World War II was devastating Europe. Bombs unleashed death and destruction across London. The Allies could barely secure a beach head in Normandy. Undaunted in those dark days, visionary leaders dreamed of a brighter future when the world would emerge from the deadly carnage, and imagined the structure of a post World War II world.
Businesses throughout the world now confront a different kind of mortal enemy, but equally deadly and disruptive in its own way. This microscopic virus is virtually invisible, knows no borders, and is agnostic to any demographic. It confines us all to our homes, burying loved ones dying senselessly for no cause and way too soon, and upending our work and home lives. Just as our forbearers prepared for a new world order once the terror of their present one surrendered, we now have some time to humbly roll up our sleeves and get ready for what awaits us on the other side once the pandemic is finally vanquished.
Many of the thoughts in this article are hardly novel, and really simply continue if not accelerate existing trends. Some ideas may seem like logical outgrowths of the pandemic provided they remain emblazed in our consciousness. Others may be dismissed as unrealistic or overly dramatic and alarmist.
No one, however, can doubt a few things. Our lives and approaches to work, our society and business will change, some for the better, others not. Like inventions, there are unintended consequences and manifestations, many of which we cannot now foresee. Finally, and most obvious as we emerge from this Act of God– man may make plans, but God just laughs.
A recent paper on fifteen major pandemics and armed conflicts since the thirteenth century postulated that the major after effects of those events lasted over forty years. Real rates of return were more substantially depressed during the period ravaged by pandemics, more so than due to wars, due to the significant precautions and adjustments business and society took after pandemics but not after wars. The postulate is that after wars, most countries just rebuild and, while they may have changed institutional frameworks, do not reassess ways of doing business and conducting their day to day lives.
Therefore, please consider below, in no particular order, several humble ruminations on changes in our office environment, from social, to office structure, technology, marketing, legal, financial and government role from someone living after stage 1 (crisis stage), now in stage 2 (the new abnormal, trying to cope and function before we emerge), hopefully soon enough to be stage 3 (emerging from sequestration and slowly returning to our previous environments) and offering some thoughts on the final stage 4 emergence to the new normal stage. To paraphrase the former Mayor of Chicago, I hope these thoughts may help us not waste this crisis and prepare for a brighter future.
Social Impact of COVID-19
We have struggled to balance work and life since time immemorial. Work bestows many basic emoluments: community, identity, safety, socialization, purpose, financial and social security, stimulation, respect and support. Many often rely on or substitute the socialization of work as a surrogate or a substitute for other nurturing environments like home life and friends. Some generations balance work and life differently but all weigh these factors in calibrating their own approach.
The COVID-19 pandemic has the potential to dramatically alter the weighing of factors away from work and toward life, balancing personal health with financial health. As will be discussed, the reduced loyalty to the employer, lowered social connections at the workplace and overall employee feelings of lack of control and alienation could lead this next generation, to use an analogy to the generation following the end of World War I, to be a “Lost Generation”, ever searching for belonging and recovering from the shell shock and trauma from the pandemic and the abrupt dramatic changes it inflicted. Many reasons support this view and suggest some possible employer responses.
- Severing of Security and Control. To the extent that we depended on work for financial security or for a support network of co-workers, the pandemic radically upended these tenuous ties. The abrupt and unprecedented massive layoffs careening our economy from a 3.5% to a 10% or higher unemployment rate in less than a month mirrors Lucy’s lifting of the football on Charlie Brown. The inability to have meaningful in person conversations and meals with co-workers also tears asunder our very way of life. Having to distance your relationships by at least six feet and a wear a mask also reduces the development of deeper rapport. Eliminating the handshake or peck on the cheek further dehumanizes our interpersonal contact. Further, the lack of any control over the disease or its progress coupled with the lack of control over our work environment and even our continued employment, interwoven with the trauma of being removed from our comfortable environment with little no notice and ripped from the comfortable fabric of the work environment fosters in employees traumatic fear and alienation. This will be a difficult emotional scar to heal.
- Diminished Loyalty to the Employer. While many of us were never under any illusion that work was anything but a business, the abruptness by which our role in our company and our ability to have a part in the work family can summarily and without warning be torn asunder has to reduce anyone’s sense of safety, security and belonging, not to mention loyalty to the business. Therefore, unless driven purely by the drive for financial security, the pandemic has uncovered a basic truth of our businesses– most employees are expendable cogs in a wheel. The social fabric and community developed at work are mere conveniences and second derivatives of this basic premise. More remote working (see infra) may exacerbate the fraying fabric since time and opportunity to develop meaningful ties with co-workers diminishes.
- Less Stable Work Force. Spending even less time in the office, balancing priorities more toward life, not developing a deep support network at work due to diminishing opportunities to do so and not having the same zealous devotion to the company and work ethic will lead to employees being more inclined to hop from job to job more often, in light of more money or actually a larger company with more perceived financial stability. While younger generations have certainly shown less proclivity than older ones to remain at the same employer for long periods of time, the post-pandemic world may accelerate that trend, broaden it to older generations, and also diminish entrepreneurship and risk taking in favor of more certainty and stability.
- Employer Response to Recalibrate Employee Social Needs. Businesses desirous of attracting and retaining the best employees might need to reassess their approach in this post-pandemic world and be more cognizant of these social needs for more stability, community and certainty.
- “Rainy Day” Reserve Fund. Post-pandemic companies might balance community over pay as lure to attract and retain employees. Alternatively, businesses could set aside a “rainy day reserve fund”, on top of the usual 401-K and other retirement plans, where a portion of an employee’s pay, or company profits, could be placed in a fund to which it is used only to retain employees in situations where mass layoffs were warranted. An employee would receive his or her share of the funds upon retirement or being terminated in such a circumstance if they were not used before then. Obviously these funds are not a panacea but a means to dedicate some resources and provide some comfort. Moreover, businesses might manage their finances more conservatively and always agree to have some minimum level of cash, say a three months reserve, to assuage employees that it can stay afloat for some reasonable period of time in case another disaster strikes.
- Wellness Programs. Taking an interest in the health of the office environment is but one component of health and safety. Another is the employee’s personal health. Wellness programs have proliferated in recent years, as well as access to gyms and health clubs. These trends will only accelerate, provided that gyms and health clubs can provide sufficient comfort regarding cleanliness and social distance.
- ESG: Environmental, Social, and Governance. Companies promoting environmental, social and governance enlightenment have curried favor and gain prominence in recent years, culminating in the conservative business-centric Business Roundtable recently embracing the concept. Employers might promote their ESG sensitivity to employees to distinguish the company as one of the good actors. More substance than simply clinging to the ESG talisman will be needed for this purported sensitivity to be credible.
- Other ideas to address employees’ needs for security, absence from fear, safety and belonging are set forth under Office.
The Future of Office Work
A familiar refrain after the end of World War I was “how do you keep them down on the farm after they’ve seen Paris?” The COVID-19 work from home requirements might reverse this question, as workers wonder how are they going to leave the comforts and efficiency of home. Here are some thoughts on how our offices may change in response to this crisis.
- More Telecommuting. After spending so much time at home, and realizing the time saved from the commute and absence of coffee breaks and meals, as well as avoidance of continual interruptions, employees may be more willing and eager to work remotely. This is particularly true if technology facilitates efficient work collaboratively at a distance. Spending more time and conducting more work activities at home continues the stay at home trend we have seen over the past ten or twenty years. Just as malls and retail stores are losing the battle to online retailers, and restaurants share some profits with home delivery providers, shopping at home and eating at home will be joined by those working at home.
- Office Design. Office space design may also be reconfigured so workers feel safer. For example, office pools or desks upon top of desks may be rethought or need to be assured proper ventilation. Chairs for visitors in offices may need to be spaced out or removed to discourage proximity. This distance of course does not forge dynamic interaction or team building. Conference rooms, cafeterias and other gathering spaces may also need to be redesigned so people keep at an appropriate distance while at the same time enjoy some social interaction and forge some sort of community.
- Higher Level of Fee Earners in Relation to Assistants. The pandemic may finally accelerate the trend toward converting labor to capital. Fee earners’ embrace of producing documents and other ways to become more self-sufficient have already increased the ratio of fee earners to assistants from maybe 1.5 or 2 to 1 ten years ago to 3 to 3.5 to 1 now. Needing to physically space assistants out more, perhaps alternate those working from home and at the office, combined with increasing proficiency of at office and at home fee earners suggest the trend is likely to accelerate to maybe 5 to 1 in the not to distant future. Some of the replaced assistants could become retooled to fee earning work, such as quasi paralegal work, especially as legal fees continue to increase with apparent inelasticity.
- Less Office Space. The cumulative effect of more people working remotely and less staff suggest the need for less overall office space. The size of offices has trended toward the small size in recent years, with the average size around 140 square feet. Some are suggesting the downward trends will continue unabated, perhaps to 125 square feet per office. A countervailing offset to that trend, however, may be the requirement for more space due to the need for greater distance between and among workers and conferees and perhaps less employees out of the office by virtue of not travelling as much. Even if office sizes are smaller or the same, the trend toward office hotels and using more conference rooms where proper distancing is desired is likely to continue.
- Business Disaster Plans. Just as the Pentagon has war games for a multitude of scenarios, and just as most businesses have disaster plans for network crashes, most businesses will adopt some form of written plan, while their current plan is fresh, updated on occasion. While plans are only as good as the affliction being confronted, and our plans usually tend to fight yesterday’s wars, a lot of the concepts will be spot on. The plans may address any type of work disruption. Future pandemics of whatever catalyst agent are not the only causes of the need for disaster plans. Climate change could quite possibly introduce severe weather conditions necessitating evacuation. Lenders and other equity sources might well expect this addressed. Insurance companies might require it, especially to receive coverage for business interruption, or provide a premium incentive for those businesses that have adopted a plan.
- Health and Safety Plans. While Disaster Plans are critical to deal with black swan events, documenting and intense, detailed and comprehensive health and safety plan will soon become a must have best practices for offices. Many restaurants, hotels, manufacturing, construction and other dangerous occupations have these plans, in some form or another. Most offices are cognizant of the need for clean, hygienic and safe working environments and all have one form or another of a regimen for assuring some level of cleanliness, even if it just means paying the landlord to engage a maintenance crew. Training and educating employees on the details of the plan will become no different than the way most offices train and educate employees on personnel and policy manuals, harassment prevention training and similar workplace improvements.
- Risk Management or Work From Home Teams. The Disaster Plan may address the coordination of the office if and when it is evacuated to assure its smooth functioning. The team should be small enough that it functions seamlessly yet large enough that it covers the basic functional areas of the business and is engaged with the key constituencies of the business, both internal administrative and external customer and community facing personnel.
- Focus on Higher Level of Health, Cleanliness and Safety. Office environments may soon stress their cleanliness and safety. These attributes, always taken for granted and never really promoted in attracting and keeping workers, may now catapult to the forefront to comfort workers’ anxieties. For example, disinfectant wipes and hand soap can become omnipresent. Coffee machines, soda machines, food dispensers and other purveyors of sustenance as well as countertops, printers, copiers, file cabinets will be wiped after every use. The issue of how to open the wash room door without touching the door knob may be solved. Older or compromised personnel may be asked to stay at home more regularly during flu season and certainly when they are not feeling well instead of braving their illness and lumbering down to the office.
HIPAA privacy rules, keeping confidential employee health records and personal information, may need to be relaxed so others in the workplace may be alerted to avoid them or stay safe. We might increase the scope of services our cleaning services provide to enhance disinfecting. Just as we submit ourselves to baggage searches at airports, perhaps there could be random, or even routine, temperature checks either at building security or random tests at the office. Further, just as we pass a scanner to gain entrance to our elevator banks, perhaps we will all pass heat detectors to gauge whether we have a fever. Since 9/11 we have made tremendous accommodations to balance safety with privacy and convenience. It is not inconceivable that society, and certainly many safe and employee conscious employers, will likewise balance employee safety and health in favor of some not so dramatic intrusions.
Remote working has accelerated the need for universal embrace of technology. Here are several thoughts on this aspect.
- Universal Competence. Gone are days of luxury when you could dictate or scribble your notes in the margin or on the page, hand them to an assistant and expect flawless deciphering and typing in a rapidly produced work product. Typing and correcting is now second nature to most of us, either diminishing the demands on our assistants’ time or freeing them up to perform other tasks. The ubiquity of desktop and laptops, coupled with at least one or two other personal gadgets, to produce work product will only intensify.
- Better Connectedness from a Distance. Just as conference calls are second nature and taken for granted, videoconferencing will soon become universal, thus reducing the need to travel or come to the office. As video’s reliability and resolution improve, just as the photos in every generation of wireless phone were exponentially better, video calls’ use, cost effectiveness and efficiency will further diminish the need for travel and office space. We might reduce the reflexive compulsion for business travel, and attendance at events and conferences. This has been especially so during the pandemic as virtual lunches and events have blossomed. Video is not going to replace the need for people to ever meet and interact in person. It will, however, alter the paradigm and make more acceptable less in person contacts.
- Enhanced Acceptance of Remote Working. Any stigma to working remotely will ebb if not disappear. In fact, the converse may be true, as people wonder why that guy always comes to the office, can’t he just get his work done at home and save time and money and not imperil himself and others? Improvements in and wider use of remote technology applications may also support the need or culture of diminished in person transactional interactions. We have already seen this dramatically with less in person negotiation sessions as people just send markups back and forth and less in person closings as PDF and DocuSign have eliminated the need to perform these time consuming and costly tasks in person. Just as the need to be chained to your desk is called into question, we could see a reassessment of other business travel and in person interaction. Further in the future, litigation may be revolutionized by more video depositions and even motion calls in court to reduce unnecessary exposure.
- More Backroom Automation and Sophistication. The need for broadband, cabling, wi fi, bandwidth, data storage, data compression, backhaul, caching, routers, hubs, processing power, internet of things, bits and bytes will be the lubricant to this generation reducing if not replacing the role of oil in previous generations. Remote working will increase the risk of hacking and the heightened need for secured networks fortified against cyber theft and introductions of malware. Further, the adoption of more sophisticated applications of technology such as AI and machine learning will accelerate. AI and machine learning will enable corporate and litigation document review more efficiently and conducted at remote locations. The need will intensify to support the seemingly insatiable demand for video and other broadband service.
- Increasing Strategic and High Level Management Role. The dependence on technology to operate our businesses and lives, already acute, will become more critical. Most firms of any size will have a “C” suite officer whose job is to have the data running seamlessly through the ether (the modern equivalent of the trains running on time). Technology will be recognized universally as the glue holding the business together in crucial periods and there is no excuse for downtime, slowness or dysfunctionality, whatever the perceived cost.
How Marketing Will Change and Develop
Reaction to the pandemic may recalibrate the old adage that there is no substitute for pressing the flesh and looking them in the eyes. Of course, we will not become hermits and rely only on video and e mail to communicate with clients and prospects. We humans will always need interpersonal interactivity. Our clients will always want to see their service provider in person. Interpersonal contact will still form the cornerstone of deep and trusting relationships. That being said, the plethora and omnipresence of in person meetings, meals and events, particularly those involving travel and being around a multitude of strangers, may become more circumspect. As a result, here are some ways approaches to marketing may change.
- Diminished Travel and Entertainment. Business trips, tradeshows and even meals and entertainment are petri dishes for breeding microbials. Sitting in a crowded basketball arena, constantly passing beers down the twenty seat row and then passing the germ ridden money back to the vendor, or standing up at a theatre every time a patron wants to brush by you to get to her seat conjures up frightful images of too little social distancing. Recent income tax code revisions diminished deductions for some of these items and, unless reassessed, will only contribute to this declining tactic.
- Increased Communication with Information and Videoconferencing. The future may simply substitute pressing the flesh with increased pressing the keyboards writing relevant alerts, blogs and newsletters. Or pressing the videoconferencing button. Or more podcasts and video webinars. Shorter calls with no ability to multitask since you are on screen may even enhance the connectedness and experience, allow more interaction, and further save time and cost and permit more time with family.
- Creative Use of Technology In Lieu of Direct Marketing. How do you meet new people and develop and expand your network in this environment when interpersonal contact is reduced? Perhaps business travel and conferences will simply diminish in number but certainly not be eliminated. A new emerging culture may increase Zoom video and other introductions. Video cocktail parties, lunches, gab fests etc. could become de rigueur. Expanded social media interactions, particularly LinkedIn, will accelerate. Certainly email introductions are a common means of making introductions now but could certainly accelerate in the future. In fact, organizations could set up random “speed dating” and similar video introductions for their members. Virtual conferences may emerge. Instead of going to a conference and scrolling through the print register of attendees, perhaps a conference host can arrange sort introductory conversations between those requesting conversations.
- Digital Marketing. The trend toward digital marketing will accelerate. This will become an even more sophisticated and indispensable tool to segment and target the potential customer base than it is now. Just as many leads are now generated through digital and then closed and then serviced by an account team, the paradigm may change as customers may not expect, or I daresay want, as much face to face service as in the past. Moreover, many small and mid size firms will recognize the need to broaden their reach and sophistication with the use of these tools. Whether digital marketing will be used as an offensive weapon as it is now, or will evolve to a defensive one where you need to adopt this tactic to avoid being left behind, this trend will accelerate.
New Legal Debates
The aftermath of the pandemic will unleash scrutiny in at least three areas described below.
- Force Majeure/Excuse/Impracticability. Lawyers always focus on getting out of, and keeping the other side in, contracts. While many have in the past glossed over force majeure provisions, as well as discussion of other common law excuse concepts, you can bet that force majeure or excuse provisions for pandemics will be debated more and under more intense scrutiny. We have already seen provisions actually defining “pandemic”. We have also debated how geographically dispersed the pandemic has to be, how long in duration, how broad the affected masses, how disproportionate the impact on one party in relation to its industry and how disrupted the populace. Some of suggested that a pandemic is not appropriate to include in the litany of force majeure events since it is hardly unforeseeable. Others would dispute that point as tantamount to postulating that all Acts of god and wars, by virtue of their occurring are therefore foreseeable, you just don’t know which Acts of God and wars and the specifics. In other words, just as we are prone to fight yesterday’s wars, we cannot assume that all pandemics are like one another.
Illegality as an excuse from performance is likely to become hotly contested. For example, does a shelter in place order prohibiting occupancy provide adequate grounds to abate rent payments? What if the tenant is an essential service but chooses to have its employees work from home? What if part of the tenant’s services are considered essential?
- Business Interruption Insurance Policies. Business interruption insurance policies typically cover a business whose operations are interrupted due to “physical” damage or denial of entrance to the premises due to that physical loss. Mass pandemics hardly inflict physical damage except in the most theoretical, microbial, sense. Pandemic coverage will certainly be specific areas of negotiation in the future. While premiums may be too high to justify obtaining, lenders may require some form of coverage for their borrowers. Disaster Plans devising strategies for mitigating losses during a shelter in place directive will help lower premiums for these policies.
- Landlord and Tenant Duties. The aftermath of the pandemic will provide greater scrutiny to and clarity of the respective parties’ duties in the office lease. For example, what level of daily cleaning does the landlord provide? How often are the premises hydro-scrubbed? How do the security personnel screen and admit health compromised visitors? When may access to the leased premises be denied due to outbreaks of an illness on the tenant’s floor? What about not on the tenant’s floor but somewhere else in the building? What precautions are taken that the retail tenants maintain cleanliness and health? What happens to rent when access is denied or the building evacuated due to any tenant? Due to shelter in place orders?
- Material Adverse Effect Terminations. Many business purchase and sale agreements do not require a buyer to proceed to close the transaction if, between a specified date and the closing, an event or condition has occurred which has had or may or would reasonably likely have a material adverse affect on the seller, its business, properties, financial condition and sometimes even prospects. This clause, and event the words I just typed are frequently contested and highly, nuanced and also contain several carve outs that are equally nuanced and beyond the scope of this article. Despite the presence of these clauses, very few courts have allowed buyers to refuse to close due to such an event. Sometimes, if the seller disproportionately affected in relation to its industry brethren, this circumstance will provide greater sympathy and therefore relief. Suffice it to say that the parties will undoubtedly haggle over whether a pandemic constitutes sufficient grounds to refuse to close or at least delay closing. So many uncertainties exist with pandemics such as, to name only a few: what geographic are was the pandemic predominantly located (e.g. if the spread only afflicted China at the time but not yet in the U.S., is that sufficient? If only four states had shelter in place orders in effect, is that enough? If three of the four states were in locations where the seller had manufacturing facilities? If the entire country had shelter in place orders in effect but they were due to expire in one week? If the pandemic was more like a SARS where the illness is quite severe but the spread not highly contagious, will that do it? If a vaccine was almost ready? Courts, generally loathe to encourage litigation and always desirous of enforcing the sanctity of a contract, will need to see clear and unmistakable verbiage addressing this issue before permitting a buyer to terminate or significantly delay closing a business transaction. If events like pandemics truly cause a buyer trepidation, it will likely attempt to sign and close simultaneously. This approach may not mollify a seller who is conversely desirous of inking an agreement, or a situation where a binding agreement is needed for financing or regulatory reasons.
- Transactional Due Diligence and Purchase Agreement Considerations. Purchase investigations in typical commercial transactions are already intense and thorough. Heightened sensitivity to the post Covid-19 deal world will certainly unleash evaluations on not just confirming the facts of the seller’s business, but also modelling its susceptibility to and resilience in the face of possible future pandemics or other business interruptions. Not only force majeure clauses and other termination or delay rights will need to be analyzed but the seller’s entire business operations. For example, where are seller’s key vendors located? Are there backup vendors? Are the vendors able to allocate supplies among their customers? Does the seller have multiple sources of supply in case one source is excused or delayed? Do the key customers have the financial wherewithal to keep paying in a pandemic? Have they encountered payment or disruption issues, or down cycles, in the past? If the buyer is really relying on seller forecasts and projections, then perform an intense sensitivity analysis testing underlying assumptions and possibly greater variations in revenue declines. Between signing and closing, what actions will seller be able to take to deal with pandemics and other adverse events without requiring buyer’s consent? Can a seller update its disclosure schedules for material new items occurring after the signing without triggering any rights for the buyer to terminate or seek indemnification? Is working capital unduly aberrant given cycles where receivables might be stretched due to inordinate customer delays? Same with payable due to seller’s payment delays? Are inventory levels and mix out of the ordinary due to slower sales during a crisis? These are just some of a myriad of new considerations for purchase and sale agreements the post-pandemic world will undoubtedly confront.
Financial Impact and Managing Cash Post-Crisis
The monetary seismic aftershocks of the pandemic will reverberate in many ways, some of which are noted below.
- More Cash on Hand. As previously noted, businesses may consider not living too close to the edge and consider keeping on hand at least two to three months’ reserve to pay rent, payroll, utilities and other critical fixed costs. This might be prudent fiscal discipline even in good times and a munificent marketing tool to give employees some comfort that they will not be reflexively jettisoned at the first sign of a downturn.
- Higher Maintenance and Service Costs. Maintenance and service costs might increase as employers become more cognizant of the need for a cleaner and safer workplace. This might include deeper cleaning, availability of more sanitizers, and need for more employee and guest testing.
- Technology Costs. Expenditures for technology are likely to increase but consider that technology pricing usually declines over time with scale and adoption so perhaps that will not be as dramatic. The crucial need for workers to be connected all the time everywhere and possibly need to be remote for long periods of time underscores the recognition that it is not prudent to be miserly with tech spending.
- Decreased Travel and Entertainment Costs. Greater technology use may decrease other costs such as travel and ultimately the need for office space as more people regularly and systematically work remotely.
- Higher Insurance Premiums. The cost of providing health care, not just to pay for all the Covid-19 cases but to underwrite future pandemics, will undoubtedly lead to higher insurance premiums. How employers share these increased costs with their employees is not only a financial matter but also a policy choice of the type of “safe” workplace image the employer desires to portray. Further, insurance premiums for business interruption coverage may also increase, even if the policyholder does not purchase pandemic coverage.
- Migration to More Certain and Fixed Revenue Streams. To mitigate, if not avoid, the vicissitudes of hourly billing, professional service firms may consider more monthly fixed retainer models. This steady income, in good times and bad, could soften the slings and arrows of unpredictable cataclysms (assuming the clients stay solvent or do not renegotiate). The willingness of clients to pay fixed monthly retainers, however, may be problematic and, even if it is agreed to, may be reassessed at the first whiff of a downturn anyway. Ironically, many clients who had previously suggested a fixed cost arrangement with flat monthly retainers have recently started to see the benefits of a variable cost structure, which frees up monthly burdens during challenging times.
- Possibly Lower Rent Costs. With more workers working remotely, less space will be needed. Of course, that need for lesser space may be offset by the required spreading out of personnel in the workspace, so maybe this will equalize itself.
- More Zealous Monitoring of Cash Collection Cycle. Liquidity in the form of prompt receipts from clients and moderately stretched payments to vendors is essential to keep a business afloat and well capitalized. Certainly during any challenging economic set of circumstances the cycle becomes elongated. The experience during the pandemic reinforced slavish devotion to the basic principles that Cash is King or Queen. I would expect businesses to pursue this truism more slavishly to avoid defaults or delayed payments from customers. Prudent financial management will require retainers, staying replenished, as well as security deposits and not permit advancing significant costs. Interest for late payments, late payment fees, early pay discounts, retainers, good relations, friendly but prompt reminder calls and follow ups, credit card auto pay, and abrupt cessation of work are some tactics a business could be quicker to pursue to avoid being used by their customers as a bank.
- Change in Business Valuations Initially Impacting Transaction Volume. Transaction volume in industries which use debt (private equity and commercial real estate to name a couple) could decline in the short run as buyers and sellers reorient basic financial valuation metrics. Transactions will still occur as strategic businesses, as well as those strictly trying to make money, will always perform the buy versus build calculus. The key underpinning of any valuation is the appropriate risk premium, whether that is expressed as a cap rate in a real estate transaction, as an EBITDA multiple in a private equity deal or an ARR multiple in a SaaS venture capital deal. As the perceived risk, not just of the micro business itself but of the macro geopolitical, increases the multiples will adjust to lower the price. Valuations may decline further if a lower risk tolerance necessitates less debt and more equity in the capital structure and therefore valuations would need to decline to keep return on equity at desired levels. Further, lenders might impose financial covenants which are more stringent and also more universally require a minimum cash level requirement. Just as some lenders, particularly in real estate transactions, require interest reserves to cover some time period for interest payments, perhaps some lenders in the future will insist on a rainy day reserve comprised of at least two or three months’ rent, payroll and utilities. This minimum cash level or reserve would presumably cushion the borrower from these external shocks to the economy. It also increases the cost of capital since the return on cash is not as high as on more productive assets.
Government Response to Coronavirus
Changes in our federal government unleashed by the pandemic are beyond the scope of this article. However, certain changes could directly affect our office lives.
- Increased Taxes. While the author is not an economist, the trillions of dollars of government stimulus, amounting to over 10% of our GDP, should be inflationary (although TARP and other excessive stimulus in 2007-08 did not lead to inflation). Increased taxes are a conventional tonic to drown deficit spending. This could both lead to great use of the multitude of income and estate tax planning services but at the same time decrease business activity.
- Increased Regulation. The pandemic has unleashed a torrent of legislation addressing crucial pillars of our economy and business. These include lending, labor, employment and executive compensation. Most of the legislation was written hurriedly to deal with the impending political and fiscal crisis and the need for interpretation and well as compliance creates work for the service industry.
- Government Involvement. Regardless of your position on the political spectrum, one can hardly debate that the federal government has shown a willingness and ability to take bold and decisive action in a short period of time, at least in a national emergency. The normally cautious central bank has basically adopted the approach of the former President of the European Central Bank and chose to “do whatever it takes” to keep the economy afloat. These appetites to use the government fiscal stimulus and monetary easing could lead to a few possible unintended consequences:
- Loyalty to the Government over Your Employer. Many employees will remember feeling betrayed and jettisoned, or at least extraordinarily vulnerable and at risk at work. With their economic security tenuous at best, they may now turn to the federal government as the last bastion of loyalty and hope to comfort them in trying times, not the faux nurturing bosom of their work family.
- Creation of New Government Department. Very few have extolled the federal government’s response to the pandemic. While there is no shortage of blame, the panoply of government department and agencies handling some aspect of readiness, testing, messaging, assessment and coordination suggests a need for greater oversight, focus and responsibility. This approach is similar to the creation of the Department of Homeland Security after 9/11, reacting to the multitude of disconnected defense preparedness agencies. The new department may also marshal strategic resources. Just as we have a strategic oil reserve, we may have strategic reserves for supplies of masks personal protective equipment, ventilators and respirators, subsidize over building of hospital rooms, some type of test kits and other opportunities for our clients to make sales to the government.
- Reduction in Moral Hazard. Unnecessary or imprudent risk taking, or simply bad business or bad luck, typically have consequences. The fear of those consequences keep most prudent businesses in check. Perhaps seeing that bailouts, or at least lifelines, are virtually universal, without regard to size or predicament, may encourage employers in the future to take more risks, relying on this precedent. This could undoubtedly lead to worse and worse business decisions, and more and more troubled companies, the continued vicious cycle of layoffs, and the continuation of the social alienation and lack of control felt by many.
- Rise of Nationalism and Populism. Financial crises typically unleash nationalism and populism, as we witnessed during the Great Depression and the Great Recession. The rise of Orban, Erdogan, Brexit and Trump all trace to the feeling of loss of national security and identity to other countries and forces beyond our control. These trends lead to less trade, higher tariffs, favoring of domestic goods over foreign ones and the decimation of international supply chains. These structural changes, in turn, lead to less efficient pricing, shortage of desired products, and greater international tensions. These hardly foster economic growth and security and sow the seeds for further conflict and possible disruption in our lives.
- Reduced Privacy. Society has been struggling with the growing loss of privacy as social media powerhouses and dominance proliferate. The pandemic may rebalance that calculus. People may be more willing to release their personal health information in exchange for the release of other’s personal health information so more may stay healthy. Stringent HIPAA rules, for example, may be the first to be re-examined as too stringent in a world where we need to reduce the chances of inadvertent spreading of disease. We are already seeing this with the announced partnership between Google and Apple to create an app to monitor those who have been afflicted with the virus.
- More Downtime Due to Pandemic Alerts. This pandemic will scar the psyche of many for decades to come and with the inevitable passing of stories down to the succeeding generations. Given the great disruptions a pandemic inflicts, the memories of which may become exaggerated and shibboleths as the years progress, and given the perceived slow and less than energetic response the federal government provided, future leaders will view efficient, competent and rapid response to even a whiff of a pandemic to be the prism through which their competence is judged. Therefore, government will be expected to react with alacrity, not panic, and competence. Just as governors of states in hurricane regions lead efforts to warn citizens in advance of an impending hurricane and exhort them to board up their houses and head for higher ground, future national leaders, and even some state leaders, may closely monitor outbreaks of illnesses in faraway lands, just as we now monitor the formation of tropical depressions in the Caribbean, and perhaps prepare citizens and businesses well in advance. This may result in more precautionary business closures, some warranted and some like the putative hurricane that thankfully never develops or veers off course. Very few will blame a government for shutting down the office too soon rather than keeping it open too long. While we as a society balance economic health against physical health, this pandemic has slightly tilted the balance toward the latter.
Some might say that all the talk of major transformational shifts due to the COVID-19 pandemic is an overreaction. After all, pandemics are rare black swan events. There will soon be a vaccine. Many die every year during flu season. Society has to balance health and safety against a booming productive economy. All of this is true. However, in the past twenty years we have had several worldwide pandemics, like SARS, MERS, H1N1, avian flu, Ebola, to name a few. We have also had societal and business altering events like 9/11 and the financial pandemic in 2007-8. Some might even observe that these “black swans”, being not so rare, are more like “black ducks”.
Ignoring the trends of spreading diseases in a rapidly globalized world, as well as the likely occurrence of other truly unforeseeable occurrences, is to ignore the need to properly address the ramifications of these events and perhaps recognize way to improve our ability to mitigate disruption in the future. While no one has a crystal ball, the possible responses to the pandemic may lead to profound changes or accelerate existing trends in our office environment in a broad panoply of areas, not the least of which includes those discussed above. Our future office and work environment, whether in the context of socialization, office structure, technology, marketing, legal, financial and governmental will be as profoundly different in the future as was our country before and after the last world war. Once the Genie is out of the bottle, it is difficult to put back in.
Copyright © Fred Tannenbaum 2020