Nick Martindale 8 Jan 2018 03:40pm

The battle to rebuild trust starts here

After a series of high-profile scandals, the reputation of capitalism and business in general has taken a hit. But, says Nick Martindale, a combination of public, client and investor pressure, as well as a compelling business case, means change could be on the way

Caption: Photography: Getty Images/George Clerk

The recent revelations made in the Paradise Papers, which exposed how organisations, individuals and other entities had to varying degrees made use of legal yet complex structures to avoid paying higher rates of tax, is just the latest in a series of issues to hit the reputation of business in general.

Scandals involving allegations of poor working conditions at Sports Direct, perceived exploitation of workers on zero-hours contracts, denial of working rights to staff through the alleged use of bogus self-employment at Uber and others, and the emissions scandal at Volkswagen all arrived at a point where confidence in corporate capitalism was already at an all-time low. They came on the back of the global financial crisis and outrage around the tax arrangements of international businesses, including household names such as Amazon, Google and Starbucks, as well as concern over levels of executive pay and the perception some business leaders were effectively being rewarded for failure.

Amid the wider outrage and frustration, there are signs now that some form of fightback is under way, led by regulators, clients or investors who are unwilling to back businesses with tarnished reputations. Uber’s application to renew its London licence was rejected by Transport for London on the grounds that it was not a “fit and proper company”, while Bell Pottinger fell into administration after evidence emerged that it had conducted a secret campaign to create racial tensions in South Africa, prompting a number of high-profile clients to abandon it.

All this is against – and contributing to – the backdrop of a growing sense that capitalism in general is failing to ensure the rewards are adequately shared among the whole of society. It’s a theme Theresa May put forward in her first comments as prime minister, pledging to support those who are “just about managing”, and one that was also picked up on by Paul Drechsler, CBI president, at his organisation’s annual conference in November. “UK household wealth stands at over £11trn,” he said. “Yet 15% of adults either have no share of it, or are in debt. Until everybody feels the benefits of capitalism in their pockets and in their homes, we will have a problem.”

Despite such apparent pressure, though, there is a contradiction in public attitudes and behaviour; one borne perhaps out of practicality rather than any lack of moral outrage. The decision to strip Uber of its licence was met by a petition to reinstate it, while organisations caught up in tax scandals have so far managed to survive largely unscathed. Some businesses have even managed to thrive on the back of notoriously poor customer service, relying on a notion that fundamentally people get what they pay for.

Iain Wright is former MP for Hartlepool and chaired the Business Energy and Industry Strategy Committee from 2015 until 2017, which conducted an inquiry into corporate governance. He believes such apparent contradictions should not be taken as evidence of a lack of concern among UK consumers. “The great British public like a bargain, and there’s nothing wrong with that,” he says. “But although bargains are needed, people don’t want them on the back of exploitation and undercutting workers’ rights. People want others to have a decent wage in relatively stable occupations.

“Businesses have to recognise that the world has changed,” he adds. “The public will not stand for this; people are angry. They feel their living standards haven’t improved over the past decade. There have been 10 years of stagnant wage increases and people feel that businesses often get away with things.”

Stephen Farrant, director of sustainability, innovation and sectors at Business in the Community, argues there is now a strong business case for organisations to act responsibly, as well as it being “the right thing to do”. “Business has always understood that having values is important, but the idea has moved from a choice to something that businesses that want to thrive must engage in,” he says. “Putting values and purpose at the heart of how a business operates is increasingly important, given that, with social media, people can now see straight through an old-fashioned corporate responsibility plan.”

A study by Imperial College Business School, which will be released this year, also makes the link between consumer preference and ethical behaviour. “We find that consumers still do look up to business that is future-oriented and socially responsible, and business does have a chance in enhancing consumers’ own socially responsible behaviour,” says Dr Andreas Eisingerich, professor of marketing at Imperial College Business School and programme director of the full-time MBA. “That is, if business is socially responsible, consumers are also more likely to act in a socially responsible way.”

There are other reasons why acting responsibly makes good business sense. Research by Havas Media suggests businesses with a strong sense of purpose tend to outperform the stock market by 133%, while a study by Global Tolerance claims 42% of UK employees now want to work for organisations that have a positive impact on the world, and 44% rank this as more important than receiving a high salary.

“The landscape has changed dramatically in the past 15 or so years, with people expecting more than just the opportunity to go out to work, do a job, and get home again,” says Julia Kermode, chief executive of The Freelancer & Contractor Services Association. “They want the opportunity to make a difference and do something valuable with their time.”

The reality, though, is that as well as organisations’ own efforts and societal pressure, governments may be needed to step in around certain areas to help bring practices back into line, believes Mike Tuffrey, co-founder of responsible business consultancy Corporate Citizenship. “The central dynamic for me is short- versus long-term,” says Tuffrey, who is also a chartered accountant. “Most people would accept that doing the right thing does pay off, but the problem is that in the short-term you have a competitor who isn’t doing that, and you have a set of shareholders who need the profits now.”

Manufacturing standards, rules around pollution and customer guarantees are all areas in which it is reasonable to expect governments to intervene, he says, adding that there is also an increasing consensus from a variety of business groups that some form of framework around issues such as minimum levels of pay and fair taxation is needed.

Elizabeth Richards, head of corporate governance in the technical strategy department at ICAEW, gives excessive pay as an example of one area where it has been proven that, left to its own devices, the market cannot regulate itself entirely. “In theory the market should decide but that hasn’t worked,” she says. “Thequestion is whether in the listed sector shareholders have the will to be responsible stewards and do their role in ensuring that executive pay is in kilter.”

She points to the recent guidance from Blackrock, which advised its investee base that it will only back pay rises at the top if it is matched further down the organisation, as evidence of a greater willingness to tackle such disparities, but also accepts some form of pay ratio is likely to be introduced in the UK. “We believe something needs to be done, and the numbers are already in the public domain, so rations may start a different tone for the conversation,” she adds.

The changing emphasis on just how business performance is judged could have implications for corporate reporting. Wright argues that other stakeholders’ priorities should be included in how success is evaluated, rather than just the interests of shareholders. “The workforce in particular is extraordinarily important, and you can think about customers, suppliers and the government as being stakeholders as well,” he says. “We’re moving away from that simplistic notion of shareholder primacy and trying to recognise that in the modern age it’s more about stakeholders.

“One of the things we covered in our select committee was that if shareholders aren’t interested in this – if they have a diversified portfolio of shares and can’t look too closely at the operation, scrutiny and governance of an organisation – then should there be a light-touch regulatory approach that provides stakeholders with information about who is operating companies in a spectrum of different ways?” The committee recommended giving the Financial Reporting Council (FRC) more powers to give people access to more information about businesses, which could help them make decisions about whether to invest or sell stakes.

There are also implications here for annual reporting, Wright believes, with obvious implications for accountants and finance directors. “Within annual reporting, giving the numbers is hugely important,” he says. “But giving a narrative about what a company is about, its culture, the values that it operates in, and how it deals with its staff is very important as well.” He envisages a system where organisations have to provide useful information – rather than standardised text – that is assessed by the FRC. “That’s a good balance between ensuring that shareholders can make decisions without having things imposed on them,” he says.

In time, it seems likely that any business will need to be able to demonstrate it is operating responsibly across the board if it is to thrive in an era of ever-greater customer scrutiny. “I don’t think companies can compete today without having a backbone of values, nor can they or should they wait for regulation to set the boundaries,” says Christine Elgood, managing director of business consultancy Elgood Associates. “Published values are one way in which an organisation can be held to account by its stakeholders, but you have to live them out – you can’t say you will treat suppliers with respect and then pay them late.

There are some signs that organisations are starting to think more responsibly about some of the challenges that are facing society, and factoring these into their business models. Farrant points to the proposed minibus service run by Ford’s Chariot business on fixed routes into London, which can use mobile phones to detect when customers want picking up. “One could imagine this being a model that would serve older customers well, rather than a bus company running an all-day regular bus service that is not profitable but which, if cut, would leave older people isolated and lacking independence,” he says.

For some firms, it may be the stick rather than the carrot that forces them to take action, particularly in the wake of high-profile examples where organisations have got it wrong. “Volkswagen destroyed $35bn of shareholder value more or less overnight because of an ethical lapse,” says Tuffrey. “When you do something bad it goes straight to your bottom line, because of the global world we live in. I wish it were otherwise but the pain is more of an incentive than the gain.”

ICAEW’s Connect and Reflect campaign aims to stimulate debate about the big issues facing business, including how to end excessive pay. Visit ion.icaew.com/talkaccountancy to join in

Robot wars

One of the biggest issues that will face businesses, government and society in the coming decades is that of increased automation, as a result of the use of robots and artificial intelligence.
A report by PwC warns that up to 30% of current jobs could be at risk, with wholesale/retailing, manufacturing, administration and transportation most at risk.

What is important, suggests Rurik Bradbury, global head of research at live chat software firm LivePerson, is that governments and organisations work together to help develop new skills and evolve existing roles into ones that can work alongside robots or other technology.

“Making sure that more than a third of the UK workforce is prepared to work with bots or even look at a change of work or career is a huge task,” he says. “Without a counterbalancing action to automation, we risk seeing millions of people out of work, creating a shockwave of economic hardship that will be felt for decades.”

The impact of AI, in particular, is not just confined to more menial roles, however, and could impact a number of other sectors, including accountancy and finance. “A lot of the basic work – the counting, making sure things are recorded properly – will be done by machines and that could be a really good thing; we don’t want people copying and pasting between systems,” says Kirstin Gillon, technical manager in ICAEW’s IT Faculty.

“At the moment we don’t measure things like sustainability goals or intangibles very well, and these are all new areas with data that the profession could do a lot more in. The opportunity for the profession is to expand into some of these areas and open up new ways of helping businesses make decisions.