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Why leadership must learn fast from the COVID-19 crisis – some hopeful signs

Filed under CoronavirusClimate Emergency

22 May 2020

  • Business models are going through a torture test
  • Exceptional situations require exceptional responses from exceptional leaders
  • Boards are not prepared for this scale of challenge
  • Leaders must be humble and courageous or end up in the ‘graveyard of dinosaurs’
  • Recovery and investment must focus on a new Green order
  • Leaders must not squander the new opportunity

Taken from remarks to a meeting of top leaders attending a Competent Boards Certificate Program session on 13 May 2020. Edited and published with the author’s agreement.

Not long ago we went through the financial crisis. I would argue we have only learned limited things. And that’s why we’re in the COVID crisis. I think a lot of the issues that we are now seeing are issues we urgently need to address if we don’t want to continuously go into these up and down cycles. This one is a particularly bad one.

We certainly don’t want to be in the same position in 10 years time because of the climate crisis.

It’s very predictable what is happening. Yet we are so unable to collectively rise to the challenge. That’s why I would argue that this above all is a crisis of leadership. And it’s also a test of leadership.

You could argue that this is an exceptional situation that we have now. I don’t think so. Some people might say this is a black swan. I don’t think this is a black swan at all. Every five years we have a pandemic. We can all rattle off five or six of them.

We’ve been destroying mother nature for a long time. We’ve been seeing these animal borne diseases creating a hay fog, you know, every three to five years. This is just a particularly bad one.

So I think the Black Swan is probably not the COVID crisis here. The Black Swan is the lack of leadership, especially at governmental level, and the lack of ability to work together at a global governance level.

Heroic behaviour

I do want to say that CEOs have had to deal with a crisis that is bigger than any of us has ever dealt with. It is bigger than any crisis we’ve had in the current history of mankind. And it certainly isn’t over.

I’ve seen heroic behaviour from many companies and many CEOs. Not only to save lives and protect livelihoods. But also to strive to think how do we come out better, build back better as you say, than when we went into it. I can tell you, having been a CEO but not being in the driver’s seat right now, how grateful I am that we have such a lot of people with that level of competence to steer us through it.

But some things are going to change. Exceptional situations require exceptional responses from exceptional leaders.

The critical thing is what we have learned here: the link between nature or biodiversity, health and climate is now well established. We’ve also learned that our social contracts that we thought were getting better - as these economies were growing - are actually very weak and built on quicksand, that has been exposed.

We’ve learned that if we work together - and some incredible partnerships have happened at the private level, or with universities, or companies opening up their trademarks, putting their R&D together or their supply chains, reconfiguring factories to supply PPE material - we’ve seen incredible things happen in a relatively short period of time. This is when people are aligned around a common objective and purpose.

So this is unitedness that we should not lose.

But the leaders who have done best are the leaders that have operated with a certain level of humility, and a certain level of humanity.

We can see a bifurcation happening even during the crisis between companies that were run based on a longer term multi stakeholder model, and companies that were still stuck in the antiquity may I say of the shareholder primacy only. That bifurcation is very clear.

Where are we currently? It’s very clear that companies that have an ESG focus have done better. If you look at the investment, 77% of the ESG funds have outperformed the other non-ESG funds. There clearly is a correlation there. And it’s not only because of the low oil price.

Enormous anxiety and uncertainty

If you take better care of your employees, or your partners in your value chain, or your communities, then they will take care of you. The enormous disruptions in supply chains have been an enormous challenge. But it’s better to deal with that if you have good relationships with your suppliers, than if you don’t.

And we can see that. It’s an enormous stress on the employees: enormous anxiety, uncertainty. Companies that have that stronger level of engagement and trust - and that is clearly measurable - tend to do better in this environment than the ones that get the unemployment slip sent to them via Zoom. And believe me, there are companies like that.

What we have also seen is that there is a low margin of error. We all know that reputation comes on foot and leaves on horseback.

But we have seen companies that actually are trying to do some things in the COVID crisis - making a donation, trying to put some masks out there, hoping that it gets some publicity of how well they’re doing.

But if they then take actions that are contrary to protecting people or livelihoods in their value chains; if they go for tax subsidies whilst they’re located in tax havens; if they continue to pay excessive bonuses to their CEOs; or if they continue to engage in share buybacks or special dividends, then they will be pretty well punished and pretty quickly.

You see that bifurcation happening right now in terms of not only reputation, but interestingly, for the first time also, I believe in shareholder valuations.

A good example of a very tough industry is the airline industry. It is probably less controversial for me to mention that since it has been widely publicised. But if you spent 90% of your free cash flow in special dividends and share buybacks over the last 10 years and link that to executive compensation, and all of a sudden you find yourself in a crisis like this, then we really have to ask ourselves the questions of this narrow shareholder primacy that has crept into some industries, or in some companies.

Torture test for business models

It doesn’t pay out. I think this crisis has brought it to light once more.

We don’t know what’s going to happen. It is definitely the shorter term, taking care of your employees, your liquidity, your community and your partners. That is all well understood.

But you cannot just do short term and long term. This is the torture test of our business models. If we’re serious about it, it is now that the values of our leaders are exposed, plus the cultures of the companies that we represent. What we do in the medium term is most important.

Whilst there is a lot of uncertainty, I think within that uncertainty, there is some certainty. And we should not make everything unknown or unpredictable under the excuse of then not having to act.

The first thing we knew is what got us here doesn’t get us out of this. It is clear that the crisis, the COVID crisis, doesn’t give us the answers. It has exposed us to the problems that we have created. And it is very important that we use this moment of reflection - of pause if you want - to think about redesigning our global economies, What it truly means: not just playing it safe, but through systems changes and through step changes.

A healthcare system that is broken. A social system that doesn’t seem to be as protective, especially around professions as we now notice that we need the most. A food and land use system that increasingly shows cracks. Global cooperation that is not working. A financial market again, that was relatively slow and distant in its discussions and participation in this crisis.

So these are major, major changes that will need to happen. And we need to pivot out of it in a way that we create more sustainable, more equitable jobs. Also a more sustainable society, and an environment that we can live in.

That requires all of us. That requires business to work together with governments, to work together with civil society to find the answers. And yes, it isn’t comfortable because we don’t have all these answers.

But moving in that direction happens to create more jobs - greening the economy - five times more jobs than the fossil economy that we came from. Building retrofit, replanting our forests, building bikepaths, moving to wind and solar, all of them higher quality jobs, more and more secure jobs, and locking in economics that we need.

What we know for sure is a few things. And that’s important for what boards will need to think about as we move out of this.

The first is that governments have spent over $10 trillion already to date. I would argue that they’ve only spent that for stabilising the ship. Nothing has been spent yet to build a better future. In fact only 5% so far is earmarked for greening the economy. The same was true during the financial crisis of 2006 to 2007.

So we will have a bigger role for governments in business. We will have a bigger role for governments in society. Our taxes will most likely go up instead of going down in many countries, Europe especially.

Zero interest in helping emerging markets

The good thing is that governments are making bailouts conditional - conditional that these companies have to subscribe to tackling climate change, being an important one. So what we know for sure is that we will have a higher level of involvement by governments.

Second, what we also know is that every CEO I talk to tells me that we’ve now discovered new ways of working with new technologies. We can work at home. We shop differently. We interact with each other differently. Technology changes that we’ve seen in the last two months, or [will see] in the coming three or four months will be more than the trend we were on that would have taken us 10 years to get there. This has major repercussions: the way we work with each other; the way we interact; our offices and many other things. So we need to see what that means for our businesses.

And the third thing this will lead to is a different form of global cooperation. We have seen the US increasingly on a unilateral trajectory; China limiting its foreign involvement to the Belt and Road; and Europe being incredibly occupied with the simple question - if we want a united Europe or if we want to prioritise our own country interests first. Do we want to be able to handle these crisis as a united force?

Seventy seven countries during this crisis have put export barriers in place for PPE [medical protection] material. This made it significantly more difficult for businesses to operate as they felt the government pressures, but also to respond to these life threatening crises that we now see.

We see frankly – and I am trying to be polite - zero interest in helping the emerging markets. In fact, many of the news broadcasts in the developed world are saying: ‘I’m not even interested in talking about Africa or Latin America’. We just left them hanging. These countries don’t have any money. They’ve seen money actually leave. There’s no remittance, low oil price, low tourism, no resilience or borrowing capacity, no healthcare system. But we somehow think that these are not the same human beings as we pretend to be.

We cannot solve this crisis if we don’t do that with a higher level of solidarity.

We talked about broken supply chains, making them more local. We talked about the governments. That level of uncertainty is only going to increase. They will be different coming out of this.

Then, unfortunately, a much higher level of unemployment. Every CEO will tell me now that they can save about 20% of their workforce. You see that unemployment in the US is officially 14.5%. But they don’t realise that additionally they have a very big unofficial economy or many people excluded.

Soon we will have unemployment levels in the 20’s and youth unemployment significantly higher. So that will put an enormous pressure on companies and an enormous responsibility on companies.

Graveyard of dinosaurs

So moving forward, let me look at some important things that companies should take into account in my opinion.

Again, leadership, I want to stress, is the most important one.

During the crisis, companies that have communicated honestly with their employees, have taken the misunderstandings away, used science instead of fear, and have made the extra sacrifice I would argue - not only in terms of putting their financial well being at second level for this year, but also personal sacrifices, companies that have actively participated in trying to change a broader environment, change government policies, raise other competitors to the same level of responsibility - these companies tend to be rewarded with a premium without any doubt on the social aspect.

It is also absolutely important that companies over-compensate in their communication to the financial community. In reality, you have to communicate what you’re currently doing, what your financial results mean, and how you’re going to get out of this moving forward. That transparency actually helps.

The financial community has already factored in that 2020 is a lost year to some extent. One of the reasons that you see the stock market still holding up so well - especially in the US more so than in Europe - is indeed because that is factored in.

The financial community expects you now to spend money protecting livelihoods, protecting people and all the other things.

Important too, is that boards will have another role. We have to be honest as board members that we haven’t done a good job because many companies weren’t prepared for this. We frankly have discovered that we have many boards and many leaders that simply aren’t prepared for this.

So, the board role is going to change in terms of asking the right ‘What if?’ questions right now; in terms of understanding better the forces that are going to reshape their industries in order to make their industries more resilient, and to make these companies even more closely connected to ultimately the consumers or citizens of this world that they serve, so that they can respond to these new needs that are going to emerge undoubtedly.

So it will require a different board. A board that has a different level of governance and probably a bigger responsibility to figure out how businesses are going to succeed when there is new social contract, with new forms of partnership to address these enormous challenges that I have laid out.

That means a new operating model; a new corporate governance model. That’s not simply the phrase we’re going ‘to multi stakeholder’. It requires a lot of things for us to rise beyond the minimum requirements that we usually attend to to run our own companies.

It requires us to step up, become more courageous and form these bigger alliances or partnership as the jobs to be done are too big to do alone. Companies that do that and understand that, I believe, will do well. Companies that don’t will go into the graveyard of dinosaurs.

It will not be easy because the vested order is out there and talking about ‘Let’s go back to where we came from’, or ‘Let’s protect what we had because it was much better’.

But we have to realise that that was better for some, but not for the majority.

This is our opportunity. So let’s not squander it.

Paul Polman is Chair, International Chamber of Commerce, Chair, The B Team, Chair, Saïd Business School, Vice-Chair, the UN Global Compact and Co-Founder of IMAGINE, a new organisation which mobilises business leaders around tackling climate change and global inequality. He is Member, UN Secretary General’s High-Level Panel and was CEO of Unilever from 2009-2019.