Corporate Social Responsibility in a Time of Crisis

Blanaid Clarke, Trinity College Dublin

 

How are companies responding to the Covid-19 Crisis? Are we seeing a new more compassionate, more altruistic approach or merely business as usual with an element of virtue signalling thrown in for good measure?

One of the key questions dominating corporate governance over the last hundred years is: in whose interests should a company be run? The shareholder primacy norm which advocates that companies operate in the interests of shareholders is generally attributed to Milton Friedman who fifty years ago described “the social responsibility of business” as being to increase its profits. A broader stakeholder theory by contrast has suggested that companies should be operated in the interests of a wider group of stakeholders including employees, customers, suppliers, local communities and society at large. Even before the current crisis, a change in the rhetoric of business leaders was discernible. Some commentators have attributed this to political dysfunction stemming from both the Global Financial Crisis and governmental failures to address societal issues such as climate change, poverty and inequality. In January, Larry Fink, CEO of BlackRock Inc., the world's largest asset manager, drew the obvious connection between social responsibility and shareholder return explaining:

“a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders…. actions that damage society will catch up with a company and destroy shareholder value. By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.”

The Davos Manifesto 2020 launched the same month at the World Economic Forum promised “a better kind of capitalism”. This set of ethical principles described the purpose of a company as being “to engage all its stakeholders in shared and sustained value creation.” Companies, especially multinationals, were asked to take responsibility to work with governments and civil society to address big global challenges. Less than a week after Davos, such a global challenge emerged as the WHO declared a coronavirus outbreak to be a Public Health Emergency of International Concern and subsequently a pandemic. Faced with a health crisis and an economic crisis giving rise to a global recession of a scale unseen since the Great Depression, companies have been asked to step up and reconnect with society. As might be expected, some have behaved better than others as a recent list by the Financial Times of “business saints and sinners” demonstrates. The latter includes Sports Direct who initially sought to keep stores open by categorising them as “essential” and Amazon who dismissed whistleblowers who had raised concerns about the safety of warehouse employees’ and Covid-19 risks.

Let us focus on the activities of companies which have responded in what we might consider a “responsible” manner and delve a little deeper into the nature of their responses. Their actions might be classified in three ways.

 

The first category of actions might be best described as “social activism”. This would include the donation of €2.4m by AIB to Trinity College Dublin's Covid-19 immunology or the raising of €350,000 in donations by aircraft leasing company Avolon to fund a cargo shipment of personal protective equipment (PPE). These were significant and commendable contributions. Whilst consistent with the stated values of the two entities, these actions fell outside their core business operations which did not change. In this way, these actions are distinguishable from the other two categories of actions.

 

When examining the measures taken by companies as part of their business operations, we can identify a second category of actions which benefit both shareholders and a wider group of stakeholders. These actions would not be inconsistent with the shareholder primacy norm. They would include actions which lead to reputational gain or increase stakeholder loyalty or well-being. Examples include the retention by many companies of employees on the payroll or the early payment by companies such as Heineken and L’Oreal of small and medium-sized suppliers to enable them to survive the Covid-19 Crisis. These actions would be in keeping with the enlightened shareholder value norm envisaged by Fink and involve companies promoting the wellbeing of both investors and stakeholders.

 

The third category of actions involve those taken as part of their business operations to protect stakeholders for the sake of stakeholders’ relevant interests in response to what Parkinson described as “a supposed moral imperative that may conflict with profit maximisation”. These actions involve “uncompensatable costs” which do not improve shareholders’ returns. Barbour, the waxed jacket manufacturer which repurposed an existing production line to make PPE free of charge for the UK National Health Service would be an example. For that line, the company fundamentally changed the way it did its business. In addition, although Barbour’s action resulted in a positive reputational impact in a way actions in the previous categories also might, this was not the purpose of the action and it did not equate to the cost involved. It acted in this way because the board took the decision that this was the right thing to do and consistent with its corporate purpose. It should be noted that if such an alternative moral imperative exists, it needs to be identified at the outset and publicised in order to allow investors commit to it in advance and to allow managers make business decisions informed by such a purpose. The UK Corporate Governance Code, which applies to Irish and UK listed companies, asks boards to identify their companies “purpose, values and strategy” and to embed them in their behaviour. Particularly for certain sectors such as banking, insurance and, I would argue, big technology where there is a strong and obvious public interest dimension, a “social licence” or social responsibility emerges very clearly and should be part of their wider purpose.

 

While it was heartening to see many companies stepping up to the mark - taking responsibility beyond their own immediate financial successes and living their values in a real and demonstrable manner – it is too early to determine if this is an enduring trend. One hopes so because there many other significant societal challenges which will require the co-operation of corporate players, governments and civil society. Climate change is of course the most obvious. As many commentators have noted, the Covid-19 Crisis presents an opportunity to rebuild our economies and to make better choices in so doing. However, it is clear that there will be challenges along the way, most immediately competing demands to get the economy moving as quickly and cheaply as possible. The costs or burdens perceived to flow from environmental standards and regulation might be framed by the short-sighted as an unaffordable luxury. Another concern is that social responsibility might overshadow environmental responsibility in the immediate aftermath of the Covid-19 Crisis. The necessary current focus on the S component of Environmental Social Governance (ESG) goals may divert attention from the E component. This would be unfortunate as all elements are equally important in the long run.

 

The Covid-19 Crisis has demonstrated that companies of all sizes can be affected by a crisis and that they are not self-reliant entities. They depend to greater or lesser extents on Governmental policies and support. In responding to climate change, companies play a fundamental role through the manner in which they conduct their own businesses, their support for the sustainable practices of their customers and suppliers and through their influence in shaping public policy. In the Covid-19 Crisis, many companies have demonstrated their ability and willingness to exercise their social licences and a reversion to business as usual would be unacceptable.

 

Blanaid Clarke is McCann FitzGerald Chair of Corporate Law, Trinity College Dublin, and a member of the COVID-19 Law and Human Rights Observatory

 

Suggested citation: Blanaid Clarke, ‘Corporate Social Responsibility in a Time of Crisis’ COVID-19 Law and Human Rights Blog (17 June 2020) http://tcdlaw.blogspot.com/2020/06/corporate-social-responsibility-in-time.html

 

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