Half a century ago, and half a decade before he received the Nobel Prize in Economic Sciences, Milton Friedman published an essay in the New York Times titled “The Social Responsibility of Business is to Increase its Profits”. Friedman argued that businesses do not have social responsibility, people do. Also, employees should conduct business in line with the desires of the shareholders (which is usually to make as much money as possible).
Fifty years is a long time and most organisations today care about more than just share price increase. While shareholders continue to be important, most firms have evolved from being guided by the sole objective of shareholder value maximisation to balancing interests of all stakeholders including the environment. Organisations are seen integrating their purpose and values with business and acting like responsible global citizens. The evidence is for everyone to see. From monetary aids, to willingly reducing the price of hand sanitisers, to going above and beyond the call of duty to ensure supply of essential products, we have seen India Inc. come together to deal with the impact of COVID-19 as a team.
The harsh reality however is that many parts of the world continue to be under lockdown. Economists are scratching their heads figuring out the aggregate impact of the coronavirus and while their views may differ on the speed and extent of the damage and recovery, one doesn’t need to be an economist to know that growth has been severely impacted. Industries where the opportunity (and ability) to serve customers digitally is limited have been hurt more than others – particularly construction, transportation, and travel. Many of them are having to take difficult decisions as financial pressures increase.
Companies that have an employee-first approach in such circumstances (who choose not to stop promotions and increments, not to reduce salaries, not to lay-off employees, etc.) are perceived as having a “nicer” culture. But as affordability becomes a valid concern, one can’t help but wonder whether this is sustainable or even fair to the shareholders. So, how then, does an organisation decide the right course of action when the business is not doing well – particularly when the answer is judgement based? Should it be “nice” to employees or “fair” to the shareholders? Can it be both? If yes, how?
While there are neither easy nor binary answers here, we believe that organisations should consider two things while taking this decision when the business is not doing well financially: the cause and the duration (proxy for magnitude) of the deteriorating performance. If performance is deteriorating despite there being no negative externality (something that the management could have avoided), it is fair to uphold the interests of the shareholders first and focus on pay-for-performance – a frequently cited principle in rewards strategy/philosophy documents. Under-performance should, and usually does, reflect in lower bonuses and increments. In case of sustained underperformance, firms usually replace the incumbent(s).
It is when there is a negative event like COVID-19 that decisions become trickier. In our view, if the adverse impact of the externality is relatively short-term in nature, organisations would be better served caring about employees more than shareholders. Most importantly, they should refrain from using the ongoing crisis as an opportunity to lay-off employees as there are other tools available to contain costs (driving efficiencies in non-employee costs, reprioritising discretionary HR costs, variable pay cuts, tilting pay-mix towards pay-at-risk, increasing only non-cash compensation, reduction of accrued leaves, voluntary pay reductions by senior management, etc. can be used as necessary and permissible).
Apart from the obvious humane angle, there are multiple reasons why this is also good-for-business. Firstly, total employee benefit expense can be rationalised over time as business leaders rewrite their strategy plans and new organisation structures evolve. While not all organisations may have this ability, many medium to large-sized organisations do. Secondly, employees and customers tend to be more loyal to brands that are socially responsible in these situations. In some cases, there is even an overlap between employees and customers. Thirdly, by safe-guarding the livelihood of employees, organisations also ensure that they are able to serve their customers when the clouds clear. And finally, depending on the industry and context, employees can use this time to work on development of new products, drafting potential risk mitigation strategies, assessing business and digitisation opportunities, skill and team building – all things that get brushed under the carpet in our attempt to chase deadlines.
Caring more for employees during a downturn does not mean not caring for shareholders. Actually, caring for employees more in such times is the same as caring for shareholders in the long-term. It makes both social and economic sense. Short-term profit maximisation through lay-offs is not equivalent to long-term shareholder value maximisation. This, of course, is easier said than done and will be a remarkable test of resilience and leadership. India Inc. can do with some help right now. What if the government allows organisations to use a part of their CSR budgets in favour of employees this year? An analysis of non-PSU NIFTY 50 companies suggests that the median CSR expense (as a % of total employee cost) was 3.4% in FY 2018-19. Moreover, almost 50% of the companies spent more than the required amount of 2.0% of 3 year average net profits on CSR activities. May be responsibility can begin at home this time.
Views are personal.
Anandorup Ghose is partner and Dinkar Pawan is associate director, Deloitte India.