Brexit and the role of the GC in business strategy
Over the coming decade, Brexit-related risk management will become a key part of most organisations’ activities. And, as a General Counsel, you can expect to play a huge role in managing these risks and implementing regulatory change in your organisation.
If it hasn’t already, this will probably mean making changes to the structure of your team and building and managing resource to ensure you’re equipped to meet your organisation’s evolving needs. If you’re still waiting to see what the final outcome of Brexit will mean for your organisation and industry sector, you could be left with a great deal to do in a very short time.
In May 2017, the Financial Times published an analysis indicating that there are at least 759 international treaties that the UK will need to negotiate with 168 countries just to replace existing EU arrangements. Of these, more than 600 have specific business or commercial implications for most organisations in the UK.
Domestically, a report published by the Institute for Government indicated that we’ll need up to 21 pieces of primary legislation to fully implement the knock-on effects of the Repeal Bill. The purpose of the Repeal Bill, (official title, the European Union (Withdrawal) Act 2018), which commenced on 26 June 2018, is to clone EU law into UK law so it can be adapted in the months and years following Brexit. The main purpose of the extra legislation will be to create, here in the UK, corresponding institutions to those of the EU. This equates roughly to a year’s worth of UK parliamentary law-making capacity.
Domestic vs EU considerations
There are people who believe that, because their business appears to be entirely domestic, they’ll be unaffected by Brexit. Wrong. If you’ve had a cup of tea or coffee today, consider how much law was in that drink – and how much of that law was national law and how much of it was EU law. We’re talking water safety, water quality, the health and safety environment through which the water came through, the pipes in your office - even European competition law that governs water utilities that are local monopolies. Think too about how much of that law was international treaties negotiated by the EU. Hidden in there are product safety and quality definitions, import and export duties and international trade treaties that allow the goods to be shipped to you in the first place.
This simple example highlights just some of the changes that Brexit will bring. They’ll be pervasive and affect businesses directly, through the people they employ and the organisations they trade with, and indirectly, through the people who those organisations themselves trade with.
To take another example, think about the device you’re reading this article on. Where was it made and how did it get to you? The Brexit environment will affect almost every step of that journey, from the factory to your office.
Another factor to take account of is that for many, Brexit was about ‘taking back control of our national legislative and regulatory agenda and our international trade treaties’. So things won’t just be different at the outset, they’ll also change more over time, creating ever more divergence. In some areas the changes the Repeal Bill will bring will be minor. One thing we do know, for example, is that the UK has already committed to keep the General Data Protection Regulations similar in UK law to those across the EU.
However, this doesn’t mean that transporting data between the EU and the UK will be frictionless.
Nor is Brexit just about the EU-UK relationship. Remember, the majority of the relationships that the UK has had with international trading organisations and bodies beyond Europe over the last 40 years have been negotiated by the EU. Now, the UK, as a non-EU member, must negotiate its own relationships with these bodies from scratch.
So, if your business does anything, directly or indirectly, with anyone anywhere other than the UK, it will be affected by Brexit.
The business problem
When we look at what our organisations do and how they do it, we need to think about the impact of law and regulation on business strategy and forward planning.
And there are major changes to our legislative framework on the way, many of which will be of uncertain duration, impact and magnitude. These changes could affect your organisation’s future plans to the extent that it needs to re-evaluate its costs, locations, trading geographies – possibly even its very financial viability.
Business planning, broadly speaking, is the process through which organisations assess a range of factors. These include people, future staffing needs, the customer base, economic conditions, taxes, tariffs, availability of access to components and raw materials and, of course, the legal and regulatory environments in which they operate.
This builds up a business ecosystem, an environment which directors can analyse and work out how their business plans and projects will work within that ecosystem. Good businesses will monitor changes in the system as well as their own performance, correcting and improving things as they go along. That way, they’re continually adapting to the environment and the challenges they face.
A big challenge for in-house lawyers is that, often, they’re not involved in planning so they’re not fully aware of what’s going on. However, for an example of how your business plans ahead, think about when the next lease-break clause on the property it occupies kicks in.
Or, ask yourself how long the biggest contractual arrangement you have with suppliers lasts for. Think about the duration of your customer contracts. And think about how long the current incentive and option plans for your staff and senior management run for. This is critical because it will tell you how far ahead these people are really planning!
And, of course, any arrangements that run past March 2019 are giving you a Brexit planning problem already..
Horizon scanning, business planning and Brexit
Legal horizon scanning, then, is an important part of the law department’s interaction with other functions. This is true both generally and in the context of Brexit.
The legal function needs to understand what legal and regulatory implications, both contractual and in terms of law change, will occur over a given period. It should use its findings to inform the organisation and help it change its plans, adapt its strategy and adjust the cost base of what it does. Be sure also to make provision for the legal resource and support you’ll need to provide that service.
The annual budget and financial cycle
The annual budget and financial cycle is one of an organisation’s most important planning activities and one that many law functions don’t properly understand or engage with. The critical point about this process is that it typically happens between two and six months before the start of the financial year it relates to. In bigger organisations, it may start earlier than that.
However, it’s vital that you inform other business units and plan yourself for things that will or may impact on the business during that next financial year. Do this early enough to enable others to act on your advice, ideally when those people are thinking about their plans, revenues, costs and other factors that will affect them.
The significance of Brexit
Brexit makes all this even more important. Many, if not most, businesses are now well into the financial year that March 2019 falls into. They’ve had to plan as best they can for Brexit day while still not being in possession of all the facts relevant to international trade, legislation, industry regulation, travel and employment. They are trying to work out what they need to do to be ready as the clock ticks down to 11.00pm on 29 March 2019.
This means you’ll necessarily be taking decisions and implementing them before you’re absolutely sure about what will happen in the future.
It’s similar to buying foreign currency ahead of time to provide exchange rate certainty. Hindsight may prove you paid the wrong price, but at least you’ve got some operational certainty to work with.
Even at this late stage, many businesses are trying to decide how late they can leave it before making a decision and taking action, while still being ready for March 2019.
In the financial services sector, many organisations realised that the longest lead times were for things like applying for regulatory licences in Europe so they can move parts of their business that need to be in the EU. As a consequence, they had to make decisions in early 2017 to be able to implement them in time.
So whatever sector you work in, identify your legal and regulatory challenges, whether they be lease-break clauses, change in operations of organisations, changing supply or customer models or regulatory licensing. Start with those with the longest lead times and assess how much pressure they’ll put on the organisation and how much time you need to make any changes.
Impact on the legal team
Of course, all this will involve a lot of work. You’ll need to understand what’s going on and decide what the main issues that need tackling, both within your department and across the wider organisation, are. You’ll need to review your contracts, familiarise yourself with break clauses and assess whether there will be a force majeure impact on you.
And the type of work involved, both in terms of volume and of character, could be very different from what you’re doing as run rate. All of a sudden you may find yourself looking at administrative law, the legislative provisions that underpin what you do, health and safety law, premises law, tariffs and duties on imports and exports and so on.
So, the resources you need, both within your team and from your external advisors, may be different from what you have now. It’ll be particularly important to work out early how to equip your department to deliver for your organisation next year. You may also need to co-opt colleagues in finance, procurement, HR and risk to help you build a plan and get management acceptance of why next year and the years after may be very different from what they’ve been to date.
… assuming there is a deal between the UK and the EU
All the points we’ve discussed above assume that the UK and EU negotiate a deal that covers trade, regulations, employment, travel and customs arrangements for imported and exported products – and much much more. However, with progress slow in the negotiations, the chances of a no-deal Brexit have risen from unthinkable to quite possible. When the 11.00pm deadline arrives on 29 March 2019, we’re leaving the EU come what may, unless all parties agree to an extension. If no deal is in place, we revert to World Trade Organization trading terms with the rest of the world. We’ll no longer be subject to regulations such as EU product safety standards and air travel standards, etc. As a result, many people are concerned that that this will result in chaos, with our trucks held up at the docks and our planes not permitted to fly – and a wide range of other nightmare scenarios.
But as with most things to do with Brexit at this stage, nobody knows for sure.
Our advice remains to plan as much as you can now so as to give yourself plenty of time to make your case for extra resource and get it in place, ready for March 2019 and beyond.
You may also find this article published in September 2018 by the Institute for Government helpful.
This article was originally adapted from video presentation by Bruce Macmillan for Thomson Reuters Practical Law. If you subscribe to Practical Law, you can log in and watch the video here.