So here is your starter for ten: name a company with a market capitalisation of several billion pounds which has recently come under attack, with accusations of poor corporate governance and accounting issues?

Well, I could probably come up with a few names that fit that bill. I could talk about the German company Wirecard, where the Financial Times focused for well over a year on highlighting accounting issues, before an external review confirmed that all was not as it appeared.

Or what about the UK retailer Boohoo, which has come under the spotlight recently having been accused in the media of using cheap labour in its UK suppliers?

“Tall poppy” companies like these tend to become “Stock Exchange darlings”, with an uncritical analyst following, and then often became subject to a critical campaign, from an activist investor, such as Shadowfall at Boohoo, or TCI at Wirecard.

So how do these stories usually end?

For Wirecard, it looks increasingly likely that a company which had a market capitalisation of over £20bn is now worth next to nothing, after auditors were unable to trace cash that was on the balance sheet.

For Boohoo, the share price initially nearly halved in July from its high before seeing some recovery, but we are only at the beginning of what might be a long process. The company had already responded to criticisms on its corporate structure by buying in the minority interest in the Pretty Little Things business. On the working conditions accusations, supporters would argue that the company should be commended for acting quickly, instigating an independent review of its supply chain; on the other hand, it could also be accused of ignoring several reports on illegal payment practices in the UK garment manufacturing industry over the last few years. 

What appears to be different about the Boohoo situation, is that it does not concern impropriety within the company itself but within its suppliers – and hence raises questions about its oversight. In the old days, when shareholder capitalism was paramount, the company might have been congratulated by investors on finding the cheapest and most flexible sourcing for its products in Leicester, as this would mean higher profits, and probably a higher share price.

But the world today is moving on towards a model of stakeholder capitalism. Aberdeen Standard Life has already voted with its feet on this issue, by selling shares in the company, and other “responsible” investors have come under some criticism in the media for not following suit, and only appearing to pay lip service to ESG issues.

We are already seeing how COVID-19 has  moved the focus within the ESG debate towards the S, or social issues. In many company news releases and analyst presentations in recent weeks, gratitude has been expressed by management to employees, and other people in the supply chain, for keeping the wheels of business turning. And once this genie is out of the bottle, it cannot be put back in again, in my view.  And this may explain why the supply chain issues for Boohoo have become much more mainstream now, and are starting to lead to some shareholder action.

But the real lesson here for companies is that, as the interest in stakeholder capitalism grows, you will be judged not just by your own behaviour but also by that of the company you keep. You will need to ensure that your supply chain and your customer base are legal and above board. You need to continue to improve your focus on sustainability. And you need to work hard on continually proving your credentials as a good corporate citizen to all your stakeholders.

And if you appear to be keeping bad company, your shareholders will increasingly find new friends

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