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Top businesses unprepared for Brexit

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It's decision day. Both financial markets and a substantial number of top businesses seem to be remarkably dismissive of the possible risks that could ensue from a Brexit...

Remain or leave?

Despite the majority of polls showing both camps as neck and neck, it seems that most observers believe the outcome isn’t as finely balanced as the surveys suggest, with recent odds from bookmaker Betfair showing a 76% ‘implied’ probability of a Remain scenario.

Earlier this week the pound traded at its highest level of 2016 against the US dollar, whilst the FTSE 100 has gained over 300 points or approximately 5% in the last five trading sessions. Given the conventional wisdom that a victory for Leave would weigh heavily on both these markets, this suggests that little discount is currently priced in for a Remain.

A quarterly survey of 120 chief financial officers and group finance directors of major companies in the UK by Deloitte shows a surprising lack of contingency planning in the event of a Brexit. The CFOs questioned are responsible for the financial strength of approximately 17% of the UK and their responses offer a fairly respectable level of insight into the wider views within the country. More than half of the respondents explicitly stated that they had made no plans in the event of the UK terminating its existing EU membership, which is alarming considering the potential impact to nearly all sectors - something that has been widely acknowledged throughout the campaigns and debates. 

Whilst it is an unenviable task that borders on the impossible to accurately predict the new trading conditions within an industry in a post-Brexit Britain, the absence of any tangible contingency plans seems hopeful at best and negligent at worst. Hope may go some way to explaining this laissez-faire attitude with 75% of the CFOs surveyed in favour of the UK remaining in the EU, but the borderline dismissive attitude that is also reflected in current market prices for sterling and UK equities has done nothing to dampen the potential scale of a shock if the Leave campaign finds itself victorious. 

A separate research report conducted by the Chartered Institute of Internal Auditors (CIIA) found that 77% stated that they rated Brexit as a more significant risk now than six months ago and had discussed the implications of a possible Brexit at executive board level. Despite 39 heads of internal audit at FTSE 250 companies being asked on their levels of preparation for a possible UK exit from the EU, only 10 had formally discussed contingency planning for such an outcome with the chairman of the audit committee or the board chairman. 

Are you prepared?

The adoption of a wait-and-see strategy is not desirable for most firms but seems to have transpired due to the uncertainty about the process, timing and consequences of a Brexit if indeed it does occur. The range of issues that could impact on a firm’s operations range from potential currency fluctuations, a drop in inward investment, and changes in trading arrangements. At least some preparation of possible strategies across these factors would surely be deemed prudent. 

The City of London is one of the most susceptible to a decline in business in the event of a Brexit and therefore it’s unsurprising that banks have been one of the forerunners in announcing their views and plans if this scenario plays out. Warnings published in an analysis performed by the Treasury that up to 285,000 jobs are at risk seem to be bordering on an exaggeration, with scaremongering being a common - and seemingly largely unsuccessful - strategy that the pro-remain government has decided upon implementing during the run up to the vote. 

HSBC have announced that 1,000 investment banking jobs would be moved from London to Paris if the UK leaves the EU, with fellow international banks JP Morgan and Citigroup echoing the same sentiment even if they chose to refrain from quantifying the impact on jobs numbers. However it should be noted that these explicit commitments to actions in the event of a Brexit are few and far between with many blue chip companies hoping this is referendum represents a problem that will never materialise. Whilst this viewpoint and business planning may prove adequate if Britons vote as expected, there still is a high enough probability that they will not to warrant a greater level of contingency planning than their is at present. If a Brexit does occur it will unfortunately be a lesson that will be learned in hindsight and could damage businesses to a far greater extent than is necessary. For the sake of many companies this education will be too little too late in mitigating what is arguably the biggest risk to the present generation of executive board members.

For more information about the author David Cheetham, click here

David  Cheetham

By David Cheetham

David is a market analyst at XTB

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