As Britain prepares to withdraw from the European Union, LBS professors share what Brexit might involve – and how businesses might react
It’s hard to give any advice given the range of possible outcomes: with that level of uncertainty, the best approach is probably one of caution – both about relocating from the UK and increasing any UK commitments.
Longer term, much depends on the nature of Brexit, but certain things seem likely: the UK will be a cheaper place to operate due to the fall in sterling required to boost competitiveness in response to the tradeshock. Further, those looking to global markets and the benefits of high human capital industries will find the UK a more welcoming place as policy tries to mitigate the loss of European trade.
Brexit is likely to have negative consequences for the UK’s climate and environmental policy and the broader sustainability agenda. Theresa May’s decision to dissolve the Department of Energy and Climate Change coupled with the flip-flopping on renewable energy policy, are not encouraging signs. However, this uncertainty does not only present a challenge: it is also a unique opportunity for the UK corporate sector to lead by demanding ambitious and effective climate change legislation, economic openness, inclusive growth and tolerance.
Adoption of a global perspective will in fact be imperative, given that challenges such as climate change are not confined to national borders: UK businesses will have to extend and enhance their global outreach to counter the recent wave of isolationism and xenophobia.
As evidenced by the vote to leave the EU and the American presidential election, we live in a world of deep division. Views are entrenched.
In business, too, managers and leaders need to manage diversity and prevent and resolve disputes. Taking others’ perspective can help this.
Are you able to imagine the world from someone else’s vantage point, to picture yourself in their shoes? It means investing effort to understand another person’s visual viewpoint, thoughts, motivations, intentions and emotions. There are risks to adopting this perspective, but it will be a key skill required in the coming years.
The question, “How to prepare for a post-Brexit world”, is relatively easily answered for any financial manager. Brexit proponents claim it will open the gate to a rich orchard of economic opportunities. Even if that does happen, it is some way off. Much more likely is increased volatility and exposure to significant negative shocks. Many firms are already seeing sharply increased input costs. Firms who find traditional markets closed to them may face collapsing revenues. So business might hope for the best, but it needs to prepare for the worst.
Enter our old friend financial resilience. Financial resilience means building reserves of cash and liquid resources and shifting the balance of funding away from borrowing towards equity capital – the classic ‘strong’ balance sheet strategy. It derives its strength from low financial leverage; unused cash and unused borrowing capacity will help weather the storm. For many firms this simply continues the habits learned after 2008.
In the income statement, financial resilience means getting fixed costs down. This ‘low operating leverage’ strategy means if a downward shock hits sales, more of the shock can be passed onto suppliers. Unfortunately, the main ‘supplier’ in this sense is usually the company’s workforce, so we can expect continuing pressure on fixed employment and a continuing trend towards ‘flexible’ labour on temporary or zero-hours contracts. Of course, if and when we ever see the upside, this resilient financial structure should also offer a good basis for growth – assuming the firm retains the human capital it needs to take advantage of the opportunities ahead.
Brexit will bring change. We can’t predict the nature of that change, but we can safely say that it will be profound. Organisations will have to adapt and that will inevitably require adaptation by workforces. But never forget that today’s workforce is more educated, sceptical, questioning, sophisticated (and, indeed, more cynical) than ever before. It is tuned-in and plugged-in; in large part because information and ideas are gleaned from the internet and social media. People in the workforce now also have a greater awareness of their competition and what other companies are doing. Switched-on and alert employees demand a different kind of leader. The modern workforce has been through so many ‘change initiatives’ that change has become a dirty word.
Leaders must provide their employees with hope, purpose and encouragement to try new things: top-down, industrial revolution-style management isn’t going to cut it anymore. Change that lasts will come, at least partially, from the bottom up. As the challenges and adaptations necessary to cope with Brexit become manifest, leaders will need to inspire people to believe in change, to want change and to see that change through.