Tag Archive: United Kingdom

The Brexit Vote: Scenarios for Business Leaders and Boards

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This Thursday, the United Kingdom (UK) will vote in a referendum on whether to leave the European Union (EU)—referred to as the “Brexit.” Opinion polls have shifted sharply over the past two weeks to indicate that the likelihood of Brexit has increased substantially, but Frontier Strategy Group continues to believe that the UK will vote to remain in the EU, albeit by a very small margin. Opinion polls have been extremely inaccurate in the past two UK elections and we believe some hesitant voters will choose to remain in the EU in a conservative bias that we saw in both the parliamentary elections last year and in the Scottish referendum. Markets are also interpreting the murder of pro-EU Labour MP Jo Cox as likely to damage the Leave campaign.

A narrow win for the Remain campaign—our baseline scenario—is unlikely to alleviate the grievances of those supporting Brexit and would cause deeper tensions within the UK’s Conservative Party, raising the likelihood of early elections and another referendum in the next couple of years. While the economic impact of these trends would be relatively modest, lingering uncertainty would cause investments to underperform.

Should Brexit happen, however, multinational businesses would be affected in several key ways. Besides the initial financial volatility and somewhat weaker growth in Europe, most of the broader effects of Brexit outside the UK would be slow-moving, although their long-term implications could be significant enough to reshape the European Union. Companies need to be prepared for short-term volatility—particularly of currencies—but should Brexit occur companies can expect to be gradually adapting to its effects for at least the next two to three years.

Financial-market volatility and currency depreciation

The possibility of Brexit has already rattled currency, bond, and equity markets and this volatility will increase in the immediate aftermath of the event should Brexit occur. The British pound could depreciate by as much as another 10–20% against the United States’ dollar (USD) in the aftermath of Brexit, and the euro would also likely lose value, possibly as much as 5–10% against the USD. The scale of the losses would likely be temporary, but neither currency would be likely to recover to pre-Brexit levels. Brexit would also dampen investment confidence, softening commodity prices and causing overall financial market uncertainty. Added to a backdrop of weak global growth and deep concerns about China’s slowdown, Brexit would prompt another bout of volatility that would cloud corporate expectations and complicate 2017 planning for emerging markets generally.

Growth in Europe

Brexit would cause a slowdown in UK investment and business activity. A similar, though smaller, effect would be likely in the EU as a whole. Markets strongly linked to demand from the EU—such as North Africa, Eastern Europe, and parts of Asia—would see a softening of demand for the next 12 months that would affect industrial performance but would not disrupt growth trajectories. The demand effect for other parts of the world would likely be negligible. As corporate leaders gear up for 2017 planning, they would have to dedicate more analytical energy to identifying sources of growth in Asia, the Middle East, Africa, and the Americas to compensate for weaker performance in Europe.

Policy predictability

Brexit would raise a host of trade issues from the future of the Schengen Area to the outlook for the Transatlantic Trade and Investment Partnership, all of which would increase uncertainty over the cost and structure of supply chains that involve the EU. Any tangible effect on supply chains, however, would likely materialize over a period of several years, giving companies ample time to respond. It would, however, raise fundamental organizational issues such as where companies’ European headquarters will be located, tax rates, distribution-chain structure, and other concerns that should be factored into 2017 and longer-range planning as well as profitability targets. Making changes earlier could yield valuable competitive differentiation for cost and talent.

Political risks

Brexit’s most dangerous effect could be to galvanize anti-EU sentiment and populist parties across the EU, setting into effect a series of policy disruptions in the region that could weaken the EU, slow down EU integration, or even lead to other EU members exiting the union. All of this would undermine the EU’s economic outlook, and force multinational corporations to manage political risk in this usually stable region much more closely. While that would be unlikely to have ripple effects globally, it could contribute to greater instability in the Middle East and Eastern Europe if it coincided with increasingly isolationist foreign policy from the United States.

Overall, Brexit would put greater pressure on regions outside of Europe to deliver strong results that can compensate for years of underperformance by the UK and the EU in corporate portfolios. This may be a big challenge in the current global growth environment, requiring an even greater focus on agile strategies that emphasize strong competitive positioning, careful risk management, and a reshaping of how companies plan to win in emerging markets.

In case the UK votes next week to leave the EU, boards and executive teams should ask themselves several urgent questions to effectively prepare their response:

  1. What is our company’s exposure to short-term currency volatility of both the British pound and the euro? How would significant depreciation against the dollar affect our overall revenue and profit targets for this year?
  1. Have we developed alternative international growth strategies that rely less on demand in Europe?
  1. What production and distribution disruptions are we likely to face in our European operations?
  1. How should we adjust our long-term outlook for doing business in Europe? What economic and political risks are now more likely and more significant to our company?

Joel Whitaker is Senior Vice President of Global Research at Frontier Strategy Group (FSG), an information and advisory services firm supporting senior executives in emerging markets.

On the Global Investment Menu

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In these times, it is rare to be able to use the words “extremely successful” and “real estate investor” in the same sentence. So when I consider the utterances of my friend Joe, an extremely successful real estate investor, I often take heed. One of Joe’s key aphorisms has long been:  “If we all had the same taste, we’d all be eating in the same restaurant.”

Those words, and their applicability to the choices and preferences of investors, regulators and directors, came to mind while on a recent two-week stretch in Singapore, the UK and the US.  The range of attitudes and approaches in responding to rule-making and compliance was noteworthy, as it demonstrated the spectrum of approaches that can be employed in attempting to reach the goal of good, responsible governance.

Without getting enmeshed in long, generalized discussions about cultural differences and attitudes on ensuring compliance, I thought it might be interesting to offer a few quick snapshots of what is on the regulatory menu around the globe.  Think of them as small “appetizers” from a number of cuisines, and please, disregard any old biases about English, Asian or American food.  There are great chefs at work, and great meals to be had in each of these places.

  1. SGX Blacklist

    SGX Blacklist

    In Singapore, regulators “name and shame” companies whose governance practices fail to measure up on specific requirements.  One of the consequences of ignoring the mandate to have separated the chair and the CEO roles, is having the company name appear on a list of those “out of compliance”, and having that list well-publicized and broadly published. The newspapers and the financial press are ready consumers and promulgators of the list.

  2. In the UK, the Financial Reporting Council (which is the principal corporate watchdog) has proposed a “comply or explain” requirement in a proposed UK Stewardship Code for the behavior of institutional investors as shareholders, matching the UK Corporate Governance Code which is already in place. In this case, for example, the goal is to bolster shareholder involvement in corporate governance.  The code, as proposed, is not mandatory, allowing for the possibility of extenuating circumstances such as size or a specific investment strategy.  At the same time, who adheres to the code, and who does not, becomes a matter not just of public record, but of public disclosure as well.
  3. Dodd-Frank financial reform has moved many of the questions regarding corporateIn the US, we have seen that governance, such as majority voting, out of the hands of legislators and into the hands of regulatory entities who are charged with balancing the interests of a wide band of constituencies, ranging from public-sector pension funds that own huge quantities of corporate shares all the way to smaller-scale, newly-public companies.  The public-sector investors have substantial leverage, and are clear about the practices they expect to see disclosed and followed on the corporate governance menu.

NACD Dodd-Frank Act Webinars

Business Judgment Rule

Business Judgment Rule

2011 Shareowner Expectations

2011 Shareowner Expectations

NACD Members, click here to access the complete Dodd-Frank Act webinar archives

So what’s the takeaway from all of this? Does it whet your appetite for more in the way of voluntary compliance?  More in the way of mandatory compliance? More or fewer consequences for non-compliance?

In the arena of restaurant practices, there is wide variation. Some jurisdictions publicize the names of restaurants who have recently “failed” inspection, and why.  Others make restaurants conspicuously post the most recent results of their inspections for cleanliness, with big colored signs carrying a letter grade or a test score.

Keeping in mind Joe’s views on peoples’ tastes, along with the global availability of venues in which to invest or manage, what do you want on the menu that will satisfy your appetite for good governance?

*NACD Members, click here to access the complete Dodd-Frank Act webinar archives.