Week of 23 March 2020
The spotlight is growing on how companies previously managed their finances (e.g. share buyback programmes) and are now responding (e.g. drawing down credit lines and executive pay) to the financial pressures of COVID-19
Klaus Schwab, Executive Chairman of the World Economic Forum, highlights that those companies that maintained a short-term profit orientation and failed to embrace stakeholder capitalism are those that are suffering the most in this crisis.
Klaus notes that companies that “used their rising profits in past years for major share buyback programmes” (which “boosted short-term profits and increased executive bonuses”) are now “faced with the lack of strategic reserves or investments” and are “the first to suffer” from this crisis (e.g. US airlines). Schwab contrasts this with other companies such as Microsoft “who used profits to invest in digital transformation, talent, research and development, and their customer relations” and who have an ability to react in this crisis.
Klaus also remarks on companies’ attitudes to executive pay in this time of crisis. He contrasts easyJet (which just announced a £174m dividend payout) with Marriott (whose CEO Arne Sorenson announced he and his chairman would not get paid in 2020, and that his executive team’s remuneration would be halved) and Kenya Airways (whose CEO Allan Kilavuka announced he would take an 80% pay cut, while board members and senior executives would take a 75% pay cut).
Paul Polman, former Unilever CEO, states that the pandemic “is, in fact going to be an acid test for [the concept] of stakeholder capitalism.” He criticises “companies like Boeing and Kraft Heinz for ploughing money into share buy-backs and raised dividends to prop up their share prices to the extent they can’t afford to support workers when hit by a ‘black swan’ event such as the coronavirus.” Polman underscores that “investors should be rewarding long-term behaviour that protects communities and workers as well as the environment.”
Ellen Carr from Weaver Barksdale cautions companies against drawing down from their credit lines – their revolving credit facilities – highlighting that if all companies max out their revolvers, “banks won’t have enough capital to keep the system afloat.” Carr recommends instead a review of executive compensation. The Financial Times finds this week that over 130 companies in Europe and the Americas have drawn $124.1bn from their lenders over the past three weeks, with the actual amount likely to be considerably higher.