Washington -- Strong corporate governance is about more than execution -- it's about leadership. We can learn about a company's governance from how it reacts in times of crisis. This was true during the financial crisis of 2008 and it's true today. A rapidly escalating response to the spread of COVID-19 in Europe and the US has closed borders, reduced normal commercial activities and disrupted supply chains, and is putting greater strain on management teams than seen in over a decade.
The median tenure of CEOs at large-cap companies is about five years.1 Most have not directly led a company through an economic recession before and none have faced the dual shocks of a public health crisis combined with a recession at the same time. Yet all understand the existential threat to their businesses and the pressure to balance the welfare of shareholders and employees through periods of market turmoil.
While the crisis seems immediate, a response that takes the long view is most likely to help a company quickly return to long-term productivity of its workforce and even enhance brand value and investor confidence as well. This is consistent with Calvert's investment research approach to identify and assess a company's management of the long-term environmental, social, and governance (ESG) factors that are material to corporate performance. We believe this approach helps us identify the management teams that are best positioned to help their businesses weather the current crisis.
What we are watching from management teams' ongoing response to COVID-19:
Do they take the long-view?
The current situation gives managers an opportunity to demonstrate to the public that they recognize the importance of all stakeholders, not just stockholders, and can balance the needs of both. For tech platforms, the COVID-19 crisis could either build or erode trust with a user base that is concerned about the growing power of big technology companies. For example, Google has been showing leadership by partnering with the US government to develop a website dedicated to reliable COVID-19 education, prevention and resources. It is also protecting people from misinformation by removing harmful content, such as videos promoting unproven methods to prevent or cure COVID-19 and fake reviews and misleading information about health care locations. These types of projects require leadership to shift resources in the near term, but could accrue benefits to tech platforms that prove to be trustworthy in times of crisis.
Are they putting employee health and safety first?
The health of many companies is closely tied to the health of their workforces. Disruption to productivity from sick leave and absenteeism is not in the best long-term interests of shareholders. Leading companies moved quickly to respond to public health directives to maintain social separation and offer employees the ability to work remotely to stay productive.
For companies with low optionality for remote work, many have taken steps to ensure employees have paid leave available to them when needed so that lower-income workers are not adversely affected by becoming sick. Some companies are offering up to two weeks of paid sick leave for the first time to employees who are quarantined or diagnosed with COVID-19. These changes could have a lasting impact on employee health and productivity even after the current crisis passes.
How are they serving customers?
Many companies have recognized the importance of keeping customers well informed and supplied with necessary food and staples through a period of extended confinement. For example, in today's digital world, access to communications means access to work, finance, education, health care and safety. Telecom and internet service providers are responding to the current crisis by promising to maintain service without disruption during the pandemic, waiving home internet data overage fees for customers who don't already have unlimited home internet access, and increasing the speeds in programs for low-income subscribers. These leadership actions in the near term could result in an increased subscriber base over the longer term, as people accelerate the shift from in-person to online work and entertainment.
Several large national retailers are taking steps to ensure shelves stay stocked amid an outbreak of panic buying across the US and national pharmacy chains have offered free delivery of prescriptions to prevent the elderly or infirm from needing to venture out. This leadership in times of crisis may enhance brand value with customer loyalty long after the current crisis has waned.
Bottom line: Companies with strong governance and a focus on getting the community through the Covid-19 pandemic should be better positioned for long-term success. Companies that take the long view, put the health and safety of employees first and serve customers well should be positioned to emerge as leaders in their industries.
1 CEO Tenure Rates, Harvard Law School Forum on Corporate Governance, https://corpgov.law.harvard.edu/2018/02/12/ceo-tenure-rates/
© Calvert Investment Management
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