The scale of the economic rebuilding task now facing the UK is perhaps matched only by the period after 1945. The Bank of England expects the UK economy to shrink by 9.5% this year – the biggest annual decline in 100 years. Governments around the world face a similar challenge.

“There will be rising unemployment including youth unemployment, restricted social mobility, the challenge of net zero and getting to a sustainable economy, achieving fairness so everyone can benefit from economic prosperity when it comes,” says Iain Wright, ICAEW’s Director for Business and Industrial Strategy.

Wright sees similarities between now and the previous century in the drive to “build back better’. Former UK Prime Minister David Lloyd George promised to build “homes fit for heroes” after the First World War, and by 1928 women had gained the vote, while the modern welfare state was developed after the Second World War. “We need time now to pause and reflect on how we want something better than what went before,” Wright says.

Even while the fight against COVID-19 continues, attention is turning to the type of future UK economy we want to create. “Profit is the lubricant by which society can move on, but there’s been a recognition that business is wider than profit,” Wright says. 

“There’s been a lot of sacrifice and tragedy and a sense that we could only have got through it together. There’s a sense that we want people who went the extra mile – public workers, NHS and social care staff, our own employees – to be rewarded with a different type of economy that fuels sustainability. Look after your workforce, play fair with your suppliers, treat your customers with respect, acknowledge who owns the business and treat your shareholders fairly, treat citizens fairly and with respect, pay your taxes on time. I think there’s a real appetite for that.”

Roger Barker, Head of Corporate Governance at the Institute of Directors, also senses a change in mood as a result of the unparalleled government intervention required to prop up the economy during the lockdown. 

“We have shifted away from the widely-accepted notion that we had a capitalist system which made a virtue out of creative disruption – this notion that it was better to allow weak companies to disappear and then the economic system would redistribute the resources to more efficient, effective companies,” he says. “That’s been put on ice during the crisis. The emphasis has been on maintaining the survival of companies as organic entities, avoiding large-scale unemployment and discouraging the recirculation of capital – so discouraging dividend payments and share buybacks. Can we go back to how we were before?’

Government interventions have been essential for supporting businesses and preserving jobs. Around 9.6m UK employees had been furloughed by early August, while businesses had benefited from over £50bn of additional government support through the various loan schemes. Public policy measures will also shape the rebuilding, and the environment in which companies have to operate. 

This will be a world of higher public debt and more state intervention. Corporate behaviour is likely to be subject to increased oversight. When steelmaker Celsa agreed the first deal under the UK government’s Project Birch scheme to bail out strategically important companies, the £30m loan came with a series of legally-binding conditions, including commitments on jobs, climate change, tax obligations and restraint on executive pay and bonuses.

Some businesses may have no desire to owe government and society anything – a possible factor behind some repayments of furlough money. A less cynical perspective is that companies want to do the right thing. “It’s a mixture,” says the IoD’s Barker. “This pandemic has offered certain companies the opportunity to build social capital and show they are good corporate citizens, that they are thinking about their employees, doing their bit, undertaking socially-oriented projects and not taking more from government than they need. I also recognise a desire to maintain their independence. If you do take government support or if you behave in an egregious way in the eyes of society, one of the implications is that you open yourself up to more scrutiny.”

Many companies have clearly demonstrated their willingness to support wider society during the COVID-19 crisis. Some companies, including high-profile supermarkets such as Morrisons and Aldi, paid small suppliers on time to help them weather the crisis rather than stretching payment terms as is more typical in time of recession. And, as good a marketing boost as it was, moves like those by clothing manufacturers Barbour and Burberry to make personal protective equipment for the NHS certainly added to their costs at a time of great uncertainty. Other manufacturers produced ventilators, and airlines Virgin and EasyJet redeployed flight attendants to provide services to support NHS staff.

Welcome though these actions are, they are short-term responses to the immediate COVID-19 crisis. But it may be possible to encourage this kind of collaborative corporate behaviour across the longer term too. Section 172 of the Companies Act 2006 requires directors to act to promote the success of the company for the benefit of its members, but also to have regard to matters such as the interests of employees, the need to foster relationships with suppliers, customers and others, and the impact of operations on the community and environment. 

“Section 172 is a unique piece of law,” says George Dallas, Policy Director at the International Corporate Governance Network (ICGN). “Shareholders are positioned in a favourable way, but it does hardwire stakeholders into the fiduciary duties of directors. It’s saying to directors, if you are promoting the long-term success of the company itself and provide returns to investors, you cannot avoid taking these stakeholder constituencies into consideration.”

The emphasis on the wider impact corporate decisions have on society has been growing for a while, but COVID-19 has accelerated it and brought it into sharp relief given the widening inequalities in the world. In April the ICGN issued a Statement of Shared Governance Responsibilities, outlining governance priorities including social responsibility for companies. 

Its accompanying open letter to business leaders emphasised the need for companies to “pursue a long-term view on social responsibility, fairness and sustainable value creation and publicly define a social purpose as we all adjust to a new reality”. Dallas says: “COVID is making us aware of systemic issues that bring us all together. We are working together in the same social and economic system. We have our own interests that are distinct, but there is a lot of common ground as well. We all need to show mutual support, but everybody has a role to play.”

Before the pandemic hit, momentum had been growing behind the idea that “company purpose” will help businesses operate profitably as well as benefit multiple stakeholders and wider society. Establishing a company’s purpose was a new requirement of the 2018 UK Corporate Governance Code. Larry Fink, BlackRock’s influential CEO, emphasised the importance of company purpose in his last three annual letters to CEOs, writing this year that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders”. The World Economic Forum’s 2020 Davos manifesto, The Universal Purpose of a Company in the Fourth Industrial Revolution, expressed the idea that a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. 

Colin Mayer CBE, Peter Moores Professor of Management Studies at the University of Oxford’s Saïd Business School, is a leading proponent of corporate purpose. “The purpose of a business is to produce profitable solutions to the problems of people and planet,” he says. “It should solve problems in a commercial way – this is not about philanthropy.” But he adds: “Businesses should not profit from producing problems for people or planet. That latter part is what people typically understand by the notion of a responsible business.”

“COVID has catapulted purpose up the corporate agenda, rather than the reverse,” says Emma Cox, PwC Partner and Head of Purpose. “Companies with a clear sense of purpose have used it to guide their response to the crisis. That’s really helped them to make difficult decisions quickly, fairly and transparently. Even where there have been difficult decisions, they’ve been easier for stakeholders to understand because they can see the logic and framework by which the decisions have been evaluated.”

Cox says the themes of purpose and societal impact have been resonating more strongly in recent boardroom discussions. “The crisis has thrown into stark relief the levels of inequality in society and the desire for business to play its part in helping to create a fairer, more resilient society for the future,” she says. However, she emphasises that business purpose is not about one-sided altruism. “Businesses need to make profits,” she says. “Where they can combine the way they make profits with doing things that have a positive impact, then you get the ‘win win win’ of ‘build back better’.”

There are implications for the way that businesses treat their wider stakeholders, such as suppliers. “We have seen businesses coming together and realising they are part of an ecosystem and working up and down their supply chains in a more open manner,” Cox says. “Alliances are another pillar of the future – businesses not doing things in isolation for their own self-advantage, but looking at where they deliver impact, who they do that with, how they can work with suppliers, customers, stakeholders and investors in a broader platform on a range of topics they can influence.”

Businesses that don’t immediately embrace such concepts may be encouraged to do so by consumer pressure. Paul Druckman FCA, the Chairman of the World Benchmarking Alliance, believes the pandemic has shown the power of getting society – the public – involved in change, which the WBA had the foresight to recognise. It has identified the 2,000 most influential companies in the world based on their impact on the UN’s Sustainable Development Goals (SDGs), and is benchmarking their performance. Recent benchmarks look at the performance of auto manufacturers and seafood companies, and at corporate human rights. “You don’t need to be a sophisticated investor to see how these companies perform,” Druckman says. “We are trying to empower society to understand. Financial institutions and investors can of course use this information, but governments listen to voters. We have to drive change – it won’t just happen.”

People and governments should in future have more information on how to assess corporate performance on environmental, social and governance (ESG) matters. The UN-backed Global Investors for Sustainable Development group is calling for global ESG disclosure standards. Jay Collins, vice-chairman of Citigroup, says the pandemic has only served to “supercharge” the need to achieve the SDGs, adding: “I haven’t seen this urgent need to align government policies with private sector actors and investors since the Second World War.” 

Companies will increasingly come under a brighter public interest spotlight. A key recommendation of the December 2019 Brydon report was that directors should make a mandatory Public Interest Statement explaining the company’s view of its obligations to the public interest and how the company has acted to meet this public interest. 

‘This is essentially a report on a company’s impact on society,” says Druckman, who chaired the Future of Corporate Reporting Advisory Group set up by the Financial Reporting Council. Its report (which at the time of writing was due to be released in mid-September) also calls for an impact or public interest statement as a mandatory report. The result should be a “wider understanding of the impacts a company has on society and the planet’, Druckman says. “That’s a big move. COVID only enhances that because the pandemic has shown us that society is much more able to make radical change than governments expected.” This gives him hope of a step change after COVID in “understanding what is important to the planet and society”, with major repercussions for business activity.

ICAEW’s Wright also highlights the importance of ESG performance reporting. “What gets measured gets managed,” he says. “If you have disclosures on things like gender pay, how many black and minority ethnic people you employ at the top of your company, what your pay structure looks like, your payment terms for smaller businesses – if you shine a light on that, it should improve business behaviour. Chartered accountants are going to have a massive role in making sure we can use monitoring and reporting mechanisms to improve performance and improve society.”

The Connect and Reflect ICAEW thought leadership series has been created to help companies and company directors operationalise positive approaches to corporate governance.

Our Action Plans cover the most challenging areas of corporate governance, e.g. excessive pay, employee directors, whistleblowing and directors’ use of social media. These ideas can no longer be described as radical, as companies have successfully implemented far more radical changes as a result of COVID-19.

Search for Connect and Reflect on icaew.com.