“You never want a serious crisis to go to waste.”
Rahm Emanuel – 2008
After the 2008 Financial Crisis, America had an unprecedented opportunity to encourage more sustainability by corporations. Unfortunately, the majority of US corporations still operate under the Friedman Doctrine. The Friedman Doctrine that states that “an entity’s greatest responsibility lies in the satisfaction of the shareholders.”
Now America has approved a $750B+ bailout for big businesses and will have a similar opportunity to influence corporate policy. The Financial Times Editorial board has highlighted the COVID crisis as a chance for better corporate citizenship by businesses but is light on specifics. Here we discuss bailouts, buybacks, and being better. We provide guidance on how investment firms and corporations can rebuild and make themselves stronger and more sustainable post-pandemic.
A buyback is when a company pays shareholders the market value of a share and distributes capital to investors. Buybacks are an alternative to a dividend to distribute cash to shareholders. The likelihood a public company will buy back stock varies by industry. For instance, banks repurchase roughly 10% of outstanding shares annually. Three reasons why a corporation would buy back stock are shown in the graphic from Investopedia below:
Not all corporations buy back shares though. Some corporations like Apple and Berkshire Hathaway prefer to keep extra cash on hand instead of investing in new products or businesses or returning it to shareholders. That means in crises like the current COVID-19 pandemic, Apple has the liquidity to weather the storm. Airline companies are in now in very a different situation. The sector is currently asking for $54+ billion bailout from the government after spending roughly $45+ billion buying back their stock over the past decade. Senators Schumer and Warren as well as businessman Mark Cuban have argued against share buybacks for corporations that receive federal assistance. But why stop there?
The federal bailout and COVID-19 crisis represent an opportunity to make companies more sustainable. Some large organizations are already taking positive steps:
- CVS, Walmart and Amazon are raising wages and offering bonuses to employees, with Walmart paying employees over $17 an hour
- Uber started offering sick leave to drivers who test positive for COVID
- Bank of America is letting customers defer credit card and mortgage payments
Even companies like Gravity Payments, famous for promoting income equality, are making changes to do right by their staff and customers. It’s great that corporations are taking action on their own.
However, the Federal Government could use incentives from the bailout to encourage companies to promote income equality, climate action, and other environmental, social, and governance actions. Airlines and other companies desperate for federal funds may be more receptive to improving corporate policy in exchange for capital. The French government, for example, has made the Air France bailout contingent on the company reducing emissions.
For example, the Federal Government could offer better terms to corporations that:
- Have a $15 minimum wage or higher
- Provide similar benefits to gig workers they do to their full-time staff (sick leave, equity, etc)
- Commit to better gender/minority equity at the leadership level
- Commit to reducing air and greenhouse gas emissions.
Despite the commitments corporations have made so far, minimum wage workers still don’t feel as secure as others. There is no guarantee that the natural environment will stay in the healthy state it is currently in. We shouldn’t waste this crisis and ignore the opportunity to make business more equitable and sustainable post COVID-19.
Graphic 1: iStock
Graphic 2: Melissa Ling, Investopedia