After Coronavirus
By David Shaw

Last year, Directors & Boards devoted its attention to the rising focus on environmental, social and governance issues (ESG) from institutional investors and others, culminating in our Character of the Corporation event last November. While much of the discussion surrounding ESG was illuminating and perhaps game-changing, I worried that there was a certain “faddishness” in thinking about stakeholders in addition to shareholders. I worried that in the next (inevitable) economic downturn, ESG principles would fly out the door.

David ShawBut that was the time Before Coronavirus (B.C.).

Once we reach the time After Coronavirus (A.C.), there will still be much for boards to consider as they look at the shareholder/stakeholder debate, the most important of which may be to evaluate whether a balanced and more nuanced view might be appropriate. It’s not one or the other. But if the stakeholders are going to be on the hook for rescuing the economy with their future tax dollars, with being the “insurer of last resort,” they need to be accommodated.

Let’s look at stock buybacks. Airlines have squeezed every last cent (and inch) from their passengers. MarketWatch calculated that the five airlines in the S&P 500, plus JetBlue, generated $49.175 billion in free cash flow over the past decade, and spent $47.28 billion on common stock buybacks during the same period. That’s wonderful for shareholders, I guess, and good for executives compensated on earnings per share. But since they can’t ask those shareholders (and executives) to reinvest in a time of crisis, to put their money back into their companies, the airlines are looking for a bailout from stakeholders. They didn’t put rainy day funds together, even though they had experience with a global shock that ground their business to a halt just 19 years previously. It doesn’t look good, and it doesn’t smell good.

In fact, companies who build up cash reserves are criticized by activist investors and often forced, if the company’s will and strategy are weak, to return that cash to shareholders. And this, I think, is the second stakeholder-oriented issue that boards will need to look at A.C.

First, any risk management strategy that doesn’t involve having cash reserves for unexpected crises needs to be acknowledged as mostly an exercise in magical thinking. Second, using cash for stock buybacks in place of R&D investment shows that the board isn’t pushing management to innovate. Innovation breeds growth; stock buybacks breed short-term earnings-per-share boosts.

Of course, there’s more to this than stock buybacks. There’s the whole idea of the corporation’s purpose and responsibility. Is it solely to maximize shareholder return? Is it to continue to maximize efficiency and productivity, at the cost of incredibly narrow margins for error? Is it to rely on governments as rescuer, and not take true responsibility for its own risk management and mitigation?

This year’s theme for Directors & Boards, which we established late last year, is “The Age of Risk.” We’re certainly there, and our content will focus on a variety of strategies boards can and should use now, and going forward. In this issue, you’ll find how boards are responding to the coronavirus crisis, and an illuminating piece on how to wargame future risks in the boardroom.

I hope that you, your family, your shareholders and your stakeholders remain healthy and safe.


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