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ANALYSIS: Pandemic Poses Human Capital Challenges, Opportunities

May 11, 2020, 9:00 AM

Unlike natural calamities such as hurricanes and earthquakes, the coronavirus pandemic is leaving the nation’s physical capital structure intact. The impact on human capital in a few short months has been devastating, however, as large and small companies alike have needed to shift from long-range planning to a short-term focus on survival and business continuity.

The economic fallout has been hard on workers. Many have been laid off or furloughed, while others are forced to make difficult choices about their health and livelihood. The pandemic has left many workers with few options and little hope that things will change any time soon.

A short-term focus on corporate survival is understandable during such an emergency. The pandemic presents businesses with the opportunity to demonstrate that they may recover more quickly, and respond more positively to the economic downturn and to future disasters, if they proactively plan and engage in positive human capital development.

The Crisis in Human Capital

Following on last summer’s Business Roundtable statement moving away from shareholder primacy, this year began on a high note for stakeholder governance. Blackrock head Larry Fink wrote in early 2020 that “a company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.” He added that “companies may maximize returns in the short term,” but cautioned that “actions that damage society will catch up with a company and destroy shareholder value.”

Fast-forward three months, and we see workers losing their jobs at a record pace. Unemployment claims pour in by the millions each week, and, even with some signs that pace is slowing, more than 30 million Americans are currently looking for work. While some of these job cuts are furloughs and not layoffs, for many workers, it’s a distinction without a difference: Businesses have no legal obligation to rehire furloughed workers.

Even those workers who are fortunate enough to keep their jobs can face hard choices. The personal protective equipment (PPE) that workers need to stay safe is in short supply, even for hospitals. Even when workers have access to PPE, other safety demands, such as hazard pay and accessible paid sick leave, can provide real challenges. Workers who demand better conditions may also find themselves unemployed, leaving too many workers to choose between their health and their livelihoods.

While the situation for workers will change once the immediate threat subsides, there is no clear blueprint for a post-pandemic economy, and many workers will likely face a difficult road forward. Eventually, the economy will rebound and businesses will need employees, but it may not happen soon enough for many workers. Their savings have been depleted, and retirement is often out of reach.

The Need for a Governance Focus on Human Capital

Statistics cited by the SEC in an August 2019 proposal concerning human capital disclosures shows the importance of a focus on workers going forward. In 1988, the 500 largest U.S. companies had a ratio of intangible assets to market capitalization of 8.44%. In 2018, the largest 500 companies had a ratio of intangible assets to market capitalization of 29.7%. The numbers are more striking for the top 100, where the percentage of market capitalization representing intangible assets rose from 7.07% to 32.62% during the same period.

Institutional investors will be a driving governance force during the pandemic and as companies move forward into recovery. A group of more than 250 institutional investors, representing more than $6.4 trillion in assets under management, issued an April 2 letter stating that “the long-term viability of the companies in which we invest is inextricably tied to the welfare of their stakeholders.” Accordingly, the investors, including the New York City Comptroller, the Illinois State Treasurer, and several large pension and benevolent funds, urged companies to take several steps.

The funds urged companies to initially provide paid leave to all employees, including temporary, part time, and subcontracted workers. Companies should also take steps to prioritize health and safety. According to the investors, “protecting worker and public safety is essential for maintaining business reputations, consumer confidence and the social license to operate, as well as staying operational.”

The funds also advised companies to:

—maintain employment, as retaining a well-trained and committed workforce will permit companies to resume operations as quickly as possible once the crisis is resolved;

—be mindful of potential discriminatory impact and the risk for subsequent employment discrimination cases; and

—take steps to maintain supplier and customer relationships in order to “help to stabilize the economy, protect our communities and small businesses and ensure a stable supply chain is in place for business operations to resume normally in the future.”

Conclusion

The coronavirus pandemic presents the first real challenge to the Business Roundtable’s stakeholder governance model. Short-term responses are necessary, but companies should not lose focus on long-term goals. Institutional investors will be looking to see how companies respond to the pandemic and how they manage their human capital resources. While cuts in labor costs may be a common response to the short-term crisis, the maintenance of a ready and well-trained workforce is a necessary asset for recovery and long-term profitability.

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