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Out-Law Analysis 3 min. read

Why companies need to consider Brexit scenario planning, and what it involves

ANALYSIS: Businesses that undertake comprehensive structured scenario planning around Brexit will be best prepared for the changes Brexit promises and meet their duties to shareholders.

A failure to scenario plan on Brexit is not an option for publicly-listed companies that face obligations under company law to report material risks to shareholders.

Those risk disclosure duties will materialise for UKPlc as their annual and quarterly reporting deadlines approach between now and Brexit date on 29 March 2019, and the information on the risks those companies will be required to highlight is expected to become more detailed the more that becomes agreed by the EU and UK negotiators on what Brexit will look like.

Recent research we commissioned suggests that, with just one year to go until the UK is due to exit the EU, more than half of the UK's biggest public companies are already acting on contingency plans around Brexit, while most others are set to do so before the end of this year.

Structured scenario planning will inform the contingency plans businesses put in place. This is because it helps them obtain a comprehensive understanding of their risk environment and stress test what risks would materialise from various potential outcomes of Brexit negotiations.

Our research found that 70% of boardroom executives across FTSE 100, 250 or equivalently-sized private businesses expect a detailed risk assessment on Brexit from their legal team by June 2018. Allied to this, 61% of the executives expect general counsel (GC) to lead their company's scenario planning on Brexit, and 95% of them expect GCs to flag up any major risks.

It is therefore vital that GCs begin scenario planning, and make the business case to bring in external support to help their team now, or they risk falling short of boards’ expectations.

Structured scenario planning will involve a detailed risk assessment. Our research identified five main areas in which boards want their legal teams to assess risks related to Brexit: 

  • restrictions on transfers of customer data between the UK and EU
  • the impact of customs duties and tariffs applied to supplied goods imported into the UK or exported to the EU
  • risks related to supply chain disruption
  • ability to attract highly-skilled workers
  • contractual risk exposure

By carrying out a detailed risk assessment, GCs can identify the specific risks to report to the board and, in the case of publicly-listed companies, those that should be reported to shareholders in accordance with company law.

It is vital that GCs ensure boards understand potential risks, and their severity, and take the lead on communicating realistic timescales for implementing changes that will protect against those risks.

Scenario planning can be tailored for each business, but the basic process for each exercise will be similar.

It should begin with 'deep dive' scenario workshops where the heads of business critical functions congregate to apply various scenarios that Brexit presents, identity consequences from those scenarios for the business and to highlight actions that would be needed to respond to those circumstances.

A broad range of business functions should be represented at scenario planning sessions, and businesses should consider bringing in external expertise to inform the scenarios and provide a broad sector perspective.

Workshops should work through pre-identified Brexit scenarios leading up to March 2019 and beyond. The scenarios developed should reflect the up-to-date state of Brexit negotiations.

Identification of the risks, and indeed opportunities, that Brexit brings for businesses will necessarily involve an assessment of the impact of custom duties and tariffs, supply chain disruption, labour shortages, restrictions on transfers of customer data, and risk exposure in contracts companies face.

Once the risks and opportunities have been highlighted, the structured scenario planning process can then lead businesses down a roadmap to Brexit day, where the scenarios are played out hypothetically with reference to drivers of change such as political developments and changes to the course of the negotiations.

A bespoke, actionable risk and mitigation strategies report can then be formulated and submitted to the board highlighting the central issues arising from Brexit and proposed solutions to address the organisation’s risk register.

The report can then provide the spur for implementation of the solutions, such as the review and updating of contracts, changes to employment strategies, and a refresh of company policies and procedures.

As my Brexit advisory colleague, and UK government strategy adviser, Lynette Nusbacher said in our new report, engaging with scenario planning allows businesses to take control of their place in the future.

"Structured scenario work prepares you for the future you’re going to have to deal with, not just the one you’d like to deal with," Nusbacher said. "You can never get rid of uncertainty, but structured scenario work can help you understand and prepare for the reality when it comes.”

Guy Lougher an EU and Brexit specialist at Pinsent Masons, the law firm behind Out-Law.com.

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