The corporation in the 21st century

The value flows from corporations to households through eight different pathways. If you take a dollar of revenue that the average corporation generates, 25 cents of that flows through as labor income: wages, salaries, and other benefits to employees. Seven cents of that dollar goes to capital income, meaning dividends, share buybacks, and interest payments to debtholders. Six cents goes to investment—earnings that are retained to be invested in new productive assets—and four cents to production and corporate taxes. The remaining 58 cents goes to supplier payments, which then result in labor income, capital income, investment, and tax pathways for those supplier companies.

There are three additional pathways. One is consumer surplus, which represents consumers’ willingness to pay higher prices than companies charge them for goods and services. That value is an additional 40 cents per dollar of revenue, so a very substantial contribution to households. Then you have two sets of spillovers beyond the purely economic. Negative spillovers include, for example, carbon emissions, land use, and impact on biodiversity. Global emissions are now at 40 gigatons a year and rising. Any pathway toward stabilizing the climate will require unprecedented levels of capital reallocation and creating new opportunities for building green businesses.

Of course, there are positive spillovers as well, such as productivity gains in the broader economy when a company’s innovations become more widely adopted. We looked at total factor productivity, which is how the economy combines capital and labor to create value—essentially, the grease in the machine of economic progress. It includes dimensions such as how we harness technology to get more out of capital and labor inputs and how we share best practices. That productivity rate has slowed down materially, from a 1.1 percent annual increase for the 1995–2005 decade to 0.2 percent for the more recent decade.

The world has become less effective at combining capital and labor in innovative ways to create economic gains, but this is a subject of debate among economists. During the dot-com boom, economist Robert Solow famously said, “You see the computer age everywhere except in the productivity statistics.” It turned out that it took a while for everybody to apply new technologies in ways that created productivity gains. Some of that may be true for the current investments in digital analytics and artificial intelligence.

The most striking [shift over time in how corporate gains flow along these different pathways] is the declining share of value going to labor income versus capital income. It’s a trend we have observed for quite some time. If the share of capital versus labor had remained constant, an additional $1.2 trillion in value would have flowed to households as part of the labor pathway. In addition, capital income is usually concentrated in top-income households. In the US, the top-decile households increased their capital share of capital income by seven percentage points during the period we studied. The polarization is lower in other countries, but nevertheless this concentration triggers questions about how corporate value is shared.

Another change I would highlight is the reduction in supplier payments to small and medium-size enterprises. Small and medium-size enterprises [SMEs] account for a lot of employment in local communities.

On the plus side, the consumer surplus that almost everybody, in all income brackets, has benefited from has increased. However, we also have price increases—as much as 50 percent relative to inflation in some areas—that are putting education, healthcare, and some other services out of reach of lower-income households.

There are some nuances within the pathways as well. Among the largest OECD economies, the biggest surge in capital income has happened in US-headquartered corporations and the smallest in Japan. Also, Germany has seen an increase in the supplier payments pathway for German corporations, whereas most other OECD economies registered a decrease.

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We live in the era of ESG [environmental, social, and corporate governance issues] and we talk a lot about the “E,” but the “S” will also be crucial. This research shines a spotlight on some of the fundamental forces driving the phenomena we see today. One suggestion to business leaders is, know your numbers. What does your company’s value look like by pathway? What does it look like relative to your industry peers, or companies headquartered in your country, or companies within your archetype?

Secondly, do those numbers suggest there are pathways that you could or should broaden? If so, that has implications for the fundamentals of business operations. How do you view your labor pathway, including where you are locating colleagues? What is the income balance when you consider diversity, equity, and inclusion? How do you approach re-skilling at scale given that many of today’s jobs may become less relevant? How inclusive is your procurement, and are you developing new SME suppliers?