Denmark’s recent statements on bail-outs for companies illustrates a trend seen widely at the moment: if companies want state aid they have to do right by the societies in which they do business.
At the weekend Denmark revealed an extended aid package of $14m. But shortly after the announcement it revealed amendments excluding companies registered in tax havens from accessing the funds.
The news was reported widely and led to calls for similar measures in other countries. Poland’s finance minister, Tadeusz Kościński, claimed the EU should be acting against tax havens as part of developing a Europe-wide fund to support members states during the pandemic. Kościński also called for action to tax digital goods, a long-running issue for the EU.
‘A shift in mindset’
But if Denmark and Poland demonstrate anything, it is the way governments have tied bail-outs to measures that seem more allied to capitalism with a societal purpose.
Writing for Board Agenda this week, Luca Giacalone, an analyst with shareholder advisory firm SquareWell, listed the governments that have so far set conditions for receipt of government funds. US aid comes with demands for a suspension of share buybacks; the French government called for a halt to shareholder dividends and buybacks; the Bank of England asked that UK banks halt shareholder payments too.
“The shift in mindset,” writes Giacalone, “and in capital allocation have undoubtedly put management teams in a challenging situation whereby they need to balance the market’s demands for financial returns while ensuring that their actions are not detrimental to the interests of other stakeholders.
“As the coronavirus pandemic is providing an acid test to the sustainability claims of companies and investors, this crisis and its aftermath may make louder the calls for the adoption of a more stakeholder-oriented decision-making process at companies,” he adds.
Giacalone adds that state action has been matched by calls from shareholders too. Last week Board Agenda reported the contents of a letter sent by Hermes EOS, the governance advisory arm of asset manager Federated Hermes, and its observations that there is a direct link between receipt of government funds by companies during the crisis and their “social licence” to operate.
“All businesses are likely, directly or indirectly, to benefit from government action to support the economy,” said the letter. “The Covid-19 crisis therefore highlights that all businesses need to have, and maintain, a social licence to operate which is underpinned by a corporate purpose centred on being sustainable and creating long-term value for its stakeholders, including shareholders.”
A permanent change?
Others are more emphatic in suggesting that the current crisis is forcing a change in the “social contract’ between corporates and society. Indeed, they go so far as to argue that the pandemic is an opportunity to force a permanent change in the way companies relate to stakeholders and society.
Writing on the website OpenDemocracy, Mary Robinson, a former high commissioner for human rights, and Phil Bloomer, director of the Business and Human Rights Resource Centre, insist that the lesson from Covid-19 is that “our dominant business model is unsustainable and must be transformed”.
“With the planned scale of global economic stimulus, governments, business and investors have a unique chance to bring human rights and climate responsibility to the heart of business models and our economies. We should be brave enough to grasp this opportunity,” they conclude.
Government demands, on the face of it, look temporary. The measures they ask for are tied to bail-outs. In the longer term, government interest in the efficacy of buybacks, dividends and the use of tax havens may wain as normal service resumes.
However, business shouldn’t count on it. Plenty of institutions and influential voices are currently engaged in calling for change. Complacency and a failure to see the trend would be an error.