We seem to be past the first phase of the federal government’s $145.6-billion-and-counting response to the COVID-19 crisis. Exhale. There is no doubt we needed an immediate public intervention to help laid-off workers, and to keep as many as possible employed. It’s time to start thinking about what comes next: preventing business bankruptcies.
Incredibly, in both years of the 2008–2009 recession, the number of company bankruptcies fell. Even the consumer-sector increase of 45 per cent was smaller than in previous recessions. And no major Canadian financial institutions required government bailouts. I fear that this time—particularly in the oil and gas and transportation sectors—things will be different. So we’d best be prepared.
Get used to hearing the term “corporate bailout” over the coming months. The next wave of emergency provisions will likely bring populist anger from all sides.
There are early indications that governments are willing to step into the fray, and when they do, they should resist short-term bailouts and instead wield corporate aid packages as the stick that pokes companies toward greater sustainability. It was just three long months ago that Larry Fink, co-founder of the world’s largest asset manager, BlackRock, noted in his annual letter to CEOs that “climate change is compelling investors to reassess core assumptions about modern finance” and encouraged companies to embrace a “more sustainable and inclusive capitalism.”
At a virtual climate summit this week with environment ministers from 30 countries, German Chancellor Angela Merkel said, “It will be all the more important that if we set up economic stimulus programs, we must always keep a close eye on climate protection,” adding the focus should be on supporting modern technologies and renewable energies.
But it’s about so much more than a green economic transition or short-term “green stimulus” interventions.
Governments should use equity investments to align a company toward delivering long-term sustainable growth.
As a condition of federal investment, it would have a handful of principles to which companies need to adhere:
1. Best-in-class corporate governance, including the appointment of diverse boards. While diversity considerations should go beyond gender, over a reasonable period of time these boards should comprise at least 30 per cent women. This is particularly important for energy and resource companies, where studies have shown that women directors positively correlate to a company’s longer-term economic performance and environmental stewardship.
2. The creation and communication of a three- to five-year roadmap to explain the company’s long-term strategy for sustainable growth. This should include an assessment of its competitive advantage, long-term objectives and capital allocation priorities. Ideally, this should also include key performance indicators to allow investors and other stakeholders to understand the company’s progress on its path to sustainable growth.
3. Incorporation of best environmental and social practices into corporate strategy and disclosures. Shareholders are increasingly recognizing the positive correlation between a company’s approach to environmental and social (E&S) factors and their returns. Companies should redouble their commitment to addressing all material E&S considerations impacting the sustainability of their businesses. The Expert Panel on Sustainable Finance has already outlined one framework for companies to follow.
4. Executive and director compensation aligned with creating long-term value. A successful, corporate-led transition requires compensating people accordingly. That includes clearly linking pay to management’s long-term performance metrics and ensuring that pay packages are transparent and easily understood. In both the immediate and longer term, pay levels should be appropriate for the circumstances to ensure company leadership has the support of employees and shareholders—including the general public.
5. A commitment to building a globally oriented, long-term investor base. Companies should continue to invest in building a base of long-term investors that will support their transition to sustainability. This will also help the federal government and other investors find willing buyers, when they decide it is the right time to sell.
Any Government of Canada-purchased shares could be placed in a segregated fund, to be professionally managed at arm’s length from political leadership. Over time, this fund could expand to play the role of a sovereign wealth or rainy day fund, investing and managing these assets for the benefit of current and future generations.
Transformation starts by aligning incentives for all parties involved. As the government weighs buying stakes in companies to save jobs, it should take advantage of the chance to transform them, both for their shareholders and the planet.