As ever in a crisis, cash conservation becomes a priority and COVID-19 is no different. Fidelio is seeing across our Board assignments a clear focus on liquidity and cash. Indeed, one Chair forwarded the following familiar advice: "My other piece of advice, Copperfield," said Mr. Micawber, "you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
- Charles Dickens, “David Copperfield”, 1850
So far, so simple. Major investors have also been encouraging Boards to conserve cash. For example, Sacha Sadan, Director of Corporate Governance at LGIM, has advised companies not to pay dividends and to stop buybacks, saying “this is a time to survive”. However, Boards of companies implementing a rigorous cash conservation programme need to be sensitive to the consequences and the potential stakeholder impact. This is surely ESG at play. Based on Fidelio's experience, here are some pointers for Boards focusing on cash conservation:
If cash is short, substantial executive bonuses will be inappropriate and in companies that are under significant pressure, senior executives should be thinking of cutting their own remuneration. The UK’s Prudential Regulation Authority has already indicated that it expects banks not to pay cash bonuses to senior staff and banks globally are coming under pressure to cut or suspend dividend payments.
Employee well-being is a priority. The current situation puts the S of ESG into the spotlight – are Boards practising what they preach. This is an opportunity to build loyalty and goodwill by behaving well; conversely, individuals will long remember being treated shabbily. Employees expressed their concerns, for example at continuing to retail non-essential items when almost overnight lockdown and Covid-19 risk management became a priority. Equally, where possible, companies should avoid redundancies into a very difficult job market.
Companies in receipt of government funding need to make sure that that cash serves not just narrow self-interest, but the wider purpose of keeping the economy going. One important lesson of the financial crisis was a lingering distrust of banks perceived to have profited from bailouts, and a similar reputational taint now accompanies share buy-backs. These were a favourite tactic to boost earnings per share in the good times, but it’s now clear that some cyclical businesses – notably airlines – have left themselves inadequately capitalised and in need of aid. This has immediate and long-term implications for Boards, investors and valuation.
Like employees, suppliers have an important role to play, and cash conservation should not be pursued at the expense of the company’s surrounding ecosystem. There has already been evidence of some egregious behaviour here: treating suppliers badly is likely to backfire in the long run.
In summary, Boards need to be prudent in ensuring their company’s survival, and also sensitive to the ecosystem that is important to their survival and supports a much broader range of jobs with the economic benefits. Business has a moral obligation to do what it can to keep the economy going, and the collective mood clearly favours those supporting the “war” effort, while turning very negative towards those companies perceived to be self-serving or even profiteering.
Hence, cash is king and Boards beware ….
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