Chris Thackray of Periculum Associates and Bill Bandon of Hubashisan Solutions sat down to answer questions about the current political climate surrounding Brexit and how companies can prepare for what’s to come.
What’s your view on the Brexit situation in general?
Bill: So, Leave won with 51.9% majority. A swing of 3% would have led to a different result. The reasons people voted Leave originally were predominantly on issues of control and sovereignty, and of migration. But in focusing on these issues, Leave didn’t focus on what Remain was arguing, which are the many benefits to the UK remaining in the EU - particularly economic – and that it’s stronger together with other EU countries to face challenges from the US, China and other players. With all this delay and these ineffective votes, people are coming to the realization that sovereignty follows economics, in that “taking control” may in fact provide you less benefits economically like free trade, and that the loosening of inter-country barriers requires a surrender of some sovereignty. On migration, the sharpest sticking point is the backstop. Britons want to better control migration from other countries, but the implications of such greater control on the historic fraught relationship with the Republic of Ireland weren’t thought through in 2016. You can throw up this border to migration from other countries, but you’ve got this open border between Ireland (an EU member) and Northern Ireland and no one wants to lose that greatest benefit of the Good Friday accords. The causal effects of a hard Irish border or even of the backstop is that Good Friday is now at risk because of Brexit. And any delay will only kick these sovereignty and migration cans down the road. They are inextricably linked to economic benefit and to safety and security within the Irish island.
Chris: Looking back at 2016, the Remain and the Leave camps had their respective views about the benefits of either remaining within, or leaving, the European Union. However, the way the UK and EU Governments are approaching the separation process suggests there is significant risk of prolonged downside to both the UK and EU. The separation process is being approached in such a way that accentuates the implications for companies – big and small.
What do you expect to be the eventual Brexit outcomes?
Chris: I doubt Theresa May will secure enough support for the EU Withdrawal Agreement in Parliament next week. The hard Brexiteer camp sees the prospect of a no-deal – being their preferred outcome. The DUP remains unreliable for the Government and similarly motivated by the prospect of the no-deal outcome. Right now, there’s simply too much divide. I expect a special EU Council meeting on or around the 12th April 2019 to agree the terms for a significant extension to the Brexit process. I expect any extension to be in the realm of 18-24 months. Let’s not forget, however, that the risk of a no-deal outcome remains significant and cannot be discounted. Companies must be prepared for all eventualities.
Bill: I do think that backing into a crash out is something that the people, including MPs, are now saying they don’t want. It’s not enough to just stick by a 51.9% margin vote. Now you see the populace expressing their will in petition form; you see business and trade unions uniting to call for an end to the uncertainty. Because if taking control means exercising sovereignty in this chaotic manner, maybe we don’t want that. I think you’re spot on about April 12. It’s likely that the UK will have to participate in EU elections, but that means the benefits of Remain will become more evident over time. And voters will start to realize that Brexiteers are a minority wing of a fractured party being whipsawed by a DUP who would love to secure a stronger connection to the UK, and who view any invocation of the backstop as something that would kill them as a party. My long-term gut feeling is for eventual consensus on remaining in the EU, but adjusting the relationship, with the consequence of a party realignment in which hardline wings – hard Brexit Tory on the right and trade union Labour on the left – are marginalized in favor of more centrist governing. And whichever party can grab that center will have a dominant parliamentary majority for a considerable time.
What’s the one recommendation you would give to any CEO today?
Bill: Batten down the hatches, No-deal is the worst-case scenario, and just like an impending flood, you have to take precautionary sandbagging-type measures. So, prepare yourself by identifying your company’s connections to the continent – and your reliance on other companies with connections to the EU – and start figuring out how those things will change.
Chris: I would stress financial resilience at this point. The Bank of England’s forecast of 7.5% GDP contraction in the UK economy suggests severe changes in the UK’s capital markets if a no-deal scenario materializes. At this point, companies must look at money coming in, the security of that money, and the reliability of credit lines and other lending facilities. Companies should prepare a 30 day plan, setting out how they will scale back operations to operate within their own financial limits (particularly reduced reliance on lending facilities). Bank’s will be forced to adjust lending profiles towards a number of higher risk industry sectors. Without doubt, companies across all industries will not be able to sleep at night in the knowledge of their existing lending facilities, if the contagion of a no-deal Brexit is the eventual outcome.
Bill: This is key. Yes, a company’s diagnosis of Brexit’s operational effects is critically important. However, it can’t drill down on that analysis and transformation unless it has a solid financial position with enough cushion to allocate resources to priority areas and people who can help you analyze and transform. You need to spend money to so you can secure your revenue resources.
Who do you think will be the corporate victims of Brexit?
Chris: In the UK, we see the construction industry already showing signs of stress. Some of that is due to there being reduced appetite for risk in this industry amongst lenders. Another likely victim is the travel industry as fewer Brits travel to Europe. This industry already operates on low margins and frequently produces victims as it weathers cyclical trends. Sadly, a no-deal outcome will bring uncertainty for all industries, and each industry will contribute a number of victims. In a no-deal outcome, companies will be dependent on the UK and EU Governments to quickly put temporary measures in place to reduce the pain. The political deadlock between the UK and EU Governments throughout the Brexit process so far, doesn’t provide much confidence in the political process to quickly pick-up the pieces of a no-deal Brexit.
Bill: Also, industries that deal in perishables could suffer because of supply chain issues.
Chris: Exactly. There will be early victims, and more victims will crop up the longer it takes to recover. A no-deal outcome will create political gridlock, and corporations will be dependent on the EU and the UK to come up with goodwill agreements.
Bill: But it’s not just those two parties. The UK also must negotiate with all other parties who have agreements like the U.S., Australia, and Japan.
Chris: Absolutely, the sheer amount of work that must get done is outstanding. And the longer this process goes, the more victims will be pulled into the crisis.
What will differentiate companies during and after Brexit?
Bill: The differentiation is operational preparedness. Companies can do this immediately. Knowing processes and people and committing to sustaining and building your company’s goodwill—doing right by your customers, suppliers, and employees. Goodwill is still a definable and tangible asset. Maintain goodwill by steering through the unwritten principles of management that should be eternal truths in business,
Chris: Two words: Elasticity and Adaptability. Companies are going to find that they are stretched to new limits. Their finances, ability to operate in stress scenarios and supply chain disruptions, managing frustrated customers who lack the tolerance for delays and vent their impatience with the political chaos. Companies need to know how far they can stretch before they snap. Consider what the new normal will look like. Companies may need to change to upfront payment contracts, stockpile key products, and incentivize talent to deal with a new and highly stressful operating environment. A no-deal outcome will force companies to adapt and change the way they conduct their business. Being prepared for how they will need to adapt is essential.
Bill: Another way to look at it: elasticity is the ability to have more cushion within the existing paradigm your company is already subject to; adaptability is the willingness to change the paradigm in a thoughtful manner. Look at your existing policies and agreements with suppliers, customers, employees, and your resiliency plans, etc.—see if they have elasticity, and if not, they need to be adapted.
What opportunities does Brexit bring for companies?
Chris: A no-deal Brexit will force companies to rethink what they do and how they do it. In some instances, such as high-end manufacturing, companies will need to find new customers and explore their production methods to optimize efficiencies. This will need to happen on the back of a highly depressed economy.
Bill: Or, I hate to say, companies may need to jettison unproductive customers and lines of business to focus on higher margin lines. They will need to be a lot more aggressive.
Chris: Absolutely. Companies are going to have to do more to make sure the business they do bring in is profitable. A no-deal Brexit will also be the biggest test of leadership. It will distinguish a group of individuals that demonstrate how to truly lead people in times of uncertainty. Leadership will play a huge role in determining how companies enter and adapt to the new normal and what they will look like afterwards. There will be winners and there will certainly be losers.
Bill: I completely agree. And it’s not just leadership in terms of applying foresight in the company’s business lines, but also executing that strategy in the environment and market in which the company plays. Top corporate leaders will engage with political leaders and other corporate and media leaders to brainstorm issues.
What do you think will be the benefit of hindsight as companies look back on Brexit?
Bill: It’s less a benefit and more of a rude awakening: the effect and suddenness with which political risk can throw all other assumed risk into the trash can. 2016 showed how the political stability of the two greatest democracies in the world can be undermined by one event. The norms and unwritten rules are out the window. And this instability may mean the rise of political systems that are arbitrary and unpredictable in ways that do not benefit businesses, much less the individual, which will affect all sectors.
Chris: The new norm for political risk was written in 2016. This has given companies 3 years to prepare for a potential no-deal outcome. We are no longer operating in stable or predictable political environments. One of the benefits of hindsight will be the approach companies take to navigate through the new normal. As a nation, people will look back and judge the agility of companies, big and small, for how they anticipated the fallout of a no-deal Brexit and what that would mean for their customers and their own survival. Today, many people will look back and say they weren’t prepared enough. They could have done more to prepare.
Bill: Right. It’s not just a question of misunderstanding the nature of the Gordian Knot created over the last 50 years. It’s not just the complexity that takes time to unwind and redefine and retie those knots in ways companies thought would be preferable. It’s that the rules of tying the knots, the system in which those knots can be tied and agreed to, is unstable.
What fictional character or historic event do you liken to Brexit?
Chris: The current state of flux reminds me of the Titanic. There is a belief that the Titanic’s hull was already impaired before she set sail due to one or more of the coal pits being inflamed. When the Titanic hit the iceberg, she breached in ways that had not been considered in the design of the ship. In my view, Brexit is a bit like this. We’ve got a 40-year, long-burning dislike among political elites, who have long advocated for Brexit. As the UK nears a no-deal iceberg, it will lead to unprecedented damage to the UK’s economy, companies, political parties and the general wellbeing of the UK’s public. To prevent the ship from sinking fast, one must take proactive measures to prepare, anticipate and adapt to a ship that is breached and will leak considerable amounts of water.
Bill: Great analogy. But does Captain Smith continue to move forward and navigate the iceberg field while still heading to New York? Or try to turn the ship around and go back to Southampton? If you think the ship is brittle and there are risks out there—remember, the Titanic didn’t know about the risks at the time—why not turn around?
Nevertheless, at this point one really must presume a no-deal outcome and prepare accordingly—financially, fiscally, and operationally—to the best of your ability in the remaining hours left.
Chris: See you on the other side.
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Co-Author biography
Christopher Thackray (Chris) is the founder and Managing Director at Periculum Associates. Chris has extensive experience advising companies on the development of risk management, from operational risks to strategic risk. Chris is a trusted advisor to Board’s and C-suite executives across a variety of industries and is a keen author of risk management publications. Prior to starting Periculum Associates, Chris led the Operational Risk practice within Deloitte’s US Risk Advisory firm, advancing the awareness and disciplines of risk management in industries such Auto, Energy, Financial Services and Healthcare. Chris’s practice was awarded Consultancy of the Year by Risk.net in 2017. Chris started his career at the General Electric Company (GE) working across GE divisions within his 16 years at the company. In his time at GE, Chris led risk management programmes across Europe, Asia and the US, playing a defining role in the development of global risk management standards.
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