Just because a company can qualify for a government coronavirus aid loan doesn’t mean it should accept one.
Beyond the embarrassment of having to return loans they did not deserve, large companies also risk damaging their reputations.
Behaving ethically in a time of crisis can become a company’s defining characteristic. When its office was shuttered, when its employees were scared, when its customers stayed home, how did a business behave?
Did it adhere to principles and mission statements developed during better days? Or were those ideals shunted aside in the name of survival?
Because people are going to remember how businesses behaved during this crisis, rest assured. They will remember how a big company pushed to the front of the line, mistreated its employees, and sought out government aid it did not deserve.
People will remember which companies took advantage of a public health crisis to qualify for low-interest government loans at the expense of smaller businesses. These large companies will emerge from this pandemic in some shape or form. Many small businesses will never reopen if they don’t get this money now.
What we’re talking about are publicly traded companies that apparently circumvented one of the rules of the Paycheck Protection Program (PPP), a $349 billion loan pool with a provision that said companies with more than 500 employees were barred from applying.
The money was meant to preserve jobs and keep small businesses afloat, so Congress prioritized getting that money out to businesses, fast. And in that sense, the fund worked as intended: It was emptied in less than two weeks, showing the enormity of the need.
People are going to remember how businesses behaved during this crisis, rest assured.
But issues with the distribution of funds have since been revealed. Large banks facilitating the loans from the U.S. Small Business Administration (SBA) served their richest clients first, leaving small businesses that bank with smaller financial institutions at the back of the line.
As a result, thousands of small businesses were left with nothing.
Congress is now considering a second round of funding targeted to smaller banks and lenders, which generally serve those small businesses the program was meant to help. But, in the first round, between $243 million and $365 million of the PPP loans went to dozens of large, publicly traded companies, according to CNBC and the Associated Press—companies that apparently circumvented the loan requirements by breaking down their headcount among numerous subsidiaries.
On Thursday, the SBA issued new guidance, noting that public companies have access to other sources of liquidity, which would allow them to continue operations. The SBA said: “It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” The SBA said that companies could repay the loans by May 7 without penalty.
The worst offender is perhaps Ashford Inc., a Dallas-based hotel chain with 7,000 employees that received more than $40 million in 42 separate loans and applied for loans worth $5 million more, according to The Wall Street Journal. The company, according to public filings, actually had over $32 million in cash on hand at the end of 2019—money it could use to keep afloat, rather than taking on a loan meant for the smaller guys such as those hotel chains with 500 or fewer employees.
Also receiving PPP loans were public companies like DMC Global, Wave Life Sciences, and Fiesta Restaurant Group. Regulators will have to decide if Ashford and others violated the terms of the coronavirus loans and demand they be returned.
Ruth’s Chris Steakhouse, a national restaurant chain that had accepted $20 million in PPP loans, announced Thursday that it would return them.
Another publicly traded restaurant group, Shake Shack, took public criticism to heart and announced it would return a $10 million PPP loan.
“Shake Shack was fortunate last Friday to be able to access the additional capital we needed to ensure our long-term stability through an equity transaction in the public markets,” wrote Danny Meyer, chairman of Shake Shack, and CEO Randy Garutti in a blog post. “We’re thankful for that and we’ve decided to immediately return the entire $10 million PPP loan we received last week to the SBA (U.S. Small Business Administration) so that those restaurants who need it most can get it now.”
Shake Shack had previously announced it had raised $150 million in the form of new shares sold on the market, inspiring CNN to coin the phrase “the Shake Shack principle.”
Perhaps other publicly traded companies, worried about their post-pandemic reputations, will be similarly shamed into doing the right thing and returning PPP loans so other small businesses can benefit.
If they do, it would never be more apparent that ethics pays.
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Do ethics truly pay? PPP fiasco may tell us