Which companies should we bail out?

The UK government is approaching a phase of the Pandemic in which it faces crucial choices about which major companies to rescue, and which should be left to fend for themselves. Big players from the air transport, aerospace and steel sectors are the first in line for consideration, but there will be many others.

Writing in today’s Sunday Times, Oliver Shah rightly makes the point that these strategic investments should not only be based on financial criteria or a perception of being ‘too big to fail’. The track record of the company in terms of their approach to corporate governance and responsible business should be of equal importance. Oliver Shah expresses this point extremely well: “Now is the time when good corporate behavior, good or bad, should come home to roost”.

But how should we distinguish the good guys of the corporate sector in this respect from the bad or the ugly? This will be a key task for the UK Finance and Investment (UKFI) – the government agency tasked with coordinating these kinds of interventions through its new initiative, Project Birch.

A huge challenge for government interventions of this nature is the need for consistency and fairness. All too easily, the process of ‘picking winners’ can become hijacked by unseen lobbying, favoritism, and political expediency. If this happens, it will rapidly undermine the legitimacy of government and erode any sense of business solidarity in the fight against the Pandemic.

We received a taste of this kind of inconsistency last week when it emerged that more than half of the public funds disbursed by the Bank of England’s Coronavirus Corporate Financing Facility have been made to large overseas companies (via their UK subsidiaries) that have no plans to halt dividend payments to shareholders – despite being told by the Bank that a condition of public support was that profits should be retained in order to ensure corporate survival.

 At a time when many directors of UK SMEs are still unable to access any government programmes, this type of revelation highlights a worrying inconsistency in the level of support being given to large and small companies.

If the government now decides to inject huge sums of public money into more large companies, it must do so on the basis of transparent and widely-accepted governance principles. These must include a commitment to good governance, balanced treatment of stakeholders, and also evidence of a credible approach to the climate change emergency.

In these circumstances, it might make sense to go even further, and require that the corporate constitutions of bailout recipients embed a legal requirement for the board of directors to pursue a more explicit stakeholder-oriented approach - above and beyond the fuzzy compromise defined in section 172 of the UK Companies Act, which still prioritizes shareholders over all other constituents.