By Indranil Ghosh and Matthias Lomas
In the wake of the Covid-19 crisis and global civil unrest resulting from the police killing of George Floyd, there has been much soul-searching on how to expunge inequities in American society. The protests have spread like wildfire across the world, especially the multicultural societies of Europe where similar inequities are felt among minority communities.
Much of the press coverage has focused on racism ingrained judicial system and knee-jerk policies to de-fund the police. But we must look deeper to understand what we can do to eliminate the injustices African Americans face.
One of my friends, a LA media executive, put it well when he wrote to me saying:
“The quarantine forced some of us to spend time reflecting on where we are at. Then George Floyd sort of blew the top off hiding in our tiny zones of comfort. I consider myself liberal-minded and have a diverse group of friends, but I realized that I had not taken the time to understand structural racism. Now that everything has stopped in its tracks, this feels like a moment to seize upon. So, the big question is what can businesses, investors, and government do to deal directly with the root causes of structural racism?”
To answer this critical question, let’s turn to an idea, Inclusive Governance, which I believe is the foundation of any prosperous society. In my book Powering Prosperity, I define Inclusive Governance as follows:
“Inclusive Governance is a system of laws, institutions, and culture that promote civil liberties, political participation, and socioeconomic mobility for the entire population. It is resilient to “capture” by a ruler or special interests. It is the critical framework for upholding cohesive social contracts and reversing divisive ones.”
The tragic loss of George Floyd’s life, caught on video and watched in horror by millions, has come to confirm the breakdown of inclusive governance in America—the denial of equal civil liberties, political participation, and socioeconomic mobility to the black community.
In this article, we set out to unpack the most critical areas where inclusive governance has broken down and how these inequities can be remedied.
From our analysis, it seems that three injustices have intertwined to create a vicious cycle that has held African American communities back:
- Barriers to accumulating inter-generational wealth
- Under-representation in key decision-making roles like business ownership, senior corporate management, and finance
- Lack of investment in social mobility enablers
Let’s look at each in turn.
BARRIERS TO INTER-GENERATIONAL WEALTH ACCUMULATION
Slavery and then segregation made it very difficult for African Americans to accumulate wealth-generating assets like real estate, stocks, retirement accounts, or become business owners until the 1960 and 70s. But even after legal barriers were lifted, “redlining policies” continued to deny or limit financial services to neighborhoods based on ethnic composition, without regard for the residents’ qualifications or creditworthiness.
In the past 3-4 decades, wealth and income have skewed heavily to asset owners and executives, relative to workers. Property prices have escalated by almost 50% since 1980 and American CEOs now earn 312 times the wage of an average employee compared to 20 times in 1965.
Starting from a low base, African Americans missed out on this jump in asset prices and executive pay. As a result, wealth held by African Americans has remained flat since the 1980s while it has increased by nearly 50% for white Americans. Today, median household wealth of black Americans is about 10-times lower than their white counterparts.
Without personal wealth and less access to other sources of capital, black Americans have had far fewer opportunities to own and scale-up businesses, which in turn has starved African American neighborhoods of good jobs, inflows of private capital, and sufficient tax-base to fund adequate public services. Black-owned businesses make just $58,000 in average revenues annually, compared with $546,000 for white-owned businesses.
Several forces have also kept black Americans from moving to areas with more wealth-creating opportunities. Although residential segregation was outlawed by the Supreme Court in 1948, neighborhoods remained segregated because of private racial covenants between houseowners, or because developers couldn’t get financing without white-only covenants in the deeds. Furthermore, zoning laws which only allow single-family housing in certain neighborhoods has made housing in these areas unaffordable for many African Americans.
UNDER-REPRESENTATION IN KEY DECISION-MAKING ROLES
African American are highly underrepresented among business owners and senior management, as well as in the finance and investing profession. Minority-owned businesses typically receive smaller loan amounts—making it harder for them build businesses and wealth. This is not surprising when you consider the tiny proportion of lenders and investors that are black. For example, 81% of venture capital firms don’t have a single black principal. And just 0.0006% of all tech venture funding since 2009 was deployed by black female VCs. Business has an equally dismal record—the Fortune 500 has only four black CEOs and only 11% of board seats are occupied by African Americans.
Without greater representation in these key decision-making roles, investment companies are likely to have fewer networks with black-owned businesses and companies will have less contact with black talent. This entrenches the lack of funding for black-owned businesses and lack of diversity among companies.
LACK OF INVESTMENT IN SOCIOECONOMIC ENABLERS
As I discuss in Powering Prosperity, the most fundamental requirement for developing prosperous communities is significant investment in enablers of socioeconomic mobility like high quality education, health, housing, financial inclusion, and connective infrastructure like transportation and broadband internet. To this day, public services are still greatly underfunded in African American communities. For example, schools receive 20% less funding and African American children are three-times more likely to have elevated blood lead levels due to poor municipal water infrastructure.
Private provision of these services has also become more expensive for all Americans in the last few decades (see graph). But black Americans have been hit the hardest, as they tend to be poorer. Moreover, with health insurance typically linked to jobs, the lower wages and greater reliance on part-time work means that many African Americans have less reliable access to health insurance. The weakening of the Affordable Care Act has reversed recent improvements that led to record coverage of African Americans in 2015.
Unless investment in these socioeconomic enablers is scaled-up, African American communities will struggle to generate talent required to fuel job creation, either through building new local businesses or attracting corporations in search of high caliber workers.
How do we get from this vicious cycle to a virtuous cycle of growth for African American communities? Here are a few bold ideas that business, investors, and governments should be focusing on.
Implement a high standard of diversity and inclusion
Virtually all studies show that increased diversity of race, gender, and other identities lead to better business outcomes in terms of decision-making, innovation, and financial performance. For example, a 2018 study of 1,700 companies across Europe, Asia, and the US by the consultancy BCG found that companies with more diverse management had 19% higher revenues from innovation.
Due to these business advantages and a sense of moral duty, companies make grand commitments to improving diversity but fail to achieve them. Companies typically only seek talent when a job becomes available and search for black candidates through the same educational and training networks from which they source white talent. This transactional approach too often leads to the refrain that “we tried and failed.” Andrea Hoffman, founder of the diversity and inclusion advisory firm Culture Shift Labs, attributes her firm’s success in sourcing black talent for top jobs to cultivating strong relationships with associations of black professionals and helping companies connect with the wealth of black talent in these untapped pools.
Align diversity to business drivers
The best companies go further to align diversity to business drivers, such as tapping into new customer segments. Having diverse employees helps businesses sell more products to more people. For example, General Mills consulted an ‘employee resource group’ of African American employees on how to make its Betty Crocker product more appealing to this demographic. Through a product re-vamp, it increased its sales by 22% within a year.
Invest in social mobility-enabling businesses
Beyond funding minority-owned businesses with diverse workforce, investors can go further to support business models which help break the vicious cycle preventing African Americans from accumulating wealth. Millions of African Americans are struggling to pay for a college degree, housing, or healthcare. This represents millions of customer pain points that businesses and investors that back them can solve.
One example of such a business is Holberton School which makes coding education affordable via an income-share model. Students pay back a portion of their salary for 3.5 years once they earn above $40,000. Over half of students are from minority communities and the median salary of students 0-5 years after they graduate is $109k—higher than any Ivy League school. Holberton has helped African American men like Max Johnson, who was previously living in his car, obtain six-figure salaries. LinkedIn, Docker, and other tech companies have played an integral role in shaping Holberton’s curriculum.
Invest to make communities more innovative, connected, and entrepreneurial
As I outline in Powering Prosperity, many former manufacturing centers have withered in recent decades, but cities like Pittsburgh in the US and Bangalore in India have found phenomenal success by becoming hubs of innovation, connectedness, and entrepreneurship.
Atlanta, the majority black metropolis in the State of Georgia, has recently been rocked by another police killing of a black man, reflecting continuing racial injustices in the city. But Atlanta is also an example of a surging innovation hub. Investors have powered its success by taking advantage of opportunities generated by excellent ‘anchor assets’ such as Georgia Institute of Technology (Georgia Tech).
Georgia Tech produces more black engineers than anywhere in America. It also has a laser focus on commercializing its research output, and business creation is has incubated has made possible over 15,000 jobs. This has attracted 10 global corporations that have partnered with the university to create the largest-ever strategic grouping of companies in an independent venture investment firm.
As with other successful innovation hubs, Atlanta has also succeeded in attracting knowledge workers through development initiatives that upgraded natural assets and improve the quality of life. A mixture of public and private investment totaling $559 million has transformed ‘The BeltLine’ that encircles the city. Rusting tracks and overgrown sidings have given way to parks, nature trails, new transport links, as well as modern commercial and residential zones. Tech networking and business hubs like The Gathering Spot, on the site of a disused railway yard, house some of the top black tech talent in the country.
Georgia Tech, investor capital, and Atlanta’s quality of life are attracting black tech talent from across the US—creating a virtuous cycle of business growth. Tech now contributes 12.5% of the city’s economy. One in four of the tech workforce is black. While not representative of the city’s demographic profile, this is better than anywhere else in the country, including San Francisco where just 6.4% of tech workers are black.
Make housing more affordable
In almost all major US cities, median housing costs are three times the gross annual median income. This prevents many black Americans from living where higher-paying jobs are in greatest supply. The only real solution is to build more units to tackle the severe affordable housing shortages. At present, this isn’t happening. Since 1990, San Francisco has averaged just 1,900 new housing units each year.
It’s imperative that zoning laws are reformed to make it easier to build affordable homes. Zoning laws often prohibit high-density buildings. Governments should implement proposals like SB 50, put forward by Scott Wiener of the Californian Senate, which would see the state “up-zone” land currently dedicated to single-family housing, allowing developers to build triplexes, fourplexes, and other higher-density buildings. Up-zoning powers would be assigned to “job rich” or “transit rich” areas, allowing more African Americans to access jobs.
Minneapolis, the city where George Floyd was killed, is a rare bright spot among cities regarding zoning. Effective January 1 2020, the city’s Minneapolis 2040 plan has eliminated single-family zoning citywide. This is a dramatic shift from its previous policy that allocated 70% of residential land to single-family homes which shut out many black communities from many neighborhoods because the policy inflated property prices.
De-link schools funding from property taxes
African American communities receive poor education because the main source of funding for schools is local property taxes which bring in less revenue in poor areas. As the Center for American Progress shows, states which have reformed financing to allocate more funding to poor districts have narrowed the achievement gap by one-fifth. States should ensure all pupils receive equal funding and strive for consistency of quality across all districts. Presently, most states’ constitutions don’t even formally guarantee the right to education for all.
Another solution may be to increase funding to Historically Black Colleges and Universities (HBCUs) which provides the largest pipeline of African American PhDs across all subject areas – and produces the greatest numbers of black educators. Not only would this fund
ing support basic research which is needed to help the U.S. compete across key sectors, it would also help expand the next generation of black educators.
De-Link healthcare from jobs
The quality of healthcare Americans receive is dependent on how good their job is. About half of employed black Americans work in either education and health services, retail, or leisure and hospitality—sectors which typically pay less and have fewer or no healthcare benefits. As a result, African American health outcomes are much weaker than their white counterparts. For example, black women are three times more likely to die in childbirth, and their life expectancy is 2.5 years lower. To make matters worse, due to various factors such as a higher prevalence of pre-existing conditions like diabetes and more crowded working and living environments, the African American death rate from Covid-19 is three times higher from Covid-19 than white Americans.
Even before Covid, the unemployment rate for black Americans was stubbornly higher than for whites. Furthermore, the sectors employing most African Americans are also those with the least job security and saw the worst layoffs during the Covid-19-induced economic crisis. Once unemployed, black Americans may qualify for Medicaid if they their household income falls below 138% of the federal poverty line in some states, or 40% in states which have not extended provisions under the Affordable Care Act.
Before Covid-19, 2.3 million Americans fell into this coverage gap—most of them black and in the South. This number is likely much larger now due to higher unemployment. Expanding the threshold and thereby de-linking the guarantee of healthcare coverage with a job would help reduce the health inequality black Americans face.
What links all these solutions is that they both address the sources of African American inequality, while making a positive business or economic case. Cultivating deep networks with black talent is more inclusive and boosts a company’s competitiveness. Investing in mobility-enabling companies and ‘anchor assets’ like Georgia Tech lifts up disadvantaged communities and represents a huge source of business growth. Reforming zoning and de-linking schooling from property taxes powers talent and job creation. Ensuring a safety net for healthcare empowers citizens to live more productive lives and reduces cost for companies. And making it easier for former inmates to find work, hugely reduces the cost to society from crime.
The killing of George Floyd and the protests in reaction to it are a sharp reminder of the inequalities African Americans face. It doesn’t have to be this way. Through common sense business, investing, and government actions, we can help change it.