Transforming the Corporate World
The pandemic revealed that many corporations were not ready for a truly global disruption. The New Normal is a time for introspection and change - including the behaviours and norms of the corporate world.
The second of a 10-part series published by the Global Institute For Tomorrow.
One year ago, major companies were still touting 2019’s record profits and were predicting that 2020 would be another bumper year for profits. Even as the pandemic’s toll started to rise in Asia, and then in Europe, global stock markets rallied.
As more and more countries started to pause economic activity for public health reasons — lockdowns, social distancing, and travel restrictions — companies suddenly saw their revenue dry up. Companies went from boasting that profits would last forever to going to the government for a bailout, tail between legs. Major companies frantically cut costs and headcount as the pandemic paused economic activity. Millions around the world have been fired with little-to-no protections. Landlords living off the rent from their tenants faced a revolt as renters and companies refused, or were unable, to pay rent.
But does this really come as a surprise? There was already a growing sense of awareness for years before COVID-19 that good corporate numbers were not really connected to economic performance or the real economy. In the midst of the pandemic, we were given more proof of this, with the disclosures about Wirecard’s fraud. There was a growing disparity between stock markets — increasingly the go-to symbol of corporate performance and rewards — and realities on the ground, where wages and productivity had stagnated. Mergers and acquisitions led to bigger and bigger companies that never realised the promised cost and efficiency savings, all while hurting the actual assets, like workers, that actually support companies. Established brand names like Toys ‘R’ Us, despite good fundamentals, would go into bankruptcy as private equity owners raided their assets and swamped them in debt. Corporate operation had become obsessed with running numbers for the financial not about running companies with people as the key asset. This has to change.
Before the pandemic, global companies appeared to be incredibly resilient, at least according to established orthodoxy. Interconnectedness was supposed to mean that a problem in one place would shift supply chains elsewhere, and consumers would never see the difference. Goods would remain on store shelves (or, increasingly, on e-commerce sites), with no indication to the shopper of what was happening behind the scenes.
Even deeper global economic transformations would not sour the mood in corporate boardrooms. The trade war between China and the United States was not a cause for concern, as companies noted that they were already moving their manufacturing out of China anyway, in search of cheaper labour and other freebies in South and Southeast Asia. There were always cheaper sources of disposable labour, under-priced resources, and new places for FDI-based exploitation.
But the pandemic — a truly global shock — revealed how fragile the edifice of the global economy really is.
An interconnected economy, rather than improving resilience, instead spread economic pain and disruption around the world. Even countries that initially escaped the pandemic’s health toll have suffered major economic contractions as business and consumption in Asia, Europe and North America have been put on hold.
When these difficult times came, companies realised they had little-to-no reserves they could rely upon to weather the storm, despite years of being very profitable. For example, American Airlines CEO Doug Parker is famed for having said “We’ll never lose money again” in 2018 — American Airlines recently announced that they lost US$8.9 billion over the year of the pandemic, a larger sum than the GDP of entire countries, 50 of them to be precise.
With mountains of debt obligations in pursuit of growth targets — often set in order to enrich management and shareholders — companies were suddenly faced with imminent bankruptcy after only a month or two of reduced spending. Even the average household is arguably better managed, with an eye for saving for a rainy day. Corporate executives acted as if the good times would last forever, only to be surprised when they finally stopped. Clearly, risk management did not factor in real shocks or — tragically — the need to protect workers.
Governments can’t prevent another global shock from happening, but they can make sure that corporations are better prepared, and can meet obligations to society starting with workers, the basis of their social contract and licence to operate. Cash handouts, basic income and bailouts may be a necessary stopgap solution, but we need a system to protect workers and small businesses in the long-term. Policymakers need to think about how to transform corporate incentives to build in actual systemic resilience. One way is to require — by legislation — that companies need to have sufficient reserves to cover major costs like manpower, maintenance and upkeep during times of crisis for a reasonable period of time. This does not have to be onerous as these reserves will accumulate over the years into a sizable chunk of money; but one that shareholders and management cannot get their hands on.
On that point, shareholders and senior management cannot be allowed to suck the lifeblood out of a company through dividends and large bonuses at the expense of worker protection at times of crisis. Yet, given that CEOs are paid around 280 times more than the average worker, it is clear that corporate culture is not yet attuned to the needs of its employees — just its leaders. The graph below describes this trend:
In addition, expansion (via mergers and acquisitions) should be limited, as they are simply financial plays to excessively reward management and shareholders. They do not put people first or have any great social value. This is the Big Reset for the Corporate World. Businesses do not exist as financial plays for their shareholders and to be manipulated via the stock market.
When a company receives a bailout now, governments should require that they implement drastic reforms to ensure their long-term resilience: greater cash reserves to ensure businesses can survive weeks, if not months, of disruption; stronger protections for workers and stakeholders; compliance with environmental and sustainability regulations and requirements; and investments to give corporations a stake in their local communities (such as Black communities in the United States or First Nation people in mining areas in Australia).
There is an analogy to the financial sector. A similar problem happened with large global banks in 2008, when a sudden collapse in the housing market put several major banks teetering towards bankruptcy. Many had to be bailed out, and there was an effort to reform these companies so that they could more easily survive a similar shock in the future. The Basel rules forced banks to keep significant reserves to sustain themselves during times of financial panic.
There is a legitimate debate as to whether these rules went far enough: with hindsight, they probably did not. But there was an effort to change the incentives in large companies and force them to take resilience seriously.
More resilient companies would ultimately be less of a drain on public coffers the next time there is a crisis, and this will better allow societies to continue to operate rather than simply struggle to survive. Companies will be obliged to come to terms with managing expectations around dividend payments, bonuses and maybe even accept lower profits. These changes will reflect their obligations and the true cost of doing business. In addition, greater corporate resilience will reduce the need for the government to reserve funds for corporate bailouts, unemployment benefits, and so on.
About the Global Institute For Tomorrow (GIFT): GIFT is an independent and internationally-recognised think tank and executive education provider operating across Asia. We are committed to purposeful leadership learning and partnering with our clients to help them unlearn conventional wisdom and unleash organisational potential to redesign society
