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A rising number of investors have called on companies to cut dividends during the COVID-19 crisis while many governments have attached strings to bailout packages, requiring companies to suspend investor payouts.

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With COVID-19 upending the world economy, a long and growing list of companies from Walt Disney Co. (DIS-N) to Rolls-Royce Motor Cars Ltd. have slashed dividend payouts. In past downturns, these payments have tended to snap back quickly when normality returns – but some investors are not convinced that will happen this time.

Rather, they believe the crisis may catalyze a significant shift in how companies spend their free cash flow, following increasing acceptance that businesses bear a responsibility toward employees and wider society as well as shareholders.

Businesses are under pressure from both investors and governments. A rising number of investors have called on companies to cut dividends to ensure they stay afloat during the crisis. Many governments have attached strings to bailout packages, requiring companies to suspend investor payouts.

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Once businesses stanch the bleeding, the new corporate zeitgeist and popularity of environmental, social and governance (ESG) investing could mean that dividend cuts extend beyond the downturn. Some analysts argue that concerns such as fair wages for employees may take precedence over returning cash to shareholders.

“This is the first recession in which ESG has been in the mainstream,” wrote Jessica Alsford, an analyst at Morgan Stanley in a report last month. “In a typical recession, dividends are protected as much as possible, with operating costs and capital investment cut to improve cash flow. However, there is a new emphasis on ensuring employees, customers and society as a whole are prioritized first.”

Ms. Alsford points out that during the 2008 global financial crisis, the United Nations Principles for Responsible Investment were in their “infancy,” with only a handful of signatories pledging to implement ESG principles. More than 2,300 investors have now signed up, with US$86-trillion in assets. That means more money is in the hands of people who will judge companies’ cash distributions and executive pay in “a context broader than shareholder primacy.”

Indeed, some sustainable investors are asking for these types of changes in reaction to COVID-19. The Center on Corporate Responsibility in New York has gathered 322 institutional investors with US$9.2-trillion in assets under management to sign a letter calling on companies to “provide paid leave; prioritize health and safety; maintain employment; maintain supplier/customer relationships; [and exercise] financial prudence.”

Nicholas Lusiani, a senior adviser in the private sector division at Oxfam America, says that “shareholder primacy is distorting how we allocate resources – and that hits home especially in this pandemic.”

He suggests that companies’ unwavering fealty to shareholders is one big reason the COVID-19 crisis has had such a devastating economic impact on so many people.

“Imagine if companies that were able to pay had paid more taxes and invested that money in public health and social protection,” Mr. Lusiani says.

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Many people in the U.S. have lost their jobs because of companies’ focus on the short-term, Mr. Lusiani says, rather than being allowed to go on leave and return once physical distancing restrictions are lifted. “Instead, everyone has been thrown to the curb and is looking for crumbs from the government.”

The havoc created by COVID-19 also means that dividends are likely to be a part of a wider conversation around tackling inequality. Focus on dividends is often popular among older investors who count on them for steady income in retirement, Mr. Lusiani says. But the fact that ownership is concentrated among the very wealthy means that payouts exacerbate wealth, gender and racial inequality.

Oxfam research has shown that 97 per cent of all dividend payouts in the U.S. go to white families, Mr. Lusiani says. “By far, the benefits of payouts are going to rich white men. Others are losing out.”

With COVID-19 highlighting such concerns, it may focus investors’ attention on how their decisions affect a broader set of stakeholders.

“If I step back and look at the big risks, climate is a big one, and inequality is another one that will have a significant macro impact on businesses and financial markets,” says Andrew Lee, head of sustainable and impact investing at UBS Global Wealth Management.

“You are likely to see market feedback over time ... but right now – it is perhaps like 10 years ago when people said [climate] had nothing to do with finance,” he says.

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Mr. Lusiani believes investors will not get there on their own, however. “It will require legislation,” he says. With lawmakers in Europe and the U.S. already attuned to the theme, it is not completely impossible, he adds.

“We can’t let our society rely on the individual enlightenment of CEOs. We should pat good companies on the back, but ultimately change the rules of the game so every company will make those decisions,” Mr. Lusiani says.

© The Financial Times Limited 2020. All Rights Reserved. FT and Financial Times are trademarks of the Financial Times Ltd. Not to be redistributed, copied or modified in any way.

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