On 24 June 2016 morning, the U.K. announced the results of the referendum on the Brexit: 51.9% of the population voted to leave the EU against 48.1% wanting to remain, while the turnout reached 72,2% (BBC Referendum Results). This vote triggered among the media, financial and European political elite a “shock”, consternation, and a host of predictions of impending doom, while markets plunged worldwide (BBC News, “Brexit: What the world’s papers say“, 24 June 2016). It also set off a series of events and dynamics still unfolding nowadays with far-ranging consequences, globally, for the future.
We shall use this real life case to further enhance our understanding of the way businesses and the corporate world relate to and especially anticipate or rather fail to foresee geopolitical and political risks, thus falling prey to uncertainties, as we discovered and started framing in “Businesses and Geopolitics: Caught up in the Whirlwinds?“. Our aim with this series is to suggest elements of answers and solutions that should help businesses to properly address these very specific “risks” and uncertainties.
These will also be integrated within the ways through which the Red (Team) Analysis Society serves the corporate sector, besides, more classically, governments, state apparatus and NGOs, be it through its open access articles (find out methodological and topical articles on the front page and through the menu), its membership only resources, its consulting or its training.
Here, using the “Brexit case”, we shall first recall the shock, its components and its timeline. Out of these elements, we shall then identify two main lessons. We shall show first that surprise was not inevitable, on the contrary, while outlining what should have been done to prevent it. Second, using too later developments, we shall point out that the shock also stemmed from confusing an ideological and partisan stance with an objective analysis. Spelling out this “inconvenient truth” will allow us, third, to specify the larger geopolitical and political perspective through which the “Brexit” must be understood, beyond a simpler “business as usual perspective”, if proper anticipation, useful to the various actors involved, chief among them businesses, is to be done. Failure to do so would only again project business actors, as well as citizens, within the geopolitical whirlwinds.
As soon as the result of the British referendum were known, globally, and immediately, according to Reuters, stock markets lost a mammoth 2 trillion USD (Herbert Lash and Edward Krudy, “World stocks tumble as Britain votes for EU exit“, 24 June 2016). Multi-faceted doom was declared. One after the other, rating agencies downgraded the U.K. note, while publishing widely negative comments stressing uncertainty, negative economic outlook, etc.: “Moody’s Investors Service changed the outlook on the UK’s long-term issuer and debt ratings to negative from stable” (Moody’s, 24 June), followed by S&P which degraded the UK by two notches to AA from AAA and Fitch to AA from AA+ (BBC News. “Ratings agencies downgrade UK credit rating after Brexit vote“, 27 June 2016).
It was the end of time, notably for businesses, which would suffer no end (e.g. among so many articles The Guardian Business, “Brexit panic wipes $2 trillion off world markets – as it happened“).
Yet, besides the panic, if you did not execute any market order, nor place any, i.e. if you were not involved into financial trading, not much was happening to you. Bloomberg stressed that “the billionaires lost 3.2 percent of their total net worth, bringing the combined sum to $3.9 trillion, according to the Bloomberg Billionaires Index” (Robert Lafranco, “World’s 400 Richest People Lose $127 Billion on Brexit: Chart“, Bloomberg, 24 June 2016). Nonetheless, this was only a rather virtual loss calculated as an evaluation of their net worth – even though billionaires may have really had to support losses, if they traded wrongly on the pound for example, as seems to have happened to Soros (Zerohedge and Bloomberg, 27 June 2016). Meanwhile, and obviously, if you traded rightly on the pound, i.e. if you had anticipated the Brexit, then you could have made fortunes, which certainly happened.
Furthermore, by 30 June, markets had rallied back, and the loss had diminished to 200 billion USD (Adam Shell, “The incredibly shrinking Brexit losses“, USA Today, 1 July 2016). The loss was wiped out for the Nasdaq by 7 July 2016 (Zerohedge). By 1 October 2016, the FTSE was “close to all-time highs” and had risen by more than 12% since “the Brexit slump” (Jeff Desjardins, “Chart: The Aftermath of the Brexit Vote“, Visual Capitalist, 30 Sept 2016).
Economically, by early September 2016, facts and figures showed that, well, doom was not happening (e.g. The Guardian Business, “UK recession fears fade as service sector rebounds – as it happened“, 5 September 2016). For the third quarter 2016, the growth figures for the U.K. economy did not show any marked negative impact or worse, recession, as predicted prior to the referendum by many institutions such as the IMF, or the Bank of England, as well as pundits, but, on the contrary, an increase by 0.5% (Jill Ward, “U.K. Growth Shows an Economy Resilient to Brexit,” Bloomberg, 27 October 2016; IMF News, 19 June 2016;Jamie Robertson, “Brexit vote may spark recession, Mark Carney warns“, BBC News, 12 May 2016, Brad Plumer, “How bad will Brexit get? Here’s what top economists are saying.” Vox, 29 June 2016).
Even more interesting, businesses have seen very varying impacts for these first post-Brexit months. We shall use three ad-hoc “surveys” following the impact of the Brexit on business, as well as perceptions on the Brexit, namely, the Telegraph “How is Brexit affecting your small business?” (Anna Isaac, 24 August 2016), the Financial Times “Brexit business impact tracker” (by Matthew Vincent, Steve Bernard and David Blood, last accessed 31 Oct 2016), and Bloomberg “Brexit: The Impact on Business“. What emerges is that those companies, across a wide range of activities, that could take advantage of the weakening of the pound triggered by the Brexit actually saw their business improve. This seems to be true even in terms of mergers and acquisitions, where, if some deals were ended or reassessed, other moved forward because of the advantage provided by the weak currency (Bloomberg). Furthermore, it would also seem that more companies could benefit from the Brexit than losing because of it: according to the Financial Times, 42 companies mentioned “financial gains”, against 13 stressing “profit warning”. Meanwhile, the threat to relocate headquarters seems so far to have remained just a threat (Bloomberg).
Thus, and somehow ironically, the fall of the pound, generated by those who were – and still are – “shocked” and feel uncertain about the future, notably banks and, more broadly, financial institutions and actors, allowed many non-financial businesses, notably those with a supply-chain input in the U.K. and exporting, to discover that the Brexit is not the end of time. On the contrary, those very companies may actually also benefit from it.
This review points out that, in the Brexit case, we were not only faced with a shock but also with wrong anticipations, for the first post-Brexit months. Was this inevitable? Was it that impossible to foresee the Brexit and its early aftermath?
A shock created by lack of anticipation and confusion about analysis
Could the Brexit have been foreseen?
Could the Brexit have been foreseen? The answer is yes, definitely. The Brexit was foreseeable and it was pretty easy to do so if one seriously considered what was at stake, the actors involved, as well as their beliefs. By taking into account such political and geopolitical components, one could identify that “terrorist attacks, including outside the U.K., are one of the most likely event to fully change the result of the referendum”, as stressed by Robert Colvile (Politico, 23 March 2016), or by former European Central Bank chief economist Otmar Issing (Reuters, 10 June 2016)(see for details Helene Lavoix, “Fighting the Islamic State’s Terrorism at Home – The Third Way”, The Red (Team) Analysis Society, 27 June 2016). Then, a simple monitoring of both terrorist attacks and election polls showed when the swing towards the Brexit took place (Lavoix, “Fighting the Islamic State’s Terrorism at Home”, Ibid). By 12 June, anyone paying seriously attention to the U.K. referendum should have seen that the Brexit was highly likely.
A wise company should have actually started making scenarios, latest when uncertainty emerged, i.e. when the European Union Referendum Bill was unveiled in the Queen’s Speech on 27 May 2015 (BBC News, EU referendum timeline: Countdown to the vote, 20 February 2016). There was ample time then to do even very detailed scenarios, which would have then allowed for monitoring the likelihood of these scenarios thanks to indicators, as we promote here, at The Red (Team) Analysis. Various flexible strategies could then have been designed, with fall back options, to handle the coming changes. Had such a strategy been implemented, there would have been no surprise, even less shock, while the scenarios – assuming they were properly built – would have forbidden the kind erroneous anticipation which spread.
Lesson 1: If you don’t even try to anticipate, then you can only be surprised
Yet, even though the Brexit could have been foreseen, it seems, according to PwC (PricewaterhouseCoopers, auditing and corporate advisory firm), that it is only – amazingly – in early October 2016, that businesses started overcoming their shock and planning for change:
“I think we are through the initial shock. We’re seeing companies getting back to business, working through scenarios, impacts and the opportunities, which, when so much uncertainty remains, is essential,” said Bob Moritz, Chairman of PwC International (reported by Anjuli Davies, “PwC says companies now over initial Brexit shock“, Reuters, 4 October 2016)
Besides all the reasons previously identified, which explain the absence of proper anticipation, we may however wonder if something else also did not happen, as we shall now suggest.
Lesson 2: Strategic foresight and warning demands objective scenarios not ideologically-biased pseudo analysis
As we saw above, doom did not strike and, progressively, less than dramatic results emerged as far as the economy and businesses where concerned, contrary to most “predictions”. Yet, increasingly one could also read renewed warnings about longer term British prospects, for example from the IMF (Szu Ping Chan, “IMF rows back on Brexit warnings as UK poised to become fastest growing G7 economy“, The Telegraph, 4 Oct 2016; IMF, World Economic Outlook (WEO), Oct 2016), or from the banking sector (e.g. Conrad De Aenlle, “‘Brexit’ Blurs the European Investment Outlook“, The New York Times, 14 Oct 2016). The novel perspective promoted is well summarized by consulting firm Dun and Bradstreet, focusing mainly on the financial sectors, as “Brexit: Short-Term Gain for Long-Term Pain?” (Daniele Fraietta, 1 Nov 2016). Meanwhile, Moody threatened the U.K. with a new downgrade (The Economic Times, 2 Nov 2016).
We shall note here, that these new statements are made by and concern mainly large financial actors, and bodies, which are not innocent bystanders but, on the contrary, usually (notably lately thanks to deregulation and bail out) influent stakeholders in the way a country is governed. The IMF is not either an impartial actor, but part of the institutions of the so-called Washington Consensus, upholding a certain type of world order (e.g. Bull, H. and A. Watson, The Expansion of International Society, ed., Oxford: Clarendon Press: 1984; Center for International Development at Harvard University, “Washington Consensus“, 2003). This is not to say that only large financial interests, such as hedge and pension funds or banks, promoted the “Remain” vote, the picture is far more complex, but they certainly were and are one of the main stakeholder of the referendum vote and of the way its results will be implemented – or not. The way the Pound Sterling (see figure below – Bloomberg Tweet) rebounded on the 3 November 2016 announcement of the High Court ruling against the government, regarding the necessity to obtain a vote in Parliament to start the formal process of exit from the European Union is a strong indication of the stance of the financial world (R (Miller) -V- Secretary of State for Exiting the European Union, Case No. CO/3809/2016 and CO/3281/2016, 03/11/2016, Courts and Tribunals Judiciary; BBC News, Brexit court defeat for UK government, 3 Nov 2016).
Hence, the latest approach to the Brexit and those promoting it, help us understand what also contributed to the initial “shock” and erroneous anticipation. It is highly likely that the understanding of the Brexit referendum dynamics, as well as the predictions surrounding it, were not analyses that strove to be objective but, on the contrary, conscious or unconscious efforts to convince others of the validity of their view-point in order to make them act in a specific way. For those actors that were “shocked”, the aim was initially to prompt as many British voters as possible to vote “Remain”; after the referendum, for some among these actors, the objective was to try making sure the results of the referendum would not be implemented. Then, most of the previously shocked actors, most probably, are looking to either stop the exit from the European Union, or to obtain conditions favourable to their interests, if the exit cannot be avoided.
Now, the primary and probably most important rule when doing scenario analysis, indeed for all analysis, is objectivity. Already, Max Weber, speaking in 1918, strongly stressed that personal opinions and political stand did not belong to science, academic endeavour and the classroom:
“To take a practical political stand is one thing, and to analyze political structures and party positions is another. When speaking in a political meeting about democracy, one does not hide one’s personal standpoint; indeed, to come out clearly and take a stand is one’s damned duty. The words one uses in such a meeting are not means of scientific analysis but means of canvassing votes and winning over others. They are not plowshares to loosen the soil of contemplative thought; they are swords against the enemies: such words are weapons. It would be an outrage, however, to use words in this fashion in a lecture or in the lecture-room. …. the prophet and the demagogue do not belong on the academic platform. ” (Science as a vocation, pp.10-11, From Max Weber: Essays in Sociology, 1946).
Weber’s demonstration, it would be too long to reproduce here, is not only valid for science and the classroom, but also for anticipation in particular and all analysis in general. Struggling against all types of biases is indeed one of the major challenges foresight and warning analysts face. It is a very difficult exercise at various levels, which leads intelligence services, for example, to emphasise as a motto that one should “speak truth to power”.
If we now look again at most texts and speeches – including media news item – published before or after the Brexit, and accept first that they may be either objective analysis or political stances and enticement towards one stand or another – “Remain” or “Leave”, then we start seeing a much clearer picture of what happened. With an issue such as the Brexit, taking a political stand means convincing people that one side is right and will bring economic and political bounties, while the opposite side is wrong and will bring doom. Thus, partisans of one or the other side need to make people believe their analysis is better than the other… as well as true and thus objective. As a result, a tragic confusion starts taking place and spreads, between, on the one hand, political stance and, on the other, analysis.
We, then, have most probably two phenomena taking place. First, when actors become unaware of the difference between stand and objectivity, then they become unable to coldly and dispassionately analyse something and, as a result, surprise and shock happen. Second, in the case of the Brexit, the “Remain” camp may be seen as representing the “neo-liberal” or “ultra-liberal”, or “liberal” or “globalist” system – the label given depending, again, most often about one’s personal stance towards the issue. This system, inherited from the Washington Consensus (Ibid.), has largely ruled the world, unchallenged, since Reagan and Thatcher (e.g. Andrew Gamble, “Two Faces of Neo-liberalism“, The Neo-Liberal Revolution, ed. Richard Robison, 2006, pp 20-35; Nils Gilman, “The Twin Insurgency”, The American Interest, Volume 9, Number 6, June 15, 2014, pdf from Researchgate). Thus, its proponents believed – and still believe – in their power and continuous victory, to the point that they may also believe that their system is not a belief system but “the Truth”, which may also engender, again, an inability to carry out an objective analysis (they are prey to normative or belief-based biases). They were thus faced, with the result of the referendum on the Brexit, with a true shock, the sudden realisation that their paradigm was not “the Truth”, that something else and, most importantly, other actors, could win, and that they could lose.
Note that, even from the point of view of a partisan endeavour, being confused about the difference between stand and objective analysis is counter-productive, as one could miss threats and opportunities to one’s interests, and thus, as a result fail to design efficient and proper strategies. However, in our days and age of overabundant communication, citizen-journalism, blogs, social networks, etc. on the one hand, of struggling battles for notoriety and funding for media, universities and think tanks (those who would be meant to deliver objective analysis) on the other, the line between analysis and political stand and mobilisation is thin and often blurred.
The latest episode of ideological battle outlined above, as well as the 3 November 2016 court ruling against the U.K. government (ibid.), against which Prime Minister May appeals to the Supreme Court (BBC News, “Brexit: May ‘confident’ of winning Article 50 case appeal“, 4 Nov 16) emphasises that proper anticipatory analysis fully considering politics and geopolitics is more than ever needed on the Brexit, for all actors including businesses. Indeed, as the latter, as we saw, rank as highest geopolitical worrying issue “uncertain or restrictive regulatory environment” (MacKinsey Survey, May 2016), then, they must use scenarios to reduce this uncertainty because, as we shall now outline, we are presented with a complex case of uncertainty that will impact not only the U.K. regulatory environments, but also most probably the European one, while having more far-ranging and diverse impacts globally.
The Brexit, a complex series of battles in a new ideological war
As we stressed above, the Brexit cannot be understood as being “only” about the economy, or “only” about trade, or “only” about “migration”. It is not “only” about funding and supportive schemes that help smaller companies, such as those provided to Welsh businesses for example (e.g. Jobs Growth Wales funded by the European Social Fund; The Telegraph, “The impact of Brexit on small businesses…” Ibid.). It is not either “only” about large financial firms against the rest, as shows, for example, the co-claimants against the U.K. government, which are a London Fund Manager, Gina Miller, a hairdresser and a “Bremain” group of British expatriates, “People’s Challenge” (BBC News, “Brexit court case: Who is Gina Miller?“, 3 Nov 2016; Tom Sykes, “Gina Miller vs Theresa May: The Making of an Anti-Brexit Star“, The Daily Beast, 14 Oct 2-16; Bindmans News, “Concerned citizens launch “People’s Challenge” to Government on Article 50“, 4 August 2016). It is not either solely about the rise of “populist, inward-looking policies” (IMF, WEO, 4 Oct 2016: xv) or “nationalism”. The Brexit cannot either be understood solely in terms of British politics or Britain versus European Union politics. For example, should Marine Le Pen become President in France with the 2017 Presidential elections, should a “Frexit” referendum take place and a “Frexit” win, then the situation of the U.K. as regarding the Brexit, as well as its strength in terms of negotiations would be greatly impacted. As another example, European Commission (EC) President Juncker is worried about the way industries could manage to find ways to negotiate deals among themselves, thus weakening and challenging further the EC (Reuters, “Juncker warns European industry not to cut own Brexit deals“, 5 Nov 16). Furthermore, the meaning and place of Democracy – at least in the West – is also at stake here, with trade-offs being obviously made between interests and democracy. For example, we can witness in some “international elite” circles a relatively novel “anti-referendum” stance, referenda having become “anti-democratic” (sic) (personal observations of the author). Meanwhile, most probably answering to criticism related to the “non-democratic” behaviour of some “Bremainers” (see for more details “Businesses and Geopolitics…”, ibid.) the “People’s Challenges” also insist they act in the name of democracy (ibid.). Nonetheless, the Financial Times also emphasised that their co-and lead claimant, Gina Miller, “said Brexit will be “a disaster” for the UK asset management market and will trigger an “exodus” of international companies from London” (“Gina Miller: Brexit will be ‘a disaster’ for UK funds“, 8 Nov 2016).
The Brexit is all of this and more.
The “Brexit” is constituted by a series of battles – of which we have seen only the start – between evolving camps, in the making, of diverse global actors, within the context of a much larger ideological war, as we started outlining above. The stake of the war is the type of ideology or ideas that will rule either the world or parts of it, with their corollary in terms of norms and socio-political system. It is highly likely that the Chinese and Russian strategies, including notably the Chinese ‘One Belt – One Road” initiative (Obor) initiative, as well as stances towards or most of the time against them are also part of this war, making it even more complex to define, understand, and analyse in terms of anticipation.
As a result, it is only by also considering the larger and broader, from regional to global, factors, and the interactions among them, with a proper methodology allowing for the complex intertwining of factors, as we do at the Red (Team) Analysis Society, building upon and revisiting the famous structural analysis created by Arcade, Godet et al. (2009), as well as all the actors and their complex dynamics, that proper scenarios for issues as specific as overcoming regulatory uncertainty or preparing for supply-chain disruptions risk may be built, then monitored.
Moreover, because the Brexit is part of a war, and because we are in the framework of a war, then brutality and violence – taking many different guises – are to be expected, making anticipatory scenarios even more necessary. Indeed, with such high stakes, collateral damages will happen, and smaller, less powerful businesses, as well as some groups of citizens, or even larger actors, will most probably be sacrificed without much qualms.
This focus on the Brexit case study first confirms and refines what we outlined from the McKinsey survey. If geopolitical uncertainties and risks are to be harnessed, then it is crucial to at least try to do so (lesson 1). Then, if we want to help businesses face uncertainties and geopolitical risks, it is crucial to serve businesses according not only to their sector of activities, but to the characteristics of their sector of activities as a function of the issue at hand. Ideally, proper scenarios should be tailor-made according to each company, if a business wants to fully harness uncertainties and even take advantage if it.
Then, we identified new elements that must be considered and communicated in a clear enough language if businesses are to be helped in addressing geopolitical risks and uncertainties. The Brexit case study (lesson 2) points out that it is absolutely vital to carry out objective anticipatory analysis, struggling against all biases, including larger belief-based ones. It then emphasises the necessity to consider the issue at hand in all its dimensions rather than to focus too early on a very and too narrow approach. As for all foresight and anticipation, the right balance will need to be found between resources, and the necessary level of detail, which will need to vary according to the specificities of each company.
About the author: Dr Helene Lavoix, PhD Lond (International Relations), is the Director of The Red (Team) Analysis Society. She is specialised in strategic foresight and warning for national and international security issues.
Featured image by Alexas_Fotos, CC0 Public Domain, via Pixabay.
Arcade, Jacques, Godet, Michel, Meunier, Francis, and Roubelat, Fabrice, “Structural Analysis with the MICMAC Method & Actors’ Strategy with MACTOR Method,” The Millennium Project: Futures Research Methodology, Version 3.0, Ed. Jerome C. Glenn and Theodore J. 2009, Ch 11.
Weber, Max, Published as “Wissenschaft als Beruf,” Gesammlte Aufsaetze zur Wissenschaftslehre (Tubingen, 1922), pp. 524-55. Originally a speech at Munich University, 1918, published in 1919 by Duncker & Humblodt, Munich. From H.H. Gerth and C. Wright Mills (Translated and edited), From Max Weber: Essays in Sociology, pp. 129-156, New York: Oxford University Press, 1946.