For many businesses, Brexit appears to be a problem with no solution. Every fact is contested. Opinion is everywhere. Uncertainty is rife. This type of ambiguity is almost impossible to deal with in a professional manner. Should we prepare for the end of the world on 31st October, or will the whole thing pass us by with barely a ripple – a damp squib; a storm in a teacup?
For those who remember Y2K, when experts warned of the urgent need to upgrade computer systems to cope with the year 2000, the temptation may be to ‘wait and see’. After all, when the world awoke – bleary eyed – on 1st January 2000, the companies who had made no preparations seemed to function just as well as those who had poured millions into system changes. Why should it be any different this time?
This article will look at some of the corporate governance issues facing companies that are likely to be impacted by Brexit. It will highlight the similarities and differences between Brexit and Y2K and the practical, cost-effective ways for businesses to square the circle – making preparations for a possible No-Deal without creating a huge drain on company resources.
A common theme between Brexit and Y2K is uncertainty. In 1999 there were those who predicted nuclear explosions and food shortages, and then there were those who said that nothing would change. Brexit is less extreme, but there are still a wide variety of opinions on what the impact will be and no agreement on the probabilities of the different outcomes. However, Brexit has an added dimension of uncertainty. Everyone knew when Y2K was going to happen. There is no certainty on the timing of Brexit.
All this causes damage to businesses in two ways:
- There is a risk of future damage due to the impact of the Brexit event itself.
- There is the reality of ongoing damage due to the present uncertainty and distraction.
Is there a way for companies to reduce or avoid both present and future damage?
The approach to avoiding or mitigating both these types of damage is, of course, through pro-active Risk Management. We can estimate the costs and likelihoods of the various outcomes and then the costs of the possible responses. The right course of action becomes apparent through simple calculation. In principle, this approach has not changed since Y2K. One thing that is different, however, is an increased focus on corporate governance.
A good way to illustrate this is to look at the UK Companies Act 2006. Two of the seven Duties of Directors are to promote the success of the company and to exercise independent judgment. Essentially, I might be allowed to gamble with my own money and take risks based on opinion, but as a Director of a company, I must show that I have acted in the best interest of shareholders based on my own understanding of the situation. This makes it difficult for Directors to continue to ‘wait and see’ given that the probability of a No-Deal is not negligible, and the impact is significant. So, while Directors might personally believe that the situation will have a positive outcome, they have a duty to prepare for the worst.
Unfortunately, this is easier said than done. At KGH Customs Services, we deal with companies across the UK and Europe on a daily basis. Customs is in our DNA. As it is, we see that many companies currently have little or no knowledge of import and export formalities – still less of the internal procedures needed to manage these at scale. From a standing start, these new cross-border traders need to understand what the new requirements will be – based on their own products and transport routes – and they need to build the internal procedures to be able to meet these requirements. A customs broker can file the actual declarations, but they can only act on the information and documentation provided by their client company.
Companies will need an activation plan for their Brexit contingency – whether this will be needed on the 31st October or later. At a basic level, this means registering for Transitional Simplified Procedures for imports and finding a broker for exports. It also requires the acquisition of customs knowledge, e.g. via the UK Customs Academy funded by HMRC (www.ukcustomsacademy.co.uk).
A Standard Solution?
The big opportunity here, and a major difference from Y2K, is that the preparation of a Brexit contingency plan lends itself to a templated solution. Customs requirements are the same or similar for many products being traded between the UK and EU27. A templated solution, therefore, allows for rapid configuration and implementation for any particular company.
This now destroys any comparison with Y2K. Rather than months, or years, of effort (and millions in consultancy fees) trawling through lines of legacy code, the mitigation for the Brexit risk can be implemented in weeks. By using a templated approach, the cost-benefit calculation becomes trivial. In addition, the security of knowing your company is prepared for Brexit brings a huge intangible benefit – it allows you to turn your full focus on building your core business, regardless of what is happening in Brussels or Westminster.
The Approaching Tidal Wave
I’ll leave you with one last thought. Mark Carney, Bank of England recently commented that there are 250,000 businesses in the UK that currently export to EU27 countries and that only 100,000 had applied for an EORI Number (the first thing you need to do to prepare for Brexit). This means that there are 150,000 impacted businesses (just in the UK) who have yet to start preparations. There are a limited number of customs and supply chain specialists available to help these companies and fewer than 100 days left before 31st October. Even considering the support being given by HMRC, many risk being left behind.
But there is also opportunity. As Lars Karlsson, Managing Director KGH Global Consulting and former Director World Customs Organization, has said before the House of Commons: “It is vital for the private sector to prepare for Brexit. We have been asked to support many companies and we still have not encountered one company that is prepared enough. Companies that do prepare would be ahead of their competition.”
I’d like to thank Joe Corcoran of VNFS and my colleague Donia Hammami at KGH Customs Services for their help in preparing this article. If anyone would like to know more about a cost effective and templated response to Brexit planning, please feel free to contact us.