Marina Gorbis's Blog, page 1471

Case Study: Can an Ethical Bank Support Guns and Fracking?

As the founder and president of a new ethical bank focused on environmental sustainability, Jay McGuane realized that he and his board needed to set guidelines about which loans to approve and which to reject on “values” grounds. In his eagerness to start running the business, he’d put the issue off, but the bank was already confronting two problematic requests, one involving fracking and another concerning guns.

Without clear ethics rules, Jay worried that his already divided directors would fall into bitter squabbling, which could lead to resignations, negative media attention, and a flight of investors.

Ethical banking had seemed so benign when Jay had decided to enter the industry. Now it seemed like a hornet’s nest.

(Editor’s Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.)

A Green Vision

Jay hadn’t needed this job. At age 50, he had years of entrepreneurship behind him. He had founded a bank in Maryland, expanded it to six branches and $400 million in assets, and sold it for a substantial profit. While looking for his next project, he happened to see the movie An Inconvenient Truth again and decided, during the sleepless night afterward, to build something meaningful out of his concern for the environment, his love of his native Colorado, and his knowledge of banking. The result was Rocky Mountain Green Bank, a company with a mission to promote environmental stewardship.

He established himself in Colorado Springs and assembled a board of directors: Four successful entrepreneurs, a lawyer, an ex-mayor of the city, a former executive in the Maryland bank (who had been more than willing to make the move West), a doctor who was a school friend and sometime hunting partner, and an evangelical (and ardently environmentalist) leader of a megachurch Jay had attended a few times.

To drive home its mission, the board hired a famous architect to make the bank’s headquarters an environmental showcase, with prototype solar-power windows, a set of wind turbines, and a butterfly roof that channeled rain and meltwater into underground cisterns. Bike racks and charging stations for electric cars ringed the building. Every lightbulb was an LED.

Articles and TV segments about the building and about Jay, the returned native son with a passion for the environment, helped attract local depositors and small borrowers, who’d grown disenchanted with the big national and global banks. Rocky Mountain Green Bank’s promise of timely, personalized service sounded good to a lot of people. And Jay’s track record in Maryland drew investors, who were eager to see their money double or triple in a few years, when (they assumed) he would sell the bank. Deposits grew at a healthy rate, but to succeed financially, the bank needed to make big loans to a few strong companies. So far, that hadn’t happened.

Moreover, the values-based approach was proving harder to implement than Jay had anticipated. In the branch’s second-floor boardroom, with its soaring view of the mountains, rifts among the directors had started to appear. The first sign of conflict had come up in a discussion of what Jay thought was a nonissue: a gym for employees.

“Oh, come on,” Neitha Wellman said, shaking her head. “Are you going to have a personal trainer on-site, too?”

“Actually, yes,” Jay said. “Two afternoons a week.”

She rolled her eyes. “Since when does a gym or a personal trainer have anything to do with being green?”

An avid fly fisher and former bouldering champion, Neitha considered herself a pragmatic environmentalist, but she detested the idea of the “nanny state.” She actively campaigned for Libertarian candidates—in fact, she had been at a rally at a mall when a shooter had gone after a Congressional candidate and the people waiting to shake his hand. A picture of her doing CPR on a wounded child, who later died, had been all over the internet, though she’d refused to discuss the incident.

Two other board members had agreed with her about the gym, so Jay had scaled back those plans and hadn’t even mentioned his healthy-eating initiative, an agreement with a catering company to make sandwiches, salads, and smoothies on-site.

Twin Debates

Neitha had been the one to solicit the first problematic loan application. She’d been talking to the head of a Colorado engineering company that developed pumping systems used in hydraulic fracturing—fracking—and wanted to expand into making the polymers, emulsions, and surfactants the industry relied on. These materials, the executive had said, would be significantly less toxic than those currently in use. Though ambivalent about fracking in general, Neitha had recommended that the executive approach Rocky Mountain Green Bank, and he had seemed interested.

On hearing about this interaction, Neitha’s fellow directors were divided. One side touted the economic and employment benefits of fracking, while the other insisted that the environmental and seismic risks outweighed any good that could come from it. The 300-million-year-old sedimentary rock under the Denver Basin in eastern Colorado contained one of the country’s largest gas deposits, and a number of local engineering firms were working on solutions for drilling, injecting, and waste disposal. It was a growth industry, but warnings from experts about the risks of groundwater contamination and seismic instability seemed to increase every day.

“Look, let’s not get worked up about a loan application we haven’t even received,” Jay said, trying to lower the temperature in the room. “But when we are approached by a company like this one, we have to be ready. We need to be talking about how to make loans that reflect our mission.”

Jay promised that he would research the guidelines other ethical companies used to make values-based decisions, solicit opinions from each director individually, and come back to the group with a proposal.

The next day, Jay visited the board member he knew best, Fred Keeler, a gastroenterologist who had been trained at Harvard. “I’m a believer in the precautionary principle,” he told Jay. “It’s the idea that in order to act, all you need is partial evidence—not proof.” Bans on smoking in public areas were a perfect example, he said: Many of them went into effect before the dangers of secondhand smoke had been proved. He quoted from a mural that he said could still be seen near Harvard Square: “Indication of harm, not proof of harm, is our call to action.”

So if it looks bad, it is bad, Jay thought ruefully. Hoping for a more nuanced perspective, Jay went next to the pastor, the Reverend Clyde Dahlberg, who, to Jay’s surprise, advocated a completely evidence-based approach: “Make two columns, one for adverse environmental effects, one for the positives,” he said matter-of-factly. “Figure out a way to quantify the effects, then do the math.” Simple.

It was while he was wrapping up his meeting with Clyde that Jay received an e-mail from the bank’s chief loan officer. “Wow—three million dollars,” he blurted out.

“What’s this?” Clyde asked. Jay wished he hadn’t said anything: The e-mail was about an official application from Field Force, a large, local firm that had been talking informally with Jay about a multimillion-dollar loan to expand its business. In some ways, it was just the type of loan the bank needed: Field Force was a solid performer, a growing source of local jobs, and a good corporate citizen, with a record of support for military-related philanthropic initiatives like the Wounded Warrior project. But its business was manufacturing lightweight small arms technologies, so-called LSATs, for the U.S. government.

“A gun manufacturer?” Clyde asked in horror.

“A military contractor,” Jay said.

“A gun manufacturer,” Clyde corrected him. “In the state of Colorado? After Columbine and Aurora and Arapahoe High School? You’d better not do anything on that without a board decision. I’d put it on the agenda for next week’s meeting if I were you.”

Changing the Subject

Jay didn’t share the aversion that some of his directors felt toward guns, and it seemed to him that weapons had nothing to do with environmentalism. But Clyde was right about the necessity of a board discussion, so he notified the directors about the Field Force application and planned his strategy for the meeting.

“As you all know,” he said to the group a few days later, at the start of the meeting, “I got into this business because I was excited by the environmental mission. And I think you all joined me because you felt the same way.”

Heads nodded.

“But,” he added, “the regulators made it very clear that we were to be a profit-making bank first and a green bank second. To get our charter, we had to demonstrate that our mission wouldn’t add significant costs or impose significant limits on our banking operations, that we wouldn’t let the mission wag the dog. I remember telling them they had nothing to worry about: Even if we wanted to lend only to businesses aligned with our environmental mission, we couldn’t—we’d go broke in a month.

“I’m not always happy with this situation,” he added. “I didn’t get into this just to run another bank, but I accept it as the price to play.”

Mark Lerman, Jay’s former employee from the Maryland bank, provided a few facts and figures to support Jay’s point: “Green” loans—to green-certified builders and consultants, as well as landscapers, farms, nurseries, organic-food companies, and solar-energy firms—constituted only 7% of the bank’s total; deposits from green businesses or from customers drawn by the bank’s mission accounted for just 1.8%, surveys showed.

“We’re pioneers,” Jay said. “And part of being a pioneer is knowing your limits. Probably our biggest impact on sustainability comes not through the loans we make but through media coverage of our mission. By being a successful green bank—with an emphasis on ‘successful’—we pave the way for more capital to flow to green causes.

“As I said last week, I think we need to create a decision-making framework so that we don’t have to reinvent the wheel every time a loan application falls into what some of us might see as an ethically gray area. I’ve made a little progress on that front by talking to Fred and Clyde here—”

Clyde interrupted him: “With all due respect, Jay, we already have one of those applications on the table. It’s from Field Force.”

Apparently, Clyde had prepared for the meeting by recruiting other directors, including the ex-mayor and two of the entrepreneurs, to his position, and together they had drafted a statement categorically rejecting business from gun makers.

Clyde began to read aloud: “Point number one: The economic considerations…” The statement compared gun makers with tobacco companies, arguing that their stocks would quickly lose value as the public became more concerned about violence. The statement cited Cerberus Capital Management’s unsuccessful attempts to shed its investment in the company that made the weapon used in the 2012 elementary-school shooting in Newtown, Connecticut. Under pressure from investors, Cerberus had finally allowed clients to sell their individual stakes.

Jay was irritated. “No one would ever advocate that our military do without weapons,” he said. “And as long as there’s demand from the Pentagon, Field Force’s stock will be fine. Next point?”

Clyde put down the statement and looked at Jay. “Rocky Mountain Green Bank is supposed to be founded on ethical principles,” he said. “What is ‘green’ if not an ethical principle? That’s why we’re part of the Global Alliance for Banking on Values. Last time I looked, it wasn’t the ‘Global Alliance for Banking on Selected Values.’ What would other members of that alliance think about our lending to a gun maker?

“You say that our main impact is through media coverage,” he continued. “What will the media say if we lend to Field Force? That certainly trumps our fancy LEED-certified office building. A loan to a gun manufacturer would announce to the world that we really have no principles and that the green thing is just a marketing gimmick. If that happens, I’ll have to leave this board.”

Lukas Hoenig, a board member who was the founder of a chain of environmentally friendly dry-cleaning businesses, cut in. “Let’s be real here,” he said to Clyde. “We’re a green bank, but when did we become the bank for the entire liberal agenda? Selling weapons to our military is not only legal, it’s laudable. And we need the business.”

“There’s nothing unethical about making or selling arms that are purchased and used properly,” Jay added. “I’m a gun owner myself, and so is Fred.”

Looking for support, Jay turned to Neitha, who had been uncharacteristically silent. She gazed at the other board members in turn, as if trying to decide how to respond. Finally, she said, “Jessica Belford was killed by a lightweight cartridge from an FF286.”

It took Jay a few seconds to figure out what she was talking about: The girl on the ground at the mall. A weapon from Field Force.

“Sure, they sell to the military,” Neitha said. “But you can buy the FF286 at gun shows. That’s what makes it one of Field Force’s most profitable products. Our bank’s mission is sustainability. How can we have a sustainable society where military-grade guns are being used to kill children? How can we, in good conscience, do business with that company?”

“It’s a no-brainer,” Clyde said. “Jay was talking about establishing guidelines for decisions. I’m all in favor of weighing the pros and cons—let’s do that when we discuss the shale gas loan. But when it comes to guns, there’s only one guideline we should follow.” He turned to Fred Keeler. “It’s like the Hippocratic Oath, right? First, do no harm. Or how about this: Do no evil.”

It was Fred who had advocated saying no to a loan if there was mere indication of harm, but now he looked confused. He loved his gun collection, from the flintlocks to the Uzis, as Jay well knew. Fred asked, of no one and everyone, “But what is ‘harm’? What is ‘evil’?”

Question: Should Rocky Mountain Green Bank deny a loan to a gun manufacturer?

Please remember to include your full name, company or university affiliation, and e-mail address.

When Rising Revenue Spells Trouble

Readers in industries where the pace of change has slowed and ambiguity has decreased, please stop reading. This post isn’t for you.

Everyone still here? Thought so. An interconnected world where technology advances at a dizzying pace and new companies emerge, scale, and decline in the blink of an eye means never a dull moment for corporate leaders.

Despite conceptually understanding that this change mandates fresh strategic approaches, Roger Martin (among others) has highlighted the mistakes companies continue to make by relying on processes and tools honed in a differently paced era.

One of the most frequent challenges we observe in the field is that companies tend to radically underestimate the threat that disruptive change poses to their business.

For example, back in early 2005, I and my colleague Clark Gilbert (now the CEO of Deseret News and Deseret Digital) ran a workshop for 100 top executives in the U.S. newspaper industry. The sentiment in the room was clearly triumphant. Pundits had proclaimed that the newspaper industry was a shuffling dinosaur as the commercial Internet took off in the late 1990s, yet most companies still had healthy financial statements and stable balance sheets.

We saw it differently, describing to industry leaders the need to radically change in response to disruptive content models (later that year, Huffington Post and YouTube were founded) and emerging advertising models like Google’s search-based advertising.

Industry leaders were buoyant because advertising revenues continued to grow over the next couple of years. But the warning signs were in plain sight. Readership had been dipping for four successive generations, as most youth turned to social networks and other online media for news. Advertising spending was shifting, albeit more slowly than readers were changing their behavior. For example, a prescient report by McKinsey in 2005 showed that classified advertisement (the true driver of profitability for many newspaper companies) had decoupled from newspapers’ economic growth. Executives dismissed the argument, with Tony Ridder, the gruff chairman and chief executive of Knight-Ridder (which was sold to McClatchy in 2006 for what now appears an incredible $4.5 billion), proclaiming McKinsey’s analysis “shallow and superficial.”

When the industry tipped, it did so with a fury. A beautiful (yet scary) graph from University of Michigan economics professor Mark Perry shows how 60 years of growth was wiped out in three. There is still money to be made in what remains of the newspaper industry, but the past few years have seen dramatic retrenchment and downsizing.

Amara’s law teaches us that we tend to overestimate the amount of change in the short term but under-estimate it in the long term. Leaders at Kodak, Blockbuster, Research in Motion, Digital Equipment, and, perhaps now, Best Buy can explain that one of the toughest challenges about responding to disruptive change is that the full financial impact only appears when it’s too late to respond in any material way. As Kodak president Philip Faraci told a group of newspaper executives in 2008 (oh, the irony), one of Kodak’s biggest problems was the apparent stability of its core film business. The company wasn’t blind to the disruptive changes in its industry (after all, it was a Kodak engineer who had invented digital photography way back in 1975), but its impact on the company’s financials lagged far behind changes in both technology and customer behavior.

In 1999, Kodak’s photography business peaked at $10.3 billion. The business stayed basically flat in 2000. The next year featured a modest decline of 8%, which could be explained away by a global recession. But then the pace accelerated dramatically, and by the end of the decade, revenues had dropped to less than $1 billion. Kodak’s leaders legitimately struggled to square the story they kept hearing (“the future is digital!”) with their own data (“the future is still in the future”).

Sometimes rising (or even flat) revenue and profits are good things, of course. So how can you spot circumstances where an apparently healthy business masks an existential threat?

One way is to pay very careful attention to any development that fits the pattern of disruptive innovation – something that makes it simpler, easier, or more affordable for people to do what used to be complex or costly – emerging in the edges of your industry. You may see the signs in a fringe group of customers. Pay attention when college students pick up what appears to be an inferior product as a workaround substitute for one of your products. Or when they start behaving in new ways (as when they started providing status updates on social networks). Or you may see suppliers or distributors start to encroach on what you considered to be your business. Perhaps new competitors are starting to emerge from industries that historically had only a tangential connection to yours. Pay particularly close attention any time someone comes toward your market with a business model that looks highly unprofitable to your company or is based on a technology that no one in your company understands very well.

Spotting disruptive business models early is very powerful but arguably difficult. It can be hard to infer a potential rival’s business model, and most start-ups change their models a few times before finding one that sticks. That’s not an argument not to scan for disruption but rather to make sure you do it diligently.

Another, arguably simpler, technique is to change the way you measure market share. Rather than looking at your revenue growth relative to that of your competitors or the share of units you sell in traditional market segments, estimate the share you have of the job that you historically do for customers. For Kodak, looking at its share of the “memory sharing” market as it declined over the first decade of the 2000s would have shown how it had gone from dominance to a bit player with the rise of on-line sharing mechanisms — even as its revenues appeared stable. Newspaper companies would have seen that jobs such as finding movie times, renting an apartment, searching for a job, and even getting general information were rapidly migrating away from them to new technological platforms, even while many consumers hadn’t yet taken the step to stop their newspaper subscription.

Disruptive innovation rarely sneaks up on a company, yet it is easy to discount since its impact is often nonlinear—slow for a long time before the crunch comes. Carefully monitoring shifts in the periphery and the market share that really matter will give you a more grounded view of the risk to your business brewing in today’s market.

Write Your Brand’s Obituary

What would happen if your company ceased to exist? 

Would journalists write headlines heralding your past achievements, or would their stories simply add you to a list of bygones?  Would analysts express disappointment or would they point to indicators that made your death predictable? Would employees wonder how it could have ended, or would they have known it was inevitable? Would customers mourn your passing, or would the demise of your brand go unnoticed?

Thousands of companies come and go every year, barely leaving a trace of their existence. Even many large corporations are easily forgotten — like those in the airline industry. Remember TWA?  Once the largest domestic airline, TWA introduced many ground-breaking developments and embodied the glamour of air travel. But hit by the pressures of de-regulation, the airline suffered through bankruptcies and was eventually acquired by American Airlines, which quickly discarded the brand name. In my home town of St. Louis, TWA went from dominating the airport to a fleeting memory in just a decade.  By the end, the value of the TWA brand had diminished only to the route it flew – which were easily replaced.

Compare that to what would happen if Southwest closed its doors. Or Singapore Airlines. Or Virgin America.  These companies have built powerful brands that would be seriously missed if they ceased operations.  Who would give us the freedom and fun that Southwest is known for? Who would pamper us and attend to our every need like Singapore does? Who would design the travel experience with Virgin America’s combination of service and style?

How do you build the kind of brand that would be missed? How do you carve out such a distinctive position and create such a powerful emotional connection? You drill down to the core of your existence to identify the essential, enduring value of your brand – and then you design and run your business to execute relentlessly on that core brand essence. When what you stand for is clearly expressed and delivered in everything you do, every day, you make an indelible mark on people’s hearts and minds.

Being crystal clear about your brand essence is critical. Some organizations enjoy that clarity, but for those that don’t, there are several ways to achieve it.  One is an exercise I often use with my clients: writing a Brand Obituary.

It’s not the most pleasant thought, but it focuses the mind to imagine what it would be like if indeed your brand ceased to exist.

In this exercise, it helps to think of your brand as though it were a person — the type of person the brand would be if it came to life today. I ask my clients to think of their brand in its totality, as all that the brand entails — and on its best days, when it’s executing with excellence.

Pretend that you are a reporter for a local newspaper who must write the obituary for this person, your brand, who just passed away today. This invented scenario can help you uncover the true nature of your brand.

Here are some questions to answer in the obituary:

What was the brand’s biggest accomplishment in life? What will it be remembered for?
Who did the brand leave behind?  What did the brand leave unaccomplished?  Who will mourn or miss the brand, and why?
What lessons can be learned from the brand’s life?  What can be learned in the wake of its death?
Now that the brand is gone, what will take its place?

Once you’ve completed the column, write a headline to capture the essence of the obituary – that headline, in turn, often captures the essence of your brand.

I often instruct members of the executive team, or a cross-functional group, to write their obituaries individually and then share them with the group in a working session. As the columns are shared aloud, there is usually some discomfort (talking about the brand’s demise is understandably not a desirable activity), but there are always moments of revelation. Common themes emerge and people start to see their purpose, their core beliefs, and what sets the brand apart with great clarity. From that point, the brand essence is just a few pen strokes away.

Positive thinking is powerful and envisioning success is a popular exercise among athletes and executives alike.  But sometimes taking the opposite approach can be just as important. By imagining a future without your brand, you can create one in which it thrives and makes an impression that is exceptional, sustainable, and memorable.

Income Inequality Is a Sustainability Issue

This evening, President Obama will deliver his State of the Union Address, and it is widely reported that it will focus on the issue of income inequality. He will be “on trend,” as they say in fashion — in recent months, leaders from the new Mayor of New York to the Pope have also been vocal on the subject. Just last week, the World Economic Forum named income inequality as “the risk that is most likely to cause serious damage globally in the coming decade,” and Oxfam International reported that the world’s 85 richest people have more wealth than the 3.5 billion in the bottom half of the scale, and that 70 percent of the world’s people live in countries where income inequality has increased in the past 30 years.

How should business respond to the growing prominence of this issue? According to Morgan Stanley CEO James Gorman, “It’s not a business issue. This is a moral and society issue. Businesses work on behalf of their shareholders with proper governance, regulated by a regulator. This is a broader society issue.” Gorman added his voice to calls for the minimum wage to be raised in the U.S., according to Bloomberg.com. In other words, business should wait to be told how to address the issue.

But it’s a false dichotomy to separate business issues from social issues. Peter Drucker wrote: “One is responsible for one’s impacts, whether they are intended or not. This is the first rule. There is no doubt regarding management’s responsibility for the social impacts of its organization.” Even as a pure “business issue,” engagement with social problems is justified. The business community has learned over the past three decades that, sooner or later, a company’s track record on social issues will affect its business. Consumers will demand that Apple’s Chinese workers be treated fairly, that P&G’s post-consumer waste not end up in landfills, or that Tyson’s chickens be hormone free, well beyond what is required by regulation. Meanwhile, the world’s largest companies have begun to understand that their viability depends on a healthy world. As The New York Times reports, Coca-Cola and Nike have come to see climate change as a threat to their ability to source the materials they need cost-effectively and reliably. Business by now has a well-developed playbook for dealing with such sustainability issues.

It’s time to recognize that income inequality is a sustainability issue, too.

What does the inequality of income have to do with sustainability? First, income inequality has negative effects on society that leave subsequent generations worse off. Among advanced economies, studies show close correlations between a nation’s degree of income inequality and its rates of homicide, imprisonment, infant mortality, teenage births, and obesity. Beyond blighting many lives, every one of these “social” problems imposes a huge tax on society by increasing the costs of security and healthcare and allocating resources to unproductive uses, like prisons.

Second, the bimodal distribution of incomes is inimical to the consumption behavior businesses depend on to thrive.  The evaporation of the middle class, like the disappearance of fish stocks or forests, will be the end of many companies. Henry Ford understood this, paying the workers at Ford more than their counterparts at other industrial companies, reasoning that helping to expand the new middle class was a way to expand the market for Ford’s product. As with other sustainability issues, the social and business consequences are inseparable.

And directly, the trends are literally unsustainable. Between 1976 and 2012 the share of US income earned by the top 1% almost tripled, rising from 9% to 24%. (While this measure fell to 19% in 2009, it has since recovered.) As the economist Herbert Stein once observed, “If something cannot go on forever, it will stop.” It cannot happen that income continues to concentrate until the entire national income is earned by the 1%. If by nothing else, the process will be ended by social uprising. With corporate profits and the stock market booming, business risks becoming a target — of Occupy Wall Street, Congressional scrutiny, or whatever political movement decides it must put a halt to this trend. As an example, last March, 68% of Swiss voters approved a measure giving shareholders the right to block executive and Board pay packages, outlawing “golden parachutes,” and increasing transparency regarding loans and retirement packages, according to the Wall Street Journal.  Yes, Switzerland.

As more people begin to see income inequality as a negative “externality” — an unintended but damaging consequence of decisions that businesses make to boost profits  — how should managers respond?

We have argued previously in HBR that companies can choose among three levels of embracing externalities. They can …

Take Ownership. This means accepting that you have played a clear part in creating a problem, and resolving to fix it. Procter & Gamble did this when it recently set a goal that, by 2050, zero per cent of its packaging would wind up in landfills.
Take Action. Short of “owning” the problem, this still acknowledges that others associate the problem with you, and you are in a position to make a difference. After a terrible fire killed many workers in Bangladesh apparel factories, European retailers Primark and C&A worked to establish long-term compensation funds for victims and their families.
Take an Interest. At this level, an organization realizes there is a problem in an area resonant with its brand, and that it has relevant strengths to offer.  Shell Oil doesn’t sell cooking oil, but its Shell Foundation contributes to making cleaner, safer cook stoves available in the developing world.

How does this framework apply to the issue of income inequality? Business could work on all three fronts. Ownership is a fair thing to take for the income inequality a business promotes with its own compensation and hiring approaches. Some have gone so far as to cap the highest salaries they will pay in terms of ratios to the lowest. But there are many ways to increase the economic mobility of employees. The companies regularly voted among the best places to work are generally known for increasing their employees’ skills and value on the labor market.

Action could take the form of supporting worker skills training in broader communities. The fact that over a hundred companies have already joined a network called Change the Equation is a good example. The initiative is designed to improve the science, technology, engineering and math (STEM) education that will make more students employable and fuel a new generation of job-creating innovation.

Interest is simplest to express, and often takes the form of philanthropy. But it also involves speaking out. Let’s give James Gorman credit on this front, then, for voicing his personal support of a minimum wage hike. JP Morgan may not employ a lot of minimum wage workers — for them, it’s an interest, for MacDonald’s more like ownership — but its CEO has a bully pulpit and can be influential. Whether or not you agree with his stance, admit that he is courageous in talking publicly about inequality. In a recent conversation with another Fortune 100 senior executive, we were assured no statements would be forthcoming from her shop: “They’re scared to death of the issue,” she told us.

That should be a sign that it’s a topic that matters to the public. People’s expectations are growing that the businesses they regard as responsible will step up in some way. At the very least, business should recognize that narrowing the income gap will translate into higher consumer demand and faster growth. Some will recognize how their standing in the society can benefit from being on the right side of a troubling issue. A few will embrace the fact that, in a political climate where State of the Union speeches can do little to inspire cooperation, they have the luxury of being able to make decisions that make a positive difference.

A Simple Daily Intervention Decreases Employee Stress

Stress levels and physical complaints declined by roughly 15% after employees were directed to spend 10 minutes writing about three things that had gone well each day, says a team of researchers led by Joyce E. Bono of the University of Florida. At the end of the work day, the employees logged on to a website where they were asked to write about events large or small, personal or work-related, and explain why they had gone well. The findings suggest that this intervention could have important effects on employee stress and health, the researchers say.

To Cut Health Costs, Focus on the First Minutes of Care

In medicine, timing is everything. Consider the harrowing events after the crash-landing of Asiana Airlines Flight 214 last July 6th 2013. The injured streamed into San Francisco General Hospital and Trauma Center by the dozens.  For the medical professionals at SFGH involved in responding to this scene of mass triage, the passengers and crew injured in the crash presented a series of split-second challenges:  how to assess the full extent of the damage, who to treat first, and what treatment to provide?

Through four waves of patients over the course of six-and-a-half hours, with lives that could be lost or irrevocably damaged with each passing minute, what emerged in the stories of the men and women who treated the injured was a heroism informed by a common element:  in each case, within the first minutes of care, arriving at the correct diagnosis was the critical issue, and in patient after patient, the radiology department became the nerve center of operations.  Physicians and nurses from other departments congregated in the main Radiology reading room to review CT scans and X-rays to make rapid-fire diagnoses.  Together, they immediately considered the most important questions—Is there a fracture? Are there internal injuries?  Does this patient need immediate surgery?—and then decided on next steps.

These are moments we can imagine fairly easily. Popular television shows—from ER to House to Grey’s Anatomy—have long dramatized how crucial early moments of care are for trauma victims. But what most don’t realize is that very same principle—that early, accurate intervention matters—applies across the entire health care system, not just in trauma cases, but in nearly all cases.

It is in the first 15 minutes of a medical encounter—which, studies show, is the average amount of time that patients meet with their primary care physician—that up to half of all medical costs are set in motion.  It is health care’s version of Harry Potter’s famous “Sorting Hat,” a wizard’s hat that magically determines in the first hours at Hogwart’s School of Witchcraft and Wizardry which one of four very different fraternity-like houses each new student is to be assigned.

In medicine, the first 15 minutes is the pivotal timeframe in which symptoms coalesce to define an individual as a “heart patient” or a “stroke patient” or “asthmatic,” sending them down a specific road toward further tests, evaluation and eventual therapy.  Known as an “anchoring bias,” an incorrect diagnosis could lead physicians to ignore new symptoms or information that could lead to a different recommendation.

Why is this important?  At a time when the Institute of Medicine estimates that between 20 and 50 percent of health care dollars are either wasted or unnecessary, there is increasing data to suggest that a good deal of that inefficiency is due to care that never needed to be delivered—in large part, because the initial diagnosis was incorrect.  For example:

Diagnoses that are missed, wrong or delayed affect an estimated 10 to 20 percent of cases, numbers much greater than drug errors or surgery on the wrong patient or body part;
As far back as 1991, the Harvard Medical Practice Group study found that diagnostic error accounts for 17 percent of preventable errors in hospitalized patients, while autopsy studies covering four decades reveal that nine percent of patients experienced a major diagnostic error that went undetected while they were alive;
A 2012 study found that 40,500 people die each year due to fatal diagnostic errors in U.S. intensive care units, nearly equal to the lives taken annually by breast cancer;
In a review of 25 years of U.S. malpractice claim payouts, from 1986 through 2010, researchers at Johns Hopkins found that diagnostic errors—not surgical mistakes or improper medication—accounted for 35 percent of total claims, generated payments of nearly $39 billion and resulted in death or disability almost twice as often as other error categories;
A 2009 report published in the Journal of the American Medicine Association found that diagnostic errors account for 40,000 to 80,000 hospital deaths in the U.S. each year, with errors of diagnosis being the most common, the most costly, and the most deadly form of medical error;
A recent commentary on a Texas VA study as reported by Kaiser Health News estimates that “with more than half a billion primary care visits annually in the United States . . . at least 500,000 missed diagnostic opportunities occur at U.S. primary care visits, most resulting in considerable harm.”

In other words, the first 15 minutes of medicine could be health care’s most expensive.

Diagnosis—and, more importantly, misdiagnosis—matters.  So how can we better understand this phenomenon, and what can we do to address it?  Four things.

First, bring better coordination to our health care system.  Just one in three diagnostic mistakes result from physicians’ mental mistakes, according to a 2005 analysis by the Archives of Internal Medicine. The majority are the result of our disjointed health care system, from delayed tests to malfunctioning equipment to missed hand-offs between physicians.  The Affordable Care and Patient Protection Act incentivizes coordination of care, moving away from our current system that rewards doing things (paying a fee for every service performed, with no regard for results) and toward a system that rewards doing the right things (paying for better results).  Anchoring the system in results will create a stronger incentive to get the initial diagnosis right.

Second, embrace technology.  Advanced software can help physicians make better decisions.  A recent Harvard study found that using so-called clinical decision support (CDS) software to help physicians pinpoint the correct diagnosis and treatment over a three-year period shortened length of hospital stay by 370,000 days per year while lowering mortality rates.

Third, support research to create better diagnostic tools.  Medical technology is often perceived as a driver of health care costs, and there is certainly some truth to that.  But the latest innovations in imaging and diagnostic testing can lower costs by improving the odds of a correct diagnosis. Tests like troponin, for instance, can help doctors assess whether a patient is experiencing a heart attack, which leads to quicker, more effective treatment.

Fourth, fund studies to build a better baseline for action.  The founding president of the Society to Improve Diagnosis in Medicine recently observed that not a single hospital in America is trying to count diagnostic errors—even though a 2011 study of 6,000 physicians found  nearly half encounter preventable diagnostic errors every month.  Establishing a better baseline can help medical facilities of all kinds prevent errors.

Instinct, intuition and experience will always be vital to medicine.  But if we can put more technologically advanced, evidence-based tools in the hands of skilled providers, we can turn the most expensive 15 minutes of medicine into the most successful.

Life is Luck — Here’s How to Plan a Career Around It

Daniel Kahneman has claimed the following as his favorite equation:

Success = talent + luck

Great success = a little more talent + a lot of luck

Kahneman’s implication is that the difference between moderate and great success is mostly luck, not skill. Chance plays a much greater role in our careers than we might wish or even realize. Most of us can live with the upside of this observation: we tend to claim credit for good luck anyway. But the downside — the thought of our careers as the playthings of fate — is almost unbearable. Fortunately, we can make decisions that help minimize the influence of bad luck on our lives.

Nassim Nicholas Taleb argues that $1 million earned as a dentist is not the same as $1 million earned as a rockstar because success as an artist depends much more on chance. If you imagine a game of “career roulette,” you end up a starving artist 99 times for every time you end up a rockstar. If you want to minimize the chance of bad luck, he says, be a dentist. There are no “starving dentists.”

But our goal isn’t simply to minimize the influence of luck; it’s to minimize the chance that bad luck will lead to an unacceptable circumstances, be that starving, divorce, failing to achieve the autonomy you crave, etc. In other words, we want to minimize the risk associated with high uncertainty in our careers.

If minimizing the chance of an unacceptable outcome is our goal, what should we look for, when career decisions loom? Here are three answers.

The role of chance in determining performance 

The first question to answer is how much of the success in a given field, or for a given project, is due to chance. Domains with a lot of uncertainty – where cause and effect are not well understood, or the context is changing constantly, or factors over which you have no visibility or control play a large role in determining performance – have the highest likelihood of skilled people failing. Evidence of the role of chance often comes in the form of high variance of performance – a right-skewed distribution of project outcomes. We see high variance in investment performance, new product launches, startups, creative industries, and academia, all areas where luck plays an outsized role.

The number of tries you have before poor performance is attributed to skill 

Extreme uncertainty is only a problem if the organization holds you responsible for failure that has more to do with chance than with your skill. Well-run organizations will deal with high-variance projects by relying on process metrics and by judging you on diversified outcomes. Process metrics are easiest when the causal mechanism linking behavior and performance is well understood: driving down cycle time in software experiments allows for more experiments, which produces better results. Diversification is either concurrent (making a portfolio of many investments that are held over the same time horizon) or serial (making a series of investments that average out to a portfolio).

The startup world offers an example of serial diversification: everyone recognizes that, even entrepreneurs who “do everything right,” will fail more likely than not. But entrepreneurs can diversify over time by being involved in different ventures – dramatically increasing the chance that skill will pay off over time. While luck is the biggest factor in “home-run” successes, the ability to have investors say “call me when you’re starting your next company” can be achieved mostly through skill.

The degree to which early success causes subsequent success

If early success actually causes later success, the cream doesn’t always rise to the top. When success breeds success and initial success is largely random, the most successful people are those whose early luck compounded – skill doesn’t necessarily tell over time, because diversification is impossible. Sociologist Robert Merton first recognized this phenomenon in academic success and dubbed it “the Matthew Effect,” quoting a Bible passage in which the rich get richer and the poor get poorer.

Consider the case of two aspiring venture capitalists: both are very smart and good at what they do. One went to Stanford; the other, Harvard. If they begin investing in 1995, Stanford hears about and invests in Google and Harvard fails to get the early opportunity to invest; if they start in 2005, Harvard gets a chance to invest in Facebook, while Stanford is left out. In either case, early success leads to better dealflow, more opportunities for acquisition (selling new investments to Facebook or Google), more opportunities to recruit talent, stronger networks of advisors, and many other advantages. Instead of averaging out over time, the initial difference between the investors is compounded. While nearly every career provides reputational benefits for (often unearned) early success, few compound the benefits of early luck as strongly as venture capital.

Mitigating the risks of uncertainty in your career

Risk for our purposes is the chance of an outcome you can’t afford – so risk is entirely in the eye of the beholder. Often, skill can ensure that we meet the minimum economic or psychological thresholds we want from our work. But we can use an understanding of luck to pick strategies that minimize unnecessary career risk. Based on what we know about luck, here are some ways to avoid its downsides:

Avoid rigged games – Think hard about accepting a project that is highly uncertain if your performance will be compared to low-uncertainty projects.

Know what you care about – The more important relative performance is, the more you should avoid luck-dominated options, where the difference between good and great more likely results from luck than skill. Conversely, the more you care about “impact” – that the world look different as a result of your work – the more you should consider high-uncertainty choices. If you care most about certainty and social approbation, become a doctor; if you care about expected impact, start a healthcare company.

Reduce risk by smart timing – Pay attention to the order of decisions. Often reversing the order of two decisions can dramatically change their total risk. For example, starting a company as your first job out of college has very little downside – the worst case, you get interesting, valuable experiences that differentiates you among a field of bland candidates. Starting the same company after three years in your first job entails greater financial and career opportunity costs. (It often is still a good idea, but the potential downside is greater.)

Create portfolios – When operating in high-uncertainty environments, look for opportunities to diversify. As a product manager, you can run quick experiments to remove uncertainty from potential projects; as a middle manager, you can sponsor more than one project to increase the probability and magnitude of success on risky projects.

Reframe the risks you’re taking – Poker players think in terms of expectation – whether a given decision, on average, would make or lose money – as a way of avoiding decision regret and outcome bias. Often the most rewarding professional experiences have the most uncertainty. Instead of concentrating on the results of a decision, think about its expected value – both in financial and psychological terms.

Focus on what you can control: Some aspects of our lives are either highly predictable or naturally diversified. Relationships tend to be both: putting effort into friendships almost always strengthens them, and we have both many friends and many opportunities to strengthen each friendship. Invest in relationships, and they’ll pay a highly reliable dividend.

Whatever Happened to the $300 House?

The idea to design and build a $300 house first appeared here on the HBR site in August 2010, in a post by me (Vijay Govindarajan) and Christian Sarkar, and then again as one of several ideas in the HBR Agenda 2011. Believing that improving housing for the world’s most poor could help them break out of the vicious cycle of poverty, we issued a challenge to the design community to employ the strategies of innovation and disruptive thinking to attack this persistent problem. Our audacious challenge was followed by a spirited effort, in a series of HBR blog posts by experts in design, energy, finance and urban planning, to answer the following questions:

How can organic, self-built slums be turned into livable housing?
What might a house-for-the-poor look like?
How can world-class engineering and design capabilities be utilized to solve the problem?
What reverse innovation lessons might be learned by the participants in such a project?
How could the poor afford to buy this house?

At Dartmouth College, our home institution, we decided to take the $300 House challenge on the road, by sending interdisciplinary research teams—students and faculty in business, engineering, medicine, architecture, anthropology, environmental studies and other disciplines—to Haiti after the devastation of the earthquake of January 2010 to gather information, establish close relationships with communities, and identify design solutions that might address the critical need for permanent and durable housing there.

At the same time, the $300 House project initiated an international online design competition for the project. The individual and corporate winners of the competition, along with students, faculty, Haitian experts and design professionals, were brought to the Dartmouth campus for a four day design workshop. The workshop had four tracks:

Rural House Design Prototype
Urban Housing Design Prototype
Community Development, Infrastructure, Education, HealthCare Delivery
The Development of a Business Plan

Specific sites in Cite de Dieu, Port au Prince and Fond des Blancs in the southern peninsula were utilized for the prototype designs, and partner organizations engaged with these communities participated in the process. The resulting reports and designs were impressive but the work was just beginning.

The next step was to take these ideas back to the communities for feedback on design and implementation concepts. Through meetings with partner organizations and community members it became clear that the implementation in the rural area would be much more straightforward than the urban concept. Fundraising for the rural project progressed and some new strategies were developed to move forward in Port au Prince.

At present two prototype houses are beginning construction in the remote town of Fond des Blancs, a partnership between Dartmouth and the St. Boniface Haiti Foundation. This effort is intended to test the cost of building these homes using traditional construction methods and at the same time evaluate the possibilities to scale up, innovate in terms of construction and materials and bring down costs. In Port au Prince the project has shifted from the Cite de Dieu to the area of Martissant where a large scale comprehensive urban planning initiative is being directed by the Foundation for Knowledge and Leadership (FOKAL). The incorporation of the $300 House Urban Prototype concept into this larger framework offers significant promise in a collaborative initiative between FOKAL and Dartmouth.

As our prototypes are being built, what have we learned so far?

First, that we have to question every day what is achievable and how to get there. We have to think differently and use the principles of reverse innovation to learn from the communities where this housing is desperately needed.

Second, we’ve concluded that there is no one-size-fits-all solution to the worldwide affordable housing crisis. The only way to develop viable solutions is through disciplined work in the field. We can help, but the successful solutions will come from the communities themselves. We need to help train a generation of students, professionals and workers in the developing world who can take on these challenges in the next generation, and we are partnering with organizations in Haiti to do just that.

Finally, to guide our work on this project, we established the doctrine of The Three Ds—critical concepts to be kept at the forefront of our thinking:

Dignity. After extensive field work in Haiti we have come to believe that differentiating the poor by building their homes out of waste or materials that the middle class and wealthy would never consider for their own homes is not a viable option. Similarly, segregating the poor into new communities that have no variation in socio-economic status and that are separated from their home communities and from economic opportunity is also counter-productive. Any solution to housing for the poor must maintain the dignity of the members of the community.


Durability. We will never break the cycle of poverty by creating housing for the poor that falls apart in five to ten years and then becomes so expensive to maintain that the owners cannot improve their general condition. This is a large part of the innovation challenge and where lessons learned from the local community can be so important.


Delight.  Life holds challenges for all people, none of us are immune to tragedy and grief. Likewise we all thrive on moments of delight, the smile on a child’s face or perhaps the knowledge that our family is safe and has enough nutritious food to eat. Walking through a remote village in southern Haiti where children walk four kilometers each way to fetch water one sees beautiful ornamental plants at every doorstep—a reminder that even the poorest of the poor take delight in the beauty of life.

The most important lesson to take away from our experience so far?   We cannot successfully build homes without building community, infrastructure and economic opportunity.

Dartmouth Senior Julia McElhinney sums up her experience with the $300 House project with this:  “I feel very fortunate to be involved in such a creative, collaborative and conscientious initiative as an undergraduate student. It is an incredible feeling to be even a small part of such proactive and positive change in our world. Largely because of my experiences on this project, I have decided to dedicate my studies to sustainable urban design and, in particular, public place-making for community building. “

Can the $300 House project deliver on The Three Ds? Stay tuned. Or better yet, help us get there.

Don’t Write Off the (Western) Focused Firm Yet

The rise of Tata in India, Koç Holding in Turkey, and Grupo Carso in Mexico have some management thinkers contending that the conglomerate is back at the expense of the focused firm. In his article “Why Conglomerates Thrive (Outside the U.S.)” in the December 2013 issue of the Harvard Business Review, J. Ramachandran concludes from a study of the performance of listed Indian business groups that the conglomerate is a winning organizational structure, even if isn’t popular in North America yet. In its January 11th issue, The Economist also argues that conglomerates are spreading their wings again. Often the debate turns ideological, arguing that the (emerging-world) conglomerate is an intrinsically better construct than the (Western) focused firm.

In our opinion, which of the two is the more successful depends on the context in which the business operates. Specifically, focused firms fare better in countries where society expects and gets public accountability of both firms and governments, while conglomerates succeed in nations with high public accountability deficits.

Simple micro-economics sheds light on the issue. Imagine you are starting a new business. What will make it successful is your ability to induce customers to buy from you rather than from someone else. As long as the revenues you obtain from those customers exceed your costs, you will turn a profit. You would consider first whether you could offer a distinct product to each individual customer that perfectly matches his or her unique preferences. Of course more often than not you would find out that such extreme customization is not profitable. As a consequence, you would begin to lump similar customers together into segments to which you offer a “compromise” product. While you no longer extract maximum value from each customer, you are still better off as a result of economies of scale and scope.

As this phenomenon repeats itself, the diversified firm is born. You add product families first, followed by business lines, each time addressing extra customer segments. As long as the extra revenues justify extra costs, and economies of scale and scope outweigh the cost of increased complexity, it makes sense to continue diversifying.

The nature of these economies of scale and scope change as you diversify more and more. Initially these savings are mainly physical, as you stretch the use of tangible assets such as plants, networks and systems. Subsequently they become more knowledge-based, as you share technologies, brands and customer intelligence. Finally, when you are at the conglomerate stage, they relate to social capital, as you move talent across internal boundaries and leverage personal relations with politicians, government officials, investors and other external parties who can greatly facilitate or obstruct your plans–not necessarily with the greater good in mind.

Given the still-prevailing “conglomerate discount” Western firms are subject to (i.e., the conglomerate share price is less than the sum of the values of its constituent businesses), we would argue that the economies from leveraging personal relations with external parties are non-existent in these firms. The forces of lawmaking, jurisprudence and, yes, ethics bring about sufficient transparency, market efficiency and fair business behavior for the conglomerate not to be worth its salt.

In the emerging world, however, these forces may be underdeveloped. In such cases officials, investors and other parties put extraordinary trust in the people they know at the helm of the successful conglomerate, for example to realize their pet projects, invest their funds or set up a joint venture – and are willing to pay a premium for it. For example, the local connectedness of emerging market conglomerates is one of the main reasons why many Western firms, in industries as diverse as electrical power and insurance, set up joint ventures with them. In addition to serving customers – which stays the very raison d’être of a firm – the conglomerate thus serves also as a conduit for initiatives that the external parties otherwise might find too risky to pursue. For example, investing in a partially listed subsidiary of a conglomerate that has been around for more than 100 years in a volatile emerging market gives a greater sense of comfort than going it alone.

Take a tobacco company in the U.S. It may spend fortunes on lobbying, but it is all about promoting its one business activity, i.e. tobacco. It doesn’t get into, say, cereals, because it realizes that knowing this one Congressman won’t make it as successful in cereals as a focused cereals manufacturer. There is no “scope effect.” But if this tobacco company wants to enter, say, India, it could establish a joint venture with a local conglomerate that has all the right connections, be it with a governor for land, another firm for electrical power, etc. It doesn’t matter that this conglomerate isn’t in tobacco yet. It just leverages its connections, and will somehow ask a premium for that know-who from its U.S. JV partner, for example by getting a higher stake in the JV than it otherwise would deserve.

We don’t expect this phenomenon to re-emerge in the Western world, and thus the conglomerate to regain a foothold. Quite to the contrary.

Consider PPG Industries. The US-based company used to be a diversified industrial group, with activities in all types of glass, chemicals, paints, optical materials and biomedical systems. Through a raft of acquisitions and divestments since the early 1990s, it has transformed into a focused world-leading coatings manufacturer with $15 billion sales. In 1995, glass and coatings each accounted for about 40% of sales. By 2012 as the firm became more focused, this split had evolved to 85% coatings and 7% glass. In that same period PPG’s share price has risen by a compound average rate of 6.6%, compared to 5.1% for the S&P 500 Industrials. Quite a respectable performance for a company operating in a fairly mature industry. It may well reflect the power of focus.

At the same time, we’re not arguing that conglomerates aren’t effective in emerging markets. One statistic that, unfortunately, may point to the lasting importance of local connectedness is the Corruption Perceptions Index published annually by Transparency International. It uses a scale from 0 (highly corrupt) to 10 (very clean). Since 1995 the index has remained stable at around level 3 in India and level 7.5 in the U.S., to take these two countries as an example. Until such public accountability deficits can be addressed, the economies of scope related to social capital (“this-person-I-know-and-trust-in-an-otherwise-untrustworthy-environment”) will sustain the conglomerate phenomenon in the emerging world.

The conglomerate is a “necessary evil” in many emerging markets: without it, things might not work. But it is a symptom of a deficit that has a high societal cost. That’s something to think through before heralding its return. In the meantime, (Western) consumers, investors, and society at large should be delighted with the focused firm.

Inequality in the United States and China

Income inequalities in the United States and China are not only high, and similarly high (which has been the case for a decade already), they are also becoming a serious political problem in both countries. President Obama in his 2012 State of the Union address called inequality a “defining issue of our time.” It subverts democracy and imperils equality of opportunity, arguably the two pillars on which the American Dream has been built. In nominally socialist China, the newly selected President Xi in his last year’s address to National Congress promised that tackling inequality will be his administration’s “top priority.” In China, high inequality threatens to undermine the Communist Party’s key justification to unchecked claim to power.

The turning point for both countries, launching them into ever rising inequality, took place at almost the same time: late 1970s and early 1980s. With the election of Ronald Reagan to the U.S. presidency and the policies of high real interest rates and lower taxes on “unearned” (capital) income, income inequality in the United States jumped and then kept on rising throughout the 1980s and the 1990s, before eventually plateauing at a very high level in the naughts. The overall outcome was that, measured by the Gini coefficient, U.S. inequality went from around 35 to 45 Gini points—that is, from a mid-range OECD inequality level to an OECD outlier surpassed only by Mexico and Turkey.

China, under Deng Xiaoping, introduced private ownership of land in 1978, and thus began its 35-year period of unprecedentedly high economic growth and rising inequality. During that same period, Chinese inequality increased at a tempo outpacing even that of the United States: inequality in China rose from a level lower than in the United States to a level equal or slightly exceeding that in the United States today.

In the Unites States, the growth of inequality is, in terms of explanatory factors used by economists, over-determined. There are many factors that have been adduced, and in some cases empirically shown, to have contributed to greater inequality. But they can be usefully divided into three groups: technological progress, globalization, and economic policy. Technological progress by favoring highly skilled labor to the detriment of the low-skilled, might have led to the increase in the wage premium (for the highly educated) and to widening inequalities. Globalization might have, by providing cheaper imports from China and allowing U.S. companies to hire cheaper labor abroad, led to a decrease in low-skilled wages, and likewise increased the gaps between the high- and low-skilled workers. In addition, globalization, by letting capital move much more freely than before, allowed entrepreneurs to find more profitable uses for their capital and to keep profit rate up, shifting the distribution in favor of capital and the well-to-do. Finally, economic policy, by reducing taxes on the rich has exacerbated these disequalizing trends.

What is the likely evolution of these three forces in the medium-term? The form that technological progress will take is, by definition, impossible to predict, but nothing seems to suggest that we are likely to enter an era of pro-unskilled labor innovations. Some innovations may be of this kind, as for example the use of cell phones to allow small farmers in Africa to get much more accurate and up-to-date information about prices, thus increasing their incomes. But nothing suggests that similar innovations are around the corner to help U.S. workers without a college degree. Globalization, as far as we can see, is also here and likely to stay. There may be minimal retrenchments, but the forces it has unleashed are too powerful, and the people who benefit from it are too numerous (particularly in Asia) that, short of a major war on the scale of the World Wars, it is unlikely to be put back in the box.

Which leaves us with economic policy. But there the news is rather bleak. Three decades of ideologically driven pro-market change, combined with an ever-greater ability of the rich to influence the political process, has created a stranglehold for the top 1% on the political agenda. Having invested several decades worth of effort and money into think tanks and lobbying to argue for low taxes on income and wealth, it’s unlikely that the rich will suddenly change their mind. Although the economic policies that could reduce inequalities are well known—higher minimum wage, cheaper public education, and above all higher taxes—the probability that they will be implemented is rather small.

The medium term in the United States will thus continue to look more or less like the present. But farther afield, the very foundations of democracy may be shaken by the plutocratic turn in governance and by the continued hollowing out of the middle class. Inequality may not change US way of life too much right now, but it might render its democracy vacuous, and sow deep the seeds of discontent with its political system.

The causes of inequality in China are different. There, the increase in inequality is primarily due to a transition of labor from low-productivity agriculture to a higher productivity industry, not dissimilar from the evolution in the United Kingdom between the mid-1800s and early 20th century or for that matter in the United States between the late 1800s and 1927. China, like the United Kingdom and the United States, is following an intense inequality upswing of the Kuznets curve (named after Russian-American statistician and economist Simon Kuznets), characteristic for all, or most, fast industrializers. But after a certain points, or so Kuznets’s theory suggests, equalizing elements kick in: urban-rural gap declines as agriculture becomes more productive, more people get educated (and the skill premium declines), and greater wealth as well as the aging of the population lead to increased demand for social welfare and thus redistribution. This is basically the path that the US and the UK both took after they passed the (previous) peak of their inequality some 100 years ago. On that reading of Chinese inequality, one can be optimistic: there are strong forces that may curb it in the future. We already see some first signs of it: from rising wages to the demand to extend the social safety net beyond urban state-sector workers.

But there are reasons not to be so sanguine. Chinese inequality is truly spectacular in the sense that it has exacerbated all cleavages: the urban-rural gap in China is greater than in any country in the world; the gap between the rich maritime provinces and the poor Western regions is growing; the gap between capital-owners (in a nominally socialist state!) and farmers is enormous. Reversing inequality means reducing some of these gaps, and this is a very arduous task: who is going to stop a Shanghai-based highly educated technician from earning more or compel him to share it with a Hunan farmer? How will far-away poor provinces become more developed? Will rich provinces be willing to fund the needed transfers?

More importantly, the single-party political system has led to massive corruption at all levels of government, but particularly at the top. The recent scandal that revealed secret bank accounts in the Caribbean belonging to the families of the top politicians underlines the massive extent of corruption throughout the system. As with the top 1% in the United States, it is hard to see that those in China who have profited the most from inequality will vote for lower benefits, lower premiums, and fewer opportunities for corruption for themselves

Thus, politics in both China and the United States seems to work against any realistic solution to stop or curb the rise in inequality.

The Chinese situation is more serious, however. Dissatisfaction with inequality can easily spill into the demands for political liberalization. That democratic alternative is especially attractive because the corruption of the rulers coexists with a justification for their rule – Communism – that is obsolete and that the elite themselves clearly ignore. The woes of the Chinese politicians are compounded because the gap between the official ideology and reality is huge and a political alternative to address this gap exists. In the United States, the gap between ideology and reality is smaller, and a political alternative is less clear, or at least commands less support among the population.

The solution to high inequality in both countries lies in the political sphere, but the chances for a short-term fix are low. Over the longer-term, change may hinge on democratic revolt in China and democratic renaissance in the United States.