In response to Standard Life's annual report, Brad MacKay discusses how businesses deal with the uncertainty posed by the referendum.
Today Standard Life, the UK’s biggest provider of self-invested pension plans and defined contribution pensions, released its annual report. In it they outlined their contingency plans if Scotland were to leave the Union. Unsurprisingly, the lead story in the media is: “Standard Life could quit Scotland” (BBC).
In their annual report, Gerry Grimstone, the Chairman of the 189 year old Scottish-based firm made the following statement:
“In September this year, the Scottish people will be voting in a referendum on Scottish independence. Your Company is strictly apolitical and it would be inappropriate for us to give any views on how people should vote. Equally, as one of the largest companies headquartered and based in Scotland, it is appropriate that we have carefully thought through the potential consequences if Scotland were to become an independent nation. We have reviewed all the information that we have available to us at the current time, and we consider that a number of material issues remain uncertain.”
The report goes on to say: “We have a long-standing policy of strict political neutrality and at no time will we advise people on how they should vote. However, we have a duty and a responsibility to understand the implications of independence for our four million UK customers, our shareholders, our people and other stakeholders in our business and take whatever action is necessary to protect their interests.”
As a globally successful firm steeped in Scottish history, it is little surprise that observers of the constitutional debate, which is beginning to heat up in Scotland and the UK, have been watching how Standard Life might react as a bell-weather for, particularly, large businesses in Scotland. But while a vitally important firm for Scotland, there are a number of issues faced by Standard Life that are shared much more widely by medium and large firms in Scotland, which shouldn’t be lost.
Based on almost 60 interviews with business leaders in medium (over 50 employees) and large (over 500 employees) firms with significant business activity in Scotland, our research suggests that Standard Life’s position is far from unique. First, business leaders are immensely proud of their Scottish links. Second, for a majority of business leaders and the firms they represent, with some notable exceptions, they are resolutely politically neutral where their business interests are concerned. Third, the primary responsibility of business leaders is to look after their customers, employees and shareholders. Where the Scottish referendum poses a challenge for businesses operating in Scotland generally, and those whose head offices are in Scotland specifically, is with the uncertainty that the referendum presents for their businesses.
Businesses gravitate towards certainty so that they can develop plans for investing and growing their businesses, and creating value for their customers and shareholders. Where the constitutional debate presents a problem for businesses is that it doesn’t just imply one or two changes, such as a change in a regulator, it implies widespread change. Change can be good, but for many businesses, widespread disruption can destroy value within the businesses. The job then of business leaders is to ensure that their three main stakeholders – their customers, employees and shareholders – are protected. And while Scottish independence poses a particular challenge to financial institutions in Scotland – because the nature of the products and services they are selling is intrinsically dependent on a common currency, tax structure and regulatory environment across the entire UK – widespread change in these areas also creates uncertainty for businesses in the energy, engineering, manufacturing, electronics and technology industries.
With a population of 5.295 million people, Scotland is much smaller than the rump UK (rUK) with an additional population of 58 million. For many medium and large businesses, they have grown to be medium and large by having unencumbered access to the entire UK market. For a majority of these firms, a 90/10 rule applies. Generally, although not exclusively, 90 percent of medium and large firm’s trade in the UK is in the rUK, and only around 10 percent is in Scotland. Creating a border between Scotland and the rUK means that, in effect, many of these businesses who have their head office operations in Scotland will be in a different jurisdiction from their customer base. This, combined with the fact that a change in jurisdictions means that businesses would have to deal with the complexity and costs of all the changes an independent Scotland would bring, means that in many cases value within these businesses might be lost due to increased costs or a loss of customers.
Every business leader will, therefore, be obliged to develop contingency plans to ensure that their business continues to operate with as little disruption as possible. In many cases,these scenarios may include restructuring businesses so that their exposure to uncertainty in Scotland – over the currency, EU membership, tax structures, regulators and so on – is reduced by moving some of their operations elsewhere.