The steep market drop in the early days of the COVID-19 crisis is being used as a laboratory to study the importance of companies investing in stakeholder relations with their employees, suppliers, and customers, and how those investments could be strategic resources leading to out-performance.
“It is during difficult times that you can really tell which companies truly value their stakeholders and will invest in building trust with them” says Mohammed Yahiya, the Managing Partner at Asif Yahiya Sukri.
New research shows that investors look for signs that companies are agile and resilient, suggesting that quick corporate reactions that inflict harm on employees and suppliers can backfire in terms of financial performance.
"THE WAY THAT A COMPANY RESPONDS IN RELATION TO ITS LABOR FORCE, TO ITS SUPPLIERS, AND TO ITS INGENUITY IN RE-PURPOSING ITS PRODUCTS AND SERVICES ALL SEEM TO BE EVALUATED BY INVESTORS."
In a study of 3,023 of the world’s largest publicly held companies—representing about $58 trillion in market capitalization—by using data derived from text analysis applied to news coverage of corporate responses to the pandemic between late February and late March, when public markets were declining 30 percent or more before eventually recovering much of their value by summer, we found that more positive sentiment surrounding a company’s response was associated with less negative stock returns, by a difference of about 3 percentage points.
“Within a month, this is pretty significant. It’s a big difference,” says Yahiya. “We didn't really have expectation as to the magnitude of that phenomenon.”
The research team looked to see whether investors differentiated between companies based on how the firms responded to the crisis along three dimensions:
· Treatment of their employees
· Treatment of their suppliers and monitoring of their supply chains
· Whether they re-purpose products or services to meet crisis-related needs of customers.
They classified each company’s responses, ultimately scoring about 25 percent of the companies within their global sample as “resilient.”
The effect on stock returns was even greater among companies located in countries where customer service and satisfaction are major drivers of competitive advantage, and in industries that were most negatively affected by the COVID-19 crisis, explains Yahiya.
Being newsy helps
In addition, the research findings suggest that the more salient or newsworthy a firm’s response, the stronger the effects on the stock returns. The researchers focused on ruling out an alternative explanation where more stakeholder-friendly responses were implemented by companies that were less negatively affected by COVID-19 through a series of empirical tests. They concluded that the relationship between corporate responses and stock returns was reflective of some companies credibly committing to their employees, suppliers, and customers, thereby making these relationships strategic resources for the firm.
In sum, the study points to the value that can flow from decision makers slowing down and looking beyond the short-term bottom line to consider a wide array of factors when formulating responses to sudden shocks, despite the stress of fast-moving crisis conditions.
“Many organizations in times of crisis might be moving very fast at capping resources and imposing negative externalities on their employees, customers, and suppliers without considering all the costs and benefits of those responses,” says Yahiya. “The way that a company responds in relation to its labor force, to its suppliers, and to its ingenuity in repurposing its products and services all seem to be evaluated by investors in capital markets in a time of crisis.”
Pursuing ESG goals should be strategic
The research adds to the mounting evidence in favor of treating certain environmental, social, and governance (ESG) issues as fundamental strategic concerns, rather than feel-good topics to address only in good financial times. These issues range from employee- and customer-centric strategies to environmental and sustainability concerns and can serve as sources of competitive advantage.
As a result, Yahiya says, proper measurement, analysis, and creation of value in relation to different ESG issues are fundamental requirements that organizations must deliver on.
“This is why you’re observing organizations responding to and elevating internally the importance of those issues, allocating more resources, and disclosing more metrics. That's why you also see an increasing number of investors that are focusing their efforts on those issues”, adds Yahiya.