Wharton@Work

May 2020 | Finance

The Humanitarian and Financial Crisis: Prepare for Risk

When Comcast Cable President and Chief Executive Officer Dave Watson announced the company’s response to COVID-19, he joined a growing number of companies that are stepping up to help new and existing customers. Among other new policies, Comcast is offering free wireless (WiFi) service to low-income families and at all of its hotspots. “During this extraordinary time, it is vital that as many Americans as possible stay connected to the internet — for education, work, and personal health reasons,” said Watson.

In addition to Comcast’s actions, major newspapers have dropped their paywalls, making coverage of the pandemic free for everyone. Hyundai will make up to six monthly car payments for owners who have lost a job, and PayPal has a “no layoffs” policy that other companies are also adopting.

“As a consumer I value that,” says Michael Roberts, who is the William H. Lawrence Professor and professor of Finance at Wharton. “Helping children in low-income families keep up with schoolwork online is a good thing for Comcast from a financial perspective, as well as a humanitarian perspective. The social good and brand equity generated by policies like these resonate with customers, strengthening trust and loyalty, ultimately translating into revenue and value.” Roberts says there’s a misconception that doing good socially and doing well financially are mutually exclusive: “On the contrary, they are complementary, with social good often translating into financial good.”

Roberts, who is academic director of Wharton Executive Education’s Corporate Valuation and Wharton Finance for Executives programs, recognizes that some people will ask how companies can focus on finances in light of the humanitarian crisis. “Financially intelligent decision making is critical in a crisis because the consequences are so much greater. Poor decisions no longer lead to temporary setbacks, but instead lead to existential threats to organizations that impact the livelihoods of their employees and employees’ families.”

Expecting unexpected events

“In the context of what we teach in our finance programs, a significant economic shock is not unexpected,” says Roberts. In Wharton Finance for Executives, he works with participants on a case that explores the launch of a new product. It is aimed at a higher-end consumer, and participants have to determine whether it is wise, financially, to launch it. The case highlights the importance of assessing such a decision by evaluating the uncertainty around it and quantifying the risk exposure.

The launch occurs in the spring of 2007, right before the onset of the great recession, after which the market for the product collapsed. “It’s similar to what we are seeing right now in many sectors.” says Roberts.

“One of the limitations we acknowledge is that we cannot predict the future. What we can do is prepare for what could happen, which will enable us to react more quickly. The only way to do that is to assess the risks associated with a decision before making it,” he says. “The dynamics and depths of the current crisis and the great recession are different, but from a financial perspective there are a number of similarities from which we can learn.”

Lessons from the pandemic, and many other economic events, will be a part of the programs when Roberts gets back in the classroom. It is nothing new, since both are constantly revised based on the current economic environment and the needs of the participants. “This will be another opportunity to evolve,” says Roberts. “Risk is nothing new — it’s been a dominant theme of our curriculum since I started teaching. We have always discussed the fact that extreme events can happen at any time — they’re not as rare as we would like to think. The companies whose senior leaders, including the CFO, have had the honest, hard discussions about their risk exposure and vulnerabilities are always better off in the long run.”

“The challenge lies in balancing risk management with taking advantage of risky but valuable opportunities. You don’t manage a business around a black swan event,” he notes, “but you must be cognizant of its potential impact, a message that applies to risk more broadly. This recognition can have a big effect when crises hit. My hope is that the lessons explored in Corporate Valuation and Wharton Finance for Executives have helped our participants and their organizations better manage the challenges of the current environment.”