The impact of Brexit on UK boards is dramatic, and the economic consequences already appear to be grim. It is essential that board of directors provide a fair assessment of the impact of Brexit and put together a strategy that will see their companies through it. Board collaborations, board communication and detailed accountability is required.
Impact of Brexit on UK boards
From the perspective of UK boardrooms, the impact of Brexit in the near term is grim. Profit growth at some of the UK’s largest companies is expected to drop considerably, according to a study by UBS for the Financial Times. An analysis of forecasts for 2018 gives a grim view on the future for some of the UK’s biggest companies, with expectations that there will be a marked slowdown. Some companies are putting plans on hold or shifting operations to other parts of the EU.
The study also shows that investment in the automotive industry has fallen 75 per cent in the first half of this year compared with 2015 levels, according to the Society of Motor Manufacturers and Traders. It comes as WPP, the world’s largest advertising group, slashed growth forecasts for the second time amid cuts in ad budgets. Analysts expect profit growth at Britain’s largest companies to rise by 7.2 per cent in 2018, according to the FT analysis, compared with an anticipated 19 per cent this year. Meanwhile, gains by companies listed in London as a result of currency fluctuation have been eclipsed by longer-term worries.
UK boards of directors must assess the impact of Brexit
As part of their assessment of the outlook for their companies, the board of directors must determine the impact of Brexit and propose a strategy. According to a study by Market Inspector, factors stemming from Brexit range from a decline in exports to rising labour costs from losing access to the EU Single Market, rising unemployment and a slowdown in foreign direct investment.
Whatever the factors most relevant to a particular organisation may be, boards have the responsibility to take it into account and to plan for the future. As Alice Telfer, Head of Business and Public Sector at the Institute of Chartered Accountants of Scotland, points out, ICAS Policy Leadership Boards of UK companies will need to ensure that business risks have been identified, and are appropriately updated and tested against different scenarios to improve adaptability and preparedness in this evolving climate.
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Board of directors roles and responsibilities
A part of a directors role is to take responsibility for ensuring that the Strategic Report prepared is fair, balanced and understandable. As well as adequate disclosure of operational risks, there may also be financial risks such as changes to impairments, going concern and currency rates to consider and report. These may also have an impact on reported amounts, which could lead to further consequences such as an effect on debt covenants. Those which the board of directors judges to be principal risks and uncertainties must be disclosed and explained in the company’s interim management or strategic report.
The outcome of the referendum may give rise to general macroeconomic risks or uncertainties that affect all companies, as well as those risks that are specific to a particular company or industry sector.
Additionally, the UK Financial Reporting Council (FRC) also expects boards to provide an explanation of any steps that they are taking to manage or mitigate those risks. Specifically, as part of the assessment of principal risks and uncertainties, the FRC highlights that boards should consider whether the referendum vote gives rise to solvency, liquidity or other risks that may threaten the long-term viability of the business; and any implications for the viability statement in the annual report.
A high-quality narrative that supplements the financial statements and includes managements’ view of the outlook for the business will be key. Boards must determine what disclosures, if any, are required to ensure their financial statements and management and strategic reports meet the needs of investors and comply with regulatory requirements.
The FRC specifically highlights the importance of high-quality narrative information that supplements the financial statements and includes managements’ view of the future outlook of the business.
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Clear disclosure of a company’s business model is encouraged as part of the strategic report, including a description of the main markets in which the company operates and its value chain. The disclosure should be sufficient to enable readers to make an assessment of the company’s exposure arising from the outcome of the referendum. The FRC encourages directors to consider whether assets may be impaired and/or disclosures made consistent with the requirements of IAS 36 Impairment of Assets, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. They may need to consider the continued recognition of deferred tax assets.
The FRC also highlights that attention should also be given to the nature and extent of sensitivity disclosures required by IAS 1 Presentation of Financial Statements that support estimates in the annual financial statements where, due to volatility, in the short term, ranges may be wider. Overall, what shareholders, investors and regulators are looking for is a fair assessment of the future of the company given that the changes in its environment – Brexit – are dramatic.
Diligent Board Collaboration Software Keeps Board of Directors Up-to-date
Using board portal software like Diligent Boards keeps directors up-to-date with all of the information regarding Brexit. Diligent Boards moves all of the agendas, documents, annotations and discussions of board meetings online into one intuitive, secure portal. The platform goes beyond a digital board portal to manage the full scope of a board’s moving parts — minutes, committees, contacts, voting, reporting and more.
With Diligent Boards, on-the-go directors will have more than iPad board meeting software at their fingertips. From a single sign-on (even for multiple boards), they’ll be able to work across devices (with real-time syncing) to: stay current with committee meetings and materials; communicate and annotate documents in tandem with other users and get notifications for updates; easily search archives and board resources; and complete questionnaires and submit their votes and signatures any time of the day or night, from anywhere in the world, from their smartphone, tablet or laptop.
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