The Change in Administration in the United States and Brexit and Political Uncertainty in the United Kingdom and Europe

The Change in Administration in the United States

Companies and boards are wrestling with how to prepare for the Trump administration, because the consequences of the political transition in the United States this year are unusually uncertain.  They will need to tread carefully between the risk of being unprepared and the risk of overreacting in advance.  The specifics vary widely across sectors and companies, but here are a few basic steps to consider. 

• Identify the areas of potential exposure to regulatory change or government actions.  It is tempting to start by listing the topics on which political rhetoric has focused, but the list is long (tax reform, trade policy, health insurance, financial regulation, environmental regulation…)—and in most areas it is too soon to predict what specific measures a new administration might take.  It might be wise to start instead with the company’s own profile of regulatory and governmental challenges and ask internal specialists to identify the sensitivities, think outside the box about what could happen, and call out areas where change could be sudden. 
• Identify the early signs that will show the direction of policy.  In many important areas of government policy, it is too early to know where regulators and the new administration are headed.  In some areas–tax policy, for example–everything important will turn on details that will be in play for a while yet.  But it is already time to think through the early indicators.  How key jobs are filled, how long-time staffers react, what the near-term deadlines are, what agenda emerges: these kinds of signposts could usefully be listed in advance.  For example, a board on the lookout for strategic acquisitions still cannot tell how the DOJ may change its approach, but there are some key appointments coming up that will be an early sign. 
• Look for opportunities, too.  Uncertain times demand caution, but not paralysis; and changes in the regulatory landscape or government policy usually create opportunities as well as risks. To a rare degree, policy orientation may be up for grabs and regulators may be open to a new idea, especially in a deregulatory vein.
• Review disclosures.  In the next Exchange Act report, the question will be whether to add to the risk factors.  Companies should avoid bad risk factors: generic warnings about vague threats that could apply to any company.  Instead,  well-crafted risk factors—identifying specific issues and consequences for the company—are an important inoculation against risk, and if there is a specific trend or development already in view, that may need to be addressed in MD&A. 
• Review readiness for communicating with media and investors.  There are good reasons for the board to be on its toes, and to expect management to be as well—and as numerous recent incidents show, social media are a powerful and unpredictable accelerant for media brush fires.  It is worth reviewing the company’s readiness to react quickly to news and public statements, especially about politics and government policy. It is also worth identifying business practices that could attract criticism based on new, emerging arguments and concerns at every point on the political compass.

With those steps taken, it could make sense to take a deep breath.  A few changes can happen quickly, but most require time, and not everything can change at once.  There is a risk of overreacting to the mere possibility of changes, and a risk of oversimplifying their real impact.  An uncertain environment for doing business is, unfortunately, nothing new.

Brexit and Political Uncertainty in the United Kingdom and Europe

The UK’s Brexit vote was one of 2016’s major political events. While many boards have already started to assess the longer-term implications of Brexit, we expect this to be an area of increasing focus during 2017. The UK government announced it intends to make its “Article 50” notification in March 2017, which will trigger the start of a two-year timetable for formal Brexit negotiations between the United Kingdom and European Union, with the United Kingdom automatically leaving the European Union at the end.  The United Kingdom’s ability to maintain the timetable will depend on the outcome of the United Kingdom Supreme Court’s deliberations regarding the need for parliamentary approval by passage of primary legislation in order to make the notification and the subsequent timely passage of such legislation through both houses of Parliament.

A key challenge for boards in carrying out effective Brexit planning relates to the uncertainty around the terms of the UK’s post-Brexit relationship with the European Union. It is unlikely that the full terms of that relationship will become clear during the two-year period of “divorce negotiations,” but it is hoped that the broad parameters and direction will begin to emerge during 2017, particularly once the UK government has set out its Brexit strategy (which it has committed to do prior to triggering Article 50) and the European Council has set out its position shortly thereafter.  Our recommendation is for boards to start assessing the risks and opportunities raised by Brexit based on a range of potential scenarios (which may include, for example, a best case of the United Kingdom remaining in the European Single Market and a worst case of the United Kingdom having no trade agreement with the European Union and trading pursuant to default World Trade Organization (WTO) rules) and to refine this assessment over time. Boards should stay engaged with political and regulatory processes to ensure they have access to the best available intelligence for Brexit planning and should consider engaging with governments (directly or through trade associations) on areas where their business could be significantly affected.

This uncertainty has also meant that many businesses have not begun making concrete changes to businesses or operating infrastructure in anticipation of Brexit. While this “wait and see” approach may continue to be appropriate for some businesses during 2017, those likely to be heavily impacted by Brexit (including businesses in the financial and manufacturing sectors that sell services and goods between the United Kingdom and rest of the European Union) should be cognizant of the often significant lead times for making changes—such as setting up new legal entities, obtaining new regulatory licences, leasing premises and moving staff—and may need to start planning and implementing changes during 2017.

Beyond Brexit, broad political uncertainty in Europe experienced during 2016 (culminating in the resignation of Italian Prime Minister, Matteo Renzi, in December 2016 following his defeat in Italy’s constitutional reform referendum) is expected to continue in 2017 with French presidential and German federal elections being held in May and the second half of 2017, respectively. Businesses operating in Europe will need to consider the impact of these potentially significant political changes, in addition to Brexit, into their strategic planning.

Against the backdrop of the Brexit vote, which, in the view of UK Prime Minister Theresa May, signalled popular discontent with perceived excess and irresponsible behavior in the corporate arena, the UK government launched a potentially significant consultation on corporate governance reform for UK companies. Issues addressed include options for:

• Strengthening shareholder engagement and control over, and increasing disclosure of, executive compensation;
• Strengthening the engagement of employees, customers and other non-shareholder stakeholders in the management of UK companies (although Ms. May has now backtracked from her previously announced intention of mandating employee representation on the boards of UK companies); and
• Improving corporate governance at large private companies, including whether they should be subject to the rules applicable to publicly listed companies (i.e., the UK Corporate Governance Code).