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Where Does The CFO Go Now?

CFOs failed to prepare for a Brexit, and it’s likely to haunt them

27Jun

In a Deloitte survey of 120 FTSE 350 CFOs for Q2 2016, 75% of the 120 FTSE 350 CFOs questioned said that they were in favor of the UK remaining in the EU. The survey also revealed that 89% believed membership helped UK export performance, 86% that it had attracted foreign direct investment, and 78% that the UK benefited from the free movement of people. Meanwhile, market intelligence group Greenwich Associates spoke to 90 large Western European corporates in the UK and continental Europe, with most executives reporting that a European exit would be a disorderly and potentially volatile process that would have a negative impact.

However, while there was a clear consensus among financial leaders that leaving the EU would have a detrimental affect on their operations, just 26% of CFOs who responded to the survey said their company has ‘made, or is in the process of making contingency plans for a possible British exit of the EU’ - 53% explicitly said that they have ‘made no such plans.’

It appears that CFOs have done one of two things. It may be that many underestimated the chances of a Brexit happening, perhaps down to blind optimism. Geoffrey Heal, professor of finance and economics at Columbia Business School, noted that ‘the general assumption in the corporate world was that this wouldn’t happen.’ Alternatively, while believing it was a bad idea, many may simply not have considered the likely impact bad enough to be worthy of a contingency plan, or believed that a wait-and-see approach would suffice. The dramatic impact on the markets on Friday - $2 trillion being knocked off globally - would suggest that such a flat-footed response is incredibly reckless.

The question now for those who have yet to develop a plan is how to navigate the stormy waters likely to continue for at least the next two years. For US companies and others outside the UK, the most pressing challenge is ensuring that they limit their exposure to potentially volatile currencies. For UK-based CFOs, the primary focus will be on liquidity. Brexit will almost certainly result in funding costs for UK corporates going up, and CFOs need to look at their spending plans and increasing sources of liquidity to ensure they have enough in reserve.

They will also need to consider the tax implications of Britain leaving the EU. Since the UK will no longer be part of EU’s Customs Union, EU customs duties will likely apply to imports from the UK and EU companies and consumers will find sourcing goods from UK companies more expensive. Conversely, it may also be that EU-based companies decide to move their base to the UK in order to continue access to the UK market.

In truth, we are entering a world of uncertainty. CFOs who had no contingency plans in place are going to have to adapt quickly if they are going to cope with the turbulence. The Deloitte survey suggests too many are ill prepared. There will likely be some opportunities and they must be quick to spot and exploit these. Those who have planned will have an advantage, those who didn’t will likely suffer as a result.

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