People in need have long memories – the case for stakeholder primacy

May 21, 2020

We are living in the midst of the world’s largest test of corporate purpose. The COVID-19 virus has been a wake-up call that reveals the consequences of our constant pursuit of ever-cheaper products and services, global just-in-time supply chains, share buybacks and cutting CAPEX to reward short-term shareholder dividends that are deemed to be added-value.

Suddenly we see the blind spots. Our very lean global supply chains fail when all the supply comes from one region under lockdown. We witness how changing the configuration and software of an airplane for short-term profit sacrifices redundancy and safety. Then we notice when that same company is first in line for corporate bailouts. Trust is a bank account that is filled up by long-term trustworthiness. Our limited focus on shareholder value has drained our loyalty account with other stakeholders, just at the moment we most need their trust.

Let us ask a simple question:

Knowing what you know today, would you send your loved ones – your parents or significant other – to a long term care home without asking a series of questions: Are the employees paid sufficiently to make ends meet, or are they forced to work in multiple homes doing multiple shifts, self-medicating yet can’t afford to be sick? How is employee morale? Do employees believe in a higher purpose, or are they simply there to make ends meet? Do the owners have a higher purpose beyond profit maximization

One thing the COVID-19 crisis has taught us is that stakeholders matter. One person in a long-term-care home, a company, the contractor’s cleaning staff or a stranger in an office tower can be a bearer of the virus. Those frontline workers, who often are the lowest paid, now hold the key to your loved ones’ lives and indirectly to your business’s survival.

Employees are social capital that you either invest in or pay dearly for over the longer term.

We have witnessed global crises before. Almost 20 years ago, 9/11 changed the world permanently. Most of us who were alive still remember where we were, and we remember those who helped us, or those who didn’t. There is an invisible connection between those who helped each other: a loyalty, a goodwill, a sense of mutual gain, an intangible asset that we can’t put in the financial bank account, but that is a rich investment in a stakeholder-capital account.

This time will be no different. The people most in need have long memories. And this time many more people are in need in every part of the world.

We are now faced with an invisible virus that can make each of us into deadly weapons. Most understand that if we wish to keep ourselves and our loved ones safe, we must restrict our own movements and work on behalf of the whole. Not to participate, to exercise self-interest at this moment, will have economic and human consequences that will last for generations.

Many have a stake in the success of our collective short-run efforts. Yet without investment in longer-term assets and relationships, success will be fleeting. We cannot act — as a person or as a company — like an isolated island. We are an integral part of society, with rights and responsibilities that go together with our freedoms to create and to profit from our inventions and ingenuity.

We must recognize that if the world fails, no company can succeed. So our existential questions are stakeholder questions that demand an answer from generation Z. They will assert primacy, as we are the holders of their future. Shareholder value is a necessary but insufficient ambition in the face of an uneasy emerging future.

The Friedman shareholder primacy doctrine was created in a different time with different assumptions. For years, investment analysis was built on tangible assets and traditional financial data. Today, investors value intangibles. “Fair market value” means something different from what it meant in the 1970s. Today, tangible data makes up a small percentage of the market value of the S&P 500 Index. Market value comes from goodwill, reputation, customer and employee relationships, environmental performance, brand and other intangible assets. Customers want to know the provenance of their purchases. Workers want a fair and ethical employer.

Cash and Care are King

Since we started to explore the impact of the COVID-19 pandemic, we have spoken with many global leaders about their ESG (Environmental, Social, Governance) positions and strategy. Governing board members know the importance of asking the right questions:

  • How do we ensure the health and safety of our employees, customers and other stakeholders?
  • What are the longer-term consequences of saying goodbye to employees?
  • Should our company ask suppliers to wait longer than agreed to get their money for goods delivered – or should they be paid in advance to keep them safe and loyal to us?
  • Can we get access to funding from governments?
  • Will we make it to the other side of this crisis?
  • Why can we reinvent and produce much-needed healthcare equipment within such a short timeframe, when other projects take forever?
  • Why are employees working harder than ever, proud to be producing much needed healthcare equipment?

We are now months into the crisis and questions on how to reopen and rethink resiliency are being asked:

  • How do we safely restart production?
  • How will we keep our employees safe?
  • What do we do if we are hit with a second wave?
  • Do our suppliers and contractors keep their employees safe and healthy so they are able to supply us with safe and high-quality goods and services?
  • Should we rethink our supply chain and make it more diverse and resilient?
  • Are our customers in need of other products than we normally produce?
  • Should we rethink our business model? Should we rethink our purpose?
  • What does the post-covid-19 world look like? What does good corporate governance look like post-crisis?

There is no lack of questions – stakeholder questions. All of the answers circle around employees, customers, suppliers, society, governments and yes, shareholders. All of these are stakeholders. These are people who have a stake in the company’s wellbeing and success. We have seen companies being criticized as well as praised for how they have handled the crisis. One of our senior leaders was very clear: “The first questions to ask is: How much cash do you have? And how much do you care?”

No doubt that the old saying “cash is king” shows its value in a crisis. However, the debt load of many companies suggests that they were betting on a future that did not include stakeholder interests. They have used the cash to buy back shares and to give back to shareholders. Why? Because they have seen it as their duty to optimize short-term shareholder value, forgetting the intangible insurance that loyal customers, suppliers, and employees provide.

The choice remains is clear: How much do you care? Symbolic acts matter. Go ahead, reduce the salary of the leadership team to keep more employees. Reduce dividends to hold your cash position and retained earnings. Don’t wait for the reaction from shareholders, invite them into the tent and co-create your future. And then ask yourself again: Have we cared enough? What more can we do? COVID-19, as a part of nature, is a harsh teacher. We must abide by its laws or perish. It is time to circle the stakeholder wagons and bring shareholders in from the cold. They don’t have to do all the heavy lifting. We all have a stake in thriving societies and healthy communities. Reconciling the interests of all stakeholders will require a fundamental mindset shift for our generation. When stakeholders work together for a shared future, they realize that this is a great time to be alive – especially when faced with the alternative.

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