No Result
View All Result
SUBSCRIBE | NO FEES, NO PAYWALLS
MANAGE MY SUBSCRIPTION
NEWSLETTER
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Featured

Brexit, Uncertainty and Values at Risk: 5 Risk Management Lessons

A Monumental Case of Risk Management (or the Lack of It)

by Anette Mikes
March 22, 2019
in Featured, Risk
brexit chess strategy concept

Risk management pioneer and corporate governance expert Anette Mikes shares her thoughts on the U.K.’s separation from the European Union. Whatever scenario comes to pass, the risks are great. Anette outlines five lessons to be learned from the ongoing Brexit predicament.

In their 2018 polemic, “Saving Britain,” senior Labour politician Andrew Adonis and the political scientist Will Hutton pondered Britain’s tortuous path out of the European Union: “Is Britain really going to make itself meaner, smaller and poorer?” The risks of the Brexit deadline are looming, while commentators argue that there is no countervailing Brexit dividend. Companies — British and otherwise — are delaying investment in the U.K. or redirecting it to less uncertain economies. Thousands of jobs are moving abroad or are disappearing due to close-downs, as at Bombardier and Nissan. The Bank of England anticipates tens of thousands of lost jobs in the financial services industry.

Some, who consider the European Union the source of all the U.K.’s ills, see Brexit as an opportunity to regain lost national sovereignty – in particular, control over immigration and trade policies. To them, trying to minimize the U.K.’s separation from Europe — or, worse, reversing the 2016 Referendum — would be a betrayal of democracy.

Conspicuous in this argument by their absence — as the economist Paul Collier observed — are the voices of pragmatic non-ideologues.

My field is risk management, a supposedly pragmatic discipline unmoved by ideology. That is, ideology will determine what risks one is willing to take, but should not determine one’s assessment of possible risks. There is no question that Brexit is a monumental case of either risk management or the lack of it. What, then, can my academic discipline offer to those embroiled in this frustrating combination of labyrinth and quicksand?

Below are five lessons for the risk management practitioner.

1. When historic precedent is missing, forecasting is suspect.

There have been many contrasting forecasts of what Brexit would do to or for the U.K. economy. The contrasts were probably at their most extreme leading up to the Referendum. A forecast is supposed to be an attempt to detect in past events a trajectory than can be plausibly extended into the future. Yet when it comes to Brexit, there is no past trajectory to trace.

As former British ambassador to the EU Ivan Rogers points out in his “9 Lessons in Brexit,” no developed country has ever left a trade bloc, let alone in a disorderly fashion. Many “no dealers” advocate that leaving the EU “on WTO terms” will cause no disruption, as the WTO rules would provide a safety net. However, as Rogers points out, the “so-called ‘WTO rules’” deliver no clear guidance in some key sectors of the economy, so again, there is little basis there for forecasting. Instead of engaging in wishful thinking, we ought to expect that a disruptive act that no one has ever tried might well cause disruption that is most hard to plan for.

That is not, in itself, a decisive argument for or against. It is a warning, however, that our knowledge of the future is very limited indeed. There is an alternative approach to forecasting under conditions of extreme uncertainty: scenario planning. Imagining “alternative futures” – best-case/worst-case scenarios – requires us to think about the various “landing places” we could end up at. As events unfold, we may learn that one scenario is more likely to manifest than others, and as its contours emerge, we may take proactive steps to mitigate its impact or take advantage of it.

2. Uncertainty does not mean you might get lucky. Sometimes there is no upside.

In business, uncertainty is what gives you a chance to win. The only reason an investor has a chance to make a lot of money is that no one knows for sure what stocks will be winners. But sometimes the uncertainty doesn’t include winning at all, just how much one is going to lose. On February 26, 2019, the U.K. government published its preparedness report on a “no-deal” Brexit, including an impact assessment. A no-deal scenario is currently expected to leave the U.K. economy 6.3 percent to 9 percent smaller after 15 years (compared to what it would have been under the business-as-usual scenario).

The worst-hit areas would be Wales (down 8.1 percent), Scotland (down 8 percent), Northern Ireland (down 9.1 percent) and the northeast of England (down 10.5 percent). The prosperous metropolitan south is notable by its absence from that list. This scenario analysis confirms one of the paradoxes of the Brexit predicament: the very people who voted for it in the greatest numbers (the northeast) would suffer the worst effects. The geographical divide that already plagues the U.K. is likely to widen further, which could seriously undermine the stability of British society. Is any Brexit outcome — even the most hopeful — worth this risk? This is a moment to exercise what we in risk management call the Precautionary Principle: If a possible outcome would cause more harm than we are willing to tolerate — that is, if there is a risk beyond our collective risk appetite — we should not proceed. At the very minimum, we need to take a rain check and come up with alternatives (see Lesson #4).

3. Beware the natural human bias to discount the worst-case scenario.

Given the possibility of an intolerable outcome, we have to take into account the faults in our own decision-making. Psychologists have long been demonstrating that human beings have a built-in “optimism bias.” In an uncertain situation, we find it is easier (and more natural) to assume that the worst can’t really happen and that, if necessary, we can ride out whatever does happen. This bias is even more powerful if we have commitments to or investments in our present course of action.

In this way, we end up incubating and nurturing a risk we otherwise might have avoided or mitigated. Indeed, we see now that many of the man-made disasters we can all remember — from Enron and subprime mortgages to Challenger and Deepwater Horizon — could well have been avoided had it not been for the overconfidence and tunnel vision of key decision-makers.

When it comes to Brexit, experts claim that the U.K. (and for that matter, many of its partners in the European Union) are woefully unprepared for a no-deal scenario. Decision-makers are still in the “recovery window,” yet they are collectively unwilling to say, “No! Back up! We can’t let this happen.” In fact, negotiators seem to prefer a strategy of “playing chicken” as they narrow the list of available options to Theresa May’s deal (which most U.K. parliamentarians find unacceptable) or no deal at all (the disruptive worst-case scenario).

4. Generate more options than you think you have.

Stephen Johnson, author of “Farsighted,” makes the case against such single-mindedness and “going with your gut” when it comes to consequential, life-altering — in this case, history-changing — decisions. He argues that one crucial tactic is to deliberately brainstorm and generate more options than one currently seems to have. Current discussion of a short Brexit delay won’t do that. A delay would buy some time, but — due to the definite deadline that would still be involved — would not substantially change the U.K.’s options or its bargaining power.

Paul Collier’s recent article in the Spectator suggests something that might increase the U.K.’s options: revoking Article 50. Collier cites Winston Churchill’s observation in “The Darkest Hour:” “you don’t reason with a tiger while your head is in its mouth.” Getting us out of the corner that the Brexit deadline has painted the U.K. into could allow time for other things to change in Britain’s favor. For example, as Collier argues, upcoming European elections could change the positions of key players. The U.K., still a member, might become able to modify the EU into an enterprise more compatible with what its citizens want or else to negotiate a well-planned and nondisastrous exit.

Sure enough, such a radical extension of the U.K.’s available options would be a huge political risk for a government whose definition of representative democracy does not allow for the scenario that over time, the electorate might change its mind. British voters, formerly keen on Brexit, might have found out crucial information that was not available to them at the time of the Referendum about the possible consequences for employment, trade and border controls. In any case, a risk-management approach would take into account that key stakeholders (in this case the electorate) might be changing their minds in the face of the emerging realities and risks of the situation. An honest national conversation of the expected risks and benefits (in light of the learnings of the last three years) and a new social contract would be needed urgently to see how far the collective risk appetite of the British public stretches.

5. Recognize the values that are at risk and make the necessary trade-offs with eyes open.

Every consequential decision has a moral component. By now, academics and most commentators agree that the Brexit vote was a “protest vote,” a “mutiny” by those who feel they are “left behind” and, worse, “abandoned” by a more fortunate half of the population.

Several academics (among them the economists Paul Collier and Colin Mayer) make the argument that the current form of capitalism in Britain is socially toxic, so much so that its survival is in question. In “The Future of Capitalism,” Collier argues that because capitalism still offers our only hope of sustainable prosperity, we need to reform it — so as to restore its widespread popular legitimacy — rather than abandoning it. That would require practicing it in a way that is not predatory to social capital; for example, sacrificing national pride and culture for the sake of economically beneficial movement of people across borders or sacrificing local economies and ways of life for the sake of “creative destruction.”

Rather, it must take a form that is compassionate and fair. Collier further makes the point that “regardless of whether we end up leaving [the EU] or remaining,” we need to address the root causes of the Brexit mutiny by restructuring our benefits system, investing massively in training, and beginning the task of rejuvenating our provincial economies. It will be hard enough, and an economically damaging Brexit would make it harder — maybe even impossible. (Not just for lack of money, but for lack of social cohesion.)

When Theresa May became prime minister, her government promised to “honour the 2016 Referendum and deliver Brexit,” while at the same time appealing to a number of social values — notably, compassion and fairness — in order to create a “society that works for all.” This would presumably address the social crisis of rising poverty, homelessness and the widespread degradation of trust and other forms of social capital. Keep in mind that, for more than a decade, UN reports have been warning that child poverty in Britain is among the worst in the developed world and that the poorest families are getting poorer, while the U.K. government itself acknowledges that Brexit in any form will “make Britain worse off.”

This begs us to rethink the moral dimension of Brexit. In the field of risk management, we speak of “values at risk.” For businesses, this means that when they make choices, they risk not only their profits, but also certain values, such as treating employees well or treating customers honestly. There is no inherent hierarchy of values; rather, a company has to decide on its own priorities and then take those into account when making decisions in which different values conflict — a very common occurrence. What is the core value at risk in Brexit?

For Brexiters, one value is their own voice in a democracy. They consider any “softening” of Britain’s stance in negotiations — any alignment with the EU — a threat to this value. But perhaps the most important value for them is freedom from EU control, particularly over immigration policies. This is a value for which even some amount of economic prosperity is worth sacrificing.

But in our globalized world, “getting back control” is illusory. No country — even the very strong (say, the U.S.) or the very isolated (say, North Korea) — has total control over its circumstances. What is primarily at risk here, then, is the fairness of U.K. society (and perhaps the survival of the U.K. as a single country). But this, in turn, depends on the prosperity of the U.K. Thus, if we re-center the discussion on this value at risk, the primary threat will appear to become not EU regulations, but a bad Brexit deal or a shambolic crash-out from the EU. Even the EU’s most onerous or absurd regulations don’t prevent the U.K. from achieving a fairer and more compassionate society. (They might complicate it, but they wouldn’t preclude it.) A serious shrinkage of the U.K. economy could inhibit it, though.

In sum, a risk management approach to the Brexit conundrum would be to see it in the light of its root cause — the crisis of capitalism in the U.K. In this light, the primary value at risk is much-needed economic reform to create a fairer and more compassionate practice of capitalism. Brexit then seems an intolerable — the more so because unnecessary — risk to the very value that motivated those who voted for it in the first place. In her first prime ministerial address, Theresa May appealed to that value, but under intense political pressure, she changed her focus to something best described as Brexit for Brexit’s sake — the fulfillment of a contract rather than of a truly worthy ambition. Perhaps it is not too late to return to that ambition — to be pragmatic in the service of an ideal. As Bernard Shaw said, “Those who cannot change their mind cannot change anything.”


This article was originally shared on LinkedIn and is republished here with the author’s permission.


Tags: Brexit
Previous Post

National College Admissions Scandal Reveals Corrupt Underbelly of College Exams and Athletic Recruitment

Next Post

Top Risks in Supply Chain & Distribution Channels: The Risk of Counterfeit Drugs

Anette Mikes

Anette Mikes

Anette Mikes is Professor of Management Control at HEC Lausanne and the 2017 Laureate of the ACA Prize, awarded by the University of St-Gallen in recognition of her research on risk management and financial governance. She joined HEC Lausanne as Professor of Management Control in August 2014. Previously, she spent seven years at Harvard Business School at the Accounting and Control Unit. She completed her Ph.D. at the London School of Economics in 2005 and worked in the City of London during 2006 and 2007, during the “calm before the storm,” conducting a research project for the Risk Advisory Panel of the British Bankers Association on the role of the Chief Risk Officer. Her work on the evolution, variation, consequences and contextual determinants of risk management has appeared in Management Accounting Research, Accounting, Organizations and Society, the Journal of Applied Corporate Finance and in the Harvard Business Review. Anette is a pioneer in the field of risk management. While at Harvard Business school, Anette partnered with Professor Robert Kaplan to launch the executive education program “Risk Management for Corporate Leaders.” She has won the prestigious David Solomons Award (“Best Paper in Management Accounting Research”) twice – in 2010 (for her article “Risk Management and Calculative Cultures”), and in 2016 (for her article “How Do Risk Managers Become Influential?”). Her research documentary, “The Kursk Submarine Rescue Mission,” about a manmade disaster, won the Most Outstanding Short Film Award at the Global Risk Forum in Davos in August 2014. This latter project underscores her interest in manmade disasters, and her current research project, “Values at Risk,” focusses on the interface between risk management, strategy and business ethics.

Related Posts

Two tightropers walk above the clouds

The Modern UK General Counsel Walks a Tightrope Between Legal and Value Creation

by Christophe Frerebeau
February 24, 2022

While global events and domestic regulation shifts continue to cause legal disruptions, UK GCs are also being asked to do...

A billboard annoucning new rules for businesses post brexit in london.

Despite Efforts at Collaboration, U.K.-E.U. Regulatory Inconsistencies Have Begun to Crop Up for Banks

by Deepali Nijhawan
October 13, 2021

While some indications have emerged of the U.K. and E.U. collaborating closely on cross-border financial regulations, post-Brexit inconsistencies have already...

black shoes on pavement with yellow arrow pointing ahead

The Top Regulatory Trends to Watch in 2021

by Rachel Woolley
February 1, 2021

Whether it’s global reforms in combatting financial crime, the impact of Brexit or the acceleration of digitalization in financial services,...

illustration of businessman standing in front of maze

An Overview of the New Central Securities Depository Regulation

by Chris Magee
December 15, 2020

Factor’s Chris Magee illuminates a new EU regulation, discussing what organizations are impacted and what they can do to meet...

Next Post
falling tablets and capsules on dark blue background

Top Risks in Supply Chain & Distribution Channels: The Risk of Counterfeit Drugs

Compliance Job Interview Q&A

Jump to a Topic

AML Anti-Bribery Anti-Corruption Artificial Intelligence (AI) Automation Banking Board of Directors Board Risk Oversight Business Continuity Planning California Consumer Privacy Act (CCPA) Code of Conduct Communications Management Corporate Culture COVID-19 Cryptocurrency Culture of Ethics Cybercrime Cyber Risk Data Analytics Data Breach Data Governance DOJ Download Due Diligence Enterprise Risk Management (ERM) ESG FCPA Enforcement Actions Financial Crime Financial Crimes Enforcement Network (FinCEN) GDPR HIPAA Know Your Customer (KYC) Machine Learning Monitoring RegTech Reputation Risk Risk Assessment SEC Social Media Risk Supply Chain Technology Third Party Risk Management Tone at the Top Training Whistleblowing
No Result
View All Result

Privacy Policy

Founded in 2010, CCI is the web’s premier global independent news source for compliance, ethics, risk and information security. 

Got a news tip? Get in touch. Want a weekly round-up in your inbox? Sign up for free. No subscription fees, no paywalls. 

Follow Us

Browse Topics:

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks Published by CCI
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • On Demand Webinars
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Well-Being
  • Whitepapers

© 2022 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe

© 2022 Corporate Compliance Insights

Welcome to CCI. This site uses cookies. Please click OK to accept. Privacy Policy
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT