CSR and Covid-19 – Afterward

The Ministry of Corporate Affairs in India has made a series of clarifications about what activities would be considered CSR as defined under the Companies Act, 2013 which requires “every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year” to spend “in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years” on CSR activities. The Act then provides a list of activities that would constitute a “CSR activity”. Such rigidity obviously made clarifications necessary during the pandemic when many companies wanted to include their responses to it as a CSR activity. Ultimately the Ministry of Corporate Affairs (MCA) issued an order in March 2020 stating that companies’ responses to the pandemic could be classified as CSR. While the decision seems logical, the real issue is that the rigidity in the CSR requirement caused unnecessary confusion and delay.

Here’s how I had concluded my OBLB post on this issue:

The lesson to take beyond the pandemic is for the Indian government to resist the urge to intervene in how companies comply with the CSR provision in the law. Allowing companies to be creative and using their CSR activities to gain reputational capital is not a bad idea. In fact, this should be further encouraged by letting companies disclose their social activities along with the CSR disclosures (relating to the required spending) required by the law.

Unfortunately the lesson was not taken and the Ministry of Corporate Affairs has more clarifications on the matter particularly with respect to Covid-19 vaccines.

(i) Pre-vaccine

A notification in August 2020 allowed companies to classify investment in R&D activities related to Covid-19 vaccine as CSR. An official is reported to have explained this as follows: “The decision was taken in line with the Prime Minister’s directive to encourage new drug discoveries for Covid-19, and a top official of the PMO [Prime Minister’s Office] played an active role in this”.

(ii) Post-vaccine

A notification in early January 2021 clarified that companies providing vaccinations for their own employees would not be considered a CSR activity; although providing vaccinations for their supply chains would be considered as CSR activity. A few days later, a clarification about the notification issued in March 2020 was issued. In essence, it clarifies that Covid-19 vaccine awareness campaigns would be considered as CSR activity.

Apart from creating delay and confusions about what activities might be considered CSR, this level of specificity allows the government to essentially dictate the terms of corporate philanthropy. As I’ve said in the quoted text above, companies should be given freedom to leverage their CSR activity creatively in order to build reputational capital. Taking away this incentive will only create check-the-box CSR activity from companies and in the bargain, both companies and societies stand to lose.

Beware of fake news (with or without social media platforms)

Some have sought to blame the tech giants for their part in the riots at Capitol Hill. However, it is good to see two different articles cautioning against knee jerk reactions like the repeal of Section 230 of the Communications Decency Act of 1996. Both articles (in the BBC and FT) refer to a study published by Berkman Klein Center at Harvard University. The study summarised its findings as follows:

Our findings here suggest that Donald Trump has perfected the art of harnessing mass media to
disseminate and at times reinforce his disinformation campaign by using three core standard practices of professional journalism. These three are: elite institutional focus (if the President says it, it’s news); headline seeking (if it bleeds, it leads); and balance, neutrality, or the avoidance of the appearance of taking a side. He uses the first two in combination to summon coverage at will, and has used them continuously to set the agenda surrounding mail-in voting through a combination of tweets, press conferences, and television interviews on Fox News. He relies on the latter professional practice to keep audiences that are not politically pre-committed and have relatively low political knowledge confused, because it limits the degree to which professional journalists in mass media organizations are willing or able to directly call the voter fraud frame disinformation. The president is, however, not acting alone. Throughout the first six months of the disinformation campaign, the Republican National Committee (RNC) and staff from the Trump campaign appear repeatedly and consistently on message at the same moments, suggesting an institutionalized rather than individual disinformation campaign. The efforts of the president and the Republican Party are supported by the right-wing media ecosystem, primarily Fox News and talk radio functioning in effect as a party press. These reinforce the message, provide the president a platform, and marginalize or attack those Republican leaders or any conservative media personalities who insist that there is no evidence of widespread voter fraud associated with mail-in voting.

Thus, the bigger problem seems to be (apart from Trump and others responsible for the disinformation campaign) misinformation spread by some media sources. The study further found that found that social media activity around the subject surged when mainstream news reports carried speeches about it by Trump. Further, as John Thornhill at the Financial Times reports, most of the insurgents who stormed Capitol Hill had already moved off the big tech giants like Facebook and Twitter and to more niche platforms.

In any case, both Twitter and Facebook have locked Trump out of his accounts on their platforms. This might have the effect of Trump’s supporters calling for regulation of the social media giants to add to calls from the other side of the political spectrum for social media regulation. In this context of increased calls for regulation, it is worth emphasising another point Thornhill makes. He cautions that repealing section 230 would only reinforce the dominance of Facebook and Twitter because the responsibility of checking information would be too much of a burden on new challenger companies. (This is an argument Leonid Sirota and I had made here in 2019.)

While all these media platforms including Facebook and Twitter were certainly weaponised by Trump, it is interesting to note that misinformation is not a new social media era invention. In a recent book, Profit and Prejudice – The Luddites of the Fourth Industrial Revolution, Paul Donovan writes that a pamphlet was used (in 1848) to spread misinformation about Jewish banker, Nathan Rothschild apparently profiting from the Battle of Waterloo by manipulating the London financial markets. As Donovan says, “it was “fake news” in a world without Twitter” (at page 7). Rather than hasty regulatory reform, it is a good time for civil society to realise the importance of being vigilant about news sources, be responsible about what they share, and try to diversify the sources of news consumption.

Corporations and social media influencer employees

I ran a corporate short-termism and social media mini-series on this blog last year. The thrust of that series was that various stakeholders, through social media, pressured companies to act on non-financial issues; and companies responded with short-term fixes that might consist of putting out a statement on the issue without following it up with pertinent action.

Today’s post is a different take on social media and corporations. Rather than looking at stakeholder activism or pressure through social media, this post looks at employees’ use of social media and corporate discomfort around it. While corporations might want to control the story, there was a famous case last year of Sherwin-Williams Paints firing its employee who had become a Tik-Tok influencer. The employee mixed paints on his channel and the company seemed to have got uncomfortable with the social media attention because it couldn’t control the story. It fired the employee for allegedly stealing paint. As Kara Alaimo from the Print notes:

Whatever the [company’s] thinking, it was a shockingly shortsighted move. The TikTok channel was generating a huge amount of free, positive publicity for its brand. The lesson is that to reap the benefits of influencers and superfans, companies need to get comfortable not being able to script their messages as tightly as in the past.

The company’s competitors seized the opportunity and made offers to the social-media famous employee.

Something similar happened with Amazon which seems to have had a less drastic reaction. One of its employees gained a following when he started filming himself packing products in the warehouse. Although he posted anonymously, Amazon tracked him down via a packaging label visible in a video. Unlike Sherwin-Williams Paints, Amazon did not fire him. According to the employee in question, this was because his videos showed Amazon in a positive light at a time when its warehouses had been criticised and when Amazon was on a recruitment drive to keep up with the pandemic related demand.

The FT reports that there is in fact a rising trend of companies attempting to harness the potential of these influencer employees by hiring external consultants (“influencer management” companies) to help navigate this. UK-based DSMN8 is one such company and helps coordinate social media activities of employees with rewards for best performers. Companies like Ford and Huawei are among its clients.

Whether companies go the influencer management way or not, it is clear that shutting employee voices down by firing them is likely to backfire. It may be beneficial for companies to acknowledge that their employees are likely to have a social media presence and offer to help employees with deciding where to draw the line when their posts relate to the company. This kind of policy fits into the larger idea about corporate management engaging with employees as stakeholders.

(On a lighter note, I’ll leave you with a story about social media being used by another type of outfit – the Italian mafia!)

Academic “pub time”

Sarah O’Connor at the FT has written about learning how useful “pub time” can be and how it might amount to “social capital” (“the extent and nature of our connections with others and the collective attitudes and behaviours between people that support a well-functioning, close-knit society”). It got me thinking about academic social capital and how these “connections” are across borders for many of us.

O’Connor says her “store of social capital” has helped her stay connected during the Covid-19 lockdowns and general lack of real time interactions. It hasn’t been very different for academics. There have been a number of online conferences and seminars which I consider the silver lining for 2020 but it has not had the same “pub time”. While some of us have said hello to each other on some online platform while attending the same virtual seminar/ conference, it hasn’t been easy to meet people we didn’t already know informally. As O’Connor rightly says, “if it is hard to maintain relationships via video calls, it is harder still to build them from scratch”.

When we think of work in the future and how the pandemic has helped us see that many things can effectively be done remotely it is also important to retain the things that work better in real time.

On a more positive note, we have also reached out more online. I’m certainly appreciative of those I’ve been able to reach out to; and to those who got in touch with me me through this blog or otherwise. It was particularly rewarding to have academics generously contribute to the symposium on corporations and feminism run on this blog. Here’s to more academic “pub time” in 2021.

Donations by corporate leaders

There has been appetite – both public and regulatory – to require companies to help solve some of society’s problems. In fact, India has a provision in its company law statute that mandates all companies of a certain size to contribute to certain designated “CSR activities”. Billionaire charity might not be mandated but it has definitely been welcomed in the past.

Against this background, it is of concern to see that the city of San Francisco recently condemned naming of a major hospital after Mark Zuckerberg and his wife Pricilla Chan. The hospital, San Francisco General Hospital, had been renamed the Priscilla Chan and Mark Zuckerberg San Francisco General Hospital and Trauma Center five years ago after Zuckerberg and Chan donated $75 million to the hospital.

So what caused the city to condemn this renaming five years later? Recode notes:

And so after years of fits and starts, a group of hospital nurses, anti-Facebook activists, and progressive lawmakers on San Francisco’s board of supervisors began to mobilize this summer to push back against the hospital’s name. Rather than moving to officially rename it — which contractually could require returning the $75 million gift — the group decided to push for a middle ground: to condemn the name while leaving it in place.

Seems like a perfect case of wanting to have their cake and eat it too.

However, it is more worrying to see such a stand being approved the Committee on Government Audit and Oversight, a panel on San Francisco’s board of supervisors. Members of the committee seemed to have made statements that they were thankful for the gift but “that doesn’t mean that we should for forever essentially have given away advertising rights on this most essential public institution”.

This is particularly unfortunate in a pandemic stricken world where both corporate initiatives and individual philanthropy are useful for society. Such public shaming will have a chilling effect of charitable donations especially by companies and corporate leaders. Alas, activism against corporate actions in this case seems to have caused more harm than good.

Instead of attacking donations by corporations or corporate leaders which bring substantial benefits, it would be more worthwhile to investigate whether corporations that verbally signal various virtues are actually following through.

Companies signal with diversity targets for law firms

I’ve spoken about how corporations are responding to the Black Lives Matter movement by appointing black directors on their boards. Apparently the latest trend in virtue signalling is for these companies to pressure law firms they work with to “detail how many diverse lawyers they employ and whether those lawyers are assigned meaningful work“. Law firms that meet these diversity targets can earn up to 3% of their fee as a bonus (Microsoft’s policy). An example of a company using a negative incentive in Novartis which withhold 15% of legal fees if the diversity targets are not met. Such ad hoc quotas are problematic for all sorts of reasons including the fact that it will encourage tokenism just like it does in the context of quotas for corporate boards. Invariably such tokenism will result in backlash and resentment against the diverse candidates within their firms which of is obviously not desirable. Of course the ideal scenario is that such targets (or ad hoc quotas) push law firms to promote and retain all meritocratic candidates (including those that help meet these diversity benchmarks).

(While on the topic of diversity/ equality in law firms, I will take the opportunity to plug Prof Swethaa Ballakrishnen’s excellent book Accidental Feminism: Gender Parity and Selective Mobility among India’s Professional Elite which talks about women’s trajectories in Indian law firms.)

Another thing that shouldn’t go unnoticed is the fact that many of these companies themselves do not have stellar diversity records. (Prof Ann Lipton made this point on twitter.)

The elusive “corporate culture”

Pintrest was in the news earlier this month when it publicly announced an agreement to pay $22.5million to settle claims of gender discrimination brought by its former chief operating officer, Francoise Brougher. Ms Brougher had accused Pinterest of excluding her from meetings after she pushed for equal pay; and that she was ultimately fired after she raised concerns about sexist comments by a colleague to the company. Overall, her complaint said that Pintrest created an “unwelcoming environment for women and minorities”. Along with the $ 2.5 million settlement (which will be donated to organisations that work to advance women and minorities in the tech industry according to Pintrest) the company is apparently taking “meaningful steps” to improve its workplace environment. Ms Brougher also said that “Pinterest is committed to building a culture that allows all employees to feel included and supported”.

While culture in this context seems to suggest something to do with the way women and minorities are treated, it is really about how all employees are treated. As I explain in a recent paper, the “focus on culture and employees is aimed at preventing, or addressing at an earlier stage, egregious corporate scandals”. It is in the interest of the company to create an environment where employees are able to raise concerns whether it is about discrimination and sexism or about misconduct in other contexts. It helps the board address issues before they balloon into bigger problems. Regulators have started paying attention to the importance of culture as I discuss in my paper. Companies should do so too too.

Who knew that the Australian insolvent trading regime was so attractive?

I’m late to blog about this case but if you are interested in corporate insolvency, Debut Homes (in Liq) v Cooper a New Zealand Supreme Court judgement should not go unnoticed. In deciding the case, the court seems to have incidentally restated the law relating to directors’ duties in the zone of insolvency in a way that makes it veer dangerously close to the Australian s 588G regime (prior to the introduction of the safe harbour).

After stating that a company remaining solvent is in the interest of the company, shareholders, and other stakeholders (no surprises there), the court went on to apply some of the principles underpinning formal insolvency regimes to the directors’ duties in the zone of insolvency regime. It provides the following summary [49]:

Solvency is a key value in the Act. Where a company becomes insolvent, there are statutory priorities for the distribution of funds to creditors and mechanisms to ensure these are not circumvented. There are also a number of formal mechanisms in the Act, apart from liquidation, for companies experiencing financial difficulties. All of the formal mechanisms have carefully worked out processes for decision-making and involve either an independent person or consultation with all affected creditors. None of these formal regimes involve continued unfettered decision-making by directors. Directors can choose to employ informal mechanisms but these must align with formal mechanisms. At all times, including where a company is insolvent, directors must comply with their duties under the Act.

For emphasis, I will restate the one particularly thorny sentence in the above:

Directors can choose to employ informal mechanisms but these must align with formal mechanisms.

What does this imply? The previous paragraph [48] of the judgement says:

[Informal mechanisms] must also align with the available formal mechanisms. This would suggest the need to ensure the agreement of all creditors, including those who would be involved in and affected by the period of continued trading. If all such creditors are not consulted, any informal scheme would have to ensure that those creditors who were not consulted would be paid in full. This also follows from the directors’ duties in ss 135 and 136 …. [Footnotes omitted]

It seems to be a novel idea that informal mechanisms must align with formal mechanism. Nothing in ss 135 or 136 (the law relating to duties of directors in the shadow of insolvency) suggest this. New Zealand determines solvency by a consideration of both the cash flow and the balance sheet tests (s 4) and case law interpreting the insolvent trading duties up until now have allowed directors room to assess the financial condition of the company, investigate potential income streams, etc. before having to enter the company into a formal insolvency procedure. There is no suggestion in these earlier cases that all creditors need to be consulted while making these assessments.

It is therefore surprising to see the court interpret s 135 as follows:

The duty under s 135 must also be assessed in light of the scheme of the Act and in particular Part 15A, which is the formal mechanism specifically designed to be used in an insolvency situation for increasing returns to creditors. Under Part 15A, all creditors are consulted and voting is by value and class.The same applies to compromises under Part 14.90 In this case Inland Revenue was not consulted, even though Mr Cooper’s intention when he decided to continue trading was that it would bear all the loss. [Footnotes omitted.]

I quote a small section (page 108) of an excellent comment by Peter Watts’ here (but highly recommend the entire article [2020] Company and Securities Law Bulletin 107). He rightly says that “the presence of scheme provisions [do not] signal that, before their invocation, directors in running a company, even an insolvent one, are required to give equal weight to the interests of every single unsecured creditor…”. He adds that consultation with all creditors has never been a requirement. He further adds that “all formal insolvency mechanisms start from a premise of pari passu treatment, but that is not the case before those mechanisms are triggered”.

Having drifted away from established precedent, the position now set out by the court would require directors of a company in troubled financial waters to either enter the company into a formal insolvency regime or to consult with all creditors of the company about continuing to trade. It is highly likely that at least one of the creditors would object to the directors’ efforts to steady the ship (if that is possible). The court’s statements in Debut Homes may also encourage more litigation under s 135 which would in turn make directors wary of any informal restructuring efforts. This is not that different from the Australian position under s 588G and before the introduction of the safe harbour. As I say in a previous article (at page 46), prior to the introduction of the safe harbour, “Australian directors, especially in large companies, have been so spooked by the possibility of personal liability that they have tended to put the company into the insolvency -resolution process (known as voluntary administration in Australia) at the slightest possibility of insolvency.” The dicta in Debut Homes is likely to have a similar impact in New Zealand. Hopefully the court has an opportunity to correct itself soon.

The virtue of ESG Funds

ESG Funds are not actually doing so much environmental and social good, an article on the Reason tells us. This is of course no surprise but bears repeating for those of us who might start believing all the ESG branding. The article talks about a few such funds but let’s go with Blackrock which we hear so much about.

BlackRock’s socially “aware” fund brags that it gives you 2.62 percent more exposure to gender diverse boards. 2.6 percent? So what? Their “environmentally aware” fund also invests in Chevron and Exxon. I asked BlackRock about these examples, but they never got back to us with an answer.

The article goes on to tell us that some so called socially responsible funds might be doing more harm than good. For example, “most “green” funds wouldn’t invest in the Keystone pipeline, but pipelines are much better for the environment than the alternative: hauling oil by train and truck”.

It is useful to note one of Bernard Sharfman’s posts (summarising his article) on this. He argues that such shareholder activism should not be taken at face value:

…a plan manager has a fiduciary duty, the duty of prudence, to investigate BlackRock’s shareholder activism. This duty applies not only to the BlackRock mutual funds or ETFs that an ERISA plan invests in but also to those BlackRock fund selections that it makes available to its participants and beneficiaries in self-directed accounts. The fiduciary objective in this investigation is to ensure that BlackRock is utilizing shareholder activism consistent with a plan manager’s duty of loyalty under ERISA; that is, “solely in the interest of the participants and beneficiaries” and for the exclusive purpose of providing financial benefits to them. If that is not happening, these funds should be excluded from an ERISA plan.

It might ultimately be far easier to investigate the financial benefits than the claims of do goodery.

Companies and their role in Covid-19 vaccination

In an opinion piece, Scott Ratzan, an academic at CUNY School of Public Health argues that businesses should integrate vaccination into their plans. He says:

Voluntarism and gentle persuasion with simple incentives such as gift certificates should help to encourage hesitant staff. Interactive employee chats with medical experts, or union leaders where appropriate, could also allay concerns. To achieve workforce immunisation, commitment from top personnel will be essential

These are sound proposals and might even sound like a good plan in other contexts where businesses might want to get employee buy in. However, he then goes on to place a wider responsibility on business:

Businesses should also advocate for healthcare systems that can meet vaccine demand, plus more investment in digital health communications to support vaccine coverage as a social norm globally. Many companies, such as IBM and Salesforce, are already working towards this. More are needed.

Should they? It is possible that some big corporate houses see this as an opportunity to drive vaccination in the community to ensure a quicker return to normalcy. However, many businesses have struggled as a result of the pandemic and might not be in a position to/ might not be willing to expend resources on creating social norms. That’s okay too. Governments of various countries should be assuring people about the safety of these vaccines – not companies that have not been involved in the vaccine development or approval processes.