Brexit, Uncertainty and Values at Risk – Five Risk Management Lessons

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After nearly three years of negotiations, Brexit is proving a seemingly intractable problem, with all routes out of the EU looking costly for the UK. With emotions running high, opinions polarised, and reasoned argument often elusive, maybe a risk management perspective can offer some useful insights, suggests Professor Anette Mikes (HEC Lausanne, UNIL).

5 min read

Anette Mikes was a professor of Accounting, Control, and Risk Management at HEC Lausanne until 2019. She is driven by a passion to improve our ability to understand and manage pluralistic risk and disaster situations.

In their 2018 polemic, Saving Britain, the authors Andrew Adonis and Will Hutton ponder Britain’s tortuous path out of the European Union asking: “Is Britain really going to make itself meaner, smaller and poorer?” The 29th of March 2019 has passed by with the UK still an EU member, but Brexit day is merely postponed. The uncertainty and risks associated with Brexit remain. Company investment in the UK is dwindling – continuing its longest decline since 2009. The Bank of England anticipates tens of thousands of lost jobs in financial services, thousands more are moving abroad, as at Bombardier and Nissan.

But while many commentators do not believe that a Brexit dividend will materialize, those who see Brexit as an opportunity to regain lost national sovereignty view attempts to minimize the UK’s separation from Europe, revoke Article 50, or rerun the 2016 Referendum as a betrayal of democracy.

Conspicuous by their absence from this argument, however – as the economist Paul Collier observed – are the voices of pragmatic non-ideologues. My field of expertise is risk management, a pragmatic discipline where even if ideology may determine the motivation to take a particular risk, it should not affect the assessment of possible risks. Brexit is clearly a monumental case of risk management (or the lack of it). It is appropriate, therefore, to offer some insights from a risk management perspective to all those embroiled in the frustrating, labyrinthine complexity of Brexit.

Five risk-management informed lessons

#1: When historic precedent is missing, forecasting is suspect

There have been many contrasting forecasts about the impact of Brexit on the UK economy. A forecast, though, is supposed to be an attempt to detect in past events a trajectory than can be plausibly extended into the future. When it comes to Brexit, there is no such past trajectory. No developed country has ever left a trade bloc, let alone left in a disorderly fashion. Advocates of “no-deal” argue that leaving the EU on WTO terms will cause little disruption for the UK as WTO rules provide a safety net. Others point out that WTO rules offer no clear guidance for some key sectors of the economy.

A risk management approach, given the unprecedented nature of Brexit, would be to game alternatives, using scenario planning techniques. Imagining alternative best-case and worst-case futures enables proactive steps to be taken to mitigate the impact of, or take advantage of likely scenarios.

#2: Prepare for the worst-case scenario

Uncertainty may create opportunity, but sometimes there is no upside. The UK government’s own impact assessment for a no-deal Brexit reveals that the UK economy would be 6.3% to 9% smaller after 15 years (compared to business-as-usual). Wales (-8.1%), Scotland (-8%), Northern Ireland (-9.1%) and the northeast of England (-10.5 %) would be most badly affected. Hardest hit, are some of the strongest leave areas such as the northeast; an impact that may well accentuate the UK’s north-south divide and erode the stability of British society.

A risk management approach would be to apply the Precautionary Principle – do not proceed when the risk of damage is greater than people are willing to tolerate. Or, at the very least, to press pause and consider alternatives.

#3: Beware of the natural human bias to discount risks

Research shows that people have a built-in “optimism bias” assuming the worst will not happen, but if it does they will cope. The effect is more powerful if someone is committed to or invested in a particular course of action. Instead of mitigating risk we tend to compound it, ploughing on regardless. However, as many man-made catastrophes show, from the sub-prime fueled financial crash to Deepwater Horizon, there is usually a period of time during which disaster can be averted. The UK government could still take advantage of that “recovery window”.

#4: Generate more options than you think you have

When making consequential, history-changing decisions, gut instinct is probably not the optimum approach. Better to brainstorm more options than seem necessary or available. With Brexit the UK parliament have done that to some extent through the indicative voting process. Revoking Article 50 and waiting to see how EU elections affect the EU enterprise is another possibility.

#5: Recognize the values at risk and make the necessary trade-offs with eyes open

Every consequential decision has a moral component. Many argue that Brexit is a protest by a proportion of the UK population that feels socially and economically “left behind” and abandoned. A number of academics also contend that the current form of capitalism in Britain has become socially toxic and needs reforming to restore its legitimacy. For those adopting this view, addressing the root causes of the disaffection that led to Brexit, or reforming capitalism, would be very difficult, if not impossible, in the aftermath of an economically damaging Brexit.

It is important to acknowledge the moral dimension of Brexit. Risk management refers to “values at risk”. What is the core value at risk in Brexit? When Theresa May became Prime Minister, she cited social values such as compassion and fairness as necessary for ensuring that Britain becomes “a country that works for everyone”. Yet, at the same time, the UK government acknowledges that Brexit in any form will “make Britain worse off”.

For some, freedom from EU control is a value worth paying an economic price for and soft versions of Brexit that threaten this value are unacceptable. However (aside from considerations about whether “getting back control” is truly attainable in a globalized world), this value must be set against the government’s stated value – the fairness of UK society, and perhaps the survival of the Union, as it is clearly at risk given the threat to economic prosperity of no-deal crash-out or bad Brexit deal.

In summary, a risk management approach to the Brexit conundrum might easily consider Brexit – certainly a no-deal Brexit – as an intolerable and unnecessary risk to the values of both the UK government and those who voted for Brexit. Under political pressure Theresa May’s focus has shifted from creating a more compassionate and fair society “that works for all”, to delivering Brexit for Brexit’s sake – the fulfillment of a contract rather than a worthy ambition. But perhaps it is not too late for the UK government to be pragmatic in the service of an ideal and return to that initial value it strived to uphold. As the writer George Bernard Shaw said: “Those who cannot change their mind cannot change anything”.

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