‘Every CEO has the ability to do something unique here’: Perspectives on leadership and financial services during the coronavirus crisis
Welcome to Human Capital, an open exploration of the ideas and people moving financial services forward. Typically we feature a leader or rising star who's changing the game in his or her own way. In this special edition, we hear from a trio of leaders at PwC who are on the frontline of advising businesses during the coronavirus pandemic. Click Subscribe above to be notified of future editions.
Corporate leaders across sectors and geographies have very quickly found themselves in uncharted territory, thanks to the coronavirus pandemic sweeping the globe.
I recently spoke with a group of executives at consulting giant PwC to get their perspectives on how business leaders are — and should be — handling the quickly evolving crisis. Among them, U.S. financial services lead Neil Dhar weighed in with his view on how financial services in particular is faring.
Let's get right to it:
Tim Ryan, U.S. chairman and senior partner, PwC
It goes without saying we are dealing with unprecedented times, and the reality is none of us quite know where this is going to go. But when we look at the lessons learned from other parts of the globe, such as China, it is reasonable for us to expect that this will be with us for several months.
In terms of what we're hearing from other executives as we talk with them on a regular basis, I'm encouraged and inspired by the fact that almost everybody is putting the health and welfare of their employees first, and the measures that companies are taking are increasing on a daily basis to make sure the health and welfare of employees and customers is coming first.
All companies are different, and what we mean by that is companies over the last couple years have been very focused on what they can control and what's within their ability to influence. And I would have said over the last couple years companies are less focused on trade wars or regulation that they can't control, and they've been more focused on their businesses, their balance sheet, their investments, where they're investing in technology, how they're changing their businesses to be resilient in this day and age of uncertainty.
And because we've seen some companies moving faster and some companies maybe not moving as fast, almost across sectors the impact of this virus will depend on a company's readiness. Said differently, those who have been working very hard to control things like cost structure, like liquidity, will fare better, and those who weren't will be more adversely affected by this virus and the knock-on effects.
So we think it's important to look at companies versus broad-brush sectors, because their readiness will really determine their ability to weather the storm as they go through this.
Another key point is that our banks and our banking system is very strong. Credit is flowing, capital is very, very adequate, and the hard work that our banks, our regulators, and other stakeholders have done over the last 10 years, coming out of the financial crisis, should and will serve us well as we look to deal with COVID-19.
A couple of reflections from a leadership perspective. We think it's very important that we are pragmatic and give companies time to assess what 2020 will now look like given the virus. Said differently, we don't think it's a time for companies or others to hold onto what original plans were for 2020. It's clear the virus will change plans of almost every company, and they need time to assess what the new normal looks like.
Secondly, I hope that investors and other stakeholders will not judge companies by what 2020 will now look like, but more importantly, what companies are doing to get ready for 2021 and beyond — how they're looking at investments, the long term, and their stakeholders, not least of which is their employees.
Next, I hope that companies and leaders have the courage to look at the long term and make sure we're communicating transparently and openly with investors and other stakeholders as we look to adjust to the new normal that's out there and make the right investments for the long term.
And then the last point that I would say is, as leaders — over the last several weeks, including just a couple hours ago when I was speaking with some executives — it is important to be calm. It is important for executives to focus on some of the positive and heartwarming stories that are happening out there, the stories where people are rallying together, where people are taking care of one another, where people are adapting to new ways of working and doing amazing things in their communities. Because it's those stories that will help inspire others to do the same as we work through this.
And then, lastly, and maybe most importantly, transparency will be the name of the game. As I mentioned, none of us quite know exactly where this is going to go. We're all managing a number of stakeholders, whether it be investors, whether it be employees, customers, supply-chain partners, communities. Transparent, open, realistic, and pragmatic conversations will be one of the most important things that we think companies can do.
Amity Millhiser, vice chair and chief clients officer, PwC U.S.
Companies are putting in place unprecedented measures to slow the spread of the virus, and we're likely to continue to see the impact of the financial performance broadly across every sector, across every geography. In fact, almost all companies in our CFO pulse survey anticipated taking financial actions as a result of COVID-19.
As Tim said, the key focus of every executive I talk to is on the health and safety of their workforce. Companies are very focused on allowing their people to work remotely wherever they can in order to keep their businesses running, but also to keep their people productive and safe. And this goes not just for their workforce but also interactions with customers.
My general view and what we're hearing from clients is that those who are more digitally enabled are more likely to be strong as they weather the storm.
And the key question right now is the spread and the duration of the virus. The focus right now in talking to executives is more of a near-term focus on cost containment and those near-term actions, versus a change in their strategic direction. Eighty percent of the CFOs we surveyed reported a decreased appetite for M&A in the near term, but only 10 percent said they were changing their M&A strategy. So you see that difference between the near-term and the long-term payoffs in that.
Neil Dhar, U.S. financial services leader, PwC
What we're seeing play out in the marketplace at the most granular level is companies who have taken specific actions over the last several years in relation to running their companies well — having the right cost structures, making the right technology investments, hiring the right people — are weathering this storm better than companies that may not have been as vigilant as we work through COVID-19.
I want to highlight: We do have a very strong banking system, as Tim mentioned. It's well capitalized. We have a very strong regulatory regime that we operate in. You've seen the Fed take action in a very globally coordinated way to support the real economy and the financial market as a whole.
All that said, the result in cash flows for certain sectors will be impacted in the short term — sectors such as travel, leisure, energy. CEOs for some of those companies are looking past 2020 and already looking through to 2021.
I was speaking to a CEO of one of these companies this morning, and after he looks through running his business on a day-to-day basis, he's doing scenario planning looking out 18 months, acknowledging that the next two quarters are going to be very, very tough from a revenue perspective.
With that said, we see sectors such as health and life sciences and technology continuing to thrive. We should also recognize there's a lot of private dry powder in the marketplace. We think these private markets will be deploying a lot of capital as situations stabilize and become more certain, both on the equity and on the debt side of things.
In the near term, I think we have to acknowledge that M&A activity will slow down significantly, as market uncertainty will clearly be no friend to dealmaking. There's going to be a pause in relation to M&A activity.
Doing deals in uncertain times is far more difficult. Just practically speaking, it's much harder to do diligence, it's much harder to price risk. There's the added complexity of doing scenario planning. And in this specific scenario, diligencing the health and people matters that come into play will be critical. There's also uncertainty around the capital markets in relation to securing financing at the right price.
For announced and signed deals, what we're seeing is incremental scrutiny around material adverse change clauses to determine what the impact may be on the deal. And what we may see in the future is a bit more of a pickup in stock-for-stock deals. Theoretically those types of deals should be more prevalent in an economy that's a bit uncertain.
All that said, well-capitalized and well-run companies will not need M&A to survive in the near term, while others that maybe are not will look for more distressed situations. Don't be surprised to see a pickup in spinoffs, split-offs, and unsolicited proposals, both in a friendly and unfriendly manner, as companies look for alternative avenues to pursue growth.
Pivoting to the financial services industry, the primary focuses for management teams are taking care of their people, getting accustomed to working in a more virtual environment, and continuing to stay connected to clients.
The reality is also that in a very short period of time we've experienced significant market volatility, volatility in asset pricing, an extremely low interest-rate environment — which is now nearing zero after the Fed's action — a decline in oil prices, a selloff in the equity markets, movements in assets through different classes, and impact on credit and associated pricing.
So what does that mean? From a financial industry standpoint, what we're seeing senior executives work through is a myriad of complex items, such as impact on fair values, the stress on new credit loss models, liquidity and cash management, impact on consumer lending, and capital-requirement planning and scenario planning in some of the industries that I mentioned.
We're also seeing a lot of cross-sharing of information across the industry, a lot of reaching out in relation to what others are doing, and leveraging best practices.
What's your outlook for layoffs?
Tim Ryan
It's likely that we will see more. But I would tell you that I'm encouraged that there's more dialogue around, "How do we retain as many employees as we possibly can going forward?"
I think every single CEO has the ability to do something very unique here. What I'm encouraged by is that over the last couple years we've talked a lot about people, about purpose, about multiple stakeholders. This is an opportunity to see that come through in spades.
Unfortunately, some simply will not be able to do it, just given their financial conditions, and others will make trade-off decisions that I'm positive will be different today than they were maybe three years ago and 10 years ago.
This will play out in front of our very eyes over the next several weeks and months.
Amity Millhiser
One thing that's different from what we've experienced in the past is the availability of really different technology tools that enable the workforce to work remotely. That's providing a very different discussion today.
It's accelerating the tools that companies had already put in place to allow workers to work remotely, to collaborate remotely — appreciating that it's very, very different depending upon the size of the company, where they are in their digital journey. But to me, that is one of the positives that is different this time than the last time — the ability to enable workers and, frankly, customers to interact digitally and not be as dependent on physical presence.
If there is an opportunity side of this, it's this opportunity for companies to put their technology strategies in play at scale. The focus on technology is really a positive and could actually accelerate a lot of the strategies that companies have been looking at over the last couple of years.
Neil Dhar
What we've seen in the last couple of weeks is the CTO (chief technology officer) at both large and small organizations become very, very relevant, both in the boardroom and in the C-suite in relation to scenario planning around technology. If you move to mass-scale virtual working, what does that look like? So, if anything, technology and the investment in technology has become a lot more in the forefront of senior execs and boards as we go through this situation that we're dealing with right now.
Tim, you had some closing thoughts?
Tim Ryan
The first is that one of the biggest pieces of advice we're giving our clients is: transparency, transparency, transparency.
It's rare to have something that we're literally all dealing with. We are encouraging clients to be transparent and tell it like it is.
The second thing that's incredibly important is corporate governance plays a huge role in this environment. We expect and hope to see boards rise to the occasion in terms of providing strong governance and oversight.
And the last thing is for leaders, we all have the chance to give a little here. This is a time when I hope we all look back a year from now or two years from now and say we all stepped up. We stepped up around our people. We stepped up around our ability to help our communities, to help the health-care system that is going to be challenged going forward. We all have the ability to give our time, to give our resources, whether they be human or digital, or to give our money to make a difference.
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