Pandemic overhauls firm-stakeholder relationship

A new social contract will emerge as the Covid-19 crisis changes relationships between companies and their stakeholders.

The use of government support schemes, and the trade-off in terms of shareholder returns or executive pay is one example, according to Schroders global and international equities portfolio manager Katherine Davidson.

The treatment of employees is another that has garnered increasing focus during the lockdown.

While many employees with desk jobs are able to work from home, it’s a very different picture for those deemed to be essential workers.

This crisis has highlighted that there is a whole tranche of the labour market whose importance may have been previously overlooked.

Supermarket employees, delivery drivers, warehouse personnel, and workers of food manufacturers and processors are just some of the new “frontline” staff who are critical to keep the economy ticking over.

And while doctors and nurses are the new national heroes, there is growing awareness that the smooth running of health and care services also rely on so-called “low-skilled staff” such as hospital porters, cleaners, and care home staff.

Davidson says that these employees are often working in environments where interaction with customers or patients poses a particular hazard.

Companies in these sectors have faced fierce scrutiny over provision of personal protective equipment and safeguarding of staff.

“The good news is that companies seem well-aware of their responsibilities – whether out of good governance or fear of public backlash.

“The most urgent are measures to address specific safety issues related to the crisis. Offices, shopping centres and restaurants are rushing to find innovative solutions to social distancing requirements, from one-way systems to screens between tables,” she said.

Others, such as remote and flexible working, look likely to be in place more permanently.

A number of tech companies have already extended “Work From Home” indefinitely.

“Companies that embrace the new normal, and make the necessary investments in technology, are likely to be rewarded with a happier, more motivated – and potentially more productive – workforce.

“They will likely also find it easier to recruit,” says Davidson.

Beyond physical safeguarding, some employers have also taken steps to protect or improve employees’ financial health.

The Economist has noted that pandemics through history have generally resulted in a shift in returns from capital to labour in the form of much higher real incomes for workers.

The mechanism, however, was brutal: by decimating the working age population, these crises increased the bargaining power of surviving workers.

The economy today is obviously very different and the scale much smaller – but Covid-19 may come to represent a tipping point for rising inequality.

Thus the Covid-19 crisis will have long-term ramifications and it will take some time for the impacts to play out in share prices.

“However, to date the evidence for US equities has supported our conviction that responsible companies should be more resilient in a downturn and outperform over the cycle,” says Davidson.

“Since we discussed this in March, we have seen the 20% of stocks with the highest environment, social, governance or ESG scores continue to outperform the broader market.

“The outperformance has been less marked than in the initial market falls as we have seen a rotation into higher-risk and more economically sensitive stocks, but remains material,” she says.

This is partly because ESG leaders have so far seen smaller earnings per share downgrades than ESG laggards.

Since March, the scale of the downgrades has risen significantly for both groups, but the difference remains evident.

This continues to support Schroders’ view that companies which are the most sustainable will outperform their less sustainable peers over the long term. —