Shareholder primacy paused

There’s an old saying that there are no atheists in a foxhole. Faced with impending demise we are happy to desperately grasp for anything that might prolong our existence. The Covid-19 outbreak should perhaps create a new truism: there is no shareholder primacy in a crisis.
In common with the financial crisis, current economic disruption reminds us that the normal operating model for capitalism might work tolerably in normal times, but is quickly superseded when real pressure is exerted. Back in the distant past of last month shareholders would have been looking forward to dividends from many companies, and buybacks from others. That future is gone. Companies are scrapping dividend payments and buyback programmes across the board, with a few exceptions. In the banking sector it’s an official instruction. The Prudential Regulatory Authority has asked the UK’s banks to cancel outstanding 2019 dividends and pull buybacks.
But there is a deeper shift going on than simply pausing payments to investors. While some have behaved ruthlessly towards their workforce, many businesses are also trying to find a way to shield their employees from the storm. In a number of countries including the UK the state is stepping in as the employer of last resort by promising to cover furloughed workers’ wages up to a certain level. For now it looks like many public companies directors’ top two priorities are the survival of their businesses and the protection of their employees from threats to their jobs and their health. And workers themselves are increasingly demanding that their interests are prioritised.
The interests of shareholders are ranked much lower. In the current environment, any director stating that they were focused on delivering shareholder value would surely attract severe criticism. It is widely accepted that cutting distributions to shareholders (whether by dividends or buybacks) while trying to protect employees is both sensible and right.
It is as if this crisis has suddenly provided a moment of illumation where we can see both which stakeholders really bear risk, and which are most important to business and society. Whilst many of us are connected to the capital markets through pensions and other savings, for the large majority it is employment that provides economic security. The risk of losing dividends is not the same as the risk of losing a job, nor can workers ‘diversify’ that risk. We all know this instinctively, even if mainstream corporate governance tends to bury the truth.
But this is true all the time, not only during a crisis. What we are seeing in the economy is a violent but temporary rearranging of priorities. We should not forget why it was necessary when things return to normal.
There is currently a fondnest for wartime analogies in some quarters. So here are some thoughts from a speech by Conservative peer Lord Eustace in 1944 that feel relevant.
‘The human association which in fact produces and distributes wealth, the association of workmen, managers, technicians and directors, is not an association recognised by the law. The association which the law does recognise—the association of shareholder-creditors and directors—is incapable of production or distribution and is not expected by the law to perform those functions. We have to give law to the real association, and to withdraw meaningless privilege from the imaginary one.’

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