The author lives in Madrid, where the Spanish government declared a state of alarm on 14 March. Spain’s capital, one of the European hotspots of the coronavirus outbreak, is currently under lockdown.
If you reside somewhere in the Northern Hemisphere, there’s a good chance you’re either sick with Covid-19, sick of being locked at home, or worried sick for your loved ones. The ongoing pandemic is a tragedy — for those losing family members, and for those losing their livelihoods. But it could also be a tipping point for stakeholder capitalism, where boards get the blank slate they need to reinvent their relationship with their workers, their suppliers, their customers, and society at large.
During the Global Financial Crisis, governments across the globe bailed the banks out — and got a lot of flak for it from an angry part of the public. Yet, contrary to popular perception, the financial services industry didn’t go scot-free: severe rules and oversights were imposed in the process, from the increased mandatory capitalisation levels of Basel Ⅲ through to the exacting governance requirements of the SMCR in the UK.
A decade later, here we are again, as governments unveil massive rescue packages. But this time, most of the companies in dire straits aren’t systemic. That means governments can drive a harder bargain. And I mean hard: the White House is pondering an equity stake in every company that gets taxpayer money.
“Only in a crisis are governments able to rally people to accept necessary but painful reforms.”
~ James Boughton, CIGI senior fellow and former historian of the IMF
So, what kind of stringent demands should boards expect in return for much-needed government loans? It’s anyone’s guess at this point in time, but a few options seem possible.
First, environmental improvements.
If we can take such radical measures — no matter the economic harm — to tackle a health crisis, are the ambitious proposals to stop the impending climate catastrophe still so unrealistic? Not to mention many of us are getting a taste of what a greener life used to be like. True, we’ll be relieved to be safe once more and released from the confines of our homes — but will we be happy trading back clear skies for smog, and dolphins for roaring airplanes above our heads?
Should Green New Deal-inspired plans garner enough political support, airlines and other polluters with an urgent need for cash might find themselves with no choice but to accept aggressive environmental targets.
“One possible model is the 2009 bailout of the auto industry . . . The Obama administration rescued GM and Chrysler from bankruptcy but also enacted stricter new fuel-economy rules.”
Second, workers’ rights.
The gig economy was already under attack. Should governments have to step in and pay its “independent contractors” during the lockdowns, it could be the straw that transforms this business model’s back.
Traditional employers might have to make concessions, too. In the US, the tragic implications of a lack of paid sick leave and employer-provided healthcare are now clear — and the country is warming up to state intervention on these issues. With its sights set on re-election, the Trump administration might see a political opportunity in requiring boards to offer these benefits as standard in exchange for federal help.
“The Democratic House will continue to make clear . . . that any emergency response package must put Families First before any aid to corporate America is considered.”
~ Nancy Pelosi, Speaker of the United States House of Representatives
Third, business practices.
Pressure will mount to bring back jobs that had been sent offshore and “weren’t coming back.” Globalisation was already viewed with suspicion by populist governments, and a deepening spat over the origins of the virus, coupled with the apparent fragility of global supply chains in the midst of a trade war, will have done little to strengthen the case for internationalists.
“It is important for the Trump administration to bring home its manufacturing capabilities and supply chains for essential medicines.”
~ Peter Navarro, Assistant to the President and Director of the Office of Trade and Manufacturing Policy
Standard operating procedures around supplier payment could also be upended. “Negative working capital” not only threatens small suppliers but also leaves large organisations vulnerable when their sales shrink. Governments, some of which were already acting against this form of financing to limit the risk of cascading bankruptcies, will likely press CFOs to reconsider.
Digital industries, too, might end up in the regulators’ crosshairs. Whilst history’s largest working-from-home experiment will be a boon to their bottom lines, it will also highlight their services’ vital importance to day-to-day life. US telcos, which have enjoyed a wave of deregulation under the current FCC, could end up reclassified as utilities down the road — and regulated as such. Meanwhile, internet and software giants could see the formidable number of ongoing antitrust actions against them gain even more steam. Here, boards of some of the world’s most valuable companies could be faced with tough split-up decisions.
“Everyone in the telecommunications sector must step up. The time is now.”
~ Geoffrey Starks, Commissioner, Federal Communications Commission
Finally, governance.
Elizabeth Warren — a strong contender for America’s next VP — has already called for tough requirements in exchange for taxpayer dollars, including prohibiting share repurchases, dividends, and executive bonuses; requiring CEOs to personally certify their company’s compliance; and adding worker directors to boards.
Buybacks, in particular, are finding themselves in the spotlight, after soaring in recent years to a scale that’s even getting shareholders worried.
“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
~ Laurence Fink, chair and CEO, BlackRock
By raising the stock price, buybacks have a disproportionate influence on directors’ pay cheques. And they deplete companies’ coffers, leaving them exposed when times are bad — just as they are now. With stories emerging of US airlines having “spent 96% of free cash flow last decade on buying back their own shares”, boards should expect bailouts to bring harsh limitations to the practice.
In the face of all these potential changes hanging over boards, you could expect them to play it safe. But here’s the positive news: they haven’t waited for government funds to act.
Now, it’s no big surprise that most directors want to do good. What is new is that they can so freely act on it. Just weeks ago, few could have suggested paying employees not to work without being ousted manu militari by shareholders; today, unprecedented circumstances are opening the door to unprecedented measures. After years of talking the talk, boards are seizing their historic chance to walk the “moral contract” walk.
“‘Licence to operate’ is in the gift of a much larger community than just the regulator and judiciary.”
~ Christopher Rodrigues CBE, chair, British Council and Port of London Authority
Whatever these extraordinary times lead to: stay safe. Much better days, for boards and all of us, will be coming fast.
The views and opinions expressed in this article are those of the author.