Focus on resilience for sustainable, inclusive growth

Proverbs 27:17 says: as iron sharpens iron, and one man sharpens the face his neighbour. The modern version of this verse – which we will most likely be more familiar with – says: as metal sharpens metal, so one man sharpens another. While the direct interpretation of this verse is subject to interpretation, it is generally accepted that this is a positive affirmation which highlights the virtues of resilience and the role it plays when overcoming adversity.

Since the 2008 Global Financial Crisis, there have been a number of times when companies and corporate leaders have been forced to focus on resilience to find a sweet spot that will achieve sustainable, inclusive growth.

Some may find this easier to achieve than others. One may argue that Comair showed great resilience when they survived the hard lockdown that lasted for much of 2020 and almost all of 2021. However, the company faced massive liquidity issues and its BRPs recently filed for provisional liquidation.

Where does the resilience sweet spot exist? An article by McKinsey focuses on this in great detail.

Different resilience perspectives

The article points out that strategies across sectors must be coordinated to ensure that disruptions do not diminish growth.

Resilience is a broadly used term covering many aspects of organizational health and operations within governments and public foundations as well as corporations and financial institutions. The World Economic Forum Resilience Consortium endorses the strategic view of resilience and emphasizes the long-term ability of organizations and economies to create the capabilities needed to deal with disruptions, withstand the shocks, and continuously adapt as disruptions and crises arise over time. It is the strategic prerequisite for long-term, sustainable, and inclusive growth.

The article adds that World Economic Forum research suggests that the impact of resilience (or lack of it) on annual GDP growth is 1% to 5% globally. In the Covid-19 pandemic, for example, workforce attrition may have shaved 3.6% off growth in some countries. In addition, low vaccination rates in developing countries have reduced growth by 1%. Beyond the pandemic, income, gender, and racial inequalities are likely to reduce growth by between 0.6% and 1%, while extreme weather events are taking 0.4% growth. On the other hand, success in reskilling and upskilling the labour force in the digitizing economy could increase growth by 4.5% annually to 2030. Proportionate short- and long-term economic improvements can be captured through successful responses to the major risks and impact drivers in each of the resilience themes. Given the interconnectedness of the themes, the enhancements are not discrete and cumulative, and their magnitude will vary across economies, industries, and populations

Business resilience

The McKinsey article points out that resilient organizations and economies accelerate from inflexion points. Crises and disruptions expose weaknesses, separating the resilient from the unprepared. McKinsey’s research has shown that companies evaluated as more resilient generated greater shareholder value than less resilient peers across the entire life cycle of the major economic shocks of the past two decades.

The article adds that, in the GFC, resilient companies generated around 20% more shareholder returns, an advantage which accelerated to around 50% in the turnaround years of 2009–11 and 120% during the stable period of 2011–17. Two equally important dimensions of resilience emerged:

• financial strength (cash reserves, a flexible cost base, and profitability) and
• decisive adaptations to the business model through divestments and reinvestments.

A study of the performance of 1 500 companies during the financial crisis revealed that 20 percent in every sector emerged from the trough of the downturn a little ahead of the rest. They then converted that small advantage into clearly superior performance against peers for the next decade. Assumptions that the better performance resulted from long entrenched advantages did not withstand close inspection. The resilient companies had not been the clear leaders before the disruption, and most did not have pre-existing businesses that the disruption advantaged. What the 20 percent did have was a self-made advantage, which they acquired by moving fast, early, and decisively in the disruption. This did not happen accidentally; strategies had been worked out in advance to protect margins (rather than revenue) or to buy good businesses at deflated prices and use them to catalyse growth as the downturn shifted to recovery.

The McKinsey article adds that, likewise, through the downturn and disruptions of the Covid-19 pandemic, resilient companies generally performed better than their peers. The “resilients” generated 10% more total shareholder returns during the economic downturn of Q4 2019 to Q2 2020. During the period of economic recovery (Q2 2020–Q3 2021), the differential accelerated to 50%. These adapted more flexibly in the economic slump and pivoted quickly to meet the resurgence in demand. They embraced digitalized business models, organizational flexibility, and needed business portfolio changes.

Business leaders will play a crucial role in steering society toward this more prosperous, sustainable, and inclusive future. The business sector drives 72% of GDP and as much as 85% of technology investment and labour productivity growth.

Economic and societal resilience

The McKinsey article points out that similar patterns can be observed at the level of economies and societies, with financial measures or public-health interventions, for example. Once the Covid-19 pandemic struck, countries that combined fiscal stimulus with effective management were able to stabilize local economies and protect societies. Many countries recovered quickly, but the pace varied from country to country.

While economic resilience can be measured by overall long-term growth, an important aspect considers societal resilience as a reflection of social, gender, and racial-ethnic inequalities. The Organisation for Economic Co-operation and Development (OECD) estimated the relationship between income inequality and GDP growth per capita. It found that the change over time in income inequality (measured as the ratio of top to bottom income deciles) has a significant impact on GDP per capita on average across OECD countries. The impact is statistically significant: an increase in income inequality of 1% lowers overall GDP potential by 0.6% to 1.1%.

The article adds that the World Bank measures the economic cost of gender inequality globally at $160.2 trillion, an astonishing number. The research discovered that women possess only 38% of individual wealth overall and less than 33% in low- and lower-middle-income countries. The study emphasized that investments in advancing education and opportunity for girls and women make economic sense since closing the gender wealth gap is essential for sustainable, inclusive development.

Much the same can be said of wealth gaps based on racial inequality. In the United States, the median wealth of White families is ten times that of Black and Hispanic families, whose wealth did not essentially change between 1992 and 2016, a 24-year period. During this time, the median wealth of White families expanded by more than 50%. McKinsey’s research suggests that this gross disparity will cost the US economy trillions in lost consumption and investment in the next decade.

A coordinated public- and private-sector response

The McKinsey article points out that crises and disruptions require a coordinated response by the public and private sectors. In fact, the world’s most pressing crises are breaking down traditional divisions in how and when public and private organizations respond. Increasingly, business, economic, and societal resilience are interlinked. A consensus has lately emerged among leaders of both sectors that neither can go it alone—the world and its organizations are too interconnected.

The article adds that the general nature and extent of certain crises have been well estimated in advance. Most leaders understand that taking no action or limited actions will only result in worse outcomes. The climate crisis clearly illustrates how industry sectors, for example, must align goals and values. Many companies are moving on climate goals ahead of government regulation. The financial sector is exploring ways to measure climate resilience in valuations, recognizing that stronger responses will show in economic and shareholder outcomes.

A common resilience framework

A framework would provide organizations with a common language, structure, and objectives for resilience.

The McKinsey article points out that the current resilience discussion is still characterized by differences in interpretation and opaqueness on objectives, measurability, and areas for action. Consequently, the prerequisite for a coordinated, systematic approach to resilience is a common resilience framework. Such a framework, similar to environmental, social, and governance (ESG), would provide organizations with a common resilience language, structure, and objectives. It would also provide guidance on how to protect and enhance sustainability and inclusiveness in an environment of more frequent crises and disruptions. With the framework as a basis, organizations can enhance their mostly reactive risk management practices, harness strategic thinking, and take a more forward-looking view.

The framework would prioritize human capacity above all, while recognizing essential reskilling and upskilling requirements. It will encompass an adaptive supply chain, with technology as an enabler, and deploy financial and fiscal buffers as defensive supports within an overall active stance. Within the framework, organizations can identify preventative actions, proactive investments, and areas to deepen public–private-sector cooperation. Like ESG frameworks, the resilience framework is designed to help leaders see past the immediate bottom line and short-term financial goals.

The article adds that a further affinity with ESG is that the resilience framework must be supported by assessment and measurement capabilities. These will allow leaders to understand and weigh the costs and benefits of particular resilience-building actions. Inaction will certainly be more costly than an agenda of preventative actions, but resource allocation needs to be linked to real and inclusive wealth creation—whether that is reflected in shareholder value, renewable energy growth, or the eradication of poverty.

Finally, the resilience framework will, by design, foster the cooperation of public- and private-sector organizations in supporting sustainability and inclusiveness across societies. For companies, resilience will translate into sustainable business growth; for societies, resilience both enables and depends on meaningful economic growth, emphasizing improved quality of life, equality, and inclusiveness. Wealth creation becomes meaningful when it also elevates the standing of the most vulnerable and poorer populations, in economies of all developmental stages. Without sustained social advancement, societies are less resilient and secure. Likewise, the goal of sustainable, inclusive growth includes the protection and repair of natural environments, beyond mitigation of the effects of the climate crisis.