British citizens voted Thursday to leave the EU – a decision with far-reaching implications for the UK and the global economy.
The pound fell. Prime Minister David Cameron announced that he will resign. And some politicians in other EU countries – Denmark, France, Italy, and the Netherlands among them – continued calls for similar referendums. There is also renewed talk of Scotland seeking independence from the UK.
“We now face at least two, likely more, years of uncertainty ahead as the UK renegotiates its place in the global economy,” Linda Yueh, adjunct professor of Economics at London Business School, said in a statement. “The top priority on the policy agenda should be to reiterate that monetary and fiscal policies are primed to help stabilise any volatility from that process, for example, the Bank of England and HM Treasury should stand ready to address any short-term shocks.”
Cameron said he will leave his successor to negotiate the terms of Britain’s withdrawal from the EU, which could mean months of continuing uncertainty while the Conservative Party holds a leadership contest.
British businesses, meanwhile, are considering the potential effects on their companies in terms of access to the EU, which is the UK’s biggest trading partner, and access to talent. Changes to regulation and taxation could also follow.
According to media reports, companies as diverse as JP Morgan, Airbus, Toyota, and Ford suggested they would review their investments in the UK as a result of the vote. The financial services sector alone could relocate thousands of employees away from the financial services industry in London to cities inside the euro zone to retain unrestricted access to the European single market.
Business associations such as the Confederation of British Industry and the Institute of Directors have called on the government to provide urgent reassurance.
“One thing the government must do immediately is to guarantee the right to remain of EU citizens currently in the UK. Companies do not want to have to worry about losing valued staff,” Simon Walker, director general of the Institute of Directors, said in a statement.
Michael Jacobides, an associate professor of strategy and entrepreneurship at the London Business School, is most concerned with the short- and medium-term ramifications.
“The GDP will take a severe hit as uncertainty forestalls investment, but also consumption as high earners wonder about their future,” he said in a statement. “The short-term impact may be worse than what many models predicted. Tax revenues, especially by those in [London], will suffer, and the diversity and availability of labour will be at stake.”
Corporate planning put to the test
For industry, the decision underscores the need for solid risk-management and planning functions when uncertainty abounds. Organisations that prepared for multiple Brexit scenarios, including how severely markets would react to both a “remain” and “leave” vote, are in a stronger position to move forward. Companies that made no plans, based on an assumption that the UK would remain in the EU, are “probably having a really bad day today,” Rob Teis, CPA, CGMA, an internal audit manager at consumer products multinational Kellogg Co., said Friday.
Teis said companies with robust planning likely hedged on currency and possibly shipped extra products to the UK in advance of the vote results in case of a trade interruption.
Based on the drop in the value of the pound, products from other parts of the world will become more expensive for UK consumers, Teis said. “They might not see it in their prices today, but eventually, companies are going to have to start to cover that change, because I don’t think [the pound] is going to bounce back anytime soon.”
Scenario planning must continue for organisations because of ramifications related to trade agreements and other factors, known and unknown, Teis and others said.
“It’s not just about currency and dollars and cents,” Teis said. “There’s going to be a change in the way Britain relates to the rest of the continent and eventually how it relates with the rest of the world. You can see trade being harder, import-export ramifications. All those [ramifications] are going to play out over a long term. Today is just the tip of the iceberg.”
Martin Thomas, FCMA, CGMA, who spent 34 years in finance at Unilever and led the company’s global strategic planning function, recommended deeper scenario planning, “pushing back the boundaries of what you expect to happen.”
“Forget what you expect to happen,” he said in an interview. “Try to explore the boundaries of what plausibly could happen. That prepares organisations for multiple, possible futures. This is what all corporations at the moment are facing.”
One mistake management accountants can make is trying to guess what will happen, Thomas said. The implications are multilayered: financial, social and political. “Don’t try to pick a winner, because it won’t be what happens,” he said.
Short-term benefits, long-term detriments
For relatively small, export-oriented companies, Thursday’s vote could be good news in the short term. In the medium- to long-term, though, it is likely to have “a somewhat depressive effect,” said Robin Hirsch, FPMA, CGMA, managing partner of Kingdom Technology Partnership, a consultancy based in West Sussex, England.
Take Hirsch for example. His clients are based throughout the world, and his billings are in euros, US dollars, and Hong Kong dollars. “The value of those billings, in terms of sterling, is much higher on a purely financial basis,” he said in an interview. “It will make my day rate cheaper for customers abroad.”
But there are longer-term ramifications: One of Hirsch’s clients is a state-owned railway company in Europe that is interested in investing in the UK. “With the advent of Brexit,” he said, “I suspect that their motivation to get into the UK market will be less.”
For companies with a pan-European supply chain, “it’s going to be a nightmare,” Hirsch said, depending on how well the British leadership is able to negotiate the exit from the EU.
Those with a more domestically minded model aren’t in the clear. “This isn’t going to stop globalisation,” he said. Companies selling goods and services within the UK could be negatively affected “by the multiplier effect of the loss of jobs and the loss of business coming into the UK, and especially the loss of venture capital into the UK from the US to power up new companies.”
Footprint and agility
Indeed, footprint and agility will play a key role in how companies will survive the transition. The wider the geographical footprint, the less vulnerable companies will be to shocks happening in any one market, Hirsch said.
“It’s best not to have all your eggs all in one basket, he said. “It’s best if you have a number of different markets — preferably not totally correlated with one another, which is difficult in today’s global environment. But you still can get a certain amount of resilience if you’re not based on a single market.”
That’s the mantra John Mahtani, ACMA, CGMA, and his partners have followed at film-processing company Cinelab London. In the past few years, the company has landed contracts with some of the biggest filmmakers in the world.
Mahtani, the company’s CFO, is looking to the drop in the pound as a chance to draw more of the increasingly international business of movies. “There’ll be more US studios thinking of you,” he said. And a break from the European Union could be an impetus to search out diverse emerging markets.
But because of the weakened currency, Mahtani worries, a rush on silver and gold could drive up costs for film, for which silver is an ingredient.
The real antidote, he said, is to be nimble. “We’ve developed eight new revenue streams in the last few years,” he said. “Effectively, where there’s an opportunity, we’re very responsive.”
Ripples beyond the UK
For foreign companies doing business in the UK or the euro zone, the Brexit vote has also triggered uncertainty about exchange rates, pricing of products and services, and employees overseas.
“We’re in uncharted territory,” said Chris Rogers, CPA, CGMA, the CFO of Infragistics, a US software developer that employs about 100 people, roughly one-third of its headcount, at a sales office in London and research-and-development centre in Bulgaria.
Rogers is considering managing Infragistics’ exposure to currency fluctuations by temporarily suspending sales in currencies other than US dollars. He also has decided to schedule pricing discussions internally and with Infragistics’ partners weekly or twice a week instead of every six weeks.
With EU labour regulations in limbo, Rogers will have to find out whether he needs to get work visas for any of the company’s employees in Bulgaria or the UK. And he’s worried about wage inflation in Europe.
Pricing pressures caused by currency fluctuations are also among the top concerns for Mick Armstrong Jr., CPA, CGMA, the CFO of Micro 100 Tool. About 6% of the company’s sales come from outside the US, mainly from the UK and the euro zone.
A strong US dollar has already increased the price of Micro 100 Tool products in the euro zone by 20% to 30% in the past five years, Armstrong said. So far, European customers have been willing to pay the higher euro price, he said. “But Brexit is going to make it worse, and at some point the additional cost will outweigh the quality of our cutting tools.”
To keep its European customer base, Micro 100 Tool started re-evaluating its European marketing strategy about a year ago. So far, the company has not had employees or operations in Europe, but the Brexit vote is adding urgency to changing that in the next two years and establishing more of a presence in Europe, Armstrong said. Enhanced marketing could help the company overcome the effects of the price increase.
The company is considering a contract for warehouse space and is looking to set up sales representatives in Europe to better market its products, he said. “We don’t want to walk away [from our European customers].”
A silver lining?
Richard Adam, FCMA, CGMA, sees an opportunity to grow the UK’s manufacturing economy against a devalued pound.
“It actually provides an opportunity for UK manufacturing and others to invest internally and start exporting more, and start reversing the trend of years of decline in manufacturing,” said Adam, the financial controller of Omega PLC, a kitchen manufacturer and distributor based in Leeds.
The drop in the pound’s value has been more moderate than his company’s advisors expected. In fact, he said, he sees just as much danger for European continental economies as for the British economy.
“The unknown, I suppose, is what the outcome with Europe is,” Adam said. “It could provide a catalyst for future referenda. … Our withdrawal from it will probably have an impact on the European Union’s credit ratings.”
That kind of instability introduces new hazards. His company relies on suppliers on the continent, especially in Germany and Italy. Changes in trade agreements, such as reciprocal tariffs, could introduce new costs and eventually drive inflation.
However, he thinks that market dynamics will keep his company’s international relationships intact.
“We don’t believe that we will lose any of our existing suppliers or anything will become more difficult to deal with, because we’ve been supportive markets for those suppliers while the rest of Europe’s been in recession,” he said.
For now, the impact is “fairly minimal,” he said. The political fallout will continue for some time, potentially leading to Scotland breaking away, and Brexit already seems to be driving a wedge between older and younger generations – but in the meantime, he said, there’s nothing to be done but follow the quintessential British advice from the Second World War:
“The message in our business is business as usual, carry on,” he said. “… Keep calm and carry on.”
Editorial Director Jack Hagel and Contributing Editor Andrew Kenney contributed to this article.