30 aug 2022
Board Leadership Interview: Lord Jim O'Neill
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We speak to Lord Jim O’Neill, British economist and member of the House of Lords, about the prospect of a recession and what UK boards should do to prepare.
What is the likelihood of a recession?
Lord Jim O'Neill: “Much of the business world and leading media are talking about a forthcoming recession in a way that is not familiar. Normally, recessions aren’t so forecastable – they usually come as a surprise, which is why they’re so devastating. It raises the possibility that we may not end up in one.
On the one hand, it is probably a good thing that businesses and individuals are preparing for an economic downturn.
Since the 2008 crisis, a lot has been made of the uncertainty in the world, and for people to be aware of it is no bad thing.
But on the other hand, it’s not impossible that preparing for a recession actually prompts said recession. Reducing inventories, preparing for staff layoffs etc. tends to weaken the economy, especially if everyone is doing it.
The problem is, we live in a 24/7 world where the media bombards everyone with the idea of a recession. Given this, you might think inflation is going to go up forever. But commodity prices have fallen from their peak and if this trend continues, inflation may go down. We may therefore be through the worst of it by early next year."
What should UK company boards be doing to prepare for recession?
Lord Jim O'Neill: "It depends on the severity. A recession is defined by two quarters of negative growth, and to some degree, you have to ask ‘so what?’ What’s the big deal about a modest slow down? But if we have the worst of all forces coming together, inflation continues to rise, we have another wave of deadly Coronavirus etc. then it’s difficult for boards to prepare.
I’ve become a fan of profit with purpose, the idea of businesses making money while having a genuine impact within their sector.
Within the context of preparing for a recession, boards, CEOs, and CFOs need to think about the DNA of their business and what exactly it does. They need to focus on the medium to long-term view, and not overly obsess about the short-term.
Rather than continuously playing the game of satisfying shareholders, they should ask themselves whether their industry has long-term viability and if their business has an edge within it. If the answer to this is ‘it doesn’t have an edge’ then they should probably close the business down. It’s an incredibly difficult thing to do, but it doesn’t make sense to keep relying on shareholder capital just to get through to the other side.
If the company does have an edge, its board should ensure it has access to credit loans from financial supporters before the trouble happens. This is particularly important for smaller businesses and start-ups. Some of the best early-stage companies I’ve worked with have tried very hard to raise money to see them though for the next two to three years. The same strategy is applicable to larger organisations."
Does this call for a different type of board member?
Lord Jim O'Neill: "This might be cavalier, but it seems to me a lot of company boards are there to do box-ticking. Rarely are they asking the tough questions about what their business is there to do.
To me, being a non-exec on a publicly quoted company has always seemed like a poisoned chalice. Often, it seems that all they’re there for is to give some kind of business credibility and stamp of approval, while not actually having access to material which would help the business.
So this comes back to making profit with purpose. I would encourage boards to become more diverse, and not just in the typical approaches to diversity but also in intellectual diversity. This will truly help them test the robustness of their business."
If you would like to discuss the themes in this article, or your organisational needs, please do get in touch with us here or your local Odgers Berndtson contact.
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