We are now in the second stage of the COVID-19 pandemic in North America.
In the first stage, citizens, governments and businesses took comprehensive yet remarkably nimble action once the COVID-19 outbreak was declared to be a pandemic.
Corporate boards acted quickly to protect their work force and cut corporate spending to protect their balance sheets. Previously unheard-of levels of government fiscal and monetary interventions were implemented with alacrity. Unprecedented restrictions on individual liberties have been almost uniformly adopted and accepted, recognizing public health as the foremost priority.
Governments that intervened quickly successfully flattened the infection curve. Our healthcare systems have continued to function and mortality has thankfully not risen to projected levels. Yet the virus continues to spread, and the reality has set in that this is not an acute, momentary crisis that will disappear as quickly as it arrived; rather, it is a crisis that will persist for the foreseeable future.
As the economy is now reopening in varying patchworks at sub-federal levels in Canada and across the United States, we explore in this edition of the Torys Quarterly key issues that will impact businesses during this next phase of recovery.
1. "Never waste a good crisis."
Many sectors (food, essential services, critical supply chains, online shopping, shipping and transportation) flourished during the crisis and will be well-positioned to the extent that markets and consumer behaviours are transformed in the longer term. Many businesses adapted with speed and surprising seamlessness to mandated working from home.
For businesses operating or having head offices in multi-storey towers, once the move back to work comes about, the office will be a different place. Floor densification, hoteling and regimented work hours will be revisited. Two-passenger elevators and mass transit will be bottlenecks. Many businesses will have found lessons from adaptation during the lockdown phase that can be adapted during recovery—business continuity space may be unnecessary; employee work hours and days in the office may be staggered, perhaps over seven days (will the concept of rush hour be relegated to history?); back-office support can be moved to less expensive real estate; investment in secure technologies will increase; and business travel will undoubtedly decrease.
2. Government's role will change, with implications for businesses.
As one commentator put it: we couldn't afford not to implement the massive government interventions during the crisis phase, and we can't afford to continue them much longer. The waves of government programs implemented to shore up businesses and individuals during mandated shutdowns cannot be sustained. But in the wake of a depression-level shrinking of consumer demand, many businesses are left with crippling debt and the prospect of limited revenues as operations remain subject to restrictions and spending remains constrained.
Hotels, airlines, restaurants, retail and the energy industry have been some of the hardest hit, and governments are forced to decide the types of additional relief and/or "bailouts" that may or may not be made available to those sectors in light of the cost of the programs that have already been more broadly introduced. In the next phase, some are speculating governments may make direct investment in, or take ownership of, certain aspects of vital industries in a manner not seen since the 1970s and early 1980s in Canada and the United Kingdom.
Governments will also be working with industry to consider ways (beyond subsidies and loans) to stimulate job creation, infrastructure spending and project development, recognizing the paramountcy that the public will likely place on economic recovery in light of the massive deterioration of personal, corporate and government balance sheets that has occurred so quickly and without warning.
Notwithstanding the unprecedented nature of the crisis that unexpectedly gripped the world in the span of weeks, government decisions made at each stage of the crisis will be evaluated and second-guessed with the benefit of hindsight.
To some extent, corporate directors' and officers' attention will shift toward stewardship, health and safety, sustainability and long-term value.
We will continue to operate in an environment where governments are delicately balancing individual liberties and economic consequences against public health and safety considerations. While governments are regularly forced to legislate and strike balances among these competing considerations, there has been no comparable situation or playbook to which our policy makers can refer for this widespread pandemic.
The breadth and extent of the pandemic's effect on each of our personal lives has created unprecedented attention and impact previously not experienced in many generations for much of the developed world. As we move beyond the acute crisis stage where individuals and businesses were generally willing to defer to government intervention to broadly protect public health, as the longer-term realities set in and more information and data become available, we will continue to see increasingly divergent public and political viewpoints.
3. Corporations and their stakeholders.
Fueled by the 2008 global financial crisis and precipitated in some measure by short-termism, many market participants revisited the shareholder centric theory of the corporation. The stakeholder view of corporate legitimacy has gained adherents—that corporations serve a societal purpose in support of their shareholders, employees, retirees, the communities in which they operate, the environment, and other stakeholders. This view is reflected in the decisions of the Supreme Court of Canada, amendments to the Canada Business Corporations Act, and commentary by the US Business Roundtable and investment firms such as BlackRock, Vanguard and State Street.
The COVID-19 economic shutdown has not impacted all equally. We expect the movement to hold successful corporations accountable for more than shareholder returns will continue to gain momentum in the aftermath of the COVID-19 crisis. The balance of corporate directors' and officers' attention will shift, to some extent, toward stewardship, health and safety, sustainability and long-term value.
4. Board and management interactions will shift, but leadership remains critical.
During the crisis phase of the COVID-19 pandemic, many businesses faced existential threats. Many continue to do so. During an existential threat, boards and management work together on a day-to-day basis, making significant decisions to ensure the survival of the organization. That working pattern is not sustainable. Senior executives now are in a position to plan for the second phase, the social distancing phase, which is expected to last at least several fiscal quarters. Management can resume managing, setting revised corporate goals and planning for success in the new environment. Boards can resume their oversight role, and consider strategic opportunities or necessary steps for the business to reconfigure (or take advantage of relative strength) during the recovery.
Boards and management should remain aligned, including on executive compensation and performance criteria that need to be re-evaluated when the time is right and when long and short-term impacts are better understood. In the new environment, businesses' stakeholders will expect moral leadership and a mindful tone at the top, when many stakeholders face adversity as the crisis unfolds.
Business leaders who take the moral high ground and demonstrate strong, transparent leadership during the various stages of this crisis will undoubtedly reap rewards from their internal workforce and their external constituents.
Some sectors have thrived during the first stage of the crisis. Some businesses have been decimated and will not recover. Most businesses have continued operations in a limited and markedly different environment: first working through crisis mode, and now planning for a period of unknown length of re-opening while social distancing remains paramount.
Unanswered questions remain top of mind: will the loosening of restrictions result in a resurgence of cases? Will the next wave of infections be worse? Which government approaches to intervention will be most successful and how will success be defined? How will governments pay for relief programs and subsidies? And so on.
Businesses will function during the next stage in a time of social distancing—enforced both by government fiat, and individuals' fears. The keys to strong confidence remain in the future—reliable, widely available testing; digital contact tracing; protection measures for at-risk populations; and more permanently, a vaccine or a broadly achieved immunity.
While acknowledging the shift into the second stage towards recovery, the broader question of how many more stages are yet to come remains unanswered.
Originally published May 7, 2020.
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