Pre-Distribution and the AI Economy: A Conversation with Delilah Rothenberg

Delilah Rothenberg is Co-Founder and Executive Director of the Predistribution Initiative (PDI) and a co-founder of the Taskforce on Inequality and Social-related Financial Disclosures (TISFD) — an initiative the Council for Inclusive Capitalism proudly collaborates on. She brings nearly two decades of experience in finance across asset classes globally — including private equity, impact investing, and emerging markets. She is an Executive Fellow at the Rutgers Institute for the Study of Employee Ownership and Profit Sharing. PDI is a member of the Council for Inclusive Capitalism.

In Part One of this series, we introduced pre-distribution — the policies and corporate practices that shape fair labor market outcomes before redistribution is ever needed — and examined how it maps to the Council’s Framework for Inclusive Capitalism. We looked at three levers companies can pull right now: investing in workers before displacement hits, expanding training access for those most at risk of being left behind, and ensuring workers share in the productivity gains AI creates. The harder questions — which levers move fastest, what role investors can play, and what genuinely good practice looks like at scale — are what brought us to Delilah Rothenberg.

Where does predistribution stand right now — is it gaining ground with business and investment leaders, or is awareness a primary challenge? For those who understand the concept but haven’t yet acted on it, how do you explain it in a way that builds support and mobilizes action?

At the Predistribution Initiative (PDI), we explain Predistribution as an approach to business and finance that better compensates workers and communities for the risk they take and value they create in production cycles, so that they don’t have to be dependent on redistribution after the fact. Jacob Hacker, a professor at Yale, originally coined the term well over a decade ago.

When most people think about Predistributive approaches, they tend to think of freedom of association, collective bargaining, and minimum or living wages. At PDI, we support these approaches and build on them by taking a deeper dive into economic incentives rooted in the financial system. These incentives and structures have widened economic inequality and market imbalances to the point where labor’s bargaining power has eroded, and policy and regulatory reform has consistently fallen short. So to understand how to address this sticky problem, we need to understand how we got here. What hasn’t worked, and what needs to change?

In a nutshell, the economy has evolved to value financial capital over other inputs into the production process, such as human capital (e.g., workers in operating companies) and social capital (e.g., communities who might host infrastructure or natural resource projects). This means that investors receive more of the return in a transaction and also have greater say in corporate governance. Workers and communities take significant risk and create significant value, yet we can see that returns to capital have been growing while returns to labor have been shrinking. And very few seem to measure returns to communities, or content creators and data providers who are training AI and technology companies, where returns to capital have been some of the highest.

We aren’t valuing the real world, and so our real world is being left behind in a process of financialization, leading to wealth and market concentration, a loss of agency and voice for the non-wealthy, polarization, and the polycrisis. Predistribution fixes that by better:

1) valuing and accounting for human, social, and natural capital;

2) compensating human and social capital for their contributions in productivity, particularly through equity-linked compensation since assets are appreciating and cash is depreciating; and,

3) including these stakeholders who bring valuable perspectives into corporate governance.

When we first launched, Predistribution was not a very well-known term. We constantly get feedback that we should have a catchier name, but that is our goal – to make Predistribution a household concept. Many people hear our name and think we are saying the “Redistribution Initiative” because they are not used to hearing “Predistribution,” but it is gaining traction in the US and globally, and across the political spectrum.

For instance, Chris Griswold of American Compass, Ezra Klein of the New York Times, Saffron Huang of Anthropic, Nicholas Berggruen of the Berggruen Institute, and the Roosevelt Institute have all referenced Predistribution in some way.

PDI builds on common conceptualizations of Predistribution by considering how investments are structured and governed, going to root cause dynamics of how our economy works and what drives wages. This is why PDI has deep dive programming on “Broadening Equity-linked Compensation” (BEC) to include stakeholders who take risk and create value beyond executives and “Broadening Corporate Governance Participation” (BCGP) to facilitate participation of workers and communities in corporate governance models.

PDI works with asset managers and institutional investors. What can it look like when investors apply a predistribution lens? What are certain criteria investors should require?

When we first started, few investors were considering economic inequality to be a financially material risk, and that lack of understanding inhibited interest in predistributive solutions. Most institutional investors have a fiduciary duty to target risk adjusted rates of return, so it is important for them to understand how inequality poses a risk, and how reducing it can enhance returns and/or lower risk.

For the avoidance of doubt – as documented in PDI’s newly published report on inequality as a macro-financial risk – we see inequality manifesting across three dimensions. First, it contributes to disenfranchisement and populism which can drive polarization, political gridlock, extremism, and domestic and international scapegoating, trade wars, and tensions. All of this can unsettle markets. Second, research demonstrates that economic inequality can contribute to financial instability – particularly credit crises and asset bubbles. Third, the tensions from polarization can exacerbate other macro-financial risks, for instance by holding back progress on climate and nature solutions.

But economic inequality is not only a macro-financial risk. It is also an idiosyncratic risk to the financial performance of individual businesses and securities. This is one of the reasons why investors and companies are starting to show interest in employee ownership. They realize that the incentives of workers are not aligned with those of corporate executives and investors, and are seeking to correct that, particularly since data demonstrates that strong employee ownership programs result in more robust productivity and corporate performance, per research from Rutgers SMLR and NCEO.

We are now starting to see more investors recognize these dynamics. While I’m sure PDI and peer organizations had some level of influence in that, I’m also a believer that unfortunately crisis motivates action. We have gotten closer to the crisis of inequality. Given its visibility and proximity, there is a stronger case to do something about it.

In response, we are seeing a patchwork of interventions. In some cases, workers are increasingly taking matters into their own hands and unionizing wherever they can. This is important, and we are seeing a number of institutional investors voice support for policy and regulatory reform to ensure freedom of association and collective bargaining, such as the members of the Labor Rights Investor Network (LRIN) and Interfaith Center on Corporate Responsibility (ICCR).

These are mostly public equities investors, and such investors are also showing an interest in living wages, grievance mechanisms, and narrowing pay ratios. One example of a pension fund which is taking steps to reduce economic inequality is the Canadian fund, University Pension Plan (UPP). Others, such as Railpen (UK railway workers pension fund) and the US asset manager, Federated Hermes, have been supportive of workforce participation in boards of directors, recognizing the value of the perspectives these directors can bring. A coalition of investors have been advancing this work through the Workforce Directors Coalition, and PDI has been focused on building supportive infrastructure to help companies develop a pipeline of appropriately trained talent.

In other cases, investors and companies are considering sharing equity stakes with employees, whether that be through a retirement plan like an ESOP (Employee Stock Ownership Plan), or near-term payouts like the equity stakes offered to employees through the Ownership Works program. Employee ownership seems to be the intervention of strongest interest in the private equity (PE) and private credit asset classes, and as a result, there is more growing awareness of the PE models as opposed to private credit models like Apis & Heritage.

We are encouraged by these efforts and yet also recognize that investors and companies are operating in silos. They may become aware of one of these interventions by chance, without comprehensively thinking about a broader program. For instance, consider a profitable company that is offering an employee ownership program. This is great for its formally employed workforce, but what if a significant portion of the workforce is informal and can’t participate? Further, what if the median income even for formally employed workers does not meet living wage standards, or perhaps the wage seems attractive, but formally employed workers aren’t assigned enough hours to work to produce a living income? Given payout from employee ownership is contingent on company performance, it is critical that these other factors also be considered so workers do not suffer while waiting for contingent upside which may never manifest.

This is why we are working to advance comprehensive guidance for companies and investors to consider the menu of options depending on their context – their size, industry, geography, key stakeholder groups, profitability, maturity, asset class and strategy (if an investor), and so on. A start-up or company in turn-around mode may not be able to offer a living income and/or full-employment to the entire workforce, and so may prioritize equity. But the calculus changes for a profitable company. At PDI, we are big believers in embracing nuance and focus on navigating complexity. There are no silver bullets when it comes to lasting and effective solutions.

AI is reshaping labor markets faster than most policy frameworks can respond. What is the Predistribution argument specifically in the context of AI-driven productivity gains?

When it comes to AI and automation, we argue that workers and communities who have taken risk and created value in building companies developing or leveraging AI should participate in the upside. The concept of Universal Basic Capital (UBC) is slowly gaining popularity over Universal Basic Income (UBI), and with good reason, since assets have generally been rising in value while cash is depreciating. However, in our Beyond Ghost GDP discussion paper series, we warn against the risks of centralized management and distribution of UBC and offer alternative solutions for distributed ownership and governance of companies building and adopting AI.

We ground our proposals first in macro-financial analysis that considers 1) potential labor displacement and 2) arguments for why AI may not lead to higher unemployment. We do not take a strong view on whether AI will lead to higher temporary or long-term unemployment, or the counterargument of more jobs. Rather, we highlight that even as technology has historically led to more jobs, returns to labor have eroded. Without Predistributive structural reform, the upside of technology will likely be captured by incumbent owners of capital, leaving many who build the foundations of our economy behind.

We walk readers through four scenarios: 1) light: unemployment does not rise, but returns to labor continue to erode; 2) moderate: unemployment rises to 10%; 3) high: unemployment rises to 15%; and, 4) aggressive: unemployment rises to 20%. These scenarios not only pose risks to workers and communities themselves, but there are implications for consumption and aggregate demand which pose financial risks to companies, markets, and diversified portfolios. Thus, there is a strong macro-financial incentive to share more of the upside from our asset-based economy with workers and communities.

Where do you encounter the most resistance? If you could get every institutional investor to commit to one concrete predistribution practice starting today, what would it be?

When it comes to making the macro-financial case for addressing inequality, institutional investors want to know when inequality is going to hit their portfolios and by how much. That is difficult to measure for any macro-financial risk, whether it be climate change, nature loss, or inequality. Macro-financial risks are complex, have non-linear dynamics, and feedback loops.

Moreover, investors are very intermediated from their investees. The information they receive, what they can understand about how every company in their portfolio operates, and how portfolio companies interact with its stakeholders is very limited. We’ve therefore concluded at PDI that the best stewardship is when investors look to their investees’ stakeholders – who are closest to on-the-ground issues – to help inform corporate strategy and hold the company accountable.

If a company’s stakeholders are happy with it, it will likely perform well. But right now, we have a warped form of corporate governance where corporate boards aren’t necessarily in touch with a company’s stakeholders, and board directors are trained to focus on shareholder return metrics. So, we are doing some deep-dive work on what corporate governance reform could look like to include worker, community, and consumer perspectives. This will require significant programming and infrastructure development for companies to develop talent curation pipelines, but we are optimistically working on that. By breaking through this glass ceiling and offering a pathway for every-day people to access corporate governance participation, we can likely restore a lot of trust in institutions, reduce polarization, and have more lasting and effective solutions to managing the complexity and trade-offs in society, business, and finance.

Ultimately, I think one of the biggest mistakes well-intentioned investors and companies have made is to take a paternalistic view toward stakeholders. The economy and society are complex systems, and emerging research on decision making under deep uncertainty and complexity suggests that input from the ground up can lead to some of the best outcomes. Top-down decision making has gotten us to where we are. And oddly enough, I find hope in some of the technologies that are emerging, such as blockchain and Decentralized Autonomous Organizations, which can enable better multistakeholder governance. As systems thinker, Donella Meadows, said, “We can’t control systems or figure them out. But we can dance with them!”