Companies will not survive Covid-19 unless they communicate with their stakeholders. As the world around them transforms, corporate leaders must welcome input from those on the front lines of corporate activity – primarily employees and consumers, but also local communities, NGOs, academic experts, and even government authorities and regulators. And they must put in place the corporate infrastructure necessary to cast a wide net and gather and analyze this information.
In moments of crisis, the self-preservation instincts of a corporate executive call for reducing costs and conserving resources with large-scale wage cuts, layoffs, and shutdowns. Such measures are necessary, it is widely thought, to preserve value for the company’s ultimate owners, the shareholders. Protecting employees and assisting communities look like expendable luxuries available only in the foregone bull era. For example, with its entertainment parks closed, Disney furloughed 43,000 workers. When asked whether the company had considered alternatives, a Disney spokesman said, “I suggest you look up the definitions of ‘publicly traded company’ and ‘fiduciary duty’.”
It is surprising, then, that many companies are responding to Covid-19 by throwing the traditional rulebook out the window. Some, such as Microsoft, are increasing employee benefits, offering 12 weeks of paid parental leave. Others have committed to avoiding layoffs altogether, such as Bank of America and Citigroup. In contrast to executives who escaped the 2008 financial crisis with their compensation packages intact, CEOs of companies in many hard-hit industries, such as Delta, are voluntarily foregoing salary and bonuses. Apparently, it has become untenable to have workers bear the brunt of the crisis, while executives bask in their millions.
The market is throwing its weight behind socially engaged companies. According to reports from analysts at the S&P 500, HSBC, Morningstar, and others, companies with a stronger social profile before Covid-19 have fared better than the overall market. These are companies that have developed a well-designed internal structure for monitoring areas known as ESG (Environmental, Social, and Governance), regularly seeking input from their stakeholders, highlighting material non-financial risks in their disclosures, and taking measures to address concerns. As a result of stakeholder feedback, these companies had taken a variety of measures, ranging from reducing plastic waste to placing more women on corporate boards.
Why would the market favor corporate do-gooders over their cut-throat counterparts? By reaching out to stakeholders both inside and outside the firm, companies can get a head start on emerging issues before they explode into full-blown crises. Employees, consumers, and other stakeholders observe developments first hand and can alert the company to existing weaknesses and new challenges. These channels of communication allow corporate executives and boards to keep their pulse on potential risks and navigate their next move with eyes wide open. Companies with solid ESG functions had adopted privacy protections before the Facebook/Cambridge Analytica debacle, had fostered gender equality in the workforce before #MeToo, and had negotiated mutually beneficial terms with their workforce before Covid-19.
As the world economy is seeking new footing, fresh challenges are continuously emerging, from health data privacy to digital inequality. We should avoid the common trap of pitting profit maximization against the social issues of the day. Rather, our companies should put in place mechanisms for addressing social risks, with appropriate staffing, resources, and reporting structures all the way up to the board. These are essential so that our companies respond to the consumers they serve, the employees they depend on, and the community that sustains them.
This post comes to us from Stavros Gadinis and Amelia Miazad at the University of California, Berkeley – School of Law. It is based on their paper, “Corporate Law and Social Risk,” forthcoming in the Vanderbilt Law Review and available here.