COVID-19 Is A Litmus Test For Stakeholder Capitalism

COVID-19 Is A Litmus Test For Stakeholder Capitalism

As the global COVID-19 health emergency continues, the economic fallout is mounting as well. Global economic growth has gone into reverse, businesses have started canceling service to customers, and millions of workers are technically unemployed or fired. It raises the question: what happened to “stakeholder capitalism”, the enlightened economic model many companies embraced just months ago? How can it be squared with what we’re seeing today?

To answer that question, let’s recall what stakeholder capitalism is about: ensuring the long-term preservation and resilience of the company, and embedding a company in society. In this sense, a short-term economic crisis such as the one induced by the coronavirus outbreak reveals which companies truly embodied the stakeholder model, and which only paid lip service to it, while fundamentally maintaining a short-term profit orientation. The COVID-19 crisis is a litmus test that shows who has been “swimming naked” while endorsing stakeholder capitalism.

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Of course, many global companies are profoundly shaken up by COVID-19, and many have had to revert to very painful measures, through no fault of their own. Many small and medium-sized enterprises in hospitality, retail and travel were closed on government orders, too, leaving them with little or no ability to react. But the differences between global companies that truly oriented their business towards the stakeholder model, and those which had a short-term shareholder model, can be striking.

First, some major companies used their rising profits in past years for major share buyback programs. These boosted short-term profits and increased executive bonuses. But, faced with the lack of strategic reserves or investments, many of these companies are now the first to suffer, unable to turn the situation around unless the government intervenes. The most obvious example comes from the biggest US airlines, which spent 96 percent of their free cash flow during the past 10 years on buying back shares.

By contrast, other companies used profits to invest in digital transformation, talent, research and development, and their customer relations. That now gives them an ability to react that other companies lack. Microsoft, for example, ranked first in JUST Capital’s stakeholder companies ranking, is a collaborator on Johns Hopkins’ coronavirus tracker, and is providing teachers with access and training for its Teams program to teach remotely. It can do so because of its business model, but also because its stakeholders expect it to step up at times such as these.

Second, some companies in recent weeks continued to announce record bonuses and rewards for their chief executives, based on 2019 profitability and share prices. The UK-based airline EasyJet, for example, which sought state aid after it had to cancel most of its flights, nevertheless said it would go ahead with a £174m dividend payout. Such short-sightedness won’t be forgotten — and it shouldn’t be — by clients, employees and governments, many of which are suffering.

By contrast, Marriott CEO Arne Sorenson, whose business and employees have been severely hit, announced he and his chairman would take no salary in 2020, and halved his executive team’s remuneration. It exemplified the company’s embeddedness with its employees and the societies it operates in. In a similar vein, Kenya Airways CEO Allan Kilavuka and his executive team also agreed to a 75-80 percent pay cut, in solidarity with ground and aircraft personnel.

But being a stakeholder company in these times isn’t just about short-term signaling. Companies that embraced the stakeholder model can simply afford better to help during this crisis, as their business model is more robust, and their alliances with other stakeholders in society, such as government and the public at large, are stronger.

The shipping giant Maersk offers the best example. It is offering its ships and cargo space to get emergency supplies wherever they are needed, maintaining or creating shipping routes that are not necessarily commercially viable. That it can do so is because of stakeholder collaboration in action: Denmark, where it is headquartered, is one of the countries protecting workers and companies most during this crisis, guaranteeing a significant share of their salaries. The “social contract” between Denmark’s people, government and business allows them to be resilient and proactive in times of crisis.

Equally, Unilever, a champion of the stakeholder model since Paul Polman’s tenure, on Monday announced an immediate donation of $50m in soap to the Covid Action Platform, which was set up by the World Economic Forum in partnership with the World Health Organization. Unilever’s commitment is a testament to its longstanding relationship with its customers all over the world.

Both cases contrast with many well-known retail and food companies in the US, such as McDonald’s, Subway and Kroger, which have tens of thousands of employees without paid sick leave. This is a failing of both government and the companies involved, which will lead to significant harm to livelihoods unless the government steps in.

Stakeholder companies understand that a global health emergency such as COVID-19 requires all societal actors to temporarily reorient themselves to the emergency response needed, and they have the agility and preparedness to do so. That is not a coincidence. They are the same companies that optimized for long-term prosperity and cultivated shareholder capitalism. During these times, and when this is all over, we must support such companies. They represent the economic model that will make us survive today but thrive again tomorrow.

This article originally appeared on The Financial Times.

Written by Village Connect

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