The coronavirus pandemic will put more companies under scrutiny for decisions that impact employees, customers and society. What ESG investors need to know now.
“It takes many good deeds to build a good reputation, and only one bad one to lose it," Benjamin Franklin observed. Now, as the coronavirus pandemic creates a public-health and economic crisis of unprecedented proportions, investors will want to consider how this truism applies to market strategy.
“Corporate behavior in a time of crisis—both in how companies treat employees and customers, and their impact on society in a time of need—can have lasting implications, both positive and negative," says Jessica Alsford, Head of Sustainability Research at Morgan Stanley. “These factors can be linked to long-term performance and returns.”
Companies don’t have easy answers for how they should balance the needs of employees, customers, investors and society. Moreover, the right actions can vary materially across sectors and be dictated by a range of factors: changes in product demand, government-mandated shutdowns, workforce flexibility, and the level of fiscal policy support, among others.
Even before the coronavirus outbreak, more investors were looking at companies through the lens of environmental, social and governance (ESG) practices. But now, corporate decisions on human capital, customers and society during the COVID-19 pandemic could carry greater weight. As companies face greater scrutiny during the crisis, ESG factors will now be a key layer of diligence in evaluating an investment.
Employee Engagement Matters More Than Ever
Employees who are more satisfied are more engaged—and that has a material impact on company performance and the broader culture of an organization. In a 2019 Gallup study, workers in the top quartile for employee engagement outperform those in the bottom quartile across a range of metrics, including customer ratings, productivity, and profitability.
Emphasizing employee satisfaction during a crisis might sound idealistic, but doing so can improve outcomes in the near term, especially given the stress and disruption related to COVID-19. Further, proactive actions by companies to support employees in the crisis could be important drivers of employee loyalty and satisfaction over time.
“We've seen examples in several sectors of employers notably ramping up employee benefits, such as paid sick time for employees not covered or one-time bonuses to support remote work," says Mark Savino, an equity strategist on the Global Sustainability team.
Among major consumer discretionary retailers that have announced temporary store closures, most have also committed to continue paying their employees during this time. “These actions are commendable, and likely to garner greater loyalty among the employee base," he says, even if companies ultimately have to institute furloughs or layoffs later.
A study by Gallup suggests that the top quartile of engaged employees outperform the bottom quartile in a number of areas
Workforce Reductions and Long-Term Productivity
Furloughs and layoffs offer an immediate, and often necessary, solution to COVID-19 disruptions, but the long-term effects of such responses may be even more devastating. A study published in the Harvard Business Review found that following layoffs, the remaining employees saw a 41% decline in job satisfaction, a 36% decline in organizational commitment and a 20% decline in job performance.
When conditions do improve, the total cost of replacing lost employees can rise to as much as twice their annual salary. Also, new employees can take up to two years to reach full productivity.
“We recognize that workforce reductions may be a necessary step for many companies under current circumstances, but we see a number of differentiating actions that companies may take," says Savino.
For example, investors are paying attention to which executives are taking pay cuts along with their workforce. “While base salaries typically represent a small portion of total executive compensation, actions like this can send an important signal regarding management accountability throughout the organization," says Savino.
Customer and Public Outreach Pay Dividends
Employee wellbeing and company culture are only part of the ESG equation. Investors also need to take note of how company responses to COVID-19 help or hurt their customers, and society as a whole.
“These actions could go a long way in positively or negatively affecting a company's reputation in the eyes of its various stakeholders," says Alsford.
In a 2017 study by Optimy, 60% of customers said they were willing to pay more for products from companies with reputable brands and good values, and 71% of millennials said they would choose to work for a company that has demonstrated a strong commitment to its community.
To be sure, the “social" decisions companies make today play no small role in their prospects tomorrow. Times of crisis can build greater loyalty, actually improve employee satisfaction and make or break a company's reputation in the marketplace.
For more Morgan Stanley Research on Sustainable Investing and COVID-19, ask your Morgan Stanley representative or Financial Advisor for the full report, “COVID-19: Effects on Employees, Productivity, and Corporate Reputations." (Mar 25, 2020). Plus, more Ideas from Morgan Stanley's thought leaders.