The Covenant for Shared Prosperity

Last Nov. 5, business history was made when the Management Association of the Philippines, Shareholders Association of the Philippines and more than 20 other business organizations launched the Covenant for Shared Prosperity. The covenant spells out a company’s pledge to do right by its various stakeholders – the people who are affected by and who affect the business. The statement was partly prompted by the compassion felt by business leaders when confronted by the impact of the pandemic on the most vulnerable Filipinos. But also, the covenant is a collective expression among concerned business leaders that something has been very wrong about how business has failed to uplift the majority of those it affects.

The Philippine Constitution has always mandated that businesses contribute to the common good, that is, the welfare of all its stakeholders. This is critically important if the aspiration of the Constitution for “a rising standard of living, and an improved quality of life for all.” The persistent poverty and growing inequality in our country shows that we are not getting any closer to this national goal. A major reason for this is the short-sighted business thinking that has tended to favor two stakeholders above the others.

First in line are customers who perpetually expect better, more affordable, and more conveniently available products and services. Second are the shareholders who want the most profits, dividends, and share price appreciation they can get. Unfortunately, the bias for these two groups often come at the expense of other stakeholders. Employees may be deprived of just compensation, benefits, or even needed training and equipment. The company may neglect its waste management processes and pollute the environment. Suppliers may be paid late, or otherwise pressured to subsidize the costs of the purchasing company. Short-sighted companies can become extractive enterprises instead of being the distributors of the benefits of capitalism that the Constitution intended.

The covenant aims to correct these short-term biases by encouraging companies to make six commitments to particular stakeholders:

1. Recruit, train, and develop our employees and managers to be the best that they can be irrespective of gender, alma mater, age, ethnicity and religion; provide just compensation and benefits; promote meritocracy and encourage work-life harmony.

2. Provide only quality products and services that are of continuing value to our customers.

3. Treat our goods, service and funds providers fairly, ethically and with respect as we expect them to treat their own workers in their supply chain the same way.

4. Be actively involved in the communities where we operate in with particular attention to the needs of the disadvantaged in those communities.

5. Protect and preserve the environment for the benefit of current and future generations by employing environment friendly technologies in all aspects of business operations.

6. Deliver reasonable and just returns to and fair treatment of our controlling and non-controlling shareholders.

Why did it take this long for business groups to arrive at the covenant?  For the longest time, many business leaders have thought that there is a trade-off between treating stakeholders well and profit – the false dilemma of “profits vs. people and planet.” This tradeoff is an illusion borne out of short-term thinking and the belief that financial statements accurately reflect the health of a company. This is obviously absurd since financial statements do not include human capital, which is the most important source of value creation in a company. Neither do the statements show the costs the company may impose on the community for the pollutants it releases to the environment.

Fortunately, some companies have been trailblazers in stakeholder-oriented and sustainable business practices over the last decade and have shown what is possible and, in fact, necessary for businesses to thrive. These companies have been producing sustainability reports long before the SEC required them. Their leadership can encourage more companies to support the covenant.

What does this mean for the investing public? At the most basic level, it means that publicly listed companies (PLCs) who take the pledge will be held to a higher ethical standard than they have ever been before. Consider the first covenant commitment to employees. When employees are properly compensated and well-trained, they are more engaged in their work and, in turn, the companies they work for can better create value. Customers look for a good transaction experience as they avail of products and services, and good after-sales service, and a more engaged workforce can provide that. Value creation depends a great deal on employee welfare. It will no longer suffice for PLCs to report impressive financial numbers – the bar has been raised on what it means to be a good business company.

Another benefit of the covenant for investors is that it gives a framework for those who want to use their investing power as a force for good to look at which companies are fair to its stakeholders. If they already own shares in a PLC, they can engage its governance group towards being more attentive to particular principles in the covenant

The pandemic has shown that companies are truly interdependent with all their stakeholders. The idea that we can take something away from one stakeholder to give to another is ultimately self-destructive and inhumane. Progressive business leaders are learning during this pandemic that business is about giving and enabling so that more value can be created for everyone. This approach lifts everyone up, builds bigger and stronger markets, and achieves the common good.

Benito Teehankee is the Jose E. Cuisia Professor of Business Ethics and Head of the Business for Human Development Network at De La Salle University and a Trustee of the Shareholders‘Association of the Philippines. Learn more about SharePHIL at http://sharephil.org.