Commitment to Community
The COVID-19 pandemic has impacted nearly every aspect of our daily lives, bringing with it an onslaught of challenges. Social distancing measures have shut down economies resulting in heightened market volatility, significant unemployment claims, disrupted supply chains, decreased consumer demand and more. The recent crisis has shed light on the importance of sound corporate social responsibility (CSR) practices and the need for robust evaluation of these factors. For many of our fundamentally driven strategies,1 the evaluation of a company’s CSR policies has been a critical element of our investment process. In our view, it is more important than ever.
Mellon’s research expertise is the foundation for our investment process. Specifically for our fundamentally driven strategies, analysts have actively pursued information in an effort to differentiate leaders from laggards within the purview of ESG considerations that could impact the long-term value of organizations. Through a collaborative effort across the firm’s investigative research and equity and fixed income resources, we engaged with hundreds of companies to gain insights into their response to the outbreak. The value chain under review included labor, vendors and customers where we identified and evaluated what we believe are key actions that responsible management teams should be taking in order to protect their stakeholders and emerge as market leaders.
Employee advocacy, customer protection and community support
- Ensure Health and Safety. Protecting the health and safety of employees and consumers is paramount during this critical time. The measures a company takes now will be remembered well beyond the crisis and will drive long-term retention rates and consumption behavior. Organizations can implement a number of precautions and policies to protect individuals’ physical health and safety, as well as mental and emotional health. There is no shortage of examples but some include providing health gear to protect front line workers at grocery stores or distribution centers. For organizations that can operate remotely, establishing coordinated, efficient work-from-home procedures or in-office rotations can help put employees at ease. Equally as important is proactive outreach to employees to better understand their needs. We found that allowing employees to share in the ownership of appropriate safety precautions allows for a more collaborative environment and results in a greater sense of security. We expect that those companies that earned the trust of their workers and communities will benefit from increased loyalty and reduced turnover long after this crisis has passed.
- Preserve Employee Income. Through addressing income considerations, companies have earned the trust of employees, vendors and customers. Global closures have resulted in lost corporate and personal incomes and the highest unemployment rates we have seen in decades. People are suffering financially which has amplified their daily fears surrounding their health and safety. Companies focused on social responsibility are evaluating all available options to help assuage financial concerns. We have seen companies provide paid leave and maintain health care coverage for furloughed employees. We have even witnessed a consumer staples company find alternative employment opportunities for its employees at a customer’s warehouse in lieu of a layoff. For essential personnel, increasing wages and maintaining those wages beyond the pandemic can instill a deep sense of appreciation and potentially loyalty (e.g., grocery employees). Another key consideration is the action taken to narrow the widening gap between management compensation and those struggling to make ends meet. We have already seen management teams at select organizations forgo compensation, demonstrating to their employees that they are in this together. Management sharing in the near-term fiscal pain will generate greater goodwill within an organization.
- Support the Community. The current environment exacerbates the dichotomy between affluent and impoverished communities. This is due to a number of factors including lack of access to technology for virtual learning or remote work or the inability to work remotely. Couple this with a reliance on public transportation and underserved communities are disproportionately exposed to the virus. To help alleviate these pressures, we are seeing organizations give back to their local communities and the charities that seek to help these communities and those unable to protect themselves. They are also inspiring their employees to give back to communities and in doing so are strengthening corporate culture and demonstrating strong corporate citizenship. Some companies are providing free services to those who are underprivileged or unemployed, such as internet connection so that students have access to online learning. The notion of community support also extends to consumers. One company we spoke with is prioritizing safeguarding consumers over near-term profits by monitoring merchant practices and removing those seeking to exploit consumers (e.g., charging excessive prices for goods in high demand), thereby helping to build sustainable businesses. Organizations taking such action are sacrificing near-term profit to protect the integrity of their consumers and communities.
- Communicate Freely. As the situation continues to evolve, organizations that have established and maintained consistent communication across all business channels have allowed employees to both express their concerns, as well as share best practices and new ideas. Some of the best solutions have come from the front line. For example, a supermarket employee suggested acrylic barriers between shoppers and employees and the practice has been widely adopted across grocery stores, pharmacies and food establishments. Companies that listen to their employees and customers and are more responsive to concerns will likely build a greater sense of trust with their constituents and should emerge stronger on the other side of this crisis.
Supply chain stabilization, capital resiliency and supply/demand balance
- Improve Supply Chain Resiliency. Organizations with diverse supply sources, including a local presence, and those that have quickly adapted their supply chains have proven more resilient during the crisis. As the pandemic closed plants and ports, companies with single production locations or dependency on offshore sourcing have suffered significant losses. Pay flexibility within the supply chain has also resulted in more sustainable operations and workforce stability. We found that investors are rewarding companies that have built resilient supply chains and have adapted quickly to secure redundancy and alternative sourcing.
- Build Capital Resiliency and Financial Prudence. Balance sheet strength and agility are rewarded during periods of stress. The inability to secure additional capital has pressured the continuity of certain organizations and industries. Today, a higher emphasis with regards to capital resiliency is emerging as companies and regulators look beyond satisfying solely the individual firm’s needs and aim to support wider system stability. Companies have halted buybacks and nonessential expenditures in addition to forgoing executive salaries to ensure adequate cash to protect employees, communities and the greater economy.
- Respond to Supply/Demand Patterns. Companies able and willing to respond to changes in supply and demand patterns can stimulate wider economic growth and reduce exacerbating risks developing in the environment. Leaders are quickly adapting production lines to meet shortages in essential supplies, as well as creating new products and services to identify and protect those in harm’s way. They are also adjusting distribution strategies to respond to shifts in demand. This flexibility is allowing these companies to support business continuity and generate economic value throughout the system.
- Contingency Plan. In the words of Benjamin Franklin, “By failing to prepare, you are preparing to fail.” The pandemic has overtly demonstrated the need for robust contingency and business continuity planning. Organizations with robust business continuity plans in place have been able to respond and pivot more efficiently, allowing for minimal disruption to daily operations. Moving forward, companies must enact scenario planning to ensure seamless operations in the event of another calamity (e.g., an infected employee in a manufacturing plant, plant closure, distribution disruption, ability to ramp production up or down as regions open and close).
1Fundamentally driven strategies include our fundamentally driven equity and fixed income strategies, with the exception of our stable value and cash strategies.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mellon Investments Corporation (“Mellon”) is a registered investment advisor and subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”). Any statements of opinion constitute only current opinions of Mellon, which are subject to change and which Mellon does not undertake to update. This publication or any portion thereof may not be copied or distributed without prior written approval from the firm. Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorized. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security. Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by Mellon. Mellon makes no representations as to the accuracy or the completeness of such information. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment and past performance is no indication of future performance. The indices referred to herein are used for comparative and informational purposes only and have been selected because they are generally considered to be representative of certain markets. Comparisons to indices as benchmarks have limitations because indices have volatility and other material characteristics that may differ from the portfolio, investment or hedge to which they are compared. The providers of the indices referred to herein are not affiliated with Mellon, do not endorse, sponsor, sell or promote the investment strategies or products mentioned herein and they make no representation regarding the advisability of investing in the products and strategies described herein. Please see mellon.com for important index licensing information.