Issue #18                                                                                                    June 2020
Can Boards Afford Purpose and Sustainability During the Pandemic?
by Professor Fabrizio Ferraro

Being a board member has never been harder. The Covid-19 pandemic is a once-in-a-lifetime challenge for board members and corporate leaders. As the pandemic spread, corporate leaders had to react quickly, assess how it would affect their business, and make quick but momentous decisions to keep their companies operating. In some cases, especially in the worst affected industries, e.g., air transportation or tourism, they are fighting to stay alive. 
Given the bleak outlook, a reasonable question has been raised about whether corporations should shelve the numerous sustainability initiatives aimed at improving their environmental and social performance and focus on keeping the lights on. 2020 was going to be the year of corporate purpose (and here at IESE, we will hold a virtual conference in late October on the topic – stay tuned), and even financial investors were increasingly joining other stakeholders in asking corporations to improve their environmental, social and governance (ESG) performance. A skeptic would now look back at all this as a luxury we could only afford in prosperous times. As a recent Financial Times debate puts it: “It’s a lot easier to put purpose above profit when cash is flush and times are good.” Are we going back to just profit and forgetting purpose in the pandemic and post-pandemic world? 
This question is especially timely, as most corporations are now slowly exiting from crisis-mode and starting to evaluate more medium and long-term scenarios. Should they rethink their commitments on social and environmental issues? The enormous number of layoffs and furloughs seems to indicate that most boards are doing just that, at least in terms of their commitment to their people. Environmental commitments are stickier, but it is likely that boards are facing similar tradeoffs on the environment too: should we scrap the CO2 emission reduction technology investment we had planned? Should we go for cheaper (and dirtier) energy sources? 
Obviously, the specificity of each case requires an in-depth analysis, and it might be dangerous to generalize. Yet, we already know enough on the resilience of firms to major crises to suggest that boards should stick to their social and environmental commitments and, in some cases, double-down. Resilience is a firm’s capacity to absorb the blows from a crisis and quickly recover in terms of economic and financial performance. Cash and low debt, for instance, make for more resilient firms. But social and environmental performance (two key aggregate dimensions of sustainability) also play a role. For instance, several studies on firm resilience on the 2008-2009 financial crisis had already suggested the importance of social and environmental commitments. One study shows that, during the 2008-2009 recession, non-financial firms with higher sustainability investment had 4% to 7% better stock returns. Following the recession, another study finds that firms that kept investing in R&D and sustainability performed better in post-crisis years. 
Perhaps. But isn´t the pandemic different? Does anything we learned from the past crisis apply now? Fortunately, researchers have already started to study the resilience of firms to the pandemic and, so far, all the evidence points to the importance of sustainability. One study of U.S. firms finds that a one standard deviation increase in Environmental and Social (ES) ratings leads to a higher stock return of 2.1% on average. This effect is even stronger for firms with high advertising expenditures (a proxy for investment in brands and customer loyalty). Another study of 6,000 global firms shows that firms with high ES scores had a 2% higher stock price two months after the outbreak, compared with similar firms with low ES scores. Finally, using data collected in 11 languages across thousands of news sources in 47 countries, another study shows that during the market collapse, firms with more positive media sentiment of their labor, supply chain and operating response to COVID-19 crisis had less negative returns. 
Why would financial markets favor companies with higher sustainability ratings, and punish companies who might otherwise appear to be more conservative with their cash? Shouldn´t they be primarily concerned about the financial viability of the firms they invest in? They are. And this is exactly why they are investing more in firms who honor their commitments to all stakeholders: employees, customers, suppliers, but also the natural environment and future generations. Employees and customers are more likely to stick with the firms who did not disappoint them during the crisis. Furthermore, at least in Europe, the post-pandemic recovery funding will be increasingly tied to the E.U. Green Deal, the policy framework that will guide our response to climate change, and thus even public funding is more likely to go to more sustainable firms. 
Given these arguments, financial investors are now considering ESG as good an indicator of corporate resilience as higher cash holdings and lower financial leverage. A recent report by Blackrock, the world’s largest asset manager, analyzed the resilience of the ESG stocks and concluded: “This period of market turbulence and economic uncertainty has further reinforced our conviction that ESG characteristics indicate resilience during market downturns.” 
Of course, board members and corporate leaders should consider how environmental and social commitment fit with their own unique purpose and strategy. And there will always be short-term opportunities for contrarian strategies and arbitrage deals. Yet, the fiduciary duty of board members is to steward the corporation for the long-term and, under that time-horizon, can they really afford the risk of NOT investing in sustainability?

Fabrizio Ferraro
Professor of Strategic Management
IESE Center for Corporate Governance

Corporate Governance News

The U.K. introduces the Corporate Insolvency and Governance Bill
The Bill consists of six insolvency measures and two corporate governance measures to reassure that those who act responsibly won’t be caught out by the insolvency system… read more 
U.S. Senate Passes a Bill That Could Ban Chinese Companies From the Stock Exchange
The Bill, which was passed in the Senate unanimously, requires foreign companies to certify that they are not owned or controlled by a foreign government. In addition, the companies would be required to undergo an audit that is subject to review by the Public Company Accounting Oversight Board… read more
Renault-Nissan-Mitsubishi Form Alliance to Guarantee Companies’ Survival
The three companies will divide up world markets and share technologies and models according to a "follow-the-leader" scheme. The new strategy will cut costs by at least two billion euros ($2.2 billion)… read more
Thyssenkrupp Concludes Break-up Plan to Focus on High-margin Activities
The restructuring plan announced by CEO Martina Merz includes the sale of assets, such as the units that make steel and submarines and its plant technology unit, while it considers mergers and other sorts of consolidation vehicles with competitors... read more
Directors Should Exercise Good Corporate Governance Now More Than Ever
In light of the pandemic's negative impact on business across the board, Proskauer Rose attorneys say that directors of companies being pushed into insolvency or near insolvency situations need to exercise good corporate governance now more than ever, both to keep their business afloat and to avoid liability… read more
S&P Global Launches its Proprietary S&P Global ESG Scores 
S&P Global ESG Scores are based on 20 years of corporate sustainability assessment data and they cover more than 7,300 companies (representing 95% of global market capitalization)… read more
Performance-based Executive Pay in the U.S. on Hold During COVID19 
According to Reuters, U.S. companies have shielded executive pay despite cases where large numbers of workers have been laid off or furloughed. Interestingly, monetary incentives have been decoupled from executive performance… read more
Better Performance on ESG Indicators Shows Higher Resiliency to Economic Effects of COVI19
According to a study conducted by BlackRock, the performance of companies that rank better on ESG factors exhibit less losses than those performing worse along these factors… read more

In Case You're Interested...

What Coronavirus Tells Company Boards About the Next Crisis

As part of the Financial Times special report on Responsible Businesses in a Crisis, some scholars and practitioners offer insight on how different board members can help companies through the crisis… read more

Business Faces Stern Test on ESG Amid Calls to “Build Back Better”

As part of the Financial Times special report on Responsible Businesses in a Crisis, this article discusses a key theme of the coming months: how to build back better, in the sense of creating both a more sustainable world and corporate sector. And it goes beyond simply rebuilding the economy post-COVID-19 shock… read more

Responsible Business in the Age of COVID-19

It’s clear we don’t want to simply recreate the system we had prior to COVID-19. So there are some crucial questions on the table which need addressing: What kind of world are we trying to build? What role are companies to play in it? And investors? And how will they interact with the government? Chris Pinney (President and CEO of the High Meadows Institute), Alison Kay (Global Accounts Committee Chair at EY), Tensie Whelan (Clinical Professor at NYU Stern), and Paul Polman (former CEO of Unilever) offer some thoughts on the matter… watch here

3 Ways to Put Your Corporate Purpose Into Action

The idea of corporate purpose is now mainstream, but so far it remains poorly defined and aspirational. The authors propose three innovations to make purpose meaningful. First, companies should adopt a clear “statement of purpose” that communicates which stakeholders (beyond stockholders) will be considered in the setting of strategy. Second, companies should adopt integrated reporting that allows investors and other stakeholders to evaluate the company’s success in achieving its purpose. And third, companies should adopt a new model for corporate governance based on the concept of the Delaware benefit corporation model… read more

Feeling Purpose

Global public relations agency Porter Novelli & Cone form one of the world’s largest dedicated global purpose practices. The agency conducted a national survey in the U.S. and combined it with biometrics studies to understand not only what consumers say they will do to support responsible brands, but also how they feel and physically react when exposed to purpose-driven messaging… read more

National Corporate Governance- related Initiatives During the COVID-19 Crisis

This note provides an overview of some corporate governance and capital markets-related measures that 37 jurisdictions have taken in response to the economic crisis caused by the COVID-19 outbreak. Many countries continue to consider adjustments of policies and regulations as circumstances evolve. In addition to an overview of measures that have been taken in individual countries, the note also offers an opportunity for comparison between approaches in different legal contexts… read more

Directors' Duties Both in Solvent and Insolvent Scenarios in Europe

In this white paper, the authors provide an overview of the relevant statutory and fiduciary duties of directors of companies in the “zone of insolvency” in certain Western European jurisdictions and certain measures that the applicable governments have introduced as a result of COVID-19. The authors also highlight certain potential personal liabilities for directors and set out some of the practical issues directors need to consider, suggesting some of the steps they should be taking at this time in order to safeguard the interests of creditors and minimize the risk of personal liability… read more

IESE Insight report examines corporate purpose in an altered business environment

The report, completed just as the coronavirus was declared a global pandemic, continues an important conversation that now seems of utmost urgency as we adjust our businesses and societies to the new normal. For many, this global crisis marks a before and after. What are the issues that executives and directors need to reflect on now, as they look for purpose beyond profits in a radically altered business environment?… read more

IESE's Recent Research on Corporate Governance 

“The Common Ownership Trilemma”

Journal article (May 2020)

Journal: The University of Chicago Law Review
Authors: Azar, José
Read summary

“Diversification, common ownership, and strategic incentives”

Journal article (May 2020)

Journal: American Economic Review
Authors: Vives, Xavier; Banal-Estañol, Albert; Seldeslachts, Jo
Read summary

“Futbol Club Barcelona: "Tiki-Taka" Gone Bust?”

Case-study  (May 2020)

Authors: Duro, Miguel; Soler, Edi; Rivera de Asis, Javier
Read summary

Upcoming Programs

Executive Program: “Value Creation Through Effective Boards”

*New date: September 21-24, 2020

Location: IESE, Barcelona Campus

Visit the program website

*Due to Coronavirus outbreak the program has been postponed from May to September 2020.

IESE CCG-ECGI Corporate Governance Conference

The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE's Barcelona Campus on October 25-26, 2019. The high-level event gathered the leading scholars in the field, CEOs and top executives, chairs of boards, investors, regulators, and multilateral organizations.

Check out the highlights of the conference in this video summary:

A detailed report of the conference is available here

A summary article of the event is also available here

Get access to all conference papers and discussions on the conference website (under the section “program”)
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