Whatever the outcome of next week’s vote in the UK on its EU membership, the country’s companies face their biggest political risk of the past 50 years or more. Yet they are very bad at reporting on it, discussing it with their shareholders or doing anything to mitigate it.
A selection of comments made by some of the UK’s largest listed companies on the topic makes the point. A British exit from the EU could have “an unpredictable effect on our business”, might “increase the level of market volatility” or “impact companies’ investment plans”. It could mean “damage to the UK economy” or be “a catalyst for . . . changes to the structure of the EU”.
If I were a shareholder in the London Stock Exchange, Lloyds Banking Group, Reckitt Benckiser or WPP, the four companies that made these comments in their latest annual reports, they would not help me assess the risks to my money. Nor would it reassure me that the company in which I have invested was doing anything very concrete to offset any negative consequences of a Brexit.
At least, though, these four companies actually mention the risk of it happening. In that they are unusual.
Looking at the 2015 annual reports of every member of the FTSE 100, only 26 — just over a quarter — mention Brexit. Even the ones that do flag it as a risk often limit themselves to vague warnings of economic uncertainty after the vote, rather than being at all specific about what it would mean for them. Global Counsel, an advisory group that analysed the 100 reports, said the quality of reporting on political risks was variable, “with an excessive tendency to report risks in a generic form that provided investors and other stakeholders with little information to evaluate their importance”.
There are some honourable exceptions. HSBC, for example, is reasonably specific about the nature of the risks a Brexit poses. “A disorderly exit,” the bank’s annual report says, “could force changes to HSBC’s operating model, affect our ability to access ECB and high-value euro payments, and affect our transaction volumes due to possible disruption to global trade flows”.
AstraZeneca, Barclays, BP and Old Mutual also get gold stars for their political risk reporting. AstraZeneca lists the risks it faces, as does Barclays, and analyses them and their effect on its business. Old Mutual separates political risks from the other principal risks it faces, and breaks these down by the different areas of the world. BP has set up a committee to identify and manage geopolitical risks, and HSBC not only has a geopolitical risk committee, but a geopolitical risk unit.
Admittedly, creating committees is all very well, but it does not necessarily mean a company gets any better at defining or actually addressing risk. It is also perhaps not that surprising that, post-crisis, three financial services groups and the deliverer of the world’s worst accidental oil spill ever are among the five names highlighted as focusing on political risk. Indeed, the majority of financial services groups, including all the major banks, have identified Brexit as a risk in their annual reports, suggesting they are taking this potentially serious problem for the sector as seriously as it deserves.
Elsewhere, though, it is not just corporate annual reports that suggest many companies are failing to recognise the risk of a Brexit and underpreparing for it. Despite the plethora of heavyweight warnings over the economic impact of a Brexit, survey after survey has found a substantial proportion of boards and executive committees have not done any contingency planning for such an eventuality. This, despite the fact that companies are legally obliged to report on the principal risks to their business.
In May, S&P said that political uncertainties — Britain’s EU referendum, inconclusive Spanish elections and continued uncertainty about Greece’s debt position — posed the greatest near-term risks to European corporates. Yet Brexit is just one of the political risks that companies either ignore, or cast a nod to, rather than address systematically and sensibly.
A Brexit would have many consequences for British companies, many of them difficult to foresee or predict. It hasn’t happened yet, and, despite the narrowing polls, still may not. But on Friday June 24, investors may well be asking for detailed assessments of what a Brexit means to companies and how they plan to respond. They must have better answers prepared.