05 Nov. 2017 | Comments (0) Share Follow @Conferenceboard
Donald Trump was elected with the promise to “make America great again.” But America was already great for some people. For example, America has been good for investors: The Dow Jones was at a record high before Trump got elected, and it has risen further since the election. But the country has not been great for workers, who have seen their wages stagnate or decline over the past 15–20 years. America needs to become a great place to work again. And this will only happen if we align the interests of workers and investors such that companies focus on worker well-being to deliver better financial results.
There are many explanations for growing inequality and stagnant wages, but studies have found that so-called “skills premiums” — higher wages for more-skilled workers — have been a significant factor in growing income inequality, and technology is the reason why that premium has risen. Companies have a role to play in addressing this challenge, and doing so needn’t come at the expense of performance.
There’s urgency here because we believe the role of technology in the labor market will become more pronounced as artificial intelligence and machine learning affect white-collar jobs in much the same way that robotics has affected blue-collar jobs. For example, we foresee professional service firms, such as accounting, law, and consulting, using increasingly complex artificial intelligence models to perform audits, analyze legal parameters, and provide management consulting services. This will lead to flatter and top-heavy organizations where the partner-to-associate ratio will increase dramatically. Similarly, we foresee that headcount for supportive and back-office functions will shrink dramatically in the next few decades, as artificial intelligence will be able to perform such tasks. Examples of this phenomenon have emerged already: The world’s largest hedge fund is developing a capability for an algorithm to make hiring and firing decisions. Successfully implementing such a capability could dramatically affect headcount in human resources functions, but also in other functions, such as sales.
Although much attention has been paid, rightly, to government’s role in providing educational resources and skills to its citizens, we believe it will be hard to stop growing levels of inequality and economic anxiety without companies playing a more active role and assuming more responsibility for training, skilling, and reskilling employees. Our analysis has shown that private sector enterprises now have both the financial and the human capital to achieve much more than any government could; the largest 500 corporations in the world paid more than $700 billion in taxes, sold products and services worth over $22 trillion, controlled assets valued at more than $100 trillion, and spent more than $1.6 trillion and $400 billion in capital and R&D expenditures, respectively.
Policy makers can and should do more to align the incentives of companies and workers, for example by providing tax incentives for profit-sharing schemes, by providing health benefits, by hiring new employees, or by linking workplace practices to government procurement and financing programs. But companies also need to recognize the ways in which these interests are already aligned.
Companies that focus on employee well-being and specifically on employee skills can realize numerous benefits. For one thing, they will have a competitive advantage in the political environment we have entered. They will be more likely to avoid the stick; Trump publicly shaming companies for their employee practices is just one example of that. GM, Boeing, Lockheed Martin, and Ford are the first to experience the world we will be living in.
But perhaps more important, companies that invest in workers will discover opportunities to improve their productivity and products or services. Blueprints of this change are already appearing. As an example, look at car manufacturers in the transition to a low-carbon world and to electric vehicles. While an internal combustion engine has thousands of parts, a Tesla electric engine contains a few dozen, each needing different engineering skills. This is why Volkswagen recently announced that it would retrain 7,000 engineers in electric technology. This is smart business since VW, like other car companies, needs to meet quotas for electric vehicles based on EU and country-level legislation. Or consider leading accounting firms, such as KPMG, that are developing training programs for certified public accountants to better understand big data models and techniques. Big data techniques will allow KPMG to perform better audits and produce better results for both itself and its clients. Or look at IT firms such as Tata Consulting and Infosys, which are training hundreds of thousands of people in digital services and design thinking to meet new client demands. IBM is doing the same to skill its consultants with capabilities in cloud computing, mobile technologies, and social media. Telecommunication companies such as AT&T are now offering training in data science and digital networking.
Each of these initiatives recognizes the importance of aligning workers’ and companies’ interests. Firms need skilled workforces, and in a labor market short on certain digital skills, they can’t rely on external hires to get the capabilities they need. Greater investment in reskilling has a strong business case and will benefit workers in the form of higher wages and greater long-term career opportunities.
But companies will need to be careful in how they transition their workforce to a new set of skills. When the skills needed to get the job done are new, anxiety and uncertainty can become the norm. Management teams that clearly communicate the purpose of the organization will be able to get the best out of their employees. As research by one of us has shown, organizations where employees feel a strong sense of purpose and where management has clearly communicated expectations and the vision for the organization outperformed the market by 6% yearly on a risk-adjusted basis.
Corporate efforts to invest in employees need to be done carefully, but they need to be done. Government also has a role to play, but companies can’t leave the entire job to the public sector. In fact, even judged solely on the basis of profit, they would be foolish to do so.
This blog first appeared on Harvard Business Review on 01/11/2017.