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Why poverty is (also) a management issue

At first glance, it paints a powerful picture. The data on global wealth distribution and poverty – where we are and where we’re going – are dramatic. According to Oxfam, the top 1% of the world’s population owns 43% of all the world’s financial assets. And that’s not all: since the start of the decade, the five richest billionaires have more than doubled their wealth. (At this rate, in ten years we’ll have the first trillionaire in the history of humanity.) But at the same time, five billion people have seen their economic resources dry up.  

To shrink global poverty to less than 1% it would take 230 years. And as far as inequality, Italy is no exception. Among OECD members, we place high in the rankings, with wealth distribution concentrated in the hands of the richest 20% of the population: they own two-thirds of the national wealth, while the poorest 60% hold only 13.5%. So the net worth of the top 1% is 84 times greater than the total of the bottom 20%.  

Let’s take a closer look at poverty. Around the world, as many as 711 million people live on less than $1.90 a day (the threshold of extreme poverty), and that number is on the rise since Covid. We’re talking about 9% of the planet’s population. Based on these numbers and the worsening situation of the past few years, the forecasts give us little hope we’ll hit the first UN Sustainable Development Goal: to end poverty. Things are not looking good in Italy either, where there are nearly 12 million people living on the brink of poverty (that’s 1 out of 5), and almost 6 million experiencing extreme poverty. 

There is too much inequality and too much poverty in the world: that’s a fact, not an opinion. But at a macro level, there is movement. World renowned economists like Piketty and Ghosh have been adamantly insisting that we need to raise the bar on UN and World Bank objectives to reduce inequality, calling for precise metrics and ambitious targets. In contrast, the business world seems less engaged on this score, despite an Oxfam report pointing the finger directly at corporations. Pointing out how in 2021-2022, against a backdrop of rising inequality and poverty, major corporations reported an 89% upsurge in profits, pouring mostly into the coffers of the biggest of the big. What’s more, 82% of these profits were distributed in the form of dividends and share buybacks. All this wealth, while workers’ wages are barely keeping pace with inflation.  This shows us that the distribution of the value generated by corporations is one reason for the inequality and poverty we find on a local and a global scale. 

Faced with this situation, corporations cannot fail to act. They have to deal with this like a strategic and operational risk within the context of business continuity management systems. Organizations have to shift the way they focus on poverty, moving from the mindset of charity to ordinary operations. And the AFC Department, Finance, has to champion this change from the mindset of “you can manage what you can measure.” On three fronts: 

First, re-equipping the AFC with internal competences to develop metrics for value distribution, not just value creation. Systems for measuring business performance are designed with an eye to value creation, as if value distribution were a later phase in the process that only affects shareholders. But the data we cited above show that it doesn’t work that way. We need to seriously measure value distribution too. And not only in a simplified way, i.e. by the percentage of added value that trickles down to personnel, but by taking the same serious approach to measuring value that we use for shareholders. This means measuring value distribution per capita, to try to understand if per-capita compensation is growing or not. And then comparing this to invested capital, which for people means the intellectual skills that they bring to the table, the product of their educational background and training, and their work experience.  

We need to consider overall value distribution by comparing the highest, lowest, and the average salaries in the company, and then capping the differential between them. We also have to monitor how these numbers trend. This means verifying that per-capita value distribution ticks up in percentage terms over time, in line with the value distributed to other stakeholders and shareholders, adjusted for inflation, comparing per-capita cost to per-capita added value generated.  

And finally, we need to become knowledgeable and competent on external data sources so we can fully exploit them. We need to use local data on the cost of housing, transportation and food, which are normally available from national statistics institutes, to understand whether or not wages cover the cost of living at a local level. For instance, are we paying young people enough so they can afford to rent an apartment in the cities where they live? In Milan, young workers spend nearly 70% of their wages on rent. If the company is a multinational, the ability to measure must be greater, and knowledge of available databases deeper.  We need to start with the gaps we know are there, and fill them by tapping into various data sources. A few examples: country-specific data from the World Bank, estimates on geographical areas from the Global Living Wage Coalition, sector data with specific estimates for various countries from True Price, and other data validated by the Impact Institute in the Global Impact Database. 

Second, we need to pay more attention to poverty, measuring it within the context of the corporate reporting and auditing system. On the corporate dashboard, segmented per cash generating unit, we need to include metrics outlined above, broken down by BU and geographical area. What’s more, we need to compare these numbers with a vision and an ambitious target, asking all business managers to do their part in contributing to achieving SDG 1: End Poverty by 2030. Examples here are doing away with wages that border on the poverty threshold, and looking at how much all workers are getting paid in relation to a living wage and the poverty line, information which is available in all countries today.  

Last of all, companies need to take more responsibility for poverty, tackling it throughout their supply chains. No company is an island; instead it’s a central hub in a network. And the most responsible and innovative companies must step up and play their part in the face of global events. That means CFOs have to measure value distribution and actual wages vs living wages along the entire supply chain, wherever that is, whatever type of enterprise that involves. Today, this rarely happens. Judging by the numbers, only 0.4% of over 1,600 of the biggest, most influential companies in the world are publicly committed to guaranteeing their workers a living wage and encouraging their suppliers to do the same, to ensure that all workers in the supply chain get the same treatment. So, measuring financials should prompt companies to set ambitious targets for their supply chains, and strive to ensure that 100% of supply chain workers are getting paid above the level of a living wage.  

One more thing: we need to start measuring, communicating and managing value generated for non-shareholding stakeholders. In financial terms, comparing value to these stakeholders with value to shareholders: earnings vs earnings, value vs value, expressed in simple, understandable numbers. It’s the only way that companies will be able to contribute to overcoming the biggest challenge facing the world today: poverty.