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How Covid will change corporate behaviour and challenge the pre-eminence of shareholders

Alistair de Kare-Silver

Covid will see the S in Environmental, Social, and Governance rise in prominence.

Covid will change many things about how companies operate and adapt to a new world – be that radical changes to business models or a greater focus on becoming leaner and more sustainable. There is also another significant theme emerging from this crisis, which is a company’s social contract with its employees and wider society. Hitherto, listed corporates largely existed to serve the interests of shareholders. Covid may well accelerate a shift towards corporates focusing more on the interests of all stakeholders.

Prior to this crisis the term environmental, social, and governance (ESG) became almost ubiquitous, particularly the E part. We saw the unassailable rise of environmental concerns in the news and in the corporate agenda fuelled by climate change movements and the rapid rise of Greta Thunberg. It was a key issue companies were seeking to address, champion and embed into their corporate narratives. We saw the likes of Shell and others make huge commitments to cut their carbon footprint. Many companies were producing sustainability reports and had specific slides in investor presentations to show what commitments had been made to tackle the issue. It is a theme that could well remerge as we come out of this present crisis, but we may also see a recalibration of that issue and the S in ESG rise to more prominence in the national psyche and in the boardroom.

As with all crises, they trigger profound change and can lead to a significant shift in the public mood. This was particularly the case after the second world war where the public mood shifted towards the left of centre as people demanded and expected more from the state. After the financial crisis of 2008 it triggered a wave of animosity in the public towards big businesses and led to more of a focus on income inequality and the pay gap between those at the top and bottom.

Similarly, we have seen with this crisis greater scrutiny on how companies have acted particularly on executive pay, dividends as well as their social contract with employees and wider society.

It has certainly challenged the supremacy of shareholders as the key stakeholder group and that corporates only exist to serve their interests. It became clear at the outset of this crisis, when the economy was tanking, staff were being made redundant or put on furlough schemes that any company who continued to pay dividends to shareholders or pay out large bonuses to executives would spark outrage. Corporates were very mindful and sensitive of this and almost all acted swiftly to cut their dividends and executive pay to demonstrate that everyone was sharing the pain and set out what they were doing to help staff, suppliers and customers. We also saw companies make huge commitments to support the NHS in its battle against Covid-19 and support efforts to convert production lines to manufacture PPE.

Companies that were more opaque towards employees or asked staff to continue to work deeming their businesses essential came under swift media pressure. There has also been huge outrage at businesses and individuals that appear to be very well-off making use of the government’s furlough schemes.

As we emerge from this crisis, we may well see the rise of stakeholder capitalism and more emphasis on what companies are doing for employees, wider society and all stakeholders. Vodafone for instance had a social contract slide in a recent results presentation.

With greater media and social media scrutiny on businesses and executives more than ever Boards will have to think very carefully about the optics of certain business decisions and the potential repercussions if actions do not appear to be aligned or favourable to employees or other non-shareholder stakeholders. Crises can force or accelerate good change and the S may be one of those.