Corporate wealth divisions throw a mirror on society; Evidence growing of a ‘winner takes all’ economy

February 14, 2014 6:06 pm

Corporate wealth divisions throw a mirror on society

By Brooke Masters

Evidence growing of a ‘winner takes all’ economy

For months now, the improving economic indicators in both the UK and the US have not been mirrored in better results from many companies – particularly those that cater to consumers.

That split was heightened this week as the Bank of England unveiled surprisingly bullish economic forecasts in which it predicted UK growth would hit 3.4 per cent for 2014, instead of 2.8 per cent as forecast.

But companies including Nestlé and Tate & Lylecountered with downbeat assessments about their earnings prospects. Both echoed concerns raised last month by Unilever about stagnant demand in emerging and developed markets. Big carmakers also reported adecline in US sales for January, though cold weather appears to have played a part.

The real culprit in this may be income inequality. Evidence is growing that we are living in a “winner takes all” economy right now. Consider Barclays, the UK bank. On Wednesday, it simultaneously announced that it planned to eliminate 12,000 jobs while boosting its bonus pool by 10 per cent to nearly £2.4bn. A very different example of a select few cashing in on lucrative activity was provided by Supercell, the Finnish mobile gaming company. This week, it revealed it had earned nearly $900m in revenues last year, despite having just 132 staff. Its two products, both highly addictive mobile video games, did not exist three years ago.

At least Supercell has products. As the Financial Times highlighted on Monday, the owners of US biotech companies are rushing to float right now, even though some have not even started clinical trials on their products. Fewer than one in 20 drugs typically make it through all the testing.

Dicerna Pharmaceuticals, which raised $90m in late January, has drawn particular concern because it did not require its main investors to hold on to their shares for a “lock up” period after the initial public offering. Its shares tripled on the first day of trading, but have fallen 15 per cent since that initial high. While it is not clear who cashed in, the group’s prospectus warned that 7 per cent of shares could immediately be sold and the remaining 93 per centrwithin three months. The whole thing has a strong odour of “take the money and run” – reminiscent of the US dotcom boom in 2000, or even the Gilded Age of the 1890s.

So far, investors, customers and employees have been content to watch the masters of the universe – particularly in tech and banking – reap most of the benefits from returning growth. But there are signs that public attitudes are changing, as seen in the San Francisco protests against the luxury buses ferrying Google workers to Silicon Valley.

Last month, the World Economic Forum in Davos – an unequal group if there ever was one – put income disparity at the top of its list of 31 potential risks to global stability. Thus far, the issue has remained largely theoretical for most companies. But, last autumn, US regulators proposed a rule that would force companies listed there to disclose the ratio of their chief executive’s compensation to the median pay of employees. If it is introduced, some corporate boards could find themselves in an uncomfortable spotlight.