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The moral minefield of government emergency handouts

20 April 2020

By Ian Morris, Partner

Victoria Beckham is not the first business owner to take a pasting in the media for taking advantage of government subsidies designed to help them survive the economic impacts of COVID-19.

Robust criticism led by Piers Morgan over her decision to furlough 30 staff at her fashion label despite reportedly having a family fortune of £335m, echoes the shaming of several Premier League football clubs with deep pockets who put non-playing staff on furlough while continuing to pay players exponentially higher salaries.

These businesses are far from alone. Many much larger companies are making use of the furlough scheme (usually to significantly less commotion), including International Airlines Group (IAG), the owner of British Airways, which made £2bn in profits last year and has furloughed 30,000 employees.

It is not just users of the furlough scheme under scrutiny. Tesco, for example, faced much criticism for its decision to pay out £635m in dividends while accepting a business rates holiday from the Government worth £585m.

On the other side of the coin, some businesses have taken a principled stance against accepting any government support. One such company is investment platform AJ Bell, which said it would not call on any of the Government’s financial support packages available to employers such as deferring their VAT bill or furloughing employees. Founder Andy Bell said that “businesses need to have a social conscience if we are to get through this crisis” and that “business leaders and our businesses have their parts to play in taking a socially-responsible approach.” The company’s view is that these schemes should be preserved for those companies that need it most.

So when is it ethically acceptable to take government funding? Should businesses be worried about public castigation if they take the taxpayer-funded coin on offer at the current time?

Firstly, most businesses won’t have the same set of circumstances as Victoria Beckham or many top-level football clubs, namely a colossal public profile and owners with sufficient wealth to cover the costs they are claiming relatively easily.

The second point to note is that taking the support on offer is entirely legal. These support packages were designed to be used for very important reasons – to protect jobs and businesses of all sizes, so that when the shutdown ends, the companies that will drive the recovery are still in existence. The Chancellor even declined an opportunity to criticise football clubs for using the furlough scheme, instead insisting that the high take-up was an indication of its success.

But there is a difference between the letter of the law and the spirit of the law. Just because a company CAN make use of one of these schemes, it doesn’t mean it SHOULD do so.

To my mind, the central question companies should be asking themselves is what their options are, given their own specific circumstances.

If they have alternative funds available to safeguard their future and that of their employees – if their owner is rich enough to cover those costs without breaking a sweat, for example – then they should use those alternatives instead of relying on government funding.

But if such alternatives are not easy to come by and government funding is therefore the only realistic way of save jobs and protecting their future, then taking that lifeline is the right thing to do.

Decisions are not always clear-cut, however, in this moral minefield of unprecedented challenges, unprecedented needs from a variety of stakeholders, and unprecedented availability of government rescue packages.

Take the Tesco example. It received poor headlines for paying a dividend while at the same time being a beneficiary of a business rates holiday introduced by government. But a decision not to pay the dividend would have benefited no-one – not its customers, staff or the wider UK public. Indeed, the decision it took to pay the dividend is perfectly sensible – investors are an important group of stakeholders who fund the business, and many of whom rely on dividend payments for income.

The supermarket is not accepting any other government support or loans. Its decision was not an example of serving the interests of shareholders at the cost of everyone else. Its poor headlines stem from a superficial and, I would argue, incorrect, public distaste for dividends being paid at a time when the survival of many much smaller businesses is threatened.

That is not to say that companies shouldn’t be cognisant of the heightened scrutiny they will be under and the window through which their decisions are likely to be seen at this time. Of course they should.

But doing the right thing is not always the same as doing the thing that will generate the most positive headlines the next day. At times, a business must follow its moral compass, in the knowledge that short-term criticism will be outweighed by the long-term benefits of its decisions.

Once the pandemic is over, businesses will be judged by how they acted. This means how they looked after the interests of all stakeholders including their staff, customers, communities, the Government - and yes, their shareholders too.