This is the second post in a series addressing the short- and long-term impacts of the 2016 presidential election. Read the first post here.
Directors gathered to discuss the impact of the recent presidential election on November 16, 2016 with audit and risk professionals from accounting firm EisnerAmper. While immediate-term changes were pressing on the minds of directors, they also discussed strategies to address societal and business challenges that coalesced around the following topics.
Can Corporations Bring Back Modern Manufacturing Jobs?
Directors were skeptical that the type of manufacturing jobs that have fueled American economic growth since the end of the second World War would ever return—and asserted that changes in trade agreements may directly impact the ability to create jobs.
EisnerAmper Chief Risk Officer Peter Bible outlined how the developing administration of President-elect Donald Trump could affect the ability of American companies to export their goods. The Trans-Pacific Partnership (TPP) “is basically on hold now” said Bible. “He wants tariffs on China and Mexico, wants to renegotiate NAFTA, and reconsider the U.S.’s involvement in international trade agreement.” Bible also pointed out that the president can act unilaterally on trade agreements, thus negating congressional checks on trade decisions.
Jill Wittels, chair at eMagin Corp., voiced concern about the pace at which companies could replace factories to offset the impact of tariffs and build more jobs for Americans. “Imposing currency restrictions and tariffs on goods coming in from China, South America, or other parts of Asia would be highly disruptive,” Wittels said. “You don’t instantly create replacement factories in the U.S. at a comparable cost.”
Robert Klatell, chair of TTM Technologies, concurred. “Realistically speaking, there is not that much flexibility. We cannot create in the United States the scale of manufacturing that exists in China,” Klatell said. “We don’t have the people or the capital to do it. We’ve rarely had a government willing to support manufacturing the same way that China has in the past 10 to 15 years.”
William Leidsdorf, director at Icahn Enterprises, offered a different viewpoint. “I think you have to look at how Congress may change or water down the president’s decisions,” Leidsdorf said. Trump “is a businessman. He’s a pretty good negotiator. He’s going to go in [to the presidency] and say he’ll do a lot of things and then negotiate.”
Educating the Workforce
Re-educating the American workforce has been a ubiquitous topic at roundtables co-hosted by NACD throughout 2016. This event was no exception.
A vigorous discussion about the modern workforce was ignited when Carol Robbins, principal of financial services strategic advisory group CER Consulting, cited the invention of a garment-sewing robot as a groundbreaking technology likely to replace countless garment manufacturing workers around the world. Sharon Manewitz, principal and executive director at Manewitz Weiker Associates, a firm that consults with struggling companies, responded: “But who will make the robots? Will they be made here? We need corporate America to help educational institutions change the nature of education in America” to meet the demands of a knowledge-based economy.
The ability of the workforce to be retrained for modern jobs, and how automation will continue to disappear unskilled and lower-skilled positions, was discussed at length. Klatell, however, looked to the future. “Some people won’t make the transition, so we should be focusing on their children,” Klatell argued. “Hopefully, we can get their kids through school with a more meaningful education to make them more employable.”
Laurie Shahon, president of Wilton Capital Group, placed a board lens on some companies’ struggle to fill open positions in certain fields. “Human capital is an issue boards have to deal with,” Shahon said. “We see jobs available in financial services and other industries, but they can’t be filled because there aren’t sufficient qualified people to fill them.The board can and should present alternate cases in its strategy planning to address these changes.”
If Trump makes good on his campaign promises, deregulation is expected under the new administration and the forthcoming Republican majority congress. How long, though, can directors anticipate deregulated policies to last? Bible pointed out that the current administration might attempt to press through lingering Dodd-Frank provisions. However, he warned that deregulation could cause disruption. “These things are deeply rooted, with a lot of capital behind them,” Bible said. “You can’t just say ‘poof—gone.’ It’s impossible.” Practices that companies have implemented as a result of post-financial crisis legislation [such as the Dodd-Frank Act of 2012] are likely not to disappear as governance best practices because companies invested time, energy, and money to comply with them.
Meanwhile, directors in the room considered what impact deregulation might have on enforcement of the Foreign Corrupt Practices Act (FCPA) and other international business policies by the Department of Justice. Andrea Bonime-Blanc, founder of GEC Risk Advisory, reminded attendees that enforcement of the FCPA, the False Claims Act, and other laws has been on the rise lately. “People are asking, ‘What’s going to happen with FCPA enforcement?’” Bonime-Blanc asked. “Companies can’t just say ‘oh, let’s stop worrying about bribery.’”
Bible responded: “I believe that the FCPA will continue to be enforced as a worldwide standard, and that the new administration’s focus is going to be on executive compensation and on market regulation. I don’t think there will be an increase or a decrease in enforcement.” If anything, Bible indicated that directors should be concerned about the risk of tax repatriation from companies that have moved their headquarters offshore. “Is everyone familiar with how the overseas tax issue works?” Bible asked. “There is $2.6 trillion in money offshore, and $500 billion of that is held by tech companies. There are drives to get that money back into the U.S. economy that can be done without addressing the entire tax structure.”
Don’t Give Up on Culture of Inclusion
The social unrest incited or revealed by the vitriolic presidential election was discussed in the context of the culture of inclusion and tolerance that their companies have invested in building for decades. Aside of the moral imperative felt by many attendees, the disruption of hard-won corporate culture by internal or external actors could present a reputation risk to the company.
Wittels noted that a popular American shoe company had been endorsed by an incendiary website littered with forms of hate speech after a senior manager at the shoe company stated that it felt the country was moving in the right direction under the incoming president. While the company released statements strongly stating its commitment to principles of inclusion, “there are comments about boycott,” Wittels said. “This is a real reputational risk, and a risk with consumers, that could instantly in this communication age go viral and affect the bottom line.”
Klatell returned to the question of the board’s responsibility to ensure that the CEO, his direct reports, and management across the organization are responsible for maintaining a culture of respect, dignity, and inclusion. In the face of employees who may be looking to throw principles of inclusion out of the door, Klatell said: “I’d hope that most companies would stand up and say ‘No, this is what we stand for, and this is how we behave.’”
To see the full list of participants, please click here.
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.
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.
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.