(May 22): Legendary investor Warren Buffett famously quipped that you only find out who is swimming naked when the tide goes out. Now, in the midst of the global coronavirus shutdown, the tide has gone out. Firms ranging from small family businesses to mega public companies are watching sales and profits plummet. The unprecedented collapse in both supply and demand has exposed a multi-decade trend that favoured shareholders and short-term term profits at the expense of long-term business resiliency.

While the Covid-19 outbreak popped up suddenly out of nowhere, the fragility of large firms has been growing for some time. Forty years of falling interest rates has made increasing corporate leverage too irresistible. “Fortress balance sheets” were no longer valued, they were considered inefficient while a BBB rating — the last rung before “junk” status — is now seen as more optimal. Bond proceeds were used to buy back shares — particularly in the US — shrinking the first-loss shock absorber. But there were very few shocks. The global economy weathered a few minor blows, but the last truly existential threat — the Global Financial Crisis — was fading in the rear-view mirror. In effect, the 11-year equity bull market only served to reinforce the idea that short-term profit growth was paramount while stability and prudence were unnecessary.

But the pandemic has changed this calculus and will likely revive the profitability versus resiliency debate. It has become more obvious that to produce long-term results, companies must survive shorter-term crises. However, increased stability will come at a cost and managing that trade-off will become more difficult.

To continue reading,

Sign in to access this Premium article.

Subscription entitlements:

Less than $9 per month
3 Simultaneous logins across all devices
Unlimited access to latest and premium articles
Bonus unlimited access to online articles and virtual newspaper on The Edge Malaysia (single login)

Stay updated with Singapore corporate news stories for FREE

Follow our Telegram | Facebook