COVID-19: Raising share capital or social capital

By Nick Graves, partner and head of the corporate team at independent UK law firm Burges Salmon

Many companies have announced capital raises in response to COVID-19. The guidelines published by the Pre-emption Group have been relaxed to facilitate this process. There has been disquiet about the exclusion of retail investors from these discounted issues although the recent placing and retail offer by Compass Group PLC (using the Primary Bid platform) has demonstrated an alternative approach. We expect this trend to continue with more issues of new share capital.

But what about social capital? What is it and what should companies be doing?

Social capital?

A recent FT article by the Chief Economist at the Bank of England explained that social capital “typically refers to the network of relationships across communities that support and strengthen societies” and commented that “the need to change how societies and companies keep score, to better recognise all of the capitals and all of the paid and unpaid contributions citizens make, is surely a lasting lesson of this crisis”. In Social capital in the UK: 2020 the Office for National Statistics (ONS) defined social capital as “a term used to describe 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”.

The ONS measures social capital through the areas of personal relationships, social network support, civic engagement and trust, which matches the Organisation for Economic Co-operation and Development’s (OECD) framework for measuring social capital. Separately the OECD suggests “we can think of social capital as the links, shared values and understandings in society that enable individuals and groups to trust each other and so work together”.

The concept of social capital does not feature in the UK Companies Act 2006 although the concept of ‘enlightened shareholder value’ which is reflected in the language of section 172 is probably broad enough to cover it. However, the strategic report produced by a quoted company must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include information about social and community issues. The non-financial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006 also refer to social matters.

In similar fashion, there is no mention of social capital in the UK Corporate Governance Code (UKCGC) published by the FRC. The only reference to social in the UKCGC is in the context of social and ethnic backgrounds in principle J (Appointments to the board).

Interestingly, the FRC’s Guidance on the Strategic Report already contains some prompts for boards to consider as regards social and community matters. The specific questions are:

• “Is the entity’s business dependent on relationships with certain communities?”
• “Does the entity perform a strategically important role in society – by providing essential or critical services for example?”

We anticipate that the FRC will build upon that initial work on social matters as part of a more thematic review. A company’s social capital will become an essential part of the corporate agenda in 2020. We envisage that it will be seen as a key element in building back better, business resilience and more generally as an important element of a company’s commitment to Environmental, Social and Governance (ESG) matters. These will be key boardroom issues in 2020 and beyond.

So whilst share issuance and liquidity will continue to be important as companies respond to and manage the challenges of the pandemic, we expect to see a growing focus on a company’s social capital.

Raising social capital?

The first question for many companies will be to identify what social capital means for them. They will then seek to understand the most effective method of measuring their social capital and the value that brings to their business, to customers and wider stakeholders. The answers and approaches will be hugely varied but the process will serve to strengthen and embed ESG considerations at the heart of the business.

After that initial phase, companies will seek to identify the steps they can take to maintain and raise social capital. Circulars and RNS announcements will not be required and no accelerated bookbuild will occur. Instead, each company will look at its market position, customer base and position in society and will set out some practical steps which it can take in each of the four domains of social capital:

• personal relationships;
• social network support;
• civic engagement and;
• Trust

Many existing activities, perhaps those implemented as part of a drive to be a responsible business, will be captured and few if any companies will be starting from a blank sheet of paper. This will be an exercise which drives real value and we expect that many companies will ask why it’s taken them so long to identify social capital as a real source of value for shareholders and other stakeholders.