Business, Ethics and Trust
The scale of the UK government's economic response to the coronavirus pandemic was termed "unprecedented" by the National Audit Office several months ago, in May. It is one of the highest economic support responses in the world in terms of percentage of GDP, with much of the spending going towards supporting businesses.
Earlier this week the Office of Budget Responsibility noted "the largest decline in annual GDP for 300 years this year, accompanied by an unprecedented peacetime rise in the budget deficit to between 13% and 21% of GDP, and debt rising above 100% of GDP in all but the upside scenario." As we consider how, as a country, we all pay for the cost of fighting Covid-19, it is worth looking at some of the business response in the face of government support.
In the last Governance Watch, I pointed to a report by the High Pay Centre in June and covered by the Financial Times which showed that the 11 FTSE 100 companies found to have used the government's support schemes then also paid their chief executives an average of 80 times more than their median employee and 109 times more than their lowest-paid staff. From this year, major UK companies are required to disclose the ‘pay ratios’ between their CEO and their upper quartile, median and lower quartile earners in their annual reports. The think-tank is currently looking at ideas for the redistribution of pay to mitigate inequality between top earners and employees.
Excessive pay has been high on the agenda of concerned investors for some time. But business behaviour in a pandemic sparks a more immediate response from stakeholders and consumers. At a time when consumers are far more likely to gravitate to what they feel they can trust, it is a business own goal to appear disconnected from stakeholders. Nothing divides like pay disparities after months of Covid-19 fear and anxiety ahead of more anticipated economic hardship.
There are also opportunities here for businesses to state their essence and stand out by claiming a moral higher ground. Primark's decision last week not to take HMT's latest handout of £30m as part of the job retention scheme could be seen by cynics as clever marketing, or even a precursor of job cuts yet to come. But, having placed around 30,000 workers on the government's coronavirus job retention scheme, it has now brought them all back. The company has said it will not be asking for the £1,000 for each employee offered by the Chancellor of the Exchequer Rishi Sunak for each worker a business brings back from furlough.
News of this stance should put pressure on other businesses to think twice about accepting funds that they do not need.
Primark is owned by Associated British Foods plc which has not drawn down from the Bank of England's lending facility for large companies affected by coronavirus. Primark continued to pay some of its suppliers while its UK stores were not trading, which meant it suffered a cash outflow of £800m. The sight of UK shoppers queuing around the block to get into its stores on June 15 when they reopened after lockdown was a memorable sight this summer regardless of one's predilection to shop there. It was an image that was also splashed across social media.
Other businesses are beginning to stand out as we emerge from lockdown as a nation. Only yesterday the online retailer Asos said it would repay cash to the government it claimed for furloughing workers after its sales grew in lockdown. Group sales were reported to have increased by 10% to £1bn in the four months to 30 June. Although the rise was driven by international shoppers and strong online sales, sales in the UK dipped just 1%.
Could it be that not needing the government's financial support is the best statement business could be making about the state of its corporate strategy and governance as we go forward out of lockdown? It might be a good time to look at those internal pay ratios for a better redistribution of costs.
Audit and Groupthink
Media coverage of events at the German payment processor Wirecard continues to be the story that keeps on giving when it comes to the need for audit reform, but also on broader issues of governance and ethics, including the need for diversity.
The FT's latest revelations about a McKinsey assessment of compliance and risk controls that was commissioned by both management and supervisory boards over a year ago and then ignored should be flagged to all UK boardrooms. Questions present themselves on the role of gender and risk in a boardrooom, the dynamics of decision making with skewed gender representation, and an outcome that can only hope to be redeemed by being excused at best as 'groupthink.'
It transpires that instead of acting on the recommendations of the McKinsey report, Wirecard chose PwC to set up a new compliance organisation, despite a conflict of interest. PwC was also the auditor of Wirecard Bank. Conflict of interest remains at the root of so much that needs to change for better corporate governance, and to have it summarily ignored here is shocking.
PwC and the remaining Big Four UK accountancy firms have this week also been given an appalling report card by the regulator, the Financial Reporting Council (FRC) in its latest audit inspection results . Its Audit Quality Review (AQR) team reviewed 88 audits by seven of the biggest firms and concluded that only two-thirds of them were of a good standard or required limited improvement.
Failure to challenge is one of the FRC's most striking criticisms in its assessment of the accountancy firms. When you have an entrenched culture of failure to challenge, whether around an audit or in a boardroom, you are going to keep allowing the status quo to trundle along, and if that culture resists wider diversity, that too is unlikely to alter.
Diversity
Julie-Ann Haines has been appointed the first woman chief executive of Principality, the largest building society in Wales, in its 160-year history. In taking up her role, she has said that diversity in financial services "must be improved," not just by gender, but by the representation of "diverse populations."
There has been little improvement in 15 years when it comes to the numbers of senior roles held by women in financial services, according to last year's data from the Financial Conduct Authority (FCA). Data to suggest what portion of that number represents "diverse populations" does not exist. While we continue with corporate culture that endorses a failure to challenge, change is unlikely.
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