Written by Eric Knoblauch, GEI Associate
“One general law, leading to the advancement of all organic beings, namely, multiply, vary, let the strongest live and the weakest die.“- Charles Darwin
Jeroen Veldman, Senior research fellow at City University London, is of the belief that income inequality has been caused by a corporate strategy focused on the financial interests of its shareholders.
In his article, Fixing the Hole in the Heart of Corporate Capitalism, Veldman argues that this strategy has “…deeply damaging economic consequences.” I would argue that this strategy of corporate governance promotes the advancement of society and that the consequences described by Veldman are necessary evils of capitalism.
Veldman claims that the corporate governance theory implemented in the 1970s has “impeded sustainable economic growth”; however, according to the – Bureau of Economic Analysis, real GDP has steadily grown in the United States from 4,722 billion dollars in 1970 to 15,710 billion in 2012. Veldman claims that this strategy has “induced economic instability”; yet, during the worst recession since the great depression, the GDP fell by 3% from 2008 to 2009 only to increase 4% from 2009 to 2011 and continue to grow. GDP measures a country’s production output, a steady increase over forty-four years is the very definition of a sustainable and stable economy.
Income inequality is an ever increasing problem, but Veldman puts the blame on the wrong contributor. History shows us that management will exploit the law or risk putting the business at a competitive disadvantage. A plantation owner in the 1800s who chose not to use slave labor was at a competitive disadvantage until the government stepped in and ended slavery with the 13th amendment. A factory that didn’t use child labor was at a competitive disadvantage until the government ended child labor in 1938 with the Fair Labor Standards Act. Income inequality will continue to grow until the government takes steps to reduce it.
Ultimately, Veldman’s insistence that managers should shift their corporate governance strategy towards a more equitable distribution of profits creates a conflict of interest. Organizations that adopt Veldman’s beliefs limit their options and risk putting themselves at a competitive disadvantage. Managers need to focus on maximizing profits and minimizing losses. They need to be able to operate their business by the same rules as their competition. They need the freedom to choose when to invest in a company’s future and when to let that company die. Only the strong survive.