Tuesday 14 July 2020 9:32 am

Businesses must find their purpose, or risk becoming the next corporate scandal

Matthew Taylor is chief executive of the Royal Society for the Encouragement of Arts (RSA)
and Charles Lewington
Charles Lewington is chief executive of Hanover Communications

In the midst of a pandemic, the corporate scandals keep coming.

The most recent is Boohoo, a previously admired brand in the fashion industry that has been accused of sourcing clothes from a Leicester factory where workers were paid as little as £3.50 an hour. 

For many in the fashion industry, the darker side of the workplace practices of some of its suppliers has long been an open secret. Yet despite the efforts of enforcement agencies and advocacy groups, poor workplace practice has too often been ignored in the cause of providing consumers with low cost products in a highly competitive market. 

Read more: Boohoo shares plunge as major shareholder dumps stock

Covid-19 has not only wreaked havoc with the health of the populations of developed nations. The virus is challenging the way companies and entrepreneurs engage with society, particularly in the eyes of the millennial generation with its growing purchasing power. 

The pandemic has produced a long list of corporate leaders who have tried to play both ends against the middle: private equity houses accessing substantial furlough support while continuing to demand dividends from their operating companies; business leaders wanting bailouts from governments while their wealth sits offshore, and companies that have readily acceded to shareholder demands for higher debt-to-EBIT ratios only to find that they have no cash to keep their staff employed during a sharp downturn. 

So much value has been destroyed in companies without a clear sense of their societal purpose that, going forward, institutional investors will want far more evidence than a simple ticking of the environmental, social and governance (ESG) box. 

Currently, investors expect companies deemed to be socially responsible to deliver lower returns. Soon enough, the reverse will be the norm. As a case in point, Boohoo’s stock price lost one fifth of its value at one stage in the recent scandal, despite the company insisting a rogue supplier was to blame. 

Business leaders used to be prized for their single minded ruthlessness. But in this crisis, the appearance of uncaring or macho management has not only damaged brand reputations but also ended careers.  

History has shown that a crisis can be an opportunity for positive change. This is one such opportunity. In some cases, it will require a paradigm shift in corporate behaviour; in others, an acceleration of important developments that were happening anyway. 

The Financial Conduct Authority argues that financial services companies with a clear sense of purpose are more sustainable. The important question inherent in this is: what is that purpose? 

This raises a host of secondary questions. Is that purpose shared by all employees and suppliers, or just the few who helped articulate it? And does the company then insist that the values that underpin that purpose are not only understood but lived and breathed in every day-to-day activity and through hiring decisions?

If an element of a company’s purpose is to create a diverse workforce, what steps does the business take to ensure the stimulation of a supply of diverse talent to fulfil the objective? If parity of esteem is another goal, are managers sufficiently trained to treat mental health on the level with physical health? If broader societal contribution is a priority, how does an organisation measure and report its true impact? 

This crisis has removed an excuse for inaction. We have seen businesses make significant operational changes overnight when they have had to. Now boards need to consider how they might rewire, to emerge from the shadow of Covid-19 better able to answer these questions and prepared for future public and pressure group expectations about business behaviour. 

To do so, they must invest in measurement — robust data and analysis that tells the truth about their business and allows meaningful strategic planning. They must learn how to drive change at every level of their organisation, building the mindset and processes to ensure that words become deeds, and aspiration becomes reality. If not, they risk going the way of Boohoo.

Organisations face rising expectations and an impatience for change, for example in relation to tackling racial disadvantage, but also a hugely challenging economic and business environment. The post-Covid era demands new skills like a capacity to articulate a compelling vision, to engage staff and stakeholders authentically, to manage uncertainty and even to express vulnerability. The crisis has been a time for reflection, and many leaders may sense that their time has passed. 

This is a generational opportunity for today’s and tomorrow’s business leaders to build a bridge to a better future. They must grasp it.

Read more: Confession of an ESG sceptic: How I learned to stop worrying and love ESG

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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