Beware post-pandemic pitfalls

28 May 2020

5 minute read

The COVID-19 pandemic is more than just a health issue. It is likely to have a profound effect on how we live and companies operate. The way businesses protect their employees and address their concerns with the crisis will impact corporate reputations in the long term. There seems to be a growing acceptance by organisations, and their stakeholders, that social issues matter.

How companies manage their relationship with their stakeholders is a social factor that has not yet been seen by many investors as central to business performance.

Today the way employees, customers, suppliers, the environment and wider society are treated is under greater scrutiny than ever. Indeed, we believe that a company’s long-term success, operational and financial resilience and shareholder returns are becoming increasingly reliable on how successfully stakeholder relationships are managed.

The value of stakeholder relationships

Many businesses across the world are gradually restarting their activities as governments partially, or fully, lift quarantine measures. A significant challenge for them will be how to do so responsibly without contributing to a second wave of infections through their operations and supply chains. Those companies, who attempt to understand and respond to worker, customer and other stakeholder’s concerns are more likely to remain resilient, and mitigate reputational risk, during this time.

Investors can be forgiven for not being fully prepared for a human health crisis that has threatened such widespread loss of life. But, responsible investors should be paying close attention to how investee companies are responding to the pandemic and treating their stakeholders. We believe that a company’s long-term success, operational and financial resilience and shareholder returns are becoming increasingly reliable on how successfully stakeholder relationships are managed.

Gap in attitudes to employees’ health and safety

Several employers appear to have been unprepared for the crisis. Fewer than 10% of business leaders from the G20 group of the largest economies and countries in the Organisation for Economic Cooperation and Development considered the spread of infectious diseases as a global risk, according to the World Economic Forum Executive Opinion Survey in March1. This seemingly implies a lack of readiness to the crisis by several employers. In response to the pandemic, a gap seems to be opening up between companies looking after the interests of their staff and those that are not.

The International Labour Organisation (ILO) outlines principles on how workers must be protected from sickness, disease and injury arising from their employment2. Yet, every year 2.8m people die as the result of exposure to safety and health hazards at work, according to the ILO. A further 0.4bn workers suffer non-fatal occupational accidents every year. While higher health and safety risks are more commonly associated with sectors such as construction and the extractive industries, controlling the spread of COVID-19 affects worker’s health and safety in every industry.

Responsible investing to the rescue

How companies treat, and protect, their employees will be under the microscope by shareholders and the media to shine a light on the corporate culture. This may provide a helpful proxy on how employers also treat other stakeholders such as suppliers.

It is important that investors understand, and evaluate, how employees across the supply chain are treated. For example, ensuring that the pandemic does not exacerbate working conditions for employees that may be already vulnerable to exploitation. In developing markets migrant workers can be susceptible to poor living and working conditions that may make social distancing difficult to practice.

In developed markets encouraging people to return to work, social distance and keep business facilities regularly cleaned is likely to be a minimum standard as part of most government guidelines. But ensuring companies protect the welfare of all their employees equally, for instance by not discriminating between permanent and contractor staff, is likely to be important for responsible investors.

Beyond boilerplating

Companies should go beyond applying “boilerplate” health and safety polices. Instead, boards should aim to understand their own employee concerns so that they can successfully monitor and overcome those arising from the potential exposure of COVID-19.

Those that neglect their responsibilities may face consumer hostility, negative press attention and difficulty executing their long-term business strategy. Higher employee turnover may result, draining money, time, and possible business disruption, into rehiring and training at the worst time for many that are trying to keep businesses afloat.

However, company measures to support employees in the crisis, through a safe working environment (both remotely and in the office) and protecting their well-being, could improve employee loyalty and satisfaction. Those investors that encourage such practices in their investee companies are likely to find it is worth it.

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