Doing business in the Covid-19 pandemic, and positioning for the rebound, has caused investors and chief executives alike to race toward resilience. In ordinary times, resilience is nice to have. In a crisis like a pandemic, resilience is the gold vein everyone is searching for in an underground mine. What does resiliency look like? The usual managerial instinct to cut as many costs as possible yields significant costs for suppliers, customers, and society. Investors might see responses that benefit stakeholders as necessary for corporate survival and the absence thereof as detrimental to the long-term success of the organization. As GSK chief executive Emma Walmsley said at CECP’s CEO Investor Forum, “To run a business in this uncertain but exciting context, there is no doubt that we must take a long-term, agile view.”
As we overcome Covid-19, how will investors incorporate resilience more systematically into their valuation models? BlackRock chief executive Larry Fink predicted a “fundamental reshaping of finance,” declaring climate risk equals investment risk. It is reasonable to expect investors to invent new indicators to measure resilience in the wake of Covid-19. Time will tell which ones pass muster. Mr. Fink defined it as the ability to withstand a sudden shock to markets as well as understanding and addressing long-term structural changes in market, industry, business model, etc. On the smaller end of the asset management industry, Federated Hermes is already assessing investees’ resilience from various angles.
McKinsey & Co. chief executive Kevin Sneader mused:
“In the wake of recent natural disasters, the impact of climate change was increasingly being recognized by business leaders and investors, with consequent effects on decision making and valuations. This pressure to include environmental, social, and governance factors in valuing a business is likely to expand to incorporate resilience to outside shocks, such as pandemics. In sum, many companies will rebalance their priorities, so that resiliency—in all its manifestations— becomes just as important to their strategic thinking as cost and efficiency.”
Mr. Sneader even speculated that the outsized costs of being the payor, lender, and insurer of last resort during the pandemic may prompt governments to take action to ensure companies’ resilience. That is an interesting scenario to explore elsewhere.
Covid-19 exemplifies obviously and dramatically how something can become material very quickly. A Truvalue Labs analysis revealed that employee health and safety, labor practices, access and affordability, product quality and safety, and supply chain management emerged as material issues for all companies during the pandemic, and dominate all other matters even in companies/industries where they might have been immaterial before.
Harvard Business School Professor George Serafeim and team found that the capital market already values resilience, if not systematically–or even consciously. Based on data derived from natural language processing that measures public sentiment regarding how companies have responded to the pandemic, firms with more positive sentiment exhibit higher institutional money flows and less negative returns than their competitors.
Is it a blip or a practice that will continue in the investing world? Though some of Serafeim’s indicators were specific to Covid-19 and not likely applicable in ordinary times (e.g., re-purposing operations to produce masks and ventilators), others might endure in valuation models (e.g., protecting employees by avoiding lay-offs and paying sick leave, safety to avoid disruptions and manage supply chain risk).
What are chief executives to do to signal to investors they are more resilient than the competition? A few indicators of resilience seem to be on the minds of the chief executives we talk with:
- Margin of operational redundancy
- Executive and board succession plans
- Strategic and influential partnerships with key local government decision-makers
- Productivity rates for on-site/in-person work and remote/virtual work
- Sourcing mix (e.g., just-in-time, local, geographical dependencies)
These and other indicators correspond neatly to CECP’s own Long-Term Plan Content Framework, born of the work of 30 pioneering chief executives and informed by long-sighted institutional investors. Moreover, management, due diligence, and scenario planning commonly employed for climate change will likely now apply to other things–i.e., one can substitute pandemic or x other threat for climate in the recommendations of the Taskforce on Climate-Related Financial Disclosures.
From here on out, signs indicate slippery social matters that companies and investors haven’t quite measured effectively will rocket up the agenda. In an era when executives still make big money while government hands companies cash, how companies treat employees, customers, and suppliers (e.g., benefits such as healthcare plans and child support; fair pricing; terms of payment; diversity, equity & inclusion) will matter ever more.
The US Securities & Exchange Commission recognized it can be hard for companies to disclose forward-looking, somewhat speculative information, but investors highly value it particularly during this crisis, precisely because it gives clues as to how resilient the company is likely to be. As my colleague Brian Tomlinson wrote, sharp chief executives and savvy investors will reckon what’s true in this extraordinary time is surely true in ordinary times too and get smart about resilience in the face of pandemics and other threats. The evidence shows they’ve already begun that race.