Companies in our survey (which took place in January, prior to events involving troubled investment bank, Bear Stearns) largely view the impact of current financial market instability with realism. A significant majority of respondents expect a somewhat negative influence on short-term business confidence, and 60% on long-term business confidence. But concerns go much deeper within the financial services sector. Here, 45% expect the effect on business confidence in the short term to be highly adverse, and more than one quarter believe this will persist over the long term. Just over half of business leaders overall think that demand for their products and services will fall as a result of the situation, and that market instability will have a real effect on their ability to execute business strategy.
The credit crunch: where liabilities might emerge
Unsurprisingly, a significant proportion of businesses everywhere expect to reduce debt and spend less. The specifics depend on business size, with the squeeze affecting small companies far more than large ones – perhaps because they do not have the strength of balance sheet or access to capital markets on which their larger competitors are able to draw. Smaller businesses are twice as likely to reduce their levels of debt (54% of small organisations plan to do so, compared with 26% of larger companies), while the favoured strategy among bigger businesses is simply to refinance, and to allocate greater resources towards improved communications with stakeholders and customers. As a result of all this, three-quarters expect relations with financing banks to become strained as they scrutinise companies’ books more carefully or withhold credit. 61% expect tension with shareholders to emerge as they become frustrated by the lack of growth resulting from these capital constraints and the impact on share prices. Indeed, 54% of those surveyed expect an adverse impact on their share prices as a result of the credit crunch.
The outlook so far
Given that many business leaders expect an adverse impact on share price and shareholder relations, it is likely that corporate litigation will increase. Indeed, two in three business leaders believe that the scale of liability claims from the credit crunch will exceed those arising from the dotcom crash, while four in five think that it will increase the chances that individual company directors will become targets of lawsuits.
Within the financial services industry, these ratios are at their highest. At 64% of financial companies, directors feel more exposed to liability issues than they did three years ago, compared with the survey average of 49%.
The full impact of the current instability will clearly take time to play out. At the time of publication, there have been few bankruptcies of large institutions, although the near collapse in March of investment bank Bear Stearns may mark the tipping point. On March 18, US law firm Coughlin Stoia filed a shareholder claim against Bear Stearns and its outgoing management, while in the UK, Northern Rock investors have embarked on a similar process against the government.
Businesses can, however, go some way towards assessing the extent of these risks, by monitoring existing lawsuits, ensuring their lawyers are aware of the latest trends and regulatory issues, and by improving stakeholder communications. In times of economic uncertainty, investor and customer relations become especially important not only to reduce the risk of litigation but also to deter stakeholders from taking their investment and custom elsewhere.
