Covid-19 and Inequality: A Test of Corporate Purpose

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KKS Advisors and The Test of Corporate Purpose Initiative (TCP)
September 2020
Bronagh Ward, Vittoria Bufalari, Mark Tulay, Sara E. Murphy, Richa Joshi,
Nick Cohn Martin

Before the onset of the Covid-19 pandemic, the world’s largest and most influential companies made promises to their stakeholders. In 2019, 181 CEOs in the Business Roundtable – a group that includes major companies such as Amazon, Apple, and Bank of America – redefined the purpose of a corporation to one that delivers value to all stakeholders, not just shareholders. The statement immediately hit the headlines and was received with equal measure of applause and skepticism.

At the 50-year anniversary of Milton Friedman’s famous statement that the one and only social responsibility of business Is to increase profits, is it possible we are witnessing a turning point in how companies view their responsibilities? If it is the dawn of a new model of purpose-driven leadership, then 2020 is a make or break year for companies to live up to their commitments. The global pandemic and the death of George Floyd have sent seismic waves through the corporate community, pushing companies to take a decisive stance on how they treat their stakeholders during a crisis and their role in addressing inequality.

Against a backdrop of growing corporate commitments on purpose and a state of global crisis, we conduct a quantitative stress test of corporate purpose. Analyzing a sample of companies constituting the S&P500 and FTSEEurofirst indexes, we employ three tests of corporate purpose:

1.       The commitment to purpose test – Is there any relationship between being a company with aspirations to be purpose-driven and how a company performs when put to the test during times of crisis? 

2.       The historical performance test – What is the relationship between proactive company strategies to address issues before a crisis and their performance during a crisis? 

3.       The speed of response test – Does it matter how quickly a company responds to a crisis? 

Overall, our results suggest that corporate commitments to purpose are less informative about a company’s future performance on social and human capital issues than other indicators. What matters more is whether a company has a strong track record of proactively managing issues that may become material during a crisis, and whether a company is an early responder on relevant issues during a crisis.