COVID-19 and Inequality: A Test of Corporate Purpose

Bronagh Ward is director and Vittoria Bufalari is senior associate at KKS Advisors. This post is based on a KKS memorandum by Ms. Ward, Ms. Bufalari, Mark Tulay, Richa Joshi, Nick Cohn Martin, and Sara E. Murphy. 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

Before the onset of the COVID-19 pandemic, the world’s largest and most influential companies made promises to their stakeholders. In 2019, 181 CEOs in the Business Roundtable—a group that includes major companies such as Amazon, Apple, and Bank of America—redefined the purpose of a corporation to one that delivers value to all stakeholders, not just shareholders. The statement immediately hit the headlines and was received with equal measures of applause and skepticism.

At the 50-year anniversary of Milton Friedman’s famous statement that the one and only social responsibility of business Is to increase profits, is it possible we are witnessing a turning point in how companies view their responsibilities? If it is the dawn of a new model of purpose-driven leadership, then 2020 is a make or break year for companies to live up to their commitments. The global pandemic and the death of George Floyd have sent seismic waves through the corporate community, pushing companies to take a decisive stance on how they treat their stakeholders during a crisis and their role in addressing inequality. Against a backdrop of growing corporate commitments on purpose and a state of global crisis, we conduct a quantitative stress test of corporate purpose. Analyzing a sample of companies constituting the S&P500 and FTSEEurofirst indexes, we employ three tests of corporate purpose:

  1. The commitment to purpose test—Is there any relationship between being a company with aspirations to be purpose-driven and how a company performs when put to the test during times of crisis?
  2. The historical performance test—What is the relationship between proactive company strategies to address issues before a crisis and their performance during a crisis?
  3. The speed of response test—Does it matter how quickly a company responds to a crisis?

To answer these questions, we construct a COVID-19 score and an Inequality score for companies, leveraging data from Truvalue Labs measuring public sentiment on relevant issues such as Employee Health and Safety (COVID-19) and Employee Engagement, Diversity and Inclusion (inequality) among other issues.

Our results indicate that being a Business Roundtable signatory in the United States has a small but negative effect on a company’s response to the COVID-19 crisis (average -0.82 score points), while it has a positive but still small effect on a company’s inequality score (average +2.38 score points). Across the United States and Europe, companies that have a consistent and positive track record of effectively managing issues relevant to COVID-19 or inequality have continued along the same outperformance trend during the crisis. Companies with a positive track record in the 5-year period leading up to the pandemic scored in average 11.34 points higher, while companies that proactively managed inequality issues scored 20.93 points higher during the crisis. Additionally, companies that responded positively to the COVID-19 crisis at its onset continued performing better (+21.22 points) than late responders during subsequent months.

Overall, our results suggest that corporate commitments to purpose are less informative about a company’s future performance on social and human capital issues than other indicators. What matters more is whether a company has a strong track record of proactively managing issues that may become material during a crisis, and whether a company is an early responder on relevant issues during a crisis.

Based on our findings, we urge companies to focus on translating their purpose commitments into action. Short of authenticity, companies risk adopting a corporate strategy that lacks focus and generates reputational issues when unfulfilled claims are inevitably scrutinized. During this time of great social need, companies must quickly adapt, respond, and innovate to strengthen corporate resilience and deliver value for society and shareholders. We encourage the investor community to pay attention to company track records on social issues that are likely to become more important as a result of emerging trends, and to identify companies that respond quickly to events as a signal of superior future performance.

Our initial research provides fertile ground for future research on corporate purpose and performance within the context of a crisis.

The complete publication is available here.

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