Top of the risk register
Aside from nuclear war, global pandemics rank at the top of the global risk register. Whilst this is obvious to everyone now, this has long been known by governments.
"Experts agree that there is a high probability of another influenza pandemic occurring, but it is impossible to forecast its exact timing or the precise nature of its impact. Based on historical information, scientific evidence and modelling, the following impacts are predicted: Many millions of people around the world will become infected causing global disruption and a potential humanitarian crisis. The World Health Organisation estimates that between 2 million and 7.4 million deaths may occur globally"
Figure 1: An illustration of the high consequence risks facing the United Kingdom
Countries around the world will learn from this crisis. When we get through it, governments will significantly improve the resilience of our systems in preparation, which it is clear (in hindsight) have lacked adequate funding and infrastructure. Voters will fully appreciate this risk now and demand better preparedness (at least for a generation or so anyway). But what about companies? Where do pandemics fit in the strategic planning and operational preparedness spectrum for management teams?
Building a resilient business
I consider myself a long-term investor who is focused on sustainable companies that consider long-term structural risks such as climate change and healthcare system economics. Our process is designed to identify material long-term environmental, social and governance factors and analyses product impact beyond simple first order effects. Yet, in my twenty-year career (including the global financial crisis or "GFC") I have never asked a management team what their operational plan would be in the event of a global pandemic or how quickly their debt covenants would be breached if revenues went to zero next month.
Whilst disaster planning will have been vital in the initial response, it is my view that the most resilient businesses will be those with strong leadership and culture combined with the strategic focus. This crisis will be a test on the culture of every business. Trust in leadership will be key. Decisions will be made which will reinforce or destroy the fortunes of the business for years to come.
Technology comes to the fore
When assessing business risks, it is common to "stress test" based on particularly bad times in the past. However, this crisis is different because of the scale and rapidity with which it has happened. Furthermore, it is not bad for all businesses. In short, it has accelerated demand for many companies that might traditionally be viewed as "risky" and destroyed demand for those who might normally be considered "defensive".
The most obvious beneficiaries have been companies that were already winning. These include some of the largest organisations in the world like Microsoft and Amazon but also many smaller companies with disruptive new technologies and business models. These include companies providing medical diagnostics, biotech research and drug development, video conferencing, collaboration software, critical event management services, basic food supply or delivery, in-home entertainment and many more. Crucially, as demand has gone up, these companies have had to try and supply the products and services that were urgently needed. Not easy when global supply chains are shut down and orders were higher than normal. As demand has spiked, such businesses have had to demonstrate flexibility and dynamism. *A great example of what this means in reality can be found in a recent Twitter thread from Slack Founder and CEO Stewart Butterfield here.
Sustainable corporate heroes
We will all learn from this crisis and I suspect companies and investors will better understand what sustainability means as a result. Organisational culture is being called on and the essential nature of products are being assessed. Governance structures are being tested and potential of many disruptive technologies and businesses to improve the lives of billions is being unlocked.
Whilst pandemic beneficiaries have emerged, there have been many more casualties. In my view, the corporate heroes of this crisis will be those that face significant demand and supply destruction and make the right decisions despite the unprecedented position they find themselves in What do I mean by the "right" decisions? In one line, I mean decisions that protect the business for the long-term, even if that means sacrificing short-term profitability. This means doing the right thing by customers and employees first and foremost.
We have seen many examples of heroic behaviour so far, but we have also seen the opposite. My message to CEO's of public companies is simple. Whilst your financial resources are being stretched to breaking point, please remember that this is an opportunity to fill the bank account of goodwill with your customers, employees and broader society. It might be incredibly hard and financially stressful to do so in the short-term but it will likely drive long-term value for all stakeholders.
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