Capital Markets Corporate

May 21, 2020

The importance of corporate calm under pandemic pressure


The need for clarity and transparency of communication has never been more of an imperative than during the current pandemic.

Last week, however, a company came in for widespread criticism for using the newly created reporting term ‘EBITDAC’ – adding a ‘C’ for coronavirus, to the usual exceptions captured by EBITDA (earnings before interest, tax, depreciation and amortisation), essentially to show an earnings figure for the parallel universe in which coronavirus had not happened.

While the reporting of ‘EBITDAC’ was no doubt intended to demonstrate the resilience of the underlying business model, this did not go down well with media commentators and was widely ridiculed.  Investors meanwhile raised concerns about this metric potentially being used to calculate leverage ratios, which would increase the amount a company could borrow.

Under pressure

More broadly this serves to demonstrate both the intense pressures many companies are under, as companies with previously sound business models face uncertain futures. It also highlights the heightened levels of scrutiny that exist , as actions taken during a period of months will be raked over not just now, but for years to come.

In a crisis that touches every aspect of society, never has it been more important for companies to take a long-term view on reputational impact and to consider their responses through the lens of ‘doing the right thing’.

Media outlets are tracking responses to the crisis very closely, and businesses are being grouped into two distinct camps. The Financial Times has launched a new weekly series on Responsible Business in a Crisis, and are reviewing corporate responses to the crisis from ‘saints’ and ‘sinners’.

The bigger picture

With UK supermarkets Sainsbury’s and Morrisons praised for ‘providing extra help for older people and other vulnerable shoppers’ it is clear that investors are no longer at the top of the stakeholder list – companies must take a rounded view and approach.

In the financial services sector, a number of banks are investigating whether they used their lending relationships to pressurise clients into awarding work in other areas. The FCA’s ‘Dear CEO’ letter on the matter cites reports of UK banks ‘failing to treat their corporate clients fairly’, in particular that the banks in question ‘may have used their lending relationship to exert pressure on corporate clients to secure roles on equity mandates’.

Looking long term

Short-termist actions to boost revenue or present figures in a misleading way are clearly counterproductive, and not just reputationally. A survey by investment manager Federated Hermes found that 78% of financial advisers believe clients will sell shares in companies that have not done ‘the right thing’ – with the ‘right thing’ going far beyond generating returns, to encompass the treatment of staff, customers, clients and society as a whole.

This is not necessarily easy under the extreme pressures of a pandemic, but above all companies need to engender trust in their actions and think for the long-term. Straightforward, transparent and timely communication has never been more important.