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Brexit, Governance and Business – What should Boards and Directors be doing?

The issue of the first of 80 technical notices by the government this week on different aspects of a Brexit no-deal is relevant to every UK business, writes Co-operatives UK Secretary General, Ed Mayo

It is not that every business should read every word, or even that if they did, they would know everything about what a no-deal Brexit would mean. The technical notices are strong on procedures and bureaucracy, but largely silent on the knock-on commercial implications. It is that a basic principle of governance is that the directors of businesses should take a view on what they do to respond to the scenario of a disorderly Brexit.

Boards typically know how to map risks and put controls in place to monitor and mitigate them. But as with any complex challenge or unlikely external event, a disorderly Brexit won’t necessarily be picked up as routine governance. It is hard to pull together all the information on what the impacts could be and it is hard to judge the likelihood of it happening.

The art of risk management and governance tends to prefer single risks that can be identified, assessed and managed. Unfolding and multi-dimensional risks associated with a disorderly Brexit don’t fit easily. Furthermore, the social psychology of groups can tend to reinforce an all too human aversion to looking at extreme events. 

"There is no safety in silence, no professionalism in ignoring what may happen." Ed Mayo, Secretary General, Co-operatives UK

It is not enough simply to assume that the worst will not happen. A Board has to take extra steps if it is not to be blindsided. So, first put it on the agenda as an item to look at on its own – and not just Brexit, but the risk of a disorderly Brexit. In a co-operative, for example, the Board, with input from the management executive, has the ultimate responsibility for identifying the key business risks. The Board should determine the types of risk the co-operative is prepared to take. This is core to governance codes in the sector for consumer co-operatives, farmer co-operatives and worker co-ops.

The next step is information. This is inevitably speculative, in the sense that a disorderly exit is a scenario. But, looking through each part of the business, there may be impacts. Brexit planning implies looking at sales, marketing, logistics, legal, tax, HR and more. If you are engaged in cross-border payments, there will be implications. If you recruit or employ EU nationals, there will be implications. 

If you are engaged in cross-border trade with EU countries, in your supply chain or in sales, you are of course high up the risk ladder. It is both access to those markets and the terms of that access, including exchange rate risk and the practical obstacles (if the lack of integrated customs systems leaves chaos at ports, for example). The UK’s largest 'roll on, roll off' freight terminals are all designed for lorries from the EU to enter and leave the UK freely. Changes will take time, possibly years, before they settle.

Interested in good governance? Head over to The Hive for a wealth of resources all geared towards increasing the effectivenes of your co-operative.

Jon Thompson, the chief executive of HM Revenue and Customs, told a Select Committee of MPs earlier this year that there would be a fourfold increase in customs declarations under a no-deal Brexit. The Financial Times summarised the first tranche of technical notices issued by the UK government in this way: "British companies exporting to the EU will face a blizzard of red tape if there is no Brexit deal, and should consider hiring customs agents to help them deal with it."

To take another example, the EU’s VAT Mini One Stop Shop is a service that allows EU businesses selling digital services across the EU to report and pay VAT via a single return and payment in their home country. No deal, no VAT simplicity. A no-deal is expected to have a dramatic instant impact on food supplies in the UK. At present, 80 per cent of fresh vegetables and 30 per cent of fresh fruit imported from the EU. The retail sector is one of those which will be impacted and the knock-on implications in terms of food availability and consumer behaviour are ones that start to move into uncharted territory. 

If you are interested as a consumer in food stockpiling, by the way, the New Scientist has published a guide to your best options. Lentils and pulses are the most compact source of nutrition, while frozen vegetables, if you have the space, are ideal. As any foodbank volunteer knows, don’t just buy tins of beans. 

Co-operatives UK offers a range of governamnce advice and support services from Board evealuations and skills audits to governance healthcecks and strategy reviews. See what's on offer here.

For agricultural co-operatives there are risks and opportunities depending on your focus. Organic growers could be delisted on day one in the EU, without recognition for the UK certifications. Buying groups used to sourcing fertilisers and agrochemicals from overseas could find not just price rises, but challenges of availability as well. Their Boards will be asking how they ensure that their members get first call at a time of volatility.  

For producer and marketing co-ops, say of grain or of dairy, there is an opportunity to do deals with UK firms that want to tie in their supply chain in a safe way over time, for example working with retailers to manage their risk. For those in the red meat sector, business is most under threat. Your beef sold to France is not just at risk from customs changes, but from competition from Latin America - selling on the same World Trade Organisation terms. 

The EU, in its own communication on Brexit and the UK last month, drew a helpful distinction relevant for Boards between preparedness and contingency:

  • What can we do as a business to prepare for the changes ahead? 

For example, being ready in terms of marketing to communicate why products or prices may be changing, or prepared to help with payment terms or special offers to customers who face their own lean period.

  • What can we do as a business to make contingencies for the changes ahead?

For example, to prepare for a short- or medium-term disruption both to supply chains and to revenues.

The risks will be greater, possibly terminal, for businesses with a weak cash position. So what preparation can be made for access to credit or to free up cash flow?

In terms of timing, if there is a deal, then it is already agreed that there will be a transition period running up to at least 31 December 2020. If there is no deal, then Britain exits the European Union on 30 March 2019 without a further transition period. Britain would introduce new, baseline import tariffs and rules-of-origin requirements for trade with World Trade Organisation member countries. In the event of a no-deal Brexit, they would apply to EU countries too.

The responsibility of Boards is to act in a responsible way in the face of the risks ahead. There is no safety in silence, no professionalism in ignoring what may happen. It may be that having considered the options, the Board decision is to do nothing. But whatever the outcome, the owners of any business (the members in a co-operative) and the workers within any business, have a right to know that the consideration was carried out and carried out appropriately as a matter of good governance.

Written by Ed Mayo*
Updated: 24/08/2018