Experts Provide Guidance to Directors in Light of Brexit

The NACD Atlanta Chapter recently hosted an expert panel to discuss what directors should know and, more importantly, what they should be asking of management about the impact of Brexit on their corporations. The panel was moderated by Ambassador Charles Shapiro—former US ambassador to Venezuela and current president of the World Affairs Council of Atlanta—and featured Jeremy Pilmore-Bedford, consul general from the British Consulate-General in Atlanta; Mary Shelton Rose, PwC East Region advisory leader and leader of PwC’s US Brexit Response Office; and Lynn Clarke, CEO of MetroKitchen.com and director for ABARTA, Inc., Kahiki Foods, Inc., Visii.com, and the NACD Atlanta Chapter.

The takeaways from the event fell into three categories.

Takeaway 1: The Brexit outcome is uncertain, but a more moderate outcome is likely to prevail in the European Union.

To assist directors as they consider how to approach discussions about Brexit, the panel highlighted possible outcomes of the Brexit vote. Clearly, the path that would leave the least uncertainty is the one under which Britain retains access to the European single market through a series of bilateral agreements. However, a model where Britain does not continue to benefit from any part of the single market is also possible. Since the panel met, a UK court ruled that the British government requires parliamentary approval to trigger the process of exiting the European Union (EU), which adds additional complexity and uncertainty to the situation, and could give pro-EU lawmakers more opportunity to influence the direction of the exit.

While some may believe that other EU countries may want to punish the UK for Brexit by offering unfavorable trading terms, the panel seemed to agree that cooler heads will likely prevail as EU member countries focus on Britain’s role as a significant trading partner for the EU. According to Pilmore-Bedford, an upside of Brexit that is often overlooked is that Britain could begin to negotiate its own free-trade deals beyond Europe with growing countries like India.

Takeaway 2: The UK is trying to mitigate uncertainty.

Britain is attempting to mitigate some of the uncertainty about possible outcomes through outreach to companies. For example, British Prime Minister Theresa May recently met with top executives from such companies as Amazon, Goldman Sachs, IBM, and Morgan Stanley in an attempt to reassure investors.

UK officials like Pilmore-Bedford are quick to remind companies that the free movement of labor between Britain and the EU will continue until 2019 at a minimum. Also, the British government is working to enact laws that enhance legal stability for businesses. Still, with no crystal ball in hand and uncertainty even among those closest to the situation, the panel made clear that directors and management must remain vigilant.

Takeaway 3: Directors must exercise due diligence now.

Panelist Lynn Clarke showed the audience a jar of Marmite, a much-loved Unilever product in the UK. She cited an example of how, in the current climate in the UK, otherwise routine operational decisions can have significant impacts on a company’s reputation and bottom line. In the case of Marmite, Unilever decided to raise the price of Marmite in the UK, ostensibly to compensate for the sharp drop in the pound’s value following the Brexit vote. Behemoth grocery chain Tesco reacted by removing the product from its website. Analysts and consumers criticized the price hike, particularly since Marmite does not contain ingredients from outside of the UK. Clarke suggested that companies must exercise additional caution in how business is approached in the UK during this tumultuous time.

In addition, directors may pose a number of questions to management to prepare for Brexit’s impact, depending on the type of operations the company has in Europe:

• Strategic Planning: Have we included flexibility in our planning to allow the company to react to scenarios as they unfold?
• Investment: Do we want to consider either moving forward with investments or holding off on investments related to UK operations or acquisitions?
  • Clarke, on the board of a UK tech start-up, noted that start-ups in the UK may move to the EU to access existing seed-funding programs.
• Pricing and Margins: Will we be affected by margin compression from goods sold to/from the UK? Should we modify our prices?
• Talent: Have we assessed the likely impact of Brexit on talent sourcing to and from the UK should migration be restricted?
• Supply Chain: How well do we understand our suppliers’ financial positions? Do we know which of our critical suppliers are most vulnerable to price fluctuations?
• Investors: How will we communicate the financial and strategic effects of Brexit and how we plan to mitigate them to investors?
• Pension Plans: Will there be concern about pension plans (underfunding, for example, due to asset devaluation)?
• Technology: How will all of the above affect technology/systems as changes are needed to HR systems, VAT systems, regulatory systems, etc.?

PwC expert Mary Rose Shelton emphasized that preparing for Brexit will give directors the opportunity to explore less emphasized areas of the company such as the supply chain, human resources outside of the US, and European and other overseas operations. Given that the greatest certainty at this point is that uncertainty will reign for some time to come, smart directors will begin asking the right questions now, helping their companies adapt to conditions as they evolve. Please reference NACD’s recent publication The Board’s Role in Brexit Oversight for additional questions boards can consider in response to Brexit.

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Kimberly Simpson is NACD’s first regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.