does one explain the widespread support of Donald Trump and Bernie Sanders? And in this he is joined by people like Ken Langone, an outspoken investor and cofounder of Home Depot. Other CEOs to whom Georgescu has shared his data agree and several even accept his proposed solution: Companies need to raise the wages of their employees to what Georgescu and Langone argue is a “living wage”—one that will vary from region to region, but will be high enough to claw back the net worth of the middle class and restore opportunity for employees everywhere.

Interestingly, CEOs who Georgescu approached with his data and conclusions say they agree with him, but don’t wish to go on the record saying so. “I can’t do this alone,” one business leader confided. “I can’t be the only CEO who steps up and announces higher wages out of the blue.” CEO timidity isn’t the only barrier. Activist investors such as Carl Icahn, Daniel Loeb, Nelson Peltz, or Bill Ackman are not likely to sit still while companies boost employee compensation and presumably take a hit to earnings while doing so. Georgescu counters that some investor activists have come around to his way of thinking. One of them is Roger Ferguson, president and CEO of TIAA, an institutional investor second in asset size only to CalPERS.

Since July 2016, there have been about a dozen companies that have boosted wages mostly at the entry level. Although Georgescu praises such efforts, he reckons companies should extend compensation raises to middle-income employees generally and not just entry-level workers. Corporate profits are at an all-time high—according to FactSet, the highest since 2011. “The money is there,” he argues. “The excess cash generated in the U.S. beyond their investment budgets runs at a staggering $800 billion annually.” Here is a partial list of those in support of the higher compensation idea.

1. McDonald’s Corp. The fast-food giant sought to attract customers by improving 10% of its workers’ wages on the premise that happier workers make happier customers.

2. Starbucks. In July 2016, the world’s most famous coffee store treated its 150,000 entry-level workers to a long-expected 15% minimum wage increase to keep its stores open. One day after raising its minimum wage, Starbucks raised its prices.

3. JPMorgan Chase. Minimum pay rose from $10.15 to $16.50. Jamie Dimon said that this decision was the right thing to do, but critics pointed out that Dimon makes three times as much an hour as these poorly paid workers make in a year.

4. Wells Fargo. Wells Fargo has long been paying its workers a minimum wage of $12 to $16.50 an hour, at a time when entry-level employees of most competitive companies received one-third of that salary.

5. Aetna. The health insurance company gifted its lowest-paid employees with a 33% rise in minimum wage in April 2015. Almost 6,000 of its U.S. workers had been paid $12 an hour. Aetna raised its wages to $16.

6. Wal-Mart Stores. America’s corporate giant has had an up-and-down love affair with a percentage of consumers who love its low prices but loath its alleged stinginess. Forced to exonerate its name, Wal-Mart gave its entry-level workers a hike to at least $10 an hour in January 2016.

7. IKEA. Ikea’s minimum wage raise was so successful that it lifted wages again to nearly $12 an hour in January 2016, a 10.3% increase over the previous year. IKEA reduced turnover by 5%, attracted more qualified candidates and reported that the company saved more money as a result.

8. Costco. The company joined the momentum and hiked its starting wage of $11.50 an hour to $12 in March 2016, and threw in company-sponsored health benefits to boot.

9. Other Companies. Other prominent companies that felt impelled to raise their minimum wages include Target, T.J. Maxx, Gap, In-N-Out Burger and Whole Foods.

Failure to act, the author says, will drive the present economic system deeper into a crisis, besides the fact that the future competitiveness of our system depends upon the creativity and engagement of the workforce. The obsession with maximizing short-term shareholder value is corrosive and destructive of human values. Employees are not merely a cost, but a source of a company’s success.

Two and half years ago, the founder-CEO of a Seattle startup, Dan Price, triggered a media firestorm when he cut his own compensation and established a minimum wage of $70,000 at his company, Gravity Payments. Price worried that employees with money troubles would fail to provide the top-notch service that had made Gravity successful. He also believed that low starting salaries were simply wrong— contrary to his values, which his father had always taught him to respect. “I just decided I’m gonna do $70,000,” he says. “I don’t care if I have to stop paying myself or I have to work 20 hours a day. I’m going to do it.”

Georgescu doesn’t think CEOs need to take such grandstanding measures. He points to such companies as Home Depot, Costco, Whole Foods, Publix, Qualcomm, Market Basket, and Gravity Payments as taking steps to compensate employees more and are examples to others. CEOs and boards may not have created income inequality, but they are in a position to do something constructive about it.

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About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.