The Covid-19 pandemic has prompted a wide range of responses from governments, central banks and regulatory agencies around the world as well as driving adaptations to corporate governance practices to cope with the new situation. Our recent paper, derived from contributions to a webinar hosted by the universities of Edinburgh and Glasgow on 12 June 2020, focuses on the corporate governance response to the pandemic in the UK. Specifically, we analysed how stakeholder interests (especially employees, creditors and suppliers) had been accounted for, both in the decisions made by boards and in the regulatory interventions in the framework of conduct of business regulation applicable to licensed financial firms. We observe two distinct trends within the responses. The first trend is evident in board decision-making: there has been an adaptation of practices and focus in order to elevate the significance of stakeholder interests. For example, suspending share buybacks, scrapping dividends and executives agreeing on pay reductions. The context for that outcome is a legal regime for directors’ duties (in s 172 of the Companies Act 2006) which permits directors to focus on various factors (stakeholder interests) when making board decisions. The second trend is evident in the case of conduct of business regulation for capital markets: there has been a series of interventions that are not based on formal legal powers. The context for that outcome is a system of regulation in which principles and guidance facilitate intervention by the regulator without reference to formal rule-making powers. The outcome in both instances is that significant change has occurred without changes in the legal rule.

Globally, and in the UK, there have been ongoing debates for the past two decades at least about the position of stakeholders and to what extent their interests should be considered during board decision-making. The recent pandemic puts this into perspective and brings stakeholder interests into direct focus. In recent months we have seen companies engaging in various activities and initiatives to try to deal with the devastating impact of the virus. Some have acted contrary to the ‘normal’ way, where a focus on profitmaking and the interests of shareholders is paramount, by focusing on the interests of other stakeholders and putting their needs above those of the shareholders.

The question we need to ask, especially from a legal perspective, is whether this is ‘the new normal’, will most companies continue to act in this way, or will we see a move back to shareholder primacy and profit maximisation once the crisis settles down? There are potentially three responses to this question:

  1. The current legal position on stakeholder protection is sufficient.
  2. The law has its place, but it is really ‘collective social action’ that is the driver that brought stakeholder interests into clear focus. Companies responded to that pressure, as the cost for not doing this will be too high, especially from a reputational perspective.
  3. Stakeholder interests were brought to the fore during the pandemic, but it is hard to imagine that it will stay this way. Companies did not change overnight and they will potentially go back to focus on shareholder maximisation and shorter term issues. It can even be argued that this will be more so,  after the crisis than pre-crisis.

We judge point 3 to be the most convincing response and the best approach to guide policy as the pandemic recedes. There has been a remarkable adaptation in corporate governance practice during the pandemic, which elevated stakeholder interests: this observation suggests that instead of trying to reform the law we should focus on options already in place in order to integrate stakeholder interests into board decision-making. These include section 172 of the Companies Act, which enables directors to perform a balancing act between long-term interests and short-term considerations, detailed non-financial reporting requirements and, finally, mechanisms to ensure stakeholder participation and engagement. It is perhaps the last of these options where we can do more and ensure that stakeholders are not merely informed, but engaged in the decision-making process at board level, for example by engaging with the workforce through one of the three methods recommended by the 2018 UK Corporate Governance Code (a director appointed from the workforce; a formal workforce advisory panel; or a designated non-executive director).

In the context of conduct regulation in capital markets there has been a wide range of interventions at the EU and UK level in response to the pandemic. In our article we focus on the most significant, encompassing both the professional and retail markets. They include mortgage holidays, shareholders’ pre-emption rights in new offers of shares, issuers’ disclosure obligations, financial reporting and shareholder meetings. We evaluate the likely consequences of these pandemic-prompted interventions for the future of conduct regulation by linking the interventions to three trends in conduct regulation that were prominent in the regulatory response to the Global Financial Crisis of 2008: the tension between principles and rules, linked to the increasing complexity of financial regulation; culture and ethics as a focus for regulators; and expansion in disclosure obligations linked to non-financial reporting obligations and investor protection.

In a nutshell, across both corporate governance and capital markets we note that formal legal change has not featured prominently in the UK response to the pandemic. However, in contexts where the adaptability offered by the flexible nature of the directors’ duties legal standard was not present, some legal interventions such as mortgage holidays have (de facto rather than de jure) adjusted pre-existing legal rights and duties.

We conclude that without more progress on an effective mechanism to systematically integrate stakeholder interests into board decision-making, the pandemic response is unlikely to have lasting impact. In the case of conduct of business regulation, the structure of regulation in the UK facilitated a response largely without resort to formal rule-making.  We surmise that this outcome can be read, at least in part, as linked to an emerging trend away from detailed rules in favour of alternative metrics of good conduct, which might also justify a less prominent role for disclosure as a form of investor protection.

Iain G MacNeil is Professor of Law and holds the Alexander Stone Chair of Commercial Law at the University of Glasgow.

Irene Marie-Esser is Professor of Corporate Law and Governance at the University of Glasgow.