A Board’s Eye View on Brexit

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Last week, the UK’s referendum delivered a historic vote to leave the European Union. Since then, political uncertainty and market fluctuations have ensued. As the dust began to settle, Criticaleye spoke to a number of executive and non-executive directors to get their views on the recent turn of events.

“Many business leaders were surprised by the decision 51.9 per cent of the UK population took to leave the European Union. Even those that penned intricate contingency plans will now be in a period of uncertainty. What’s needed now is strong leadership and a calm, considered, long-term approach,” says Charlie Wagstaff, Managing Director at Criticaleye.

While predictions are difficult to make, it’s important to assess the situation. As such, we spoke to a number of executives, non-executive directors and advisors to get their thoughts on the forthcoming Brexit.

Steven Cooper, CEO for Personal Banking at Barclays

There is a lot of speculation about the impact of the vote on our industry. Our job is to be there for our customers and ensure our colleagues feel calmly supported – that’s exactly what we’re doing.

The business did contingency planning for either outcome and thank goodness we did because I don’t think many imagined it would come out the way it did. That planning has enabled us to respond without panic and provide reassurance to customers and colleagues.

This is a time for rational decision-making, calmness and focusing on the fundamentals of your business, not getting distracted by short-term volatility. We don’t yet know what leaving Europe actually means and it could be quite a long process.

We’re tracking things like call volumes on the hour. We’ve seen record levels of stock trading but there’s been no additional activity in branches or call centres – people aren’t calling up more or asking for more cash. We were prepared for that but it hasn’t happened.

It’s likely that the UK will go into a modest economic downturn for a reasonably short period of time. Have one eye on it but don’t be distracted from the day-to-day running of the business.

I think there will be some opportunities from this; for example some people are taking the current market positon as a buying opportunity.

Jane Furniss, Criticaleye Board Mentor, Senior Independent Director at the Solicitors Regulation Authority and Non-executive Director at the National Crime Agency

I’m not surprised at the decision, I think the Remain campaign lacked conviction and inspiration, UK governments have been constantly critical of the EU so naturally citizens have grown to believe it’s not a club we should stay in. I’m very sad about the vote as I think the ‘EU project’ has broadly been a force for good.

In terms of the organisations I am involved in, leaving the EU could have a dramatic impact on the freedom of lawyers and law firms to operate across Europe. It could also make cross-Europe co-operation between law enforcement organisations harder.

On the other hand, if we come out of the single market it might be easier to control the movement of criminals into the UK, and reduce the numbers of homeless or jobless people who come from poorer EU countries.

Whatever happens next will take time and the period of uncertainty in the short term could damage public confidence. No one actually knows from experience how to exit the EU, or even what it means.

The referendum is a democratic imperative, not a legal one. In theory the Government could ignore it. If I were still a civil servant, I would advise the Prime Minister to take their time negotiating positive arrangements for our withdrawal, and then get Parliament’s and the country’s agreement before triggering Article 50 of the Lisbon Treaty.

Bill Payne, Criticaleye Board Mentor, Chairman of Primedoc and Non-executive Director at Tekcapital 

I feel some shock [at the referendum outcome] but nobody really knows where this will go.

There are many questions. Will the UK remain in the single market? Will Scotland want independence from the UK and to remain in the EU? Or will the exit negotiations be so horrible that the UK Parliament votes to reject them, triggering a General Election and perhaps a new referendum? Anyone got a crystal ball?

My fear is that investment from Asia will significantly reduce. Asian companies have always seen the UK as a good place to do business, in particular as it gave full access to Europe.

The organisations I’m involved with haven’t made extensive plans. There are no real guidelines or ideas of what the future will look like. So, all you can really do is hunker down and be cautious while carrying on.

In terms of advice to others, I would say prepare scenarios for a number of business cases… full access to EU market, significant trade tariffs, or look to alternative markets. Finally, it is what it is and life goes on.

Simon Warr, Communications Director at National Air Traffic Services (NATS)

Personally, [I feel] disappointed and worried about what Brexit will mean for the country in the years ahead.

The relevant teams [at NATs] examined the voting scenarios and ramifications as far as they could. This was discussed at both executive and board level and where appropriate, contingency plans were put in place.

There will be little immediate effect on the business, apart from any potential impact the economic shock waves will have on air traffic volumes, although these are largely covered through risk sharing mechanisms in our licence.

The longer term will depend entirely on the future relationship the UK forms with the EU and, in particular, whether the UK continues to adhere to the requirements of the EU’s Single European Sky legislation [EU legislation to improve air traffic] as this determines much of what we do.

It will be some time before we can complete a proper assessment. In the meantime, we will maintain dialogue with our customers, regulator and the Government on the options for the future of air traffic control outside the EU.

Leslie Van de Walle, Criticaleye Board Mentor, and Chairman of SIG and Robert Walters

In the short term the impact is uncertainty; people will stop investing and growth will slow down, especially in the UK but also in Europe.

I think the next Q4 and next year’s Q1 will be difficult for UK companies. For international businesses, I think those that have used the UK as their European headquarters will rethink whether or not they want to stay in the UK. For example, Chinese organisations saw London as one of the best places to invest because they wanted to be within the EU. Now they will decide between France, Germany and other places.

Businesses looked at the impact of leaving the EU and had contingency plans, but they were for an orderly world. People are now realising that Brexit has created a political and an economic crisis. Nobody expected David Cameron to step down so quickly; there are lots of decisions that will be postponed until there is a new Prime Minister in place.

At SIG we signed a refinancing contract that was cleared just before the referendum results. [I suspect in future] there will be a problem of liquidity, which at some point might impact on borrowing and the ability to refinance.

There is a lot of noise but people should just continue to run their business and focus on what they can control.

Sally Shorthose, Partner at international law firm Bird & Bird

I don’t think businesses are completely prepared for this eventuality. Even for the leaders of the Remain and Leave campaigns, it was not the result they expected. Of course, the implications could be very far-reaching.

Clients have been asking if they should make allowances and changes to prepare for Brexit. Actually, we’re having to think quite carefully when drafting agreements about a number of things – for example, references to directives and regulations [as] they are likely to fall away in the next few years. Care will also need to be taken in defining the ‘territory’ and with choice of law and dispute resolution clauses to ensure that these survive Brexit, and are even flexible enough to include a broken up UK.

In due course, I would suggest a review of IP portfolios to see if any action needs to be taken – but we need to see what is proposed regarding European Union Trademarks (EUTMs), Community Registered Designs and of course the future of the Unified Patent Court (UPC).

We’ve had a dedicated Brexit [team internally] here at Bird & Bird for about six months; I think it’s very useful [for businesses to] have key people who keep abreast of what’s happening. It’s likely things will change quickly and decisions need to be made. Those people could have a job for much longer than first anticipated.

 

Do you have a view on Brexit that you would like to share? If so, please email dawn@criticaleye.com

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New Adventures in Partnering

ImageAt a time when business models clearly need to adapt and change, cross-sector partnerships are a great way to experiment and be innovative. Whether it’s financial services, retail or even housing, boards are being far more imaginative in how alliances with businesses outside their industry are formed and the ways in which they can collaborate to reach customers and open up new routes to market.

Professor Dominique Turpin, President of IMD and Criticaleye Thought Leader, says: “Everyone’s on the lookout for new business models and there’s increasing pressure on brands to come up with ever more innovative ideas that can cut costs while at the same time create a differentiated and valuable experience for the consumer. So it’s about being creative and rethinking the rules of the game.”

Take Barclays’ partnership with Asda, which initially saw four bank branches being moved into the supermarket’s stores. Steven Cooper, Head of Personal and Business Banking for the UK Retail & Business Bank at Barclays, describes the “mutual opportunity” for both brands in providing convenience to consumers, with the added potential that some shoppers may be persuaded to switch accounts or their supermarket of choice.

“Not all Barclays’ branches are in high streets where parking is easy, so it’s convenient for customers if they can park in one place and do both their shopping and banking at the same time, and at a time that suits them – Barclays in Asda stores are open seven days a week,” says Steven. “Both Asda and Barclays do and can share customers and we can find cost savings for each other too, so while we contribute towards Asda’s cost base through rent, effectively, we don’t need a Barclays branch nearby, so we save in that way. Ultimately, I hope it will lead to increasing footfall for Asda and increased business for Barclays – and happy customers.”

Another example is Italian food manufacturer Sacla’s proposed venture with housing specialist Unite Students. Jim Waller, Commercial Director at Sacla, sees it as a great opportunity for broader brand exposure.

“We already have good penetration into the student market because something like 80 per cent of students use a pesto product on a regular basis, but we’re now looking to extend our reach and increase longer-term loyalty beyond their student life, when usage traditionally plummets,” he says. “It’s very early days in the discussion but there are some interesting ideas that both parties would like to explore. For example, we produce a cook book and there’s been talk of cooking demonstrations on their premises.”

For Unite, while there will be a financial benefit to such a venture, it’s more that it strikes the right note following a recent rebrand. Richard Smith, Managing Director for Operations at Unite Students, comments: “There’s clear alignment between what both parties want to achieve and we both have similar ambitions with regard to our potential customer base. The benefit to Sacla is to increase their brand exposure and hopefully generate increased sales from that; for Unite, it helps support our wider brand ambitions of promoting life skills and helping students to get more from their time living with us.”

Into the unknown

Of course, commercial arrangements of this kind aren’t necessarily anything new, but they are increasingly seen as a powerful tool to open up different markets. In India, for instance, where joint ventures have traditionally been the preferred choice, the partnership model is flourishing.

Arbinder Chatwal, India Advisory Services Leader at professional services firm BDO, says: “A number of companies we’ve worked with recently are going into the market with a more indirect model, just looking to dip their toe in the water so to speak. So they’re looking at distribution arrangements and outsourcing in order to get a man on the ground who will see what kind of orders are getting placed…

“Certainly, setting up a presence immediately is not necessarily the right answer. It’s a case of testing the market first in order to decide whether it’s going to work well for you.”

Whatever the nature of the partnership, it’s essential that both companies know how they are going to operate together. Neil Ward, VP and General Manager of Business Operations at internet communications platform Skype, comments: “The real nub of the matter is to keep the core of what you want to achieve in your own hands… A good example would be a company called Lithium, which provides our community model. They’ve built the data infrastructure, so the actual platform on which the community lives, while we host the user experience using our own people, policies and procedures.”

It works best when know-how is shared while autonomy is retained. Laura Haynes, Chairman of brand consultancy Appetite, comments: “Partnering can be more attractive than M&A because it enables you to seize a commercial opportunity without losing brand integrity or independence of business operations. That might be to fulfil the needs of customers in particular markets, or trial something that might be appropriate only for a short period of time.”

As with any arrangement, there will be risks that need to be managed. Dominique says: “Either party might have different dreams and not fully understand the other side’s position. Furthermore, you have to understand the long-term consequences of your relationship, because the context will change [over] time and what worked when you set up the agreement might not provide the same benefits to both parties a couple years down the line.”

Laura says: “Don’t underestimate the responsibility that goes with partnering. The reputational risk and commercial risks in terms of delivery are still high because you have very little control over what the other party’s brand is doing outside your arrangement.”

The details of the agreement need to be scrutinised so that both parties are clear about what’s expected. Get that right and there’s no reason why a partnership can’t be the catalyst for some much needed fresh thinking among both sets of management teams.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk

Can Banks Win Back Trust?

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The banking industry faces a huge task ahead if it is to restore trust and credibility. While it’s understandable that much anger and suspicion is directed towards ‘bankers’ for their role in the financial crisis, it has always been too simplistic to blame this group entirely for what happened. It’s time to move on, not least because a strong banking system is in everyone’s interests if the economic recovery is to gain momentum.

Getting there is another matter. The measures taken by regulators, such as the introduction of the Dodd-Frank Act in the US and Basel III in Europe, are necessary to reduce some of the remarkable risks that were being taken with unwitting customers’ money. There does need to be a limit, however, so that the political necessity to be seen to act in order to satiate public opprobrium, combined with a very rational need to reduce alarming behaviours, does not result in throwing the proverbial baby out with the bathwater.

Brian Stevenson, Non-executive Director of Agricultural Bank of China and former Chairman of Global Transaction Services for The Royal Bank of Scotland, says: “If you look at the new regulation that’s being put in place in Europe and the US, together with the FSA in the UK and the new authorities being given to the Bank of England under the new structure of regulation, when you add all of that together, you could legitimately argue that in combination it is going too far. If you’re a large international bank operating in a lot of countries around the world, you’re currently facing a multiplicity of new regulations and new regulators, and they’re not the same.”

The lack of standardisation around the world is a problem, creating a serious competitive disadvantage for some international banks, whereas at least the country-focused banks know they’re competing on a level playing field. “For domestic banks in the UK, it is very difficult to argue that the regulations have gone too far,” adds Brian, citing the issues around payment protection, liquidity and capital planning, to name but three.

Within this, there is also the question of the false sense of security that can occur in the clamour for safeguards and buffers. Steve Pateman, Head of UK Banking at Santander, says: “I may be wrong, but I don’t see that capital and liquidity management in isolation will effectively prevent another banking collapse. It has to be seen in combination with risk management. Anglo Irish would have gone bust with 30 per cent Tier 1 capital, so let’s not kid ourselves that if you’ve got Tier 1 capital of 10 per cent, you won’t go bust.”

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Tone at the top

Risk management has to be right – it’s no use, for example, having a well diversified mortgage book if there’s a massive concentration of exposure in highly leveraged corporate entities, as HBOS discovered to its cost. Omar Ali, Partner and UK Banking & Capital Markets Leader at Ernst & Young, says: “In terms of the issues we’ve had since 2007, fundamentally it comes down to a few critical questions; what is the organisation’s attitude to risk?; its culture?; how does it operate? Because, let’s be clear, all banks had rules and policies and regulation was in place already – regulation by itself is not the answer.”

Mary Jo Jacobi, Criticaleye Associate, former MD of Lehman Bros and advisor to the board of HSBC Holdings, says: “The banks need to clean up their own act and demonstrate that they are capable of occupying a position of public trust and of managing their own affairs responsibly. That doesn’t necessarily mean chasing huge profits through highly risky ventures. Of course, one of the reasons we got into the current situation was because the banks were coming up with more and more complex instruments to make money out of basically repackaging the same things. I’m a capitalist and I believe in the profit motive, but I also believe that businesses have a responsibility to understand what they are doing and address the potential consequences of what they are doing.”

Rebuilding faith in the competence of banks will not be easy. According to research from E&Y, some 40 per cent of banking customers globally have lost trust in the industry over the past year; customers are also becoming less loyal and increasing the number of banks they use, with a third of them now dealing with three or more banks.

At least banks now realise they actually need customers and success depends on winning back their trust. Paul Staples, Head of Corporate Finance at BNP Paribas, says: “Regaining public confidence in the provision of banking services will require progressive, visible changes in how we deliver value to our clients. The pursuit of shareholder returns must be blended intelligently with a tangible commitment to social responsibility.

“The project has begun and the next stage is genuine engagement with stakeholders to ensure that key initiatives are better designed through proper consultation. Clarity of communication is essential to regain credibility and to rebuild progressively an enduring trust.”

Over time, banks have been the most ruthlessly profit-focused of businesses. It’s now time for them to reconnect with customers and get back to basics, which means looking at how to provide the best possible service with transparency, such as being clearer about pricing and charges. Whether that is going to occur can be debated long and hard, as the aforementioned cultures within many organisations is entrenched, but given the public’s cynicism towards the industry, those banks that do respond will be at a distinct advantage.

“When you boil it down, banks only really do five things,” says Brian. “They provide a vehicle for customers to make investments; finance for customers; move money from A to B; risk management services; and information and advice on all of those services.

“So, in each category, they have to be careful enough to make sure that what they’re actually providing for their customers is ultimately what they want and there isn’t any form of grand deception or sleight of hand involved in the process.”

Helping first-time buyers, supporting businesses, making services quick and accessible across a variety of channels, that’s what people want to see and, if done in the right way, banks should not be pilloried for making profits. “The most important task we as an industry have ahead of us is to show that banking done well is a good thing, but it’s not a battle we’ve done a particularly good job with so far,” says Steve.

Omar suggests that it should be an enormous wake-up call for banks to appreciate the role they have to play in society: “This could create an industry that is better for everyone. Better for shareholders, taxpayers, regulators, customers, the overall economy and the country we live in. I think we have a unique opportunity to improve banking for all stakeholders and I just hope there is the collective will to do so.”

The Truth About Business Banking

It’s clear that a number of banks must redefine what they mean by ‘relationship banking’ if they are to win back the confidence of business leaders. The smart financial institutions recognise this and are trying to reorganise in order to provide a less bureaucratic, process-driven service to businesses, although the operational challenges of meeting this demand are huge.

When Members of the Criticaleye Community were asked to diagnose the health of the relationship between banks and business, it seems that, while not exactly terminal, some serious rehabilitation is needed. The main themes to emerge include:

  • Quicker decisions
  • Less box-ticking
  • Greater competition (among banks)
  • More time to understand a business
  • Better preparation (by businesses)

The current assessment process is often viewed by management teams as laboured, draconian and arbitrary. Kevin Appleton, former CEO of equipment hire company Lavendon Group plc, says: “The challenge in the UK is how concentrated the commercial lending sector is, where you only have four or five lenders to choose from. I’d like to see more competition in lending and a return to balanced judgments rather than box-ticking. Fundamentally, banks must remember the lessons of the last few years: lending indiscriminately will create problems.”

A rational and transparent approach to lending ranks high on the wish list of CEOs of both large and small concerns. Bernie Waldron, a Criticaleye Associate and Non-executive Director of various companies, says: “Although there are a number of excellent bank managers that deal with smaller businesses, there are also plenty that struggle to understand their clients business and marketplace, making it difficult for them to take intelligent judgments on who to back.

“Prior to the economic downturn in 2008, when bank financing was perhaps a more mechanical task, I think the banks may have under-invested in people who can relate to the complexities faced by SMEs. Often, the business insight of the bank’s ‘point people’ who are taking decisions and making recommendations up-the-line is not strong enough. The fact that SME banking is normally organised by geographic region rather than client industry only exacerbates this issue.”

You never listen

A lack of communication has heralded the end of many a relationship, and that’s no different when it comes to banks and businesses. A significant number of Criticaleye Members expressed real frustration at simply not being able to talk to their bank so as to explain properly the position of an organisation.

Ian Bowles, Criticaleye Associate and CEO of AIM-listed Allocate Software, says: “While we haven’t had any issues with our bank, I’m not sure banks spend enough time understanding their clients’ businesses. If the debate is essentially about funding growth, banks need to understand the business drivers of their customers.”

Mary Jo Jacobi, Criticaleye Associate and former advisor to Lehman Bros and the board of HSBC, says: “Banks need to return to the partnership approach they once had with their business customers, where they had a symbiotic relationship of trust and reliance.”

Blame culture

As much as it’s been the vogue to bash banks in recent times, what doesn’t get discussed is how numerous businesses are falling short due to poor financial controls and plain ignorance about what banks want to see.

Ian says: “The other side of the coin is that business leaders need to be realistic and sensible when putting forward business plans, with demonstrable models and tolerance levels. When we put forward an M&A proposition, which the bank will review, we have at least three scenarios built into the model, so they can see the tolerances for our ability to generate or repay cash. If you haven’t considered the variants to the plan, the banks will not see it as credible.”

In certain instances, companies are failing to wise up and realise that times have changed. Mark Stokes, MD of Large Corporates at Lloyds TSB, comments: “There needs to be a very good dialogue and a healthy sharing of information between management teams and banks; it makes banks feel they understand the business. Banks will then feel more comfortable when that customer comes to them asking for backing for M&A or an expansion opportunity, and will be better placed to do it because they have that in-depth knowledge.”

For Ian, the relationship has to be taken seriously: “If a bank wants time in a CFO’s or FD’s diary, they should get it in equal measure with investors or City analysts because it’s a fundamental part of the business. There should be no shocks either way: the company shouldn’t default on payment terms and conditions, but likewise, if a bank has indicated support for growth, perhaps through acquisition, you don’t want to hit any roadblocks with paperwork because the terms and conditions or the environment has changed.”

Mark states that if the dialogue exists then it’s easier to establish and set out common goals. “Some corporates go about it a different way,” he says. “They go to the opposite extreme, looking at a bank as more of a purchasing process, which doesn’t support a long-term relationship and sharing of information; therefore banks might not be as willing to support whatever it is that business is seeking to do because they don’t really know them.”

A personal touch

The big challenge for many organisations, not just in the financial services sector, is to get closer to customers. Steve Cooper, Managing Director, Barclays – Business and Personal Banking Solutions, Barclays Bank, argues that significant steps have already been taken in the past few years to recalibrate the relationship with businesses: “We’re being a lot more focused. When we do refuse a loan we are very thorough about how we communicate that decision to the customer, both verbally and in writing. It’s very different to pre-2008, when banks were perhaps guilty of just saying ‘no’ or the relationship manager would blame a decision on head office. Now, it’s more joined-up and the organisation will explain the ‘no’ because of, say, these five reasons. He/she will also go further to see how they can help the client along those lines to improve or if it can introduce them to someone who can help.”

Andy Tinlin, who heads up Accenture’s financial services consulting practice dealing primarily with corporate and SME banking groups, comments: “Banks are definitely sharpening up their capabilities in terms of how they deal with customers, driven by having to reinvent revenue flows to replace a drying up of their more risky or speculative loans. This is the silver lining on a really big cloud, and over the next five years or so, I expect some of these commercial banks to adopt a much more customer-centric view of the world, meaning the recruitment of people from other types of industries to provide a better view of how they should perceive their customer base.”

This can seen as recognition on the part of banks that improvements have to be made. Andy says: “What this means for businesses is, in theory, a more bilateral and equitable relationship. However, banks must be careful that they don’t simply appear to be selling product. They must show genuine interest in a business and its objectives in the medium-term. Banks are a supplier to businesses and, in the same way as any other supplier, they must work to get the time they need in their clients’ diary and work hard to achieve better after-sale service.”

Steve clearly believes this is the way forward: “We need to remain close to our customers, remain transparent about costs and offer them plenty of choice. We must also become more efficient about informing our clients before they incur fees and be more creative about the lending options we’re providing in the long run. However, it must be sustainable; it’s important to remember that banks are not charities. It’s not our money but our shareholders’ money, so we can’t be reckless with how we spend their money.”

Reality cheque 

Banks are and ought to be profit-motivated and they shouldn’t be expected to support businesses artificially with balance sheets that don’t add up. David Molian, Criticaleye Thought Leader and Director of the Business Growth & Development Programme at Cranfield, says: “Many [management teams] have learned to [control] their working capital much more tightly and squeeze the cash they need from their business. In that sense they are better-managed businesses and, in the process of improving their working capital position, they have often improved margins as well.”

Geraint Anderson, CEO of mid-cap business TT Electronics, says: “Many mid-cap companies like us have taken action to improve their own performance and be less reliant on bank debt. We’ve taken self-help action in order to repair balance sheets and see where we could improve cashflow, debt position and working capital.”

In practice, the bottom line is that struggling businesses are going to keep finding it hard when banks are tasked with simultaneously shrinking their balance sheets while also being under political pressure to lend responsibly. Paul Danos, Dean of Tuck School Business School at Dartmouth in the US, says: “I don’t see much appetite to take even reasonable risks on the part of banks and companies seem to be in a stagnant period where there’s not that much organic development.

“Given what the banks have gone through in the last four years, their tremulousness is understandable; and many say that US companies are frozen by uncertainty about taxes, regulations and other government policies. In Europe, the rolling credit markets with whole countries on the brink would instil caution even in the proverbial drunken sailor.”

It’s another reason why management teams should be switched on when approaching a bank for funding.

The days of easy money are long gone.

Please get in touch if you have any comments about the issues raised here.

I hope to see you soon.

Matthew

www.twitter.com/criticaleyeuk