Page 0001

Percentile of global income distribution

5

0%

90%

95

Real income increase 95th

75th

2013

US corporate profits

made abroad

The famous 'elephant graph' by Serbian-American

economist Branko Milanović shows the winners

and losers of globalisation. Real incomes among

the world's poorest people (those on the left of

the chart) rose massively between 1988 and 2008.

Those of the very richest in the West, shown as

the 'trunk' on the right, did likewise. However the

75th to 90th percentiles - which includes many

lower-income workers in developed economies

and upper-middle-class residents in emerging

markets - failed to keep pace with inflation.

When the crash happened the situation was

magnified. Today, the proposed remedies run from

Trump's 'America First' agenda to Bank of England

Governor Mark Carney's calls for 'redistribution'.

For much of the post-war era, control

of major Western democracies passed

from one historic party to another, with

attitudes towards business tilting (though

rarely capsizing) in the handover. But the

crash of 2008 has shifted more voters to

the electoral extremes, shown here in the

dramatic upward swing in support for

both left- and right-wing populists since

the financial crisis. Driven by widespread

rejection of 'elites', populist politicians at

both ends of the spectrum draw support by

pledging to stand up for the marginalised.

This often involves intervening in markets

and closing borders. Whether or not they

ultimately win power, populists exert a

gravitational pull on political debate; even

if Geert Wilders and Marine Le Pen lose,

their 'drawbridge up' ideas are likely to

influence whoever emerges victorious in

the Netherlands and France.

25% are

short-term

institutional

investors

75% of US stocks

are owned by longterm

investors

17%

index

funds

25%

long-term

institutional

investors 33%

retail

Data from the IMF paints a stark picture

of what effect this is having on social

cohesion. Figures from surveys in the US

show that as inequality has risen over the

past 40 years, so trust towards others has

fallen. During the 1970s and 1980s the

proportion of respondents who said other

people could be trusted fluctuated wildly.

But since the 1990s the overall trend has

been downwards - particularly so since

the turn of the decade.

One of Donald Trump's principal targets is

offshore cash. The amount of money made by

US businesses from their direct investments

overseas has been rising for the past 30 years -

and the share of it made in low-tax jurisdictions

has also been growing. In Europe this has caught

the attention of the EU Commission and is what

drove the development of the BEPS proposals,

which aim to tie taxation more closely to the

places where profits are made. It is also the

motivation behind Donald Trump's tax reforms,

which aim to bring US corporates' offshore cash

back to the US. While the narratives differ - BEPS

is ostensibly about corporations paying their

'fair share' while Trump is more interested in job

creation - both are signs of governments sending

the message that borders matter.

2016

1980

0

12

right wing

left wing

The need for business to communicate short-term

financial performance - and therefore focus

on short-term decision-making - is often used

as a reason why its relationship with society is

so fragile. Surveys by McKinsey show that in a

given situation only half of businesses would

make decisions with the long term in mind, yet

a recent McKinsey study of US stocks reveals that

75 per cent are owned by long-term investors.

It may therefore be easier to put societal

contribution at the heart of strategy than many

business leaders think.

Driven by tougher regulation and more

intrusive investigations, fines for corporate

criminal offences have surged in the US

since 2008. For many this is evidence that

the system isn't working. While the picture

is more nuanced (many of the offences are

historic and therefore rising fines are not

necessarily evidence of falling behavioural

standards), it adds to the drumbeat of a

corporate class that's out of touch with reality.

In response authorities have been equipped

with new powers to impose personal sanctions

on business leaders - new and boosted

legislation in the UK, France and New Zealand,

for example, means senior executives can

now be charged for failing to prevent certain

economic crimes by their staff. Whether more

prosecutions follow remains to be seen, but

the fact populist laws are being drafted by

mainstream leaders is a sign of the new world.

1

Globalisation has

created winners

and losers…

2

Reducing trust

towards others...

3

At the same time

standards

of corporate

conduct appear

to be in decline…

4

Multinationals

seem increasingly

stateless…

5

Driving a rise in support

for populists and a shift in

political debate...

6

But a better

relationship with

society could also

chime with investors.

1982

US corporate

profits made

abroad

25%

58%

Votes for totalitarian and authoritarian populist parties.

As % of votes in most recent national elections*

The changing

relationship

between business

and society.

Trust

Inequality

Source: brandonlgarrett.com/blog

(Cited in The Economist)

Source: Gabriel Zucman, Journal of Economic Perspectives

(cited in the Financial Times)

Source: IMF; Economist Intelligence Unit

Source: World Bank

Change of inequality index

(90/10 ratio)

% of population responding

that people can be trusted

1970

50

1.50

30

1.20

2015

1970 2015

Change of inequality index

(90/10 ratio)

% of population responding

that people can be trusted

1970

50

1.50

30

1.20

2015

1970 2015

* 33 European countries; post-communist states included from the year of first elections

Source: Timbro (cited in The Economist)

Source: Marshall E Blume and Donald B Keim,

Institutional investors and stock market liquidity:

trends and relationships, Wharton School working paper;

Thomson Reuters; McKinsey analysis

Corporate criminal penalties

2001 2015

$1bn

More than

$9bn

in fines in 2015

Index

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