Building Business Back Better
August 2020
A briefing paper on shaping the post-COVID economy.
The COVID pandemic has exposed the fragile basis on which our economy is built. In recovering from this crisis, we need to set a new direction. Rather than using public money to prop up an unsustainable and extractive system, governments should invest in alternative businesses - such as fair trade enterprises - that prioritise people and planet before profit.
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A briefing paper on shaping the post-COVID economic recovery
Contents
Corporate responses to the pandemic
Recommendations for government
Introduction
The COVID-19 pandemic has created an unprecedented global crisis, posing severe threats to public health and exposing the fragile foundations on which our economies are built. Lockdowns, supply chain disruption and changing consumer behaviour have plunged many businesses into chaos. Unable to weather the disruption alone, businesses are relying on an unprecedented level of government intervention to stay afloat.
However, to address the challenges ahead of us, it will not be enough for governments to simply prop up businesses and support the immediate reestablishment of the status quo. The COVID-19 pandemic is not the only crisis we are facing. Inequality is on the rise all around the world, and climate change poses an existential threat to the planet. This crisis must be used as a springboard to build back better, creating a more just and sustainable economy.
To build an economy that will prioritise people and planet over the myopic pursuit of profit does not require better people – there are plenty of good people. Instead, it requires a better system, and businesses that are structured differently.
This briefing looks at how a better system could be built. It incorporates lessons from alternative forms of business – businesses that exist to prioritise people and planet over profit – and makes recommendations for how the UK government can support fairer and more sustainable business models.
Corporate responses to the pandemic
Times of crisis expose the truth. Some businesses have responded to the COVID-19 crisis by adapting to better serve the local community, manufacturing personal protective equipment or coordinating collections of essentials for vulnerable people in the area. But many other businesses have been shown to not serve the broader interests of society, taking decisions based upon narrow self-interest and the pursuit of short-term profits. Their actions amidst the public health crisis have left suppliers, staff and taxpayers in the lurch.
Cancelling contracts
When the UK’s high street shops began to close in March 2020, fashion brands faced a collapse in demand. The first response of many well-known brands, including Primark and Matalan, was to cancel all contracts with suppliers and refuse to pay for orders that had already been stitched and in some cases shipped to the UK. This arguably illegal and unethical behaviour has left garment factories in countries such as Bangladesh in massive debt and unable to pay their workers. Overall, the Bangladesh Garments Manufacturers Exporters Association estimates that Western clothing brands cancelled or suspended $3.18bn worth of orders between February and April 2020.[1] The victims of this situation are the factory workers and their families, many of whom are already in a precarious economic situation, and for whom the loss of livelihood means hunger and destitution.
Regrettably, this corporate behaviour is not unique to the garment sector. When lockdown was first imposed in the UK, the JD Wetherspoon pub chain announced that suppliers left out of pocket would not be paid until their pubs reopened.[2]
Refusing to shoulder financial burdens
Industry bodies and individual businesses have been quick to call on the government to provide support during this extraordinary period. While in many cases that support has been sorely needed, some requests have sent heads spinning, with prominent billionaires pleading to the government for emergency support.
Richard Branson, whose worth is estimated at £4.7bn, called on the UK government for an emergency loan. Household names such as Victoria Beckham and Liverpool Football Club also signaled their intention to apply for the furlough scheme, drawing on taxpayer money to cover staff costs. In the end, neither followed through with applications in the face of public outrage that asked why their immense wealth could not be diverted to supporting their own workers through the crisis.
Ignoring worker safety
Businesses have been understandably eager to return to normality as quickly as possible, although how this is being done exposes where corporate priorities truly lie. Dyson, Amazon and Sports Direct have all been in conflict with their workforces over concerns that plans to return to work were being rushed through against government advice and without proper consideration being given to worker safety.[3]
From Amazon to Wetherspoons, news reports have been full of large, wealthy companies acting in ways that run contrary to the public interest. This is not some kind of aberration, and it is not down to the behaviour of a few rogues; it is consistent with the way that mainstream business is structured.
How businesses are set up, and the regulations that govern business conduct, have created a situation where the pursuit of profit is prioritised at the expense of obligations to workers, communities and the environment. This profit-primacy has increased inequality and hampered the fight against climate change.
Profit-primacy
In recent decades, many corporations have followed an extreme strategy where only one stakeholder group is prioritised – the shareholder. Companies are designed to generate maximum profits, which are then distributed to the shareholder via dividend payments. In the UK, returns to FTSE 100 shareholders increased by 56 per cent from 2014 to 2018, growing nearly seven times faster than the median wage for UK workers. If pay across the UK economy had kept pace with shareholder returns, the average worker would have been £9,500 better off.[4]
Inequality
Inequality damages the whole of society – even those at the top. Unequal societies are less healthy, less happy and less safe and less trusting.[5] Businesses that prioritise lining shareholder’s pockets rather than ensuring staff and suppliers are paid living wages are a contributing factor to rising inequality: those with wealth are able to accrue more with little effort, while workers miss out on a fair share. Inequality damages the whole of society, even those at the top. And the impact of inequality has been illuminated by the COVID-19 pandemic, with the virus having a much more damaging effect on poorer populations. According to the Institute of Fiscal Studies:
“Between the start of March and the middle of April, age-adjusted death rates in the most deprived tenth of areas in the UK were more than double those in the least deprived tenth of areas. Those on lower incomes are the most likely to have underlying medical conditions that make them vulnerable to COVID-19.”[6]
The climate emergency
The competitive focus on delivering shareholder value also means that many businesses aren’t able to justify decisions that could damage profits in the short-term, such as investing in more environmentally sustainable processes or ensuring that the corporate finances are resilient in the face of future crises. Climate change is an existential threat to the planet that requires an urgent response from everyone from the United Nations to each individual. Global emissions must be halved before 2030 if we are to avoid the irreversible impacts of climate change.[7] Business has a vital role to play in tackling the crisis. However, in many cases there is no win-win solution that delivers both profits and environmental sustainability. Mainstream businesses are structurally and culturally incapable of forgoing profit to safeguard the future of our planet.
The fact that mainstream businesses are not set up to pursue sustainability solutions that could damage their profits hugely limits the ability of those businesses to provide creative and innovative responses to the climate crisis.
The Response
The UK government has launched a number of emergency schemes to support businesses during the COVID-19 crisis. These include the Covid Corporate Financing Facility (CCFF), which extends emergency loans to large businesses, and the furlough scheme, through which the government covers 80% of the wages of staff that would otherwise have been laid off.[8]
This support has come with few strings attached – it has been offered to businesses regardless of their business structures, their governance, and their ethical standards – and it has created situations which further highlight the colossal disconnect between business and society in modern Britain.
Tesco supermarkets paid out £635m in dividends to shareholders, while receiving a similar sized tax-break from the government’s emergency coronavirus support package.[9] Meanwhile, poverty wages in Tesco’s supply chains persist.[10]
Emergency financial aid from the UK government totaling over £16 billion has been claimed by companies controlled by UK and European billionaires.[11]
For companies in receipt of CCFF support, the average CEO is paid 78 times the average pay of the poorest 25% of workers.
30% of loans paid through the CCFF went to companies with links to tax havens.[12]
Marks and Spencer received a £260m loan despite their failure to pay workers in Bangladeshi garment factories for orders that had been completed. They have still not committed to honour their contracts.
These situations are no real surprise. If new money is injected into a broken system it will inevitably end up benefiting shareholders and executives, and reinforcing things like tax-dodging and inequality. Rather than take the opportunity to articulate a vision for the future of the economy, the UK government has so far chosen to prop up extractive business models that worsen inequality and pollute the planet.
The international picture is little better. In many countries, from India to Jordan, the response to COVID-19 has been to weaken labour rights protections and support corporate balance sheets.[13]
The Alternative
As the world looks towards recovery from the chaos wrought by COVID-19, the case for rebuilding a new economy with different priorities is overwhelmingly clear.
Polling in June 2020 showed that only 18% of people in the UK felt that profit maximisation should be given priority in the post-COVID economy, while 62% of people said that sharing wealth fairly should be a priority of the future economy.[14] Frances O’Grady from the Trades Union Congress has noted that “the centre of gravity has shifted and people are remembering why equality matters”.[15]
Beyond greater equality, the public, business leaders and politicians also see increased resilience and sustainability as keystones of the future economy. As the OECD has written: “the speed and depth of the economic crisis have shown that a core principle of the global economy – prioritising short-term economic growth and efficiency over long-term resilience – can have huge societal costs.”[16]
Meanwhile, the world has just seen the first major drop in carbon emissions in over 50 years. This has come at a great economic cost, but there is broad consensus that the path to economic recovery must tackle impending climate catastrophe.[17]
Successfully building a just and sustainable post-COVID economy that is resilient in the face of threats and disruption will require more than well-meaning business leaders – it will require the structures and incentives that shape the corporate world to be transformed.
Fortunately, approaches to building fairer and more sustainable businesses already exist. Plenty of lessons can be found in Fair Trade Enterprises, a community of 364 social enterprises based around the globe that are members of the World Fair Trade Organization (WFTO). These practice and promote the principles of fair trade in their operations and supply chains[18], and their success in doing so is verified by WFTO. Of these, 13 are based in the UK.
Limiting shareholder dividends
92% of WFTO members pay no dividends, and all use most of their profits to pursue environmental and social goals.[19] This means that profits are not extracted out of the business to enrich shareholders. Without the quarterly siphoning off of money from the corporate balance sheet, directors are more able to invest in the business. Rather than paying dividends, they can prioritise creating opportunities for farmers, workers, artisans and communities. They can develop new products, pioneer new production methods and target new markets.
85% of the Fair Trade Enterprises surveyed in 2019 reported that they had sacrificed financial goals to pursue social or environmental goals.[20] This also means that these enterprises avoid methods of increasing margins that would undermine the organisation’s social goals - such as squeezing wages, paying lower prices to producers or switching suppliers in order to cut costs. In fact, these enterprises often purposefully pay more for products from artisans and marginalised producer groups.
This approach does not have to be limited to the world of certified Fair Trade. Public regulation has a role to play too; Ecuador has made it national policy that a company can only pay shareholder dividends if all its employees receive a living wage.[21]
Equality
Unsurprisingly, businesses that champion and seek to proactively support marginalised groups are more likely to have taken steps to tackle gender inequality and are therefore more likely to have women in senior positions. Meanwhile the gender pay gap in the UK stands at 17%, while women are consistently under-represented at management and executive level.
Tackling climate change
Businesses often describe themselves as being on ‘a journey’ to sustainability. However, this ‘journey’ is often knocked off course by the need to deliver maximum profit. Research from the TUC and High Pay Centre has shown that in 2018 the energy giant BP spent 14 times as much on pay-outs to its shareholders as it invested in low carbon activity. Conversely, Fair Trade Enterprises, who knowingly prioritise social or environmental goals over the desire to accrue greater profits, have more flexibility to develop processes and investments that aim to minimise environmental impact and promote the circular economy.
Resilience and employment in the face of crisis
Government intervention has been understandably focused on supporting employment during the COVID-19 crisis. This does not mean that only large, multinational giants should be prioritised: social businesses provide large numbers of jobs, with the added advantage of demonstrable resilience in the face of crisis.
While many Fair Trade Enterprises are small, their cumulative impact is significant, with 965,700 livelihoods supported through their operations and supply chains. Meanwhile, social enterprises in the UK employ two million people and contribute £60 billion to the economy.[22]
And although COVID-19 has created business disruption across the board, the response of many Fair Trade Enterprises has been impressive. Their focus on achieving social and environmental aims has meant that they have tended to support suppliers rather than cancelling orders and reneging on contracts. A June 2020 survey of Fair Trade Enterprises showed that only 7% had to cancel orders with producer groups during the crisis, while 85% said that they had responded to the crisis by providing additional support or flexibility to suppliers. One producer group said: “our Fair Trade buyers are committed and they are trying their best to support manufacturers. Their commitments give us jobs to sustain us in this period.”[23]
And this picture of resilience transcends good times as well as periods of global crisis. Fair Trade Enterprises are 4 times less likely than mainstream SMEs to go bankrupt.[24] One strong insight comes from Shared Interest, which is a social finance leader whose focus on lending to Fair Trade Enterprises and cooperatives has seen 98 per cent of their loans repaid, a repayment rate that has remained strong throughout their 30 year history.[25]
Recommendations for government
The government is currently playing a role in the economy that is unprecedented in modern times – taking on huge levels of debt to act as an employer of last resort and prop up companies that would otherwise be going under.
Although the first round of emergency measures has already been enacted, it seems inevitable that public money will continue to play a significant role in supporting UK business in the medium term. The UK government cannot afford to miss this opportunity to build a fairer, more sustainable and more resilient economy.
It is right that the initial wave of support to businesses came quickly, in recognition of the urgency of the situation. However, a sustainable and just recovery requires most than just emergency bailouts. If taxpayer money is going to deliver value for the public, the government should provide ongoing government support for businesses that invest in the future of their workers, their suppliers and their communities.
As an absolute minimum, public money must not be used to bail out companies that have reneged on their contractual obligations to their suppliers. In addition, the government should do more to support the development of social and ethical businesses:
Specific tailored support to social enterprises: including ensuring that they are able to access finance, including through government loan schemes or funds to support social investment.[26]
Buy from ethical businesses: Government procurement legislation should explicitly ensure that calls for tenders are designed to advantage social enterprises, whether by requiring ethical certification, shaping weighting criteria for tender documents or by showing flexibility when it comes to quantities and lead times.
And where public money is being used to provide ongoing support to mainstream businesses, it should come with conditions to establish a stronger link between corporate behaviour and the public interest.
Lessons from Fair Trade Enterprises suggest that these conditions should include:
A formal policy to limit shareholder dividends: Government intervention is needed to reverse the disproportionate amount of corporate profits that has been accrued by shareholders in recent years. 92% of Fair Trade Enterprises pay no dividends to shareholders, while more than half of these have a formal policy to ensure that profits are reinvested into social and environmental objectives. Businesses in receipt of government bailouts should be required to cap the annual dividends paid to shareholders, instead using profits to benefit workers, suppliers and the community.
Ensuring that workers or suppliers have a seat on the company board: 32% of Fair Trade Enterprises have producer representation on the board (meaning the farmers or artisans who actually grow or make the products) and 11% are fully owned by producers. This ensures a stronger link between company policy and the interests of these vital groups. And there are important models for company ownership and governance outside the fair trade world too – the cooperative movement and the social enterprise model both hold lessons for how companies can be structured to prioritise people and planet above profit.
There are also a number of other areas where government should act to support better business practices and support fairer enterprises, including:
Businesses should assess the risks that they pose to human rights and the environment: UK companies in receipt of government emergency support should be required to conduct a thorough assessment of the risks that they pose to human rights and the environment. They should publish an annual assessment, along with a clear plan for how risks will be managed.[27]
Limit disproportionate executive pay: The average ratio between the lowest and highest paid workers at FTSE 100 companies is 1:129. In contrast, the Spanish industrial cooperative Mondragon maintains a 1:9 ratio. Government support for businesses should be contingent on the introduction of a pay ratio, such that a pay rise for executives would mean the lowest paid in a company would also benefit.
Stop tax evasion: Eight in ten people (82%) questioned in a June 2020 poll believed that businesses benefiting from bailouts should be forced to agree to terms that prohibit tax avoidance and enforce responsible tax conduct.[28] By ensuring that public money supports ethical tax practices, the UK would be following the lead of multiple governments around the world.[29]
Conclusion
The COVID-19 crisis has already transformed the country – in April 2020 the national economy shrank by 20% – and it will shape the years to come. As the economy is rebuilt, the government is presented with a clear choice: to reestablish the fragile, unfair and unsustainable way of doing things, or to create a business sector that is fit for the future. It’s clear that ethical businesses, which prioritise people and planet over profit, are the future.
Written by Thomas Wills, Senior Policy Advisor, Traidcraft Exchange
This paper is based on ‘Creating the New Economy’, a World Fair Trade Organization/Traidcraft Exchange report by Bob Doherty, Helen Haugh, Erinch Sahan and Thomas Wills: https://traidcraftexchange.org/policy-resources/2020/1/22/creating-the-new-economy-business-models-that-put-people-and-planet-first
July 2020
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[1] According to the BGMEA website (https://www.bgmea.com.bd/)
[2]https://www.cips.org/supply-management/news/2020/march/wetherspoons-withholds-supplier-payments-amid-covid-19-outbreak/
[3]https://www.theguardian.com/technology/2020/may/21/dysons-uk-staff-revolt-against-order-to-return-to-work-coronavirus; https://www.independent.co.uk/news/business/news/amazon-workers-protest-coronavirus-walkout-safety-fears-ppe-a9466881.html; https://www.bbc.co.uk/news/uk-england-derbyshire-52050223
[4]http://highpaycentre.org/pubs/how-the-shareholder-first-business-model-contributes-to-poverty-inequality
[5] See, for example, Wilkinson & Pickett, The Spirit Level, 2009
[6]https://www.ifs.org.uk/inequality/covid-19-and-inequalities/
[7]https://www.ipcc.ch/2018/10/08/summary-for-policymakers-of-ipcc-special-report-on-global-warming-of-1-5c-approved-by-governments/#:~:text=Global%20net%20human%2Dcaused%20emissions,removing%20CO2%20from%20the%20air.
[8]https://www.gov.uk/government/collections/financial-support-for-businesses-during-coronavirus-covid-19
[9]https://www.theguardian.com/business/2020/apr/08/tesco-sales-up-30-per-cent-because-of-pre-lockdown-stockpiling-coronavirus
[10] The low wages in farms supplying Tesco have been continually exposed in sectors including fruit and tea; https://www.theguardian.com/business/2019/oct/10/workers-exploited-at-farms-supplying-uk-supermarkets-report
[11]https://www.forbes.com/sites/oliverwilliams1/2020/06/05/bank-of-england-spends-billions-bailing-out-europes-richest-families/#56855cf13f51
[12] According to analysis from TaxWatch UK, https://www.taxwatchuk.org/ccff_companies/, 3 June 2020
[13] See, for example, the weakening of the Indian Labour law (https://qz.com/india/1855914/waiver-of-labour-laws-wont-revive-covid-19-hit-indian-economy/) and the removal of wage protections in Jordan (https://www.hrw.org/news/2020/06/14/jordans-vulnerable-will-pay-price-protecting-businesses)
[14] Polling from Populus, 9 June 2020, https://party.coop/2020/06/09/new-polling-shows-that-people-want-an-economy-that-shares-wealth-more-fairly/
[15]https://www.theguardian.com/politics/2020/may/19/unions-call-national-recovery-council-rebuild-uk-economy
[16]https://www.oecd.org/coronavirus/policy-responses/building-back-better-a-sustainable-resilient-recovery-after-covid-19-52b869f5/
[17] See, for example, the Green Recovery Alliance, featuring MEPs, CEOs, NGOs and financiers https://www.euractiv.com/section/energy-environment/news/financiers-join-eu-green-recovery-alliance/
[18]https://wfto-europe.org/the-10-principles-of-fair-trade-2/
[19]https://wfto.com/jointhebusinessrevolution/
[20] Ibid.
[21]https://www.coha.org/ecuadors-accomplishments-under-the-10-years-of-rafael-correas-citizens-revolution/
[22]https://www.socialenterprise.org.uk/what-is-it-all-about/
[23] From an online survey conducted by WFTO of their membership in June 2020
[24]https://traidcraftexchange.org/policy-resources/2020/1/22/creating-the-new-economy-business-models-that-put-people-and-planet-first
[25] Interview with Malcolm Curtis, Head of Lending at Shared Interest, conducted by Erinch Sahan [7 January 2020]
[26]https://www.socialenterprisemark.org.uk/wp-content/uploads/2020/04/Social-Enterprise-COVID-19-Sustainability-Plan-Final-.pdf
[27] This is in line with the recommendations of the UN Guiding Principles on Business and Human Rights, which establish the duty of corporations to respect human rights
[28]https://fairtaxmark.net/the-new-lockdown-mindset-more-brits-call-for-greater-accountability-for-businesses-on-tax-avoidance-and-social-responsibility/
[29] Argentina, France, Poland and Denmark are amongst the countries to have announced such measures