COVID-19: A Test Of The Stakeholder Approach

S&P Global Ratings | Bernard De Longevialle | April 21, 2020

In August 2019, the U.S. Business Roundtable adopted a new standard for corporate responsibility. It changed its "Statement on the Purpose of a Corporation" to a broad commitment to all stakeholders--customers, employees, suppliers, communities, and shareholders--from shareholder primacy. In a similar vein, France in May 2019 enacted the PACTE law that obliges corporate management to take into consideration "social and environmental issues" alongside other objectives and encourages them to enshrine social objectives in their purpose ("raison d'être") in their bylaws.

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Such developments, while welcomed by many, were sometimes received with a degree of skepticism. Would companies really translate these principles into a fundamental change in the way they operate? Would these principles contribute to a more sustainable and prosperous future?

Less than a year later, the coronavirus pandemic is highlighting why stakeholders matter. Insufficient consideration paid to all stakeholders in decision-making is backfiring on a number of companies. In contrast, other businesses are taking actions that may ultimately strengthen employee engagement, brand, and reputation. While nearly all the rating actions we've taken during this time have been driven by the impact of the lockdown on revenue and cash flow, we believe that might change. We expect that differences in stakeholder management will ultimately play into a number of future rating actions, especially where companies differentiate themselves materially from their industry peers and this in turn has a bearing on creditworthiness that is observable over time. Corporations that better embed stakeholder considerations in their decision-making and strategy will likely limit unintended consequences and be more resilient over time.

Governments--and by extension taxpayers--have provided massive amounts of support to prevent economic collapse, which have raised expectations for corporations. At a time when our economies and our societies confront an unprecedented shock, there is a widespread expectation that companies must consider every stakeholder when responding to the challenge. By ignoring certain stakeholders, a company that chooses to act as if nothing has changed is likely to suffer the consequences—as it seems like everyone is watching.

  • The attempt by the U.K. retailer, Sports Direct, to keep its shops open despite the country's lockdown, with the argument that it was an essential service, could have been considered a rational business decision under normal circumstances. However, after experiencing a backlash from staff and the media, the company had to back down.
  • The appearance of unduly profiting from the pandemic or excessively bowing to shareholder interests could result in not only reputational damage but also extend to undermining a company's license to operate.
  • It is yet uncertain how much the COVID-19 crisis will lead to lasting fundamental changes to the social contract between society and corporations, but it is likely that effective stakeholder management will become increasingly important for companies to successfully operate in a world of weakened public finances, social scars, and environmental degradation.

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Conflicting stakeholder priorities are sometimes difficult to manage

At a time when growing fragmentation threatens the stability and resilience of our societies, we think that corporations that are contributing to social cohesion might come out of this period stronger in the eyes of all stakeholders. Conversely, companies seen as having focused excessively on short-term shareholder interests at the expense of other stakeholders may undermine their licenses to operate. Many companies may need to slash costs and shed workers to stay in business, but even in these instances, stakeholder management will be important. The immediate positive or negative bottom-line effects of decisions they take today may unleash large, negative or positive second-round effects.

Besides helping to address the pandemic, stakeholder-focused corporations are creating new ties with stakeholders in civil society and therefore might avoid serious reputational and financial repercussions. One legacy of COVID-19, therefore, may be greater awareness of the benefits of the stakeholder approach.

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