Institutional investors increasingly recognize that growing income and wealth inequality poses significant long-term risks. High levels of income inequality – particularly when associated with wage growth that lags productivity growth – curtail effective demand, and thus lower returns to long-term investments in fixed capital and intellectual property. Inequality within companies can create a sense of unfairness that undermines morale, engagement, and job-specific human capital investment, further reducing long-term returns. Finally, high levels of inequality are frequently associated with increased financial volatility, including more frequent and more severe asset price bubbles and crashes.
Together with like-minded long-term investors, the CtW Investment Group seeks to mitigate the risks of rising economic inequality by engaging with publicly traded companies to:
- Encourage best-practice in human capital management and workforce investment.
- Avoid costly mergers and acquisitions, which routinely destroy jobs without building long-term shareholder value.
- Re-align executive pay with long-term performance measures – such as the company’s median hourly wage – that cannot be gamed by management.
Industry wide efforts to highlight income inequality include:
- The UN Sponsored Principle for Responsible Investment’s research on economic inequality provides a range of topics and solutions for investors, policy makers, and companies. Included in these reports is one highlighting the investment case for income equality.
- The American Federation of Labor and Congress of Industrial Organizations’ tracks CEO pay through Executive Pay Watch.
- As You Sow releases yearly Pay Reports highlighting the 100 most overpaid CEOs.