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Not for profit: a new director's duty?

Posted on 19 May 2020

Whilst lockdown goes on and the furlough scheme is extended to October, directors continue to have to make decisions in difficult and unprecedented situations. For some, this has led to widespread criticism. For others, the repurposing of their businesses and focus beyond shareholder dividends has led to considerable praise.

As a director, you have a duty to promote the success of the company – and the benefit of shareholders is paramount.  Courts view directors' duties in the wider context, and this could not be more important in the current unprecedented time.  As a result, promoting the success of the company in the medium to long term no longer appears to be as simple as maximising share value and dividends. Stakeholders - and not just shareholders i.e. those interested parties who have an interest in the company's performance for reasons other than capital appreciation – need to be carefully considered.  

Take football, for example the Tottenham Hotspurs Football Club, who adopted the Government's CJRS scheme (the furlough scheme) for non-playing staff. This meant that non-playing staff were taking a 20% cut in their salaries whilst the footballers themselves, with much higher salaries, were remaining on full pay. Whilst (on average) only 9% of a club's income comes from ticket sales, the fans' views are very influential. Following an approach from the Tottenham Hotspur Supporters' Trust (THST) who opposed the decision, the board reversed their decision to furlough non-playing staff and confirmed that they would not be adopting the CJRS. The THST wrote on their website: "It takes maturity and humility to reverse such a contentious and public decision and we're pleased that, rather than doubling down, the club's board has listened to the fans on this occasion and ultimately done the right thing".

Tottenham's Chairman subsequently released a statement; "it was never our intent, as custodians, to do anything other than put measures in place to protect jobs whilst the club sought to continue to operate in a self-sufficient manner during uncertain times. We regret any concern caused during an anxious time and hope the work our supporters will see us doing in the coming weeks, as our stadium takes on a whole new purpose, will make them proud of their club".

Repurposing your business

The "whole new purpose", the Chairman was referring to was the stadium becoming a drive-through COVID-19 testing centre for NHS staff and their dependants. This is but one example of the numerous boards who have made much lauded decisions in the recent months. Such decisions will often have likely detrimental impact on profits - in the short term.

Does this still comply with their duty to promote the success of the company and specifically their shareholders? If you look beyond shareholder dividends – then yes, very much so. Directors must have regard (amongst other matters) to: the likely consequences of any decision in the long term; the interests of the company's employees; the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between the members of the company. Reacting proactively to the COVID crisis and making active decisions to assist with the effort in any way they can ensures directors are driving the success of their businesses – and does not focus narrowly on shareholder dividends.

Further examples of creative - and community minded – decisions are those made by directors of the LVMH group of companies; re-purposing their efforts from high end fashion and perfume to the production of PPE and hand sanitiser. The directors will have had to consider the cost of such efforts – actually having to invest in different equipment and supplies for which they would see no financial return – weighed against the tide of positive public feeling towards their efforts. Whether or not this translates into higher sales of LVMH's usual clothes and perfumes once life returns to normal, is a question yet to be answered.  

Engineers, doctors and Mercedes Formula One engineers developed a breathing aid to keep patients out of intensive care; it took less than 100 hours from first meeting to first production model and has been approved by the relevant regulatory authority. And now a significant proportion of FI teams are offering their engineering facilities to increase production. A spokesperson for F1 said they were committed to "provide as much help and assistance as we can". Again, this isn't a focus on immediate profit, but in the wider context of the pandemic   can readily be justified as promoting value in the business and the brand, for today and in the longer term.

Giveaways

As well as re-purposing their businesses, those in hospitality have been able to make considerable and very well received donations. In March 2020 Pret A Manger closed the majority of their 530 cafes. But for those remaining open, being takeaway only, they invited all NHS workers to enjoy their hot drinks on the house and 50% off everything else. Clearly the directors recognised the importance of sound principles of corporate social responsibility, weighing up the increased costs against the societal benefits of their decision.

ESG in the COVID-19 crisis

Repurposing businesses and giveaways are both examples of a new form of corporate social responsibility (CSR) seen during the COVID-19 crisis.  It is clear that the importance of this is greater than ever and in the spotlight during this current crisis. ESG criteria (environmental, social and governance) are a set of standards for a company's operations that socially conscious investors use to screen potential investments. Younger stakeholders in particular have shown an interest in putting their money where their values are, both in relation to investments and employment opportunities. 

For example, a global study of 1,125 millennials, conducted by the deVere Group, found that 77% consider ESG concerns as more important than returns when considering future investment.  Similarly a recent survey of 1,000 employees in the United States found that almost 40% of millennials stated that they have chosen employment in the past because the company performed better on sustainability than the alternative (compared with less than 25% of gen X respondents, and 17% of baby boomers).  Clearly, if a business wants to recruit the best talent in the future – to help ensure the mid to long term success of the company – its efforts to assist in the COVID-19 pandemic is likely to be considered a factor (if not a key factor) amongst millennials.

Insolvency

Whilst repurposing your business and giveaways are laudable, directors must still consider the immediate viability of their businesses. The crisis has had a very detrimental impact on numerous businesses, whose directors who do not have the luxury of sufficient cashflow to allow them now to repurpose or contribute to the efforts against COVID-19. Directors need to remain aware of their duties. Where a company is at risk of insolvency, the scope and nature of the duties of its directors' changes significantly and directors need to continually reassess their decision to continue trading in light of developing circumstances. Directors must avoid accepting credit or incurring new liabilities where there is no reasonable expectation of the relevant creditor being paid – which would prevent many struggling businesses from repurposing their business or contributing to the efforts against COVID-19 despite every good intention.

Returning to work

Last week the Government announced their "COVID-19 Secure guidance" on how to ensure workplaces were as safe as possible. The guidelines essentially encourage businesses i.e. their directors, to use their discretion, carrying out risk assessments to identify risk of infection and how those risks could be reduced. Directors are personally liable and can be disqualified for the health and safety failures of their company if the failures occur through the director's consent or neglect. Again, further challenging decisions for directors - who are unlikely to have had to make similar decisions before.

Conclusion

While the core directors' duties have not been changed by the COVID-19 crisis, the significance of context when viewing these duties has never been more important.  The world is changing rapidly, and a decision made two weeks ago may well not be the same decision taken today.  Given this, it is essential for directors to think carefully about the mid to long term impact of the decisions they make today. It is clear that focus on profits is unlikely to be the sole consideration.  Directors must have an eye to the wide variety of stakeholders affected when making decisions, including employees, consumers, and future investors and employees: all of whom are likely to consider the company's role during this period.  Those companies which have adapted and put social responsibilities before short term profit may well see the benefits of this in the mid to long term consideration of the success of the company.

This re-purposing by businesses in a time of crisis gives real fibre to the sometimes academic sounding discussion around the importance of corporate purpose.  Last year, the British Academy rearticulated the role of business in society as being "to profitably solve problems of people and planet, and not profit from causing problems."  As directors navigate their charges through this crisis, some may say they have a duty to bear this wider purpose in mind. 

Practical guidance for COVID-19
Read the latest COVID-19 related updates on our hub.

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