This is the third of a three-part series looking at the global economy and uncertainty in 2016 and 2017. In the first post, the challenges of slow growth in developed and emerging markets was addressed. The second postexplored how political entrepreneurs such as Donald Trump have exploited voter anger over limited economic opportunity and the perceived inability of institutions and elites to solve problems. To dive deeper into election implications, join DJ Peterson and David Kistenbroker, Global Co-Head, White Collar and Securities Litigation, Dechert LLP, for a webinar on December 15, 2016. Members may register to attend here.
On November 8, American voters extended a series of striking political surprises and rebukes that in 2016 began with the June referendum on Brexit and in October Colombians’ rejection of a peace deal with rebel forces. Looking forward, the success of Donald Trump raises questions about what will happen next in Europe when voters go to the polls in Italy, the Netherlands, France, and Germany in the coming months. Populism, nationalism, anti-globalism, and authoritarianism seem to be on the rise and time-honored principles and institutions are being weakened as a result.
In the corporate boardroom, disruption usually is thought of in terms of innovation, technology, and the competitive landscape—it is looked at as both opportunity and risk. And while board members are sometimes challenged to address economic disruption in business, political disruption is even more difficult to grasp and manage. Are board members asking the right questions? Are we creating the right scenarios?
Not surprisingly, NACD’s member surveys, as a well as discussions at the 2016 NACD Global Board Leaders’ Summit, reveal that a top concern of board members and corporate executives is how to navigate the tremendous economic and political uncertainty in the world today. A breakdown of broad-based consensus on free trade is a related concern.
Several megatrends driving the political disruption we are seeing include:
diminishing economic opportunities for the middle and working class;
a sense that urban elites—in government, the media, and business—are distant and not very concerned about the “average person”;
social media, which tends to play up societal challenges and divides;
and political entrepreneurs who look to capitalize on these trends of unrest.
This has played out on the trade issue. While lower barriers to international movement of goods and services help boost growth, the benefits are diffused throughout an economy while job loses often attributed to trade deals (wrongly or rightly) are concentrated in working class communities—making political mobilization easier. Social media, meanwhile, has helped reduce a complex policy issue to caricatures.
How might these trends impact long-term business and economic success in the United States in the coming years? Expectations are that the new Trump administration, together with the Republican-controlled Congress, will repeal a host of Obama-era laws and regulations, cut and simplify corporate taxes, and appoint business-friendly judges to the courts. These moves would be a boon for many sectors.
But Donald Trump’s populist appeal has also been derived from his willingness to blame countries for having unfair trade advantages; to publicly name and shame firms for sending manufacturing abroad; to criticize large mergers for concentrating economic power; and to target executives for opposing him. We don’t expect such appeals to end once Trump is power. He is likely to use such tactics from the bully pulpit of the presidency to bolster his position and “tell it like it is” personal brand.
Economic populism is one area where activists on the left are likely to be cheered by Donald Trump’s presidency. They certainly have been willing to name and shame companies for actions that they see as out of line with public interests.
This is where board oversight is important.
Directors can pressure test management’s assumptions about the political implications of their actions. Directors should urge management to consider what the political risk implication of the company’s actions are. For example, how will decisions about outsourcing operations, finding tax advantages overseas, or cutting job-training programs and hiring foreign workers be perceived? Will they land the company in the headlines?
Directors can ask management questions about strategy as well:
How are we identifying trends and disruptions that may affect the business?
Are we integrating political assessments into risk management—regarding, for example, currency, regulation, or supply chain strategy?
Are political risks considered as part of our strategic planning processes?
Are we considering a range of scenarios and market impacts for a country or an issue?
How are we monitoring and reassessing developments? Do we have good information?
Focusing the board lens on the bigger picture, in today’s populist, volatile political world, companies can no longer merely defend themselves against risks and criticize government policies and social activists. Rather, public-private cooperation is needed now more than ever.
At the 2016 NACD Global Board Leaders’ Summit, participants heard about conscious capitalism—shorthand for the many ways companies can make money by doing good for societies they are embedded in. Many proactive business leaders are looking for opportunities to be a part of the solution to the challenges spurning the disruption—from raising hourly wages to hiring and training refugees, to investing in underserved communities and making healthier products. Fostering long-termism is another way that companies can contribute to this aspect of the movement.
Many such initiatives are the results of a CEO’s passion and they often get relegated to the corporate social responsibility portfolio. It’s not hard to name firms and executives that get kudos for one socially responsible initiative but come under withering criticism for major failings in other aspects of their business.
For conscious capitalism to be a meaningful response to recent geopolitical disruption, incentives and priorities must be changed throughout the organization. This is stimulating a rethinking of corporate governance—the core values, norms, and rules that drive corporate behavior. Directors can help ensure long-term, conscientious response to populist pressures on businesses by asking: What is our ultimate mission? What are we doing to help solve today’s problems? How do we maintain and enhance our social and political license to operate?
DJ Peterson founded Longview Global Advisors in 2013. Longview Global Advisors is a consultancy that works with clients on a range of tasks that include strategic planning, market intelligence, thought leadership, and executive positioning. Business leaders and investors turn to Longview Global Advisors for a relevant worldview, and Peterson helps them monitor and make sense of the political, economic, and social trends they care about.
This is the second of a three-part series looking at the global economy and uncertainty in 2016. In our first post, we addressed the challenges of slow growth in developed and emerging markets. In our next post, we will focus on the outlook for 2017.
DJ Peterson, President, Longview Global Advisors
Businesses need supportive, stable political and legal institutions to prosper, yet the global landscape has become increasingly unstable as many once-implausible events have become realities.
Since the start of 2016, the United Kingdom has voted itself out of the European Union. The U.S. Republican Party is pulling itself apart over policy and personalities. In Europe, fences are replacing open borders and Jihadi terrorists are targeting festivals, shopping centers, churches, and other public gathering places. Investors pay to lend their money to governments even as debt risks mount.
In conversations, business leaders and directors repeatedly express surprise and concern at the turn of events. What’s fueling this instability? Are recent events indicative of a “new normal,” a brief detour, or a transition to a new equilibrium? And, as the end-of-year business strategy season approaches, what should corporate directors and executives focus on?
Each country has unique characteristics, but there are some important interdependencies. Four powerful, converging political forces are at play.
1. Slow growth is fueling political volatility
As noted in a previous post, global growth has been muted and uneven since the global financial crisis, prompting some economists to ask whether the world has entered a period of “secular stagnation.” Energy and commodities exporters such as Australia, Brazil, Russia, and countries in much of Africa have been particularly hard hit.
Economic hardship often leads to political volatility, but there is a larger political force at play today: A lack of policy consensus and latitude. To turn the situation around, global financial institutions have been calling on governments to undertake bold structural reforms and assertive stimulus measures such as investing in infrastructure. But thanks to large debt piles and continuing calls for austerity from fiscal hawks, big spending increases are not politically feasible in the U.S. and Europe. Emerging markets dependent on commodities exports have been forced into belt-tightening mode as well. The inability of governments to reignite growth has forced central bankers to step into the breech with extraordinary measures.
Policymakers struggle to reignite growth, people are disaffected, and the sum of this instability is the political uncertainty and volatility we are experiencing today.
2. Inequality is adding to political frustrations
Free market liberalism is predicated on creating economic opportunity, but the benefits have not been shared. In many countries, inequality has surged since the 1980s. More recently, quantitative easing, a response to slow growth, has lifted a few boats greatly. In the past, governments often played the role of an equalizer; now proximity to political power is seen as conferring huge economic benefits, creating the belief that “the system” is not fair.
Free trade could be a casualty of increasing inequality and diminished opportunity. The perception that the benefits of globalization accrue disproportionately to certain segments of the population while the losers are left to fend for themselves is pervasive. Anti-immigrant sentiment is another by-product of limited opportunity.
Animosity towards politically connected elites in authoritarian markets is kept in check by repression. Open societies may be more at risk to economic and political polarization. As we see with Brexit, the pushback against globalization, and with the rise of anti-immigrant pressures, middle-ground policy pragmatism—a hallmark of stable democracy—is losing credibility in a world of economic resentments.
3. Populists are exploiting the governance gap
The widespread belief that establishment elites are incapable of solving important problems has created a volatile atmosphere where disaffected voters are willing to take risks and throw wrenches.
Private sector entrepreneurs exploit gaps in the market and find new ways to satisfy needs. Political entrepreneurs do the same in the public sphere: They take advantage of volatility, peddle new solutions (often from both left and right), and break rules.
Dramatic, frustration-driven policy stances of political entrepreneurs make compelling platforms—such as Philippine President Rodrigo Duterte’s anti-drug dealer campaign and French presidential candidate Marine Le Pen’s anti-immigrant stance. Donald Trump and Bernie Sanders are political entrepreneurs too.
But that’s only half the story. In this context, calls for pragmatism and staying the course (“Vote Remain!”) from establishment figures sound tired, if not suspect.
4. Social media is catalyzing volatility
Thanks to social media, populists can peddle their ideas with greater ease than previously seen, without having to adhere to the agenda of establishment media and institutions. (The self-described Islamic State is the most extreme example.) Being provocative is essential to gaining visibility in today’s crowded media landscape and this imperative promotes extreme points of view and places pressures on policymakers to react—even though in representative democracies governments are designed to be deliberative and consensual.
Just as individuals may be overwhelmed by the pace and quality of information flows, so too can governing institutions that were built to be slowed by checks and balances. Few would say policymaking in the U.S. has improved over the past couple of decades thanks to better information. Nationalism, ethnocentrism, and religious animosities seem more powerful than ever.
What can corporate directors do?
Western multinationals can no longer take political stability for granted. In these volatile times, directors have an important role to play in asking the right questions and discerning material risks and opportunity in a time of uncertainty.
Integrate political and economic risk assessment into corporate strategy setting. The political forces outlined above are unlikely to change in the foreseeable future which suggests a number of scenarios. Slow growth and low interest rates are likely to persist. The U.S. presidential election is unlikely to fundamentally change the country’s political climate for the better—indeed, it could lead to more disaffection, polarization, and gridlock. Uncertainty will increase in Europe with Brexit negotiations and national elections in France and Germany in 2017. Boards should pressure test macro-assumptions from management about the external environment affecting strategy over the next 12-24 months. What are the most important moving variables and how will they affect growth prospects?
Look for pockets of opportunity. Volatility creates opportunities as well as risks. Good governance and sound policies are differentiators between countries poised to sustain relatively stronger economic performance, and those that will continue face serious challenges in volatile markets. Watch for improving and more agile governance in Brazil, Columbia, Argentina, India, and Myanmar.
Evaluate the firm’s societal commitments.Proactive companies are seeking to address today’s societal challenges rather than just defend themselves from risks. There is a business case for promoting more inclusive growth: Work by International Monetary Fund researchers has shown that, around the world, higher levels of income inequality are correlated with slower growth. Higher wages support increased consumer spending and broader prosperity. On the other hand, failing to address inequality and other societal ills risks lowers productivity, and leads to more regulation, taxation, and labor radicalization.
NACD’s Global Board Leaders’ Summit, themed around the issue of convergence, will have dedicated sessions on global economic and political disruption, featuring subject-matter experts and seasoned directors. Review the Summit agenda to attend Peterson and others’ sessions addressing global disruption.
This is the first of a three-part series looking at the global economy and uncertainty in 2016. In our next post, we will focus on geopolitics and its implications for business strategy and decision making.
The United Kingdom’s vote on June 23 to leave the European Union highlights the uncertainty and volatility that companies face this year. (See my “Why Brexit Really Matters” article in Forbes.) Indeed, the sharp fall in global equities and currency markets on June 24 accentuates the rude awakening. But should the investment and business communities have been surprised? Most polling in the run-up to the vote suggested the leave campaign could prevail. Companies are now scrambling to implement their contingency plans…or to create them. Currency shifts will be the most immediate shock to manage.
According to NACD members, the greatest concern they foresee in 2016 is the global economic slowdown and how this will affect their company. This issue outranks other concerns, such as the changing industry landscape or cybersecurity. When looking at the board’s activities, NACD members say that the most important area for improvement is the board’s ability to test management assumptions underlying corporate strategy.
The Brexit vote highlights the strategic challenges directors face in today’s volatile world: How can directors make sense of increasingly uncertain economic conditions and what can they do to pressure test the validity of management’s assumptions about future growth?
A slow-growth world
Companies are facing strong headwinds in a slow-growth world. In April, the International Monetary Fund (IMF) downgraded its outlook for global growth this year to 3.2 percent—barring any system shocks. This is about the same rate as last year. The IMF downgraded the outlook for most major economies as well (see chart).
In June, the Organisation for Economic Co-operation and Development (OECD) fretted that the global economy is “stuck in a low-growth trap.” Shortly thereafter, the World Bank issued a more negative forecast, saying global growth would come in at only 2.4 percent this year, down substantially from the 2.9 percent pace it had projected just several months before.
Of significance, there are few positive country narratives. The United States is a relatively bright spot, with the IMF expecting 2.4 percent U.S. growth in 2016—the same as last year, but lower than the IMF had forecast in October 2015. The Business Roundtable recently downgraded their expectations for U.S. growth from 2.2 percent to 2.1 percent, based on concerns over impediments to trade and immigration. And, as most Americans feel, U.S. growth is neither robust nor equally enjoyed.
Europe looked like it might have been turning the corner: Business and consumer sentiment had improved, productivity had increased, and GDP growth strengthened significantly. But growth across the eurozone in 2016 is expected to come in at just 1.4–1.6 percent—barring a sustained Brexit shock.
Over the past decade or so, many companies have globalized and bet heavily on emerging markets (EMs)—sometimes dubbed “rapid growth markets.” This strategy could be easily justified by management when EM growth rates consistently outstripped those of the United States and Europe by five percentage points or more.
But these markets have been underperforming in recent years and their outlook has been consistently downgraded. This year, the World Bank expects emerging markets to grow by just 3.5 percent—about two percentage points below their average growth over the past decade.
Moreover, EM performance will continue to be uneven and uncertain thanks to poor governance—as exemplified by a massive corruption crisis that has gripped Brazil’s business and political communities. India continues to be a top performer at 7.5 percent growth, but the reform-oriented government there has made little headway tackling the myriad of bureaucratic impediments to investing and doing business there.
And while China is still doing relatively well—with its growth expected to be in the 6.5–7.0 percent range this year—this performance has come thanks to renewed stimulus and the expansion of debt, which raises more questions about the sustainability of China’s trajectory. At the same time, Western companies conducting business in China are facing increasing political and regulatory headwinds, not to mention a much more competitive business environment.
An uncertain outlook
Not only are we in a slow-growth world but we are also in an era of significant uncertainty about the future. The IMF in April described global economic activity as “increasingly fragile” and the World Bank warned in June that “the balance of risks to global growth forecasts has tilted further to the downside.”
Uncertainty is rooted in the fact that traditional cyclical drivers such as business capital investment and consumer spending seem to have lost their oomph. In short, in our chronically slow-growth world, businesses don’t want to invest and consumers don’t want to spend. Moreover, productivity, profits, wages, and trade growth are stagnant as well, and many economists believe that income inequality is exacerbating the slow-growth problem.
On top of this, the growing influence of geopolitical risks—the Brexit vote, the upcoming U.S. presidential election, refugee migration, and China—are adding new and hard-to-quantify variables to the outlook.
Given this context, the severe market volatility seen during the summer of 2015 and in January 2016 points to profound uncertainties about the future and to how easily perceptions and the markets can get shaken in our slow-growth world. A resurgence of sustained global market volatility triggered by the Brexit vote has the potential to derail global growth.
Pressure test management’s assumptions
In this uncertain and volatile world, directors should be testing management’s assumptions about growth—now and in the future.
Start by confirming the baseline: Does management’s view of macroeconomic growth for 2016 in the company’s key markets align with the market consensus?
Get your own perspective. As noted above, we rely on the views of multilateral organizations—such as the IMF, World Bank, and OECD—for a global perspective. Their economic outlooks are easily accessible and widely viewed as a reputable baseline around which to test assumptions.
The OECD has put together a handy one-page summary chart focused on advanced economies that a director can take to a board meeting as a reference. The World Bank has an easy-to-navigate website for exploring regional and country economic outlooks. Central banks also are a good source of country-level data.
Ask questions about management’s assumptions:
What data sources does management rely on?
Does management’s view differ materially from what others are saying?
What assumptions support a divergent outlook?
How does management account for political risks?
Next, test management’s view of the future. Economists have had to significantly downgrade their expectations of U.S. and global growth and the economic headwinds are not expected to diminish over the next several years.
Has management adjusted its growth projections downwards as well?
What is management’s two- to three-year view of China and other emerging markets?
Do the company’s plans reflect a slow-growth environment going forward?
Given widespread uncertainty and the risk of volatility, management should be able to present a range of alternative market scenarios.
Does management have an economic disruption scenario?
How has management sought to make the company more resilient to the uncertainty and volatility in the global market?
Many directors we have spoken with have highlighted the challenge of managing near-term foreign exchange risks.
What steps has the company taken to hedge against swings in key currencies?
If management says the company is going to significantly outperform its peers or the macro economy—especially in emerging markets—that is a yellow flag that should signal you to dig deeper and ask more questions.
NACD’s Global Board Leaders’ Summit in September, themed around the issue of convergence, will have dedicated sessions on global economic and political disruption, featuring subject-matter experts and seasoned directors.