Towards a better capitalism: how can business reduce poverty?

One possible definition of business – borrowing the Marx-infused jargon of the early-twentieth-century Left – is the process by which labour is transformed into capital. Poverty, defined in similar terms, is a result of the fact that capital is less equally distributed than is the capacity for labour. If one accepts these two premises, then there’s a certain inevitability to the conclusion that business has an important role to play in tackling poverty.

Business and progressive politics: an evolving relationship

Pre-distribution, a term coined by Yale professor Jacob Hacker in 2011, is one of the more interesting ideas to come out of the centre-left in recent years. The logic of it – that it makes more sense to wire greater equality into our economic system in the first place, rather than to rely on government to rectify gross inequalities of outcome after the fact – is impeccable.

At the heart of pre-distributionism is an attempt to re-frame the relationship between progressive politics and business as one of deep partnership in pursuit of common goals. Of course, the Labour Party has long since stopped seeing business as the enemy. But the Blairite pact between Labour and big business was laissez-faire in essence: we’ll leave you (business) alone to make as much money as possible, so long as you let us (government) use some of the profits to look after the most pressing needs of society.

This worked fine until 2008.

Today though, the idea that you can treat economic growth and social welfare as two entirely separate spheres – leaving one to business and one to government – looks untenable. Economic and social issues are too intertwined. There’s a growing recognition that poverty and inequality are as much a problem for business as they are for government.

The good news is that broad swathes of the business community are relishing the opportunity to contribute to something more than their bottom line. Unlike pre-distribution – which, having briefly been popular with the Labour leadership, appears now to have been largely forgotten about – the idea of purpose-driven enterprise is more than a passing fad. CEOs who think Milton Friedman was right when he declared that the only ‘social responsibility of business is to increase its profits’ are – thankfully – becoming rarer and rarer.

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Business has both a positive and a negative contribution to make when it comes to poverty. On the positive side, it can help reduce poverty in three ways. One, by creating jobs and paying staff a decent wage. Two, by selling products that enable people to break out of the cycle of poverty. And three, through corporate philanthropy and pro-bono work.

On the negative side, businesses often contribute to a rising cost of living – whether by foisting price hikes on their customers or through the inflationary impact of remunerating their highest earners so generously – that traps more people in relative poverty.

The story in the developing world: commerce versus aid

Perhaps the most famous example of a business-focused solution to poverty is the Grameen Bank. Founded in 1976 by Nobel Prize-winner Muhammad Yunus, it lends tiny sums of money to the very poor – predominantly women – enabling them to feed their families and start their own micro-enterprises. The micro-finance model has been hugely successful at lifting people in developing countries out of extreme poverty.

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The Grameen story is no fluke. Given the importance of access to capital in addressing poverty, financial institutions have a crucial role to play. But, understandably, many people have a hard time visualising financiers as the new crusaders against poverty. It clashes with the prevailing narrative about greedy fat cats who plunged the Western economy into the abyss in 2007-8 whilst continuing to pay themselves exorbitant bonuses. And it’s true, the industry still has a long way to go to re-build trust. But the constant maligning of bankers is unhelpful. If we do manage to ‘make poverty history’, it won’t be thanks to Bob Geldof or Bono. Rather, it will be down to moneylenders and investors who are willing to think long-term.

That last caveat is important. One of the distinctive things about Grameen is that when Yunus started lending his own money to poor women in Bangladesh, he wasn’t looking to get it back with interest next week, next month, or even next quarter. He knew that the bank needed to be financially sustainable, but he was pretty relaxed about how long it would take.

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It’s not just access to finance that can transform the lives of the poor. Companies in many other sectors also offer products and services that can help lift people out of poverty. Take Reuters Market Light (RML) for example, the pioneering service that harnesses mobile technology to deliver accurate, real-time market information to small-holder farmers in India. Having this data at their fingertips allows them to realise more of the value of their harvest because they can always check if they’re being offered a fair price.

RML isn’t (yet) profitable, but it is run absolutely as a business, and Amit Mehra, the Founder and CEO, makes no bones about his intention to achieve positive cash flow as soon as possible. In the mean time, RML has won a cabinet-ful of social impact awards and garnered plenty of admiring press coverage. So while it may not have made money, it has added huge value in reputational terms to the Reuters brand.

Crucial in the RML success story is a conversation Mehra had in 2008, with the then-CEO of Reuters – and his boss at the time – Tom Glocer. At this point RML was still just an embryonic idea, but Glocer told him not to worry about achieving positive cash flow within the first 2-3 years (the usual timeframe granted to new products before they are dismissed as unviable). He told Mehra to focus on building a business that would be profitable within 7-10 years.

In the field of consumer goods, the Holy Grail is the development of products that reduce environmental impact and, at the same time, can be sold to so-called ‘bottom-of-the-pyramid’ consumers. The two FMCG giants, Unilever and P&G, both offer products that reduce the amount of water needed to wash clothes – Comfort One Rinse and Downy Single Rinse respectively. The race is now on to get products like these to consumers at the bottom of the income scale.

In many of the poorest communities across Africa and Asia, finding clean water involves walking – often many miles – to the nearest well. In this context, cutting water consumption isn’t just about saving the environment: it’s about saving valuable hours that could otherwise be dedicated to more productive, revenue-generating activities.

Once again, the key here is the ability of the business to look beyond short-term profits. It’s no coincidence that one of the most eye-catching changes implemented by Paul Polman (Unilever CEO, widely considered the poster boy of responsible capitalism) has been to move away from quarterly financial reporting. Often, to achieve market penetration in the first place, a company will need to donate its products and defer financial returns. Long-term though, the most desirable outcome isn’t charity: it’s the development of a commercially viable market for the goods.

The challenge of inequality

What about poverty here in the UK? The problems of access – to capital, knowledge and basic amenities – are less relevant in a developed nation with a welfare state. And yet poverty persists. Here, the narrative for business is a less comfortable one. It’s more often cast as the villain than the hero. Whether it’s energy companies increasing bills, making it harder for people to heat their homes, or investors speculating in property, driving up average house prices – the key to poverty in Britain is affordability rather than access.

Of course, with unemployment still hovering around 2 million, business has a significant positive role to play by creating jobs, but it also needs urgently to address its contribution to the rising cost of living.

The success of books like Richard Wilkinson and Kate Pickett’s The Spirit Level and, more recently, Thomas Piketty’s Capital is an encouraging sign. The notion that inequality is one of the biggest issues we face today is gaining traction. But the solutions proffered by these and other leading thinkers still tend to be redistributionist rather than pre-distributionist. A global tax on wealth is a headline-grabbing idea, but it’s also unrealistic, inefficient and ultimately avoids addressing the root problem.

Far better would be for governments to concentrate on designing a tax and regulatory system that incentivises a fairer, more equal distribution of profits in the first place. Why not reward companies that create jobs and have a relatively inclusive approach to remuneration through tax breaks? This could be done by, for example, making employer National Insurance contributions progressive (as opposed to the current flat rate) – cutting the cost to companies of hiring people on modest salaries while increasing the cost of having higher earners on their books.

Similarly, rather than basing corporation tax simply on overall profits, something akin to a Gini coefficient for organisations – a measure of how fairly profits are distributed amongst staff – could be developed and factored into the corporate tax system. Of course, inequality of pay is not the only cause of relative poverty, but it’s a significant part of the equation and one that business has a particular opportunity to impact.

Lately, business has been under the spotlight on the issue of prices – particularly of essential services like gas, electricity and transport. Increasingly, consumers are frustrated at the fact that the promised dividend that privatisation was meant to deliver for them has not materialised. Introducing competition into sectors previously dominated by state monopolies was meant to lead to greater efficiency, lower costs – and ultimately lower prices for the end-user. This simply hasn’t happened.

Some of the reasons for consistent above-inflation price rises are beyond the control of service-providers. For example, the climbing international price of gas is estimated to be responsible for more than 60% of the increase in household energy bills over the last decade. But, undoubtedly, companies can do more to keep a lid on spiraling prices and to ensure the most vulnerable are not always the worst affected.

Here again, finance has a particularly significant role to play. The Archbishop of Canterbury’s public criticism of Wonga has drawn attention to the fact that the financial needs of Britain’s poorest are generally not well served. Just as Muhammad Yunus found that nobody would lend at non-exploitative rates to the poorest members of Bangladeshi, the Wonga issue has highlighted the fact that the poor in Britain are largely ignored by mainstream banks.

Archbishop Welby has promised to put Wonga out of business by throwing the full weight of the Church of England behind Grameen-style credit unions. This type of partnership is only part of the answer though. The high street banks also need to re-assess their current business models. At present, most offer a ‘free’ service to those in credit, which is partially subsidised by fees charged on overdrafts and other products that are overwhelmingly used by poorer customers. An end to free banking would meet with vocal resistance from the majority who benefit from the status quo. But it may need to at least be on the table if the banks are to start serving the needs of the poor as effectively as they already serve the needs of the rich.

Coporate Social Responsibility or Creating Shared Value?

So far I have focused on the contribution that businesses can make to reducing poverty by acting as businesses. This is because, no matter how well-intentioned and well-funded a company’s CSR programme is, it can never come close to the reach and the ability to impact lives that the core business has. The products of companies like P&G and Unilever are an integral part of the daily routines of millions – and in some cases billions – of people worldwide. Embedding social outcomes into core operations is by far the most powerful way that businesses can impact the issue of poverty. But it’s not the only way.

Over the last 20 years, the growth of CSR has been enormous. The key here is partnership. Improving lives through grassroots interventions is not companies’ area of expertise. But they do have resources – financial, human and physical – that, when effectively leveraged, can have a huge impact on poverty reduction.

Once again, Unilever is ahead of the field. The announcement in September 2014 of a first-of-its-kind partnership between Unilever and DFID – the aim of which is to improve health, hygiene and livelihoods for 100 million people by 2025 – points the way towards a new mode of engagement between business and government.

Cross-sector partnerships are also the key to Coca-Cola’s groundbreaking ‘Project Nurture’ – a prime example of the shared value concept (first articulated in a famous 2011 Harvard Business Review article by Michael Porter and Mark Kramer) in action. ‘Project Nurture’ is working with more than 50,000 small-scale mango and passion fruit farmers in Kenya and Uganda. It aims to create sustainable livelihoods for farming communities, by improving productivity and offering a reliable market for their produce. The project is a $11.5 million partnership between Coke, the Bill & Melinda Gates Foundation and another non-profit called TechnoServe.

Training 50,000 farmers in basic business skills and agricultural techniques doesn’t exactly play to Coke’s strengths – that’s where its NGO partners come in. But the project does serve a business need for the company: with more consumers seeking healthier lifestyles, sales of Coke’s world-famous sugary soda drinks have been in decline since 2005. In response to this, the company aims to triple the size of its juice business by 2020 (it owns the Minute Maid brand). To do so, it needs a reliable supply of fruit, which is where ‘Project Nurture’ comes in. The neat mutuality of the scheme is that the market that Coke provides is critical to the development of sustainable incomes for the farmers.

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Over the last three decades, the number of people globally living in extreme poverty has been reduced by 650 million. Local and global enterprises have played an important part in this achievement. So business already does reduce poverty.

The real question is: how can we get to a point where the stories in this essay – of the Grameen Bank, Reuters Market Light, Unilever and ‘Project Nurture’ – go from being isolated examples to the new norm? More challengingly, how can we encourage businesses to acknowledge and do something about their role in contributing to rising inequality?

If we can answer these two questions, then the dream of eradicating global poverty within a generation may yet come true.

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