David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).
The COVID-19 pandemic has caused a societal crisis of far-reaching implications. For the moment, employee, environmental, social and governance (EESG) concerns may appear to have taken a back seat to economic survival, but in the longer term, a robust corporate response will require firms to re-evaluate their priorities. Once the economic recovery has begun in earnest, there is likely to be heightened investor interest in, and public scrutiny of, key areas of EESG, particularly as they relate to firm performance, human capital and enterprise resilience. The COVID-19 pandemic has shown that the nexus between corporate performance and societal wellbeing has never been stronger. The potential role of major corporations in perpetuating global inequities and exacerbating the disparate effects of large-scale crises, and their capacity to ameliorate human suffering through private sector action in support of government initiatives, are indisputable. For better or worse, the pandemic and future crises are likely to increase the extent to which the public perceives large corporations as entities that can and should bear a heavy burden of corporate social responsibility.
Stockholders are compelled by recent events to acknowledge that EESG-related risks have the potential to affect the creation and preservation of long-term wealth. Corporate disclosures have begun to change accordingly, as both public and private companies are focusing on stakeholder-centric communications in response to the human capital impact of the crisis. While EESG-related disclosures generally have been presented separately from financial disclosures, the pandemic has blurred the line between the two sets of issues. In the aftermath of the COVID-19 pandemic—itself fundamentally an EESG event—investors will want to know whether, and how, firms are preparing for a variety of worst case scenarios. Companies will face increased pressure to enhance their disclosure around risk management, particularly with respect to systemic crises that are non-financial in origin.
