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Boards adjust to effects of war in Ukraine

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards.

UK directors are more optimistic about their own companies than for the fortunes of the broader economy as they come to terms with the effects of Russia’s invasion of Ukraine.

Confidence in their direct prospects are almost back to the levels seen before the war began, according to the Institute of Directors.

The organisation’s latest Directors' Economic Confidence Index showed that 48 per cent of directors were optimistic about the 12-month outlook for their firm, compared with 42 per cent in the weeks immediately after Russia’s invasion of Ukraine, and 53 per cent in February before the war began.

Investment intentions also recovered after falling in March, according to the IoD.

By contrast, confidence about the general economy remained low when compared with before the invasion, when 39 per cent were pessimistic. By March 54 per cent were pessimistic and this has since increased to 57 per cent.

Kitty Ussher, chief economist of the IoD, attributes the difference to business leaders feeling that they have less control over the economy than they do over their companies.

Directors now understand more about how companies are affected by the Ukraine war than they did in March, she said.

The divergence between the optimism that directors hold in their firms and the negative sentiment towards the economy is also evident in the US.

US directors were highly confident in their company outlook for the next six months, according to a survey by Agenda – the scores were the highest possible. But US directors’ confidence in the future state of the economy was at the lowest level in 12 months.

“The threat of a pandemic surge, the war in [Ukraine], the scarcity of supply of needed materials and the impact of inflation after so many years of not having any are all unknowns,” said one respondent to the quarterly survey.

But the person, a former head of a regional Federal Reserve bank and a director on several boards, added that business “broadly speaking is humming along”, even with the knowledge that interest rates will rise.

“It takes some courage to think things will stay on an upward course, but that's my bet — we have the tools and intelligence to deal with all of these things.”

In the UK, the IoD said that about one in 10 of its members was directly affected by the war.

For companies with sales in Russia, Ukraine or Belarus, boards will now have clarity about the extent of their exposure, Ussher said. They will be planning how to mitigate that effect, such as by cutting costs or increasing marketing efforts elsewhere.

Firms will also be moving from analysing the effects on their supply chains to taking action.

One example of this is sunflower oil, most of which is produced in Russia and Ukraine. Wholesale prices have risen by more than 1,000 per cent, according to the Chartered Institute of Procurement & Supply. It said this had prompted a range of responses by supermarkets.

In April, Sainsbury’s increased the cost of a litre of the oil, while other supermarkets limited the number of bottles customers could buy. Meanwhile the shortage has forced Iceland, another supermarket chain, to backtrack on its pledge to remove palm oil from own-brand products.

Supply chain managers will be seeking new sources of goods and materials, said John Glen, an economist at CIPS and a visiting fellow of the Cranfield School of Management.

The scale of the disruption and the nature of global supply routes means many businesses are seeking alternative suppliers at the same time, he said.

“Some UK-based companies may consider looking for suppliers closer to home to minimise the risk of further disruption, but this is not always straightforward,” Glen added. “It requires finding the necessary capability and capacity at a nearby supplier, as well as accepting a considerable cost increase as inflation rates continue to soar.”

Ussher, meanwhile, said boards would also be looking at how to pass costs on to consumers and whether to discontinue lines.

Most UK businesses will find conditions tough and there is a high risk of recession, said Paul Dales, chief UK economist at Capital Economics.

“The UK economy and its businesses aren’t as exposed to the economic effects of the war in Ukraine as countries in mainland Europe, but they are more exposed than the US economy and its businesses,” he said.

Energy-intensive sectors such as paper, metals and chemical manufacturing are the most directly exposed to the Ukraine war, but services businesses are also likely to suffer as households cut back on non-essential items, such as trips to restaurants and cinemas, as well as subscriptions.

This article is based on a piece written by Jack Buehrer for Agenda.

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