Last word: State support

The public sector has rolled out several schemes to keep businesses afloat since the start of the pandemic. Does it have the power to take over the ESG agenda?
by Andy Davis


The Covid-19 pandemic has demonstrated that when threats to our societies leap from cyclical to existential, only the state is powerful enough to provide protection. Governments around the world have pledged vast amounts of money to keep companies and households afloat, underwriting loans and even giving direct handouts.

Extraordinary financial relief schemes across Europe and beyond have included a furlough scheme in the UK, a €750bn emergency package in Germany, and cash handouts to seven million Hong Kong residents of US$1,280 each. The US Congress and the White House approved US$3tn earlier this year, but more aid is needed.

Just weeks after Covid-19 hit, the public sector took over huge sections of the economy. This is highly significant because, although economic activity will normalise to some extent over the coming year or two, some major things have changed, the effects of which will be with us long after the pandemic recedes. 

A force for change

Among the most obvious are the huge additional debts that governments have taken on to pay for all the support they are providing. The UK will emerge from the acute crisis period with the kind of government debt burden you would expect after a world war. With interest rates pegged around zero and economic growth likely to be modest at best, this debt will weigh us down for decades. 

This changes things in ways that are perhaps not fully appreciated just yet. Academic Yuval Noah Harari has already pointed out that the extra powers governments have taken on to address the immediate crisis may not all be rolled back, which could leave us subject to more surveillance and restrictions on our personal freedoms than before the crisis. But the massive state intervention we have seen in the economy could also foreshadow lasting changes in the relationship between business and the government. And that, in turn, could effectively rewrite the rules around corporate conduct and the social expectations that we place upon companies. 
The Covid-19 pandemic has created a rare opportunity to shift the relationship between the state and business

Numerous commentators have remarked that the major effect of Covid-19 is to accelerate changes that were already underway in our societies and economies: the rise of online shopping and subsequent demise of the high street being one obvious example. 

Here is another suggestion. The gradual migration of the environmental, social and corporate governance (ESG) agenda into mainstream thinking was already well advanced by the time Covid-19 emerged: the expectations placed upon companies by the state and civil society have increased hugely over the past few years. At its roots, this process represents a reaction against the 1980s, free-market economic programmes of Reagan, Thatcher and their followers. It gained significant momentum following the financial crisis of 2008 – now the next crisis seems likely to accelerate the trend still further. 

In effect, governments' swift action to keep companies afloat and employees paid has earned them the right to say to company management and shareholders, "We came to the rescue – now that the crisis has passed we expect you to take a bigger share of the responsibility, alongside us, for supporting your people." After years in which risk and responsibility has steadily shifted from organisations to individuals, the 'pendulum of paternalism' may be about to swing back. 

A new corporate agenda?If governments choose to take this opportunity, it could usher in a very different vision of how companies ought to be run and what their goals should be, and with it a new vision of what the ESG agenda should look like. 

This could involve much more explicit pressure on companies to make safeguarding the interests of their people and communities as high a priority as maximising profits for their shareholders and top executives. Concrete changes could, for example, be to require companies to make bigger contributions to employee pensions, help employees build up 'rainy-day' savings, offer more support and flexibility for parents, more support to lead healthy lifestyles, greater provision of financial education and guidance, and, of course, more support for local community programmes.  

The Covid-19 pandemic has created a rare opportunity to shift the relationship between the state and business, and to reset our vision of what the central purpose of a company should be. The big question is whether governments and politicians will remember the words of India's first post-independence leader, Jawaharlal Nehru: "Crises and deadlocks when they occur have at least this advantage, that they force us to think." 

This article was originally published in the October 2020 flipbook edition of The Review

The full flipbook edition is now available online for all members. 

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Published: 19 Nov 2020
  • Corporate finance
  • economy
  • interest rates
  • Covid-19
  • ESG

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