Look after employees, customers, and suppliers; adopt a through-cycle mindset; and communicate transparently. Profits and dividends will come later if you make the right moves now.
The social impact of their decisions is under the spotlight as they try to balance the needs of all key stakeholders—customers, partners, suppliers, and society in general. The good news is that executives’ most important investors, long-term shareholders, believe that doing the right thing for all stakeholders in the near term will benefit investors in the longer term.
We asked a simple question: What advice would you give to executives during this difficult time?
The investors all acknowledged that executives are making decisions in an extremely uncertain environment. “Cash is king” in times of crisis, and every company is facing its own liquidity challenges.
Several common-sense themes emerged in our conversations, however, including the advantages of using a through-cycle approach when making decisions about investments and operations and the need to communicate transparently during the crisis period. The investors’ primary piece of advice?
Look after employees first, followed by customers and suppliers. It will pay off in the long run, as each group will certainly remember how you treated them during this difficult time. The profits and dividends will come later if you make the right decisions and moves now.
Protect employees, customers, suppliers, and the community
Most of the investors we interviewed immediately focused on the importance of taking good care of current employees, assuming a company has enough liquidity to be a going concern.
The emphasis should be on keeping employees working if possible, but only under the safest possible conditions. Protecting employees’ health is not just the humane thing to do; it can also help a business ramp back up more quickly when the risks subside.
It can also engender greater loyalty among employees – a benefit that can easily be underrated.
Executives’ reflexive reaction to the pandemic has been to try to conserve cash where they can—for instance, holding off on payments to suppliers and squeezing suppliers on price. These actions make sense for those companies that might not survive otherwise, investors acknowledge, but companies with some liquidity should consider using it to help smaller, weaker customers and suppliers. A quick recovery for customers means increased demand for goods and services. But if suppliers don’t recover quickly (or at all), companies won’t be able to ramp up production to meet this increased demand and may lose share to competitors.
Take a through-cycle approach to investments and operations
The investors we spoke with believe that strong companies with good liquidity should continue to pursue their most-promising business opportunities and use the crisis to strengthen their long-term competitive position.
Companies that invested through previous downturns emerged stronger and were able to generate higher returns than competitors once the crisis was over.
“Managing for the long term pays off,”
Companies operating in a downturn as a result of the COVID-19 pandemic may similarly want to look for new opportunities—for instance, bringing ideas to market faster or acquiring intellectual property from unexpected sources.
Regarding talent, it may also be a good time to look for ways to bring in new faces. Several investors cite the opportunity to attract people from weaker companies or without competition from companies that have frozen their hiring—not just technical talent but sales, marketing, product-innovation, and general-management experts.
The same through-cycle mindset applies to capital expenditures. Stronger companies may be able to build capacity more cheaply or purchase assets at reasonable prices from weaker companies.
During this period, well-capitalized companies can aggressively pursue M&A at attractive valuations.
During the 2008–09 crisis, a strong bank gained significant share in certain critical markets by buying up some small, weaker companies with good talent and client relationships. It has retained its leadership position in several important product areas, while some of its competitors still haven’t recovered more than a decade later.
One investor pointed to a retailer with a strong balance sheet that is continuing to invest in its winter lineup now, potentially gaining an advantage over competitors next fall.
Build for future shareholder value; deemphasize dividends and repurchases
The investors we spoke with acknowledge that many companies have cut their dividends and share repurchases as a matter of survival, especially those companies that are facing large layoffs. The decision about what to do with dividends becomes more difficult, however, for those companies that can still afford to pay them.
The investors support short-term dividend cuts in those instances where short-term uncertainty is high and cutting dividends is the prudent thing to do.
But if a company has enough liquidity to pay its regular dividend under all stress scenarios, it should continue to pay the dividend. Doing so will send a positive signal to investors about the company’s financial health and can provide much-needed cash to retail investors and income funds. Investors’ overarching advice to companies about share repurchases is to “proceed with caution.”
Stronger companies may be tempted to repurchase their stock at low prices, but the current political environment and the potential for continued economic disruption could lead them to regret that decision.
Communicate short-term execution of long-term plans
Shortterm investors may press the company for clues about trading opportunities. By contrast, long-term investors are looking for evidence of resilience: How will the company withstand the crisis, and how strong will it be in the long term, considering its competitive position, growth potential, and returns on capital?
The investors need a clear understanding of companies’ liquidity and cash position. If companies are stressed, investors want to hear more frequently from them about how they are managing liquidity in the short term: a detailed view of these companies’ sources and uses
of cash (preferably on a month-by-month basis) would be helpful.
Long-term investors say they are looking for honesty and transparency. Such transparency is especially important when different parts of the business (regions and individual business units) are being affected unevenly.
Investors understand that companies cannot predict the future. But they do expect that companies will share enough information about the pandemic’s effect on their businesses that investors can make their own assessments of how the companies will fare through the crisis and beyond.
And finally, most of them say they prefer companies to provide guidance based on longterm key performance indicators of value rather than short-term earnings per share.
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