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AIQ Editorial TeamGlobal Investment Thinking @avivainvestors
Just before COVID-19, some of the world’s biggest companies pledged to look beyond the pursuit of profit alone to consider the interests of a wider group of stakeholders, including employees and local communities. But are they ready to back up their words with actions?
Failing to live up to expectations
In August 2019, the leaders of 181 American companies pledged to look after the interests of customers, suppliers, employees and local communities as well as shareholders. But as COVID-19 spread around the world in early 2020, and economies locked down to contain the virus, those commitments were put to the test, along with companies’ finances.
According to a report published in September 2020, called the Test of Corporate Purpose (TCP), companies that signed the pledge have failed to behave better than other US and European businesses.
Amazon has been criticised for failing its employees
Take Amazon, whose leader, Jeff Bezos, signed the agreement. The online retailer’s revenues soared as lockdowns turbocharged demand for its services. But the company has been criticised for failing its employees, many of whom have complained about poor working conditions in its warehouses.
Similarly, some restaurant chains have asked staff to continue working without paid sick leave. Airlines have furloughed or laid off employees, renegotiated contracts with suppliers at lower rates, taken government aid, yet still sought to pay large bonuses to senior staff.
Reaping the rewards
Other companies have done better. Telecoms firms have raised the pay of frontline staff to thank them for keeping essential communications operational during the pandemic. Food retailers have sped up payments to support farmers and other small suppliers. Consumer-goods firms have made donations to the international relief effort.
Such behaviour is praiseworthy, but research suggests that it also pays off in terms of stock-market performance and financial health.
The world is moving away from the idea that the sole purpose of a company should be to generate profit for shareholders
Increasingly, the world is moving away from the idea that the sole purpose of a company should be to generate profit for shareholders. The escalating climate crisis highlights the damage done when companies focus solely on profits and ignore wider concerns.
It is getting easier to measure how companies are behaving on issues of social importance, but there is a risk that some will focus on easy wins and engage in “box-ticking” to improve their performance. Investors, policymakers and wider society need to be alert to this danger, known as “purpose washing”, where the real ambition is to generate good headlines rather than actually do good.
Three points to remember
- The pandemic has put the spotlight on companies whose behaviour does not mirror public pledges to look after the environment or address social concerns, such as the way they treat their employees.
- Some businesses indulge in “purpose washing”, where they focus on promoting a positive image rather than making real improvements to their behaviour and practices.
- Society, including investors, increasingly recognise that companies that look after people and the environment are more likely to be successful over the long term.
