Unsurprisingly, the debate about the long-term impact of the Covid-19 pandemic has legs. The pandemic has affected all of our lives (and livelihoods). Consequently, there is no shortage of interesting points for experts to speculate about. However, predictions about business reactions are becoming less speculative as new data emerges.
It is clear that companies are running for safety. They are building up cash and other reserves to weather the storm. In this respect, data shows that US companies are hoarding far more cash than in recent years while taking on little new debt. Some of the most reliable dividend-paying companies around the world have cut or cancelled dividend payments. Closer to home, a number of South African companies have announced rights offers to shore up their balance sheets. We might have expected a reaction of this nature by at least some companies. However, the breadth, speed and scale of the reaction is surprising and can only be properly understood by considering the historical context.
For most of the decade after the end of the global financial crisis (and the accompanying recession) around the end of 2008, economic growth in the developed world was muted. Low economic growth meant that revenue growth was hard to come by. Increasingly, the only way to drive meaningful profit growth was by reducing cost. Efficiency became the key objective of every business. So single-minded was management focus on efficiency that it became the siren song for investors too.
No other industry exemplifies this like the airline industry. An airline operates a low margin business with high fixed cost. Unlike more robust business models, efficiency is not a hallmark of the best-run business in the industry. Instead, the reward for efficiency is merely survival. In other words, the economics of the airline industry is what investors are typically taught to avoid. Indeed, Warren Buffett famously said that “if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down.” However, in the past decade, efficiency trumped all other considerations. Even this famous investor succumbed to the lure, bought airline stock and lived to regret it when the global pandemic struck (Buffet subsequently sold around April 2020).
One takeaway from the global pandemic is therefore that red-lining business models has unpleasant consequences during times of uncertainty. Some have suggested that moving to a safer speed will encourage companies to move at least some manufacturing activities closer to home. Theoretically, this would push up wages in developed countries (where wages have been mostly stagnant in real terms since the financial crisis), reduce pollution from long-distance transport of goods and reduce corporate tax avoidance. Taking this at face value, they cheer the “win” for corporate social responsibility. After all, paying a living wage, fighting climate change and paying a fair share of taxes are all causes of those demanding that business should be about more than maximising profits.
However, this argument ignores the fact that moving manufacturing out of a country means that jobs are also shifted elsewhere. Already, cancelled orders by retailers in rich countries have put pressure on manufacturers in emerging countries. Many of these manufacturers have responded by dismissing workers. This leads to particularly harsh consequences in countries with no social safety net. There are, for example, reports that some workers in India are dying of starvation while they try to return to their families in rural areas after losing their manufacturing jobs. Does this mean that corporate social responsibility, unlike charity, not only begins, but also ends at home?
The global pandemic made us aware of the dangers of a single-minded efficiency objective. However, the real problem was the single-mindedness, not the objective. If we want to learn from our mistakes, the solution will not be an obsession with safety. Instead, we should focus on developing greater balance in our views. If we do not, the next lesson from the global pandemic could well be about the consequences of social responsibility when it is too narrowly defined.
— Bill Ford —