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.
Companies continue to face significant global economic uncertainty. Although U.S. economic prospects have improved in recent years, structural weaknesses in other regions pose significant challenges for multinational companies. To ensure their organizations thrive in this volatile environment, boards and senior executive teams must pay close attention to regional trends and international politics and how these affect the growing interdependence of markets worldwide. During a presentation at the 2015 NACD Global Board Leaders’ Summit, Kaushik Basu, chief economist and senior vice president of the World Bank Group, identified four major market conditions that will influence the growth prospects for many businesses.
The shape of the post-crisis recovery continues to change. In recent years economists have been hard-pressed to forecast how global markets will behave. After the 2008 financial crisis in the United States, economists initially anticipated a V-shaped recovery, in which the market hits bottom and then recovers. As it became clear that the recession would continue, they altered their predictions, asserting that the recovery would be U-shaped instead. When the European debt crisis occurred, economists then foretold a W-shaped recovery. The lesson seems to be that economic cycles have become less predictable and no longer adhere to historical patterns. In response to this increased uncertainty, directors and management teams must now expand their strategic planning process to incorporate a range of possible economic scenarios.
The economic fortunes of emerging economies are not uniform. Brazil, India, and China are often touted as emerging centers of economic power; however, . In the past year only India and China saw growth in their gross domestic products, while Brazil—which has endured corruption scandals, tax increases, and spending cuts—has experienced virtually no economic growth. When discussing potential investments in these foreign markets, boards should require management to provide forward-looking country assessments in order to responsibly evaluate the potential risk and rewards.
Economies are porous. Directors need to be aware that local economies are inextricably intertwined, and that deteriorating economic conditions in one country can therefore spread quickly to other nations. For example, the ramifications of slowing growth in China are significant because so many countries are increasingly dependent on continued Chinese investments and consumption. Africa, Latin America, and Germany are likely to suffer most as major exporters to China. Conversely, India’s economic growth has recently accelerated, due in part to structural tax reforms that have created a more welcoming investment climate, resulting in a rapid surge of foreign direct investment in 2014.
Increasingly disparate monetary policies among the developed nations will have global economic ramifications. Directors will be expected to understand the consequences of divergent policies—especially those of developed countries—for the world’s biggest economic blocks. For example, the Federal Reserve is debating a possible rise in interest rates after seven consecutive years of record-low borrowing costs. While a rate hike would ostensibly strengthen the U.S. dollar by encouraging investments in this country, it could also raise the prices on U.S. exports and undercut the economic viability of U.S. products in foreign markets. In the Eurozone, the European Central Bank (ECB) has in recent years maintained loose fiscal policies, increasing the supply of money flowing through international markets in hopes of facilitating economic recovery. A U.S. interest-rate hike would result in a weaker euro, which in turn could lead to a boost for Eurozone economies because buying trends would begin to favor domestic products. On the other hand, tighter U.S. fiscal policies could readily be undone by the European Central Bank injecting even more liquidity into the markets to keep euro values low and maintain the viability of Europe’s export market. Emerging markets, too, might experience a negative impact from these proposed policy changes. Because they have been borrowing money in U.S. dollars at near-zero rates, these countries will almost certainly see an increase in debt and decreased economic growth if U.S. interest rates rise.
It’s a mad, mad, mad, mad world—to echo a movie title from a half century ago—but it’s also a good one when nations cooperate. This is the big takeaway from the global track at NACD’s 2014 Board Leadership Conference, where representatives of nine nations convened to create a global village and to host a series of three staged programs.
The village itself featured colorful, information-rich booths where representatives from the embassies and consulates of Brazil, Canada, China, Germany, Ireland, Malaysia, Mexico, and the Russian Federation greeted trade-minded directors seeking to expand their knowledge.
In addition, the village featured a booth for the Global Network of Director Institutes (GNDI), a network of 12 director institutes (including NACD) and one confederation (ecoDA, in Europe). The GNDI booth offered an opportunity to meet incoming GNDI Chairman Stan Magidson, CEO of the Institute of Corporate Directors (ICD) from Canada; Paul Chan, the acting CEO of the Malaysian Alliance of Corporate Directors; and Simon Arcus, manager, Governance Leadership Center, Institute of Directors, New Zealand. Vicki Jordan, vice president of marketing, ICD, joined me in staffing the booth—a truly appropriate choice, as Canadians/les Canadiens are global by nature. For proof, see this new video produced at Laval University in Quebec (featuring yours truly) created for an exciting new ecoDa educational program also held in October.
The Global Village was home to a series of panels in the Global Track at the Conference. This blog offers takeaways for these dynamic panels.
Global Panel 1: Trade and Business in North America
Moderator: Dean A. Pinkert, vice chairman, U.S. International Trade Commission (USITC). Panelists: Gilles Gauthier, minister, Economic Affairs, Embassy of Canada; Francisco J. Sanchez, chairman, CNS Global; former under secretary at the Department of Commerce.
Know your trade agreement. A well-known example of a free trade agreement is the North American Free Trade Agreement (NAFTA), now 20 years old, which has been a success for all the economies This is why it is important to support the new and emerging free trade agreements of other regions namely: Transatlantic Trade and Investment Partnership (TTIP), and the Trans Pacific Partnership (TPP).
Give bipartisan support to good trade agreements. Although free trade is often associated with the pro-business Republican party and opposition is often associated with the pro-union Democratic party, good trade agreements such as NAFTA get bipartisan including union support—especially considering that one can always seek a trade remedy to cure imbalances.
Think beyond tariffs. If trade unfairness arises, a variety of trade remedies are available. Tariffs—charging duties on imports—are only one way to correct imbalance. Even more constructive is regulatory cooperation and harmonization of standards.
Tell your company’s story so stakeholders and the public will understand. Reatha Clark King, chair of the NACD board of directors, noted that boards need to do a better job of ensuring that companies are more forthright in disclosing information about their global nature: where they are headquartered, where they employ people, where they source their products, and where they sell their products, among other topics. By revealing their global nature, they will build more informed support for free trade.
Global Panel 2: Translating Corporate Culture Across Borders
Moderator: Dennis Whalen, partner-in-charge and executive director, KPMG’s Audit Committee Institute. Panelists: Orlando Ashford, director, ITT Corp., Executive Leadership Council, and Streetwise Partners; senior partner, Mercer; Michael Marquardt, director, Commonwealth Trust Co., Delaware Theatre Co., American Cancer Society (South Atlantic), and CEO, Global Compass Strategies Inc.
Live “la vida local.” Many companies think locally and act globally, when they must do the opposite. As a company, value your local talent; as an individual, live your local life. Companies acquiring outside their borders used to send in executives from headquarters. Now, they are more likely to hire and promote locals—including expatriates who want to stay longer on an assignment.
Check your culture and mark your calendar. One of the best examples of culture arrogance is when we are oblivious to non-U.S. national holidays. Not all are marked on global calendars. For example, don’t try to schedule a meeting in Berlin on November 9 – when the fall of the Berlin wall is commemorated.
Focus on outcomes. When two companies get combined, focusing solely on process may result in getting buried in protocol. Instead, focus on desirable outcomes—for example an effective workplace. This was the case for Orlando Ashford when he learned that as a matter of policy, a particular non-U.S. division of a U.S. company had collected information on blood type, then run a blood drive for an employee’s relative, and published the results, causing some disharmony at work. He changed the policy.
Insource HR. It may be tempting to ask a local company to hire your talent but it is worth your own time. While professional support can be valuable, human capital is too important to leave entirely to third parties.
Know your agents. Enacted some four decades ago, the Foreign Corrupt Practices Act (FCPA) does hold companies—and, by extension, boards—accountable for certain internal controls. Directors should ask for assurance from management that the people who are involved with selling the company’s products and services act within the boundaries of the law.
Global Panel 3: The Global Start-Up Revolution
Moderator: Andrea Bonime-Blanc, chair, Epic Theatre Ensemble; audit chair, Counterpart International; CEO and founder, GEC Risk Advisory. Panelists: Andre Averbug, founding partner, Rankpad Consulting, Inc.; Mark Little, CEO and founder, Storyful; Bernard Moon, cofounder and partner, SparkLabs Global Ventures.
Be “hyper-transparent.” In the new economy, “reputations can be lost or improved overnight.” Learn what the market wants to know about you and provide that information as soon as possible.
Look around you. Any place and every place can fuel a start-up revolution. Berlin, Dublin, Nairobi, Seoul, and Tel Aviv are all current examples. Places with a long-established rule of law are ideal for startups, but no place is off limits. In these unexpected places, new ideas are finding the capital they need to become viable businesses—often in areas that do not require a large amount of funds to launch. (Cost of entry in technology-based businesses is generally lower than in traditional industries that require manufacturing plants, for example.)
Respect Silicon Valley—and look beyond it. Silicon Valley is rightly known for the entrepreneurial ecosystem so important in the second phase of growth—a system that includes both financial capital (venture cap, angel investors, banks) and intellectual capital (fellow innovators, universities), not to mention savvy law firms. But such ecosystems are evolving elsewhere as well.
Fail better. Don’t be afraid to start a business that may fail. Panelists noted that in the U.S., bankruptcy laws can be relatively forgiving. In locations where the bankruptcy laws are harsh, changes may be under way, and adaptations are possible. Also, remember that you need not go it alone. In a climate where the new form of research and development is mergers and acquisitions, a possible option may be to sell your start up to a larger company before a lack of funds brings the company to a halt.
Give back. If you develop a successful startup, consider investing at least part of it in other new ventures, the way Google and Facebook founders have done. You can keep the global start-up movement going. Vive la revolution!