This article is part of the FERMA/AIRMIC joint Brexit Newsletter which is designed to give risk professionals unique insight into Brexit related risks and mitigation strategies.
If Brexit teaches us one thing, it is that understanding social forces is vital for tackling political risk. The causes of Brexit have been simmering away for many years but few in the business communities spotted the warning signs. These patterns are not unique to the UK, and there are lessons to be learnt for risk professionals in all countries, argues John Ludlow, Airmic CEO.
Amid all the Brexit noise, the political manoeuvring and the extraordinary uncertainty about the future, it can be easy to lose sight of why and how Britain got to this point in the first place. Why, on 23 June 2016, did the UK choose to leave the European Union, and why has the subsequent process been so bitterly divisive in a country known for stability and democratic ideals?
And the answers to these questions matter. They matter for risk professionals, not just in the UK but across all of Europe, because they tell us something more profound about political risk in the current environment. Enterprise risk management means being aware of the interplay between different forces and how they might impact upon your organisation, and to that end Brexit has sobering lessons for all in the risk community, regardless of where you operate.
Brexit began decades ago
It is very easy to blame the Brexit referendum result on a widespread mistrust of the EU within the UK. It is true that Britain has always been uncomfortable with its position in Europe. Many dislike the lack of control over laws and borders, and the European system is viewed as undemocratic, costly and bureaucratic. Domestic politicians have played on this for years, blaming Europe for local problems and failing to champion the benefits of membership.
But this is only part of the story. There has been a growing disconnect between the ruling and business classes and the mass population for years. The boom years of the eighties and nineties created a wealth explosion, centred largely on the capital. Many regional communities did not feel the benefits, or worse, felt left behind, for example by being priced out of the housing market.
When the financial crisis struck in 2008, large banks and other high profile financial services – which many blamed for causing the crisis – were bailed out by politicians, leaving the social services available to ordinary people to bear the brunt of the subsequent austerity cuts. This may be an oversimplification but it is how it was perceived – and that is what matters.
This left an environment that was ripe for populism; one where anti-immigrant and anti-EU sentiment was easy to play on. Two statistics from the recent Edelman Trust Barometer showed that six in 10 Britons believe government doesn’t listen to “people like them” and that 61 per cent feel their views are not represented. So for many, Brexit represented a chance to voice political discontent. It was a promise of change, even if they didn’t know what that change would look like.
But the main point is that Brexit did not emerge out of nowhere; the causes had been simmering for years, if not decades. These patterns are not unique to the UK, even if we have the most visible manifestation of them. Many analysts believe that the election of Donald Trump the same year was part of the same trend, for example. And in Europe, populist sentiment simmers below the surface in several countries, as currently demonstrated by the “Yellow Vest” protesters in France.
Lessons for the risk and business communities
As businesses and the risk community, how can we learn from this? First, we all have a responsibility to ensure we have a finger on the pulse of the social and political sentiment of the environments in which we operate. As risk professionals, we talk about horizon scanning; we must ensure this isn’t just focused purely on specific risks, but also broader social movements.
In the UK, the business community as a whole was guilty of operating in a London-centric bubble, focused on the City of London which prospered in the boom years, and was (relatively) sheltered from the subsequent austerity. The warning signs were there to be had, but almost no-one saw Brexit coming – the belief that economic sense would overrule political sentiment made the business community out of touch.
The second lesson comes back to a much broader point about responsible business. Big business has to work for everyone in society, not just for ethical reasons but also because individuals, communities and small enterprises are the foundations upon which economies are built. Most people I speak to think that responsible business is a good idea, but how many people actually take action?
Finally, I would like to end on a positive note. Whatever the outcome of the Brexit negotiations, the UK has changed forever – Brexit represents a fundamental shift in its political and economic functioning. Whatever happens now, we will return to the fact that there is huge disillusionment in the political system. Far too many people feel they are not represented, and there is a vacuum in the centre ground.
But while there may be one almighty crisis for the UK to get through first, we will come through. Britain has a track record of being adaptable and reinventing itself, and I believe we can do it again. For all our traditional institutions we have always excelled in innovation, creativity and agility. And regardless of Brexit, some things won’t change: unrivalled expertise in insurance, global leadership in science, world-class universities, a thriving cultural and arts scene, a strategically important timezone, the English language. We will need to find a new identity in the world, but we will get there.
This article is based on a speech given by John Ludlow at ANRA’s annual general meeting in Milan on 4 April.
Read related articles from the FERMA-Airmic Brexit newsletter: