The COVID-19 pandemic is a serious crisis. To understand its effects, and to guide how firms should respond, we need evidence. However, since the crisis is recent, we do not yet have enough data to understand its long-term effects; since some firm responses have not yet been tried, or have only recently been implemented, we are unable to assess their success. Moreover, particularly given the seriousness of the pandemic, we need to ensure that evidence is of the highest quality, but the peer review process in finance journals takes several years.
We have collated a small selection of past papers that may be relevant for the current pandemic. While no two crises are the same, and the findings on prior downturns will not automatically apply to COVID-19, these papers will hopefully shed useful light on the current crisis. First, in nearly all cases they have been peer-reviewed; second, sufficient time elapsed after the downturns or policy responses to allow analyses of their long-term effects. A short summary of each paper and its potential relevance to the current crisis follows below.
Companies that cut employees and capital expenditures, while maintaining their investments in R&D and CSR, performed better once the economy recovers
Highlights the value of a discerning approach to investment – recognising that some investment may need to be cut, and that a responsible business serves investors as well as stakeholders
Uses the maturity of long-term debt as a shock to the extent to which firms were exposed to the crisis, to identify causation rather than just correlation
Kim, Maug, and Schneider (2018): Labor Representation in Governance as an Insurance Mechanism
Review of Finance
Workers on boards reduce job losses in industry downturns – but only for white-collar workers and skilled blue-collar workers. This is because worker directors are likely to be elected from these groups, and not from the group of unskilled blue-collar workers.
Employees pay for this insurance with lower wages. Overall, employees benefit and shareholders are no worse off, so the pie grows
Uses whether a firm is just above or just below a size cut off, that requires companies to have one-half rather than one-third of worker-directors, to identify causation rather than just correlation
→ Read Who should run a company? CCG report from May 2019 conference, with summary of the employee rights panel featuring Ernst Maug's presentation (pp. 11-13)
Edmans (2012): The Link Between Job Satisfaction and Firm Value, With Implications For Corporate Social Responsibility
Academy of Management Perspectives
The “100 Best Companies to Work For in America”, delivered stock returns that beat their peers by 2.3-3.8% over 1984-2011
Crucially, this 28-year period included recessions as well as booms, but the outperformance of the “Best Companies” was consistent throughout all time periods
Thus, investing in employee satisfaction is not a nice-to-have extra
Family-controlled firms significantly underperformed in the 2008-9 financial crisis. They also cut investment more, and these investment cuts are associated with greater underperformance
Suggests that families took value-destroying actions to ensure that firms remained under their control, even if receiving outside investment would have been in the long-term interest of the firm
Q&A on Responsible Business in a Time of Crisis (Alex Edmans and Tom Gosling)
- Responses to audience Q&A from the webinar Responsible Business in a Time of Crisis, on the difficult trade-offs that companies face when implementing responsibility
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