We are all aware of the growing income inequality in our nation and around the world. A small group of people are taking an increasingly large share of the pie. This topic is center stage on some of the 2020 presidential campaign platforms and frequently referenced in news articles – however less has been mentioned about the inequality that exists among corporations.
McKinsey & Company published an initial study on the subject in late 2018 that examined what is called the “superstar effect.” The research focused on the notion that a minority of companies, or superstars, are generating a growing share of corporate profits. McKinsey analyzed 5,750 companies globally with over $1 billion in revenues and found that over 20 years the top 10% of these companies accounted for 80% of economic profit, with the top 1% accounting for 36% alone.
Just as striking, the bottom 10% of companies destroyed as much value as the top decile created. Further, 20% of companies in the bottom 10% were not generating enough cash to service their debt payments. These companies were aptly labeled “zombie companies.” McKinsey also found that the top and bottom deciles had become more exaggerated in their creation or destruction of value over time (see chart below). The middle 60% of companies in the study averaged roughly zero economic profit or loss.
The news isn’t all doom and gloom for those who don’t belong to the upper echelon. McKinsey found that the superstar title was not permanent, with 50% of companies dropping out of the top 10% over the course of a business cycle (defined as 10 years). Of those 50%, forty percent made their way into the bottom decile. Interestingly, 10% of firms in the bottom decile were able to move into the top 10% within a business cycle. This just goes to show that even large complex organizations can right the ship.
Naturally, one would assume that this sort of economic concentration would apply to just a few industries and countries, but in fact, McKinsey found that superstar companies hail from a variety of sectors and parts of the world and their diversity has only increased over time. Superstar companies do, however, possess important common traits. They have large intangible assets, are globally connected, employ highly skilled labor, and invest substantially in research and development.
The superstar effect reveals that there is an increasing gap between the company haves and have-nots. This is breeding a select economy where a small group of companies are winning big while a larger group of companies and their employees are left behind (think of the manufacturing industry in the US).
Even though superstar companies are from diverse sectors and hail from different parts of the world, they tend to locate in similar cities — superstar cities, as it were (Seattle, London, Beijing, Buenos Aires, etc.). These superstar cities are drawing talent, capital, and companies from less fortunate areas, just as the superstar companies are capturing more profits than their less fortunate competitors. This process becomes a virtuous cycle, where superstar profits attract talent and capital, further boosting said companies and cities in the process. McKinsey dubs this phenomenon the “superstar ecosystem.”
One does not have to ponder deeply to see the possible outcomes of a more concentrated future. More concentrated economic engines could translate into even more growth and power, resulting in markets where competition is stifled. The impact on those left behind could lead to higher levels of public unrest and pressure for increased government regulation. Europe is already doing this, and the US is beginning to explore the ramifications of “big tech.”
The topic of income inequality has largely focused on the individual, but it would benefit us all to expand our view to the superstar ecosystem as well.