Ethics, ESG and the Corona Age
Ethics in business is a long-term affair. It is also an unresolved question that practitioners, regulators, academics and politicians have struggled to answer in the aftermath of individual corporate scandals or societal crises such as the financial disaster that was 2008/09. Governance professionals and institutions such as ILA aim to influence business behaviour to be more responsible, predictable and trustworthy – in short, more “ethical”.
In 2019, the term ESG (Environment, Social & Governance) as a byword for governance best practice has come to the fore. Confronted by the current Covid19 crisis, many are asking how this apparent shift towards corporate responsibility and concern for ethical impact will survive. What are the responsibilities of board directors? What questions must they find answers to? What should their priorities be? These are all both ethical and ESG questions. As good governance safeguards discipline, accountability and transparency, then social impact and duty constitutes the subject matter. In a time of crisis, every decision has a potential for ethical or unethical outcomes. Has ESG become a champion of ethical behaviour?
It’s only a couple of weeks since boards realized that they were facing a pandemic crisis. This was the point when companies either began reaping the benefits of past contingency plans and crisis management protocols, or found themselves in the deep end of a pool - in a sink or swim scenario. For those who manage to pull themselves out, there is a governance lesson to be noted. Learning to swim, even if you don’t like getting wet, is a prudent contingency policy: Preparing and practicing for crisis should be standard measures for boardrooms everywhere.
That is a subject to revisit later. Right now, we are still learning on the job and working to stabilise our organisations, both financially and operationally. At this time when, supply and distribution lines can no longer be taken for granted, clients are either changing their priorities or can no longer easily access your product or services, or when government guidelines and regulations may prevent employees from exercising their jobs in the manner expected, boards are confronting a number of pressing questions.
Governance to the fore in a Crisis
The ESG wave has slowly been growing, and finally appeared to enter mainstream management thinking in 2019 when it was embraced by the US Business Roundtable. As the Covid19 crisis has engulfed major economies, the question arises: can or should companies be concerned with governance, environmental and social impact issues? Or should the task be merely to survive this crisis and to prepare for the post-Covid19 future, however uncertain we are as to what it will actually look like.
Of the ESG topics, there should be no doubt that good governance is the mainstay of navigating a business through the crisis. Governance is the organisational framework that imposes discipline in the decision-making process, that ensures that essential information is properly analysed and is brought to the right decision table, and that responsibilities and accountability are clearly allocated and communicated.
Director Duties and Responsibilities
Certain directors may remain confused as to their role and duties. Where is the line between stepping up, and overstepping management? How should they choose between shareholders, creditors, the company, or even themselves perhaps? To whom do they owe their loyalty? The first point of reference as to the duties imposed on directors is the law of the land. In most jurisdictions, this requires directors to work to the best interests of the company, with financial and non-financial stakeholders often considered second. In a time where corporate survival is a topic, there is little ambiguity. Most laws require companies to protect the interests of creditors, with an immediate focus on cash flows and meeting contractual obligations; all while still respecting the health and safety concerns of employees. Share price considerations or making dividend payments come a distant second.
The Governance of Shareholders
Maintaining strong shareholder relationships remains a critical task during a crisis. Rather than seeking to enhance near-term shareholder returns, however, this may be a time for investors to bolster company solidity instead of depleting it. Depending on shareholder ownership concentration, shareholders need to be advised and comforted or consulted, and minority interests amongst them protected. Where a dominant shareholder wants to instruct the board on particular courses of action, the board must adhere to its Articles of Association as to the establishment of Extraordinary General Meetings and local laws (amended as they may be by temporary crisis regulation).
Governance and Risk Management
In any change management situation, a good deal of time and resource is dedicated to planning, risk assessment, monitoring, and reporting. In a crisis situation, such orderliness can be easily forgotten or under-resourced. As the world rapidly moved to remote working arrangements, the lack of expertise and preparation for this raised the risk of cyber threats. In businesses where people still gather, such as manufacturing, transport and essential services, hygiene and safety measures must be carefully and diligently considered and implemented. Risk management is not a static exercise; it is a moving target. The board has a duty throughout to foresee as much as possible, ensure that necessary due diligence is completed, and that risks remain monitored.
Social Impact – We are not Alone
Once we have made our immediate internal “damage assessment”, boards and the executive need to consider and act to help other stakeholders where necessary, including suppliers, distributors, clients and the local community, in order to stabilize the company’s operating environment.
The first practical impacts on businesses are known already, mostly driven by social distancing measures. The rush to remote working for office workers has been a dramatic change for both companies and workers alike. How they react and cope with this challenge will determine how well the company will emerge in the aftermath of “social lockdown”. Assessing the impact of the crisis and immediate emergency measures on your employees, is a social impact evaluation of highest importance. Boards need to ensure its executive is providing the technical and mental support employees need to contend with the isolation or stress resulting from “WFH” (working from home).
Helping the suppliers and distributors your business relies on may involve finding temporary, or new, arrangements with business partners to enable longer term planning.
How are clients reacting to the situation? Is the appetite for your product changing and can you accommodate it? Can you offer purchasing and delivery options that are more appropriate to the situation? Boards must support management to be agile and able to care for customer concerns.
Considering the impact of the crisis on local communities and their changing priorities is an act of social responsibility that will linger long in the memory of those impacted by the actions of the company. The behaviour of the company and its leaders at a time of communal crisis will be judged on those actions, and impact public opinion of the company for a long time.
Good governance requires the board to consider all of these aspects of company behaviour, and serves to emphasise that proper governance incorporates consciousness around the social impact of our actions.
Environment … Targets 2020 satisfied?
When it comes to the prioritization of ESG topics, 2019 was a year of significant pressure on companies to think green. Greta Thunberg ensured the topic was constantly in the news, and this led to new trends such as “flight shaming”– “Flygskam”. In this crisis, businesses must first concentrate on managing the immediate health and social crisis, rather than pursuing explicit environmental and sustainability objectives. However, these are not necessarily mutually exclusive. Lockdown measures have “helped” reduce pollution levels and carbon-footprints as travel and factories have stopped. Once the health crisis is controlled, and the economy is restarted, the “E” of ESG will return to prominence. Politicians and society will have to continue to demand proactive measures to help reach urgent Climate Crisis targets, such as those widely established in 2019.
Most, if not all business will be marked by the Covid19 experience. The world will not be the same as it was at the start of the year. Remote working has been forced on a large proportion of the working population; working practices in transport and industry have been subject to increased efficiencies in the face of reduced staff levels and contact. Many will reverse such measures with a sigh of relief, but the experience and lessons learnt should not be carelessly discarded. Travel activity may never return to prior levels now that people are used to video meetings, trainings and conferences. Remote working combinations may be more readily offered to (or even required of) employees, and initiatives to deal with challenges of disruption to items such as waste removal may be retained. Hybrids of the old and new practices are likely to emerge.
ESG – a way of life; now and in the future
It is inevitable that in an immediate crisis situation, priorities will shift to short-term necessities. When survival is the first concern, governance is the guardrail to keep a company on track. As discussed, many of the near-term governance initiatives already concern themselves with the social impact our actions have on stakeholders such as employees, suppliers, distributors and customers. Indirect stakeholders like local communities, the medical services that care for your employees, even your competitors and the media; all will have an influence on your ability to succeed in future and are worthy of attention, and help where it is possible.
Once the immediacy of the Covid19 Crisis is over, however, organisations will need to look once again to longer term crisis matters such as the environment.
Far from the Covid19 crisis being the death-knell of corporate responsibility and ethical behaviour, the lessons of the Corona Age will surely be that good governance requires preparedness and survival, that our actions have real impacts on immediate stakeholders and society in a way that requires our constant vigilance. Ethical behaviour and ESG become intertwined.
Our new experiences should encourage us to become more creative and attentive to our environmental and social impacts, both as organisations and as individuals. For long-term sustainability, our businesses and society need it, and our customers and employees will expect it.
Written by Anthony Smith-Meyer, ILA & IoD Certified director, member of the ILA Integrity Committee and author of Surviving Organisational Behaviour: Unleashing the Power of Purpose, Culture and Values.