A combination of higher interest rates, rising inflation, reduced investment and the ongoing impact of Russia’s invasion of Ukraine are likely to lead to a significant drop in global economic growth in 2023. In-House Perspective reports on the implications of a recession for in-house teams and how they’re preparing for such an eventuality.

Recessions can have disparate effects on different industries and types of business, but all are likely to suffer a decline in sales and profits during a recession, which places a strain on finances. How companies respond to a recession and the impact on their in-house teams is also likely to differ by region, business and industry. Some customer-facing businesses, for instance, may take longer to come out of a recession due to a reduction in consumer spending and confidence. There are also certain industries more vulnerable to disruption caused by striking workers.

Companies are generally likely to make cuts to spending, which includes reducing staffing levels and implementing hiring freezes, in order to reduce costs. During an economic downturn credit access may also be reduced and bankruptcies can become more prevalent.

Consumers are already facing increased costs and inflation, and this trend provides the backdrop under which most businesses are operating. However, as of early February 2023, inflation appears to have slowed, so it’s possible that the economic reality over the course of the year may not be as severe as feared. Despite this – and the Bank of England’s more optimistic forecast that a recession in the UK, at least, will be milder than previously thought – a slump in economic growth will undoubtedly have an impact on businesses and their in-house legal teams.

‘One of the first levers to pull for a company is to limit travel and impose a hiring freeze or constraints. This requires in-house [counsel] to be more economical with their time than ever and for managers to use more remote management/online methods and to help the team, proactively, manage the workload,’ says Graham Wladimiroff, Chair of the IBA Corporate Counsel Forum and Vice President and Assistant General Counsel, Retail Branding and Information Solutions, at Avery Dennison.

On the legal side, issues can arise or intensify in regard to the company’s workforce and indeed with third parties. These issues include suppliers experiencing difficulties supplying products due to bankruptcies up the chain and customers not paying on time, which could lead to an increase in litigation. A company may take the decision to expedite planned or unplanned workforce reorganisation, leading to heightened activity on the employment law front. 

Prolonged crisis

‘Developments often associated with inflationary and strained economic times are already evident, such as large-scale redundancies and layoffs in certain sectors, and an increase in strike action across many other sectors,’ says Aoife Bradley, Secretary of the IBA Employment and Industrial Relations Law Committee and a partner at LK Shields Solicitors in Dublin. She says that there are existing issues still to contend with, including the attracting and retaining of talent, and adapting to hybrid working arrangements. ‘Pay and benefits are clearly an area of concern, and perhaps contention, for all in an inflationary economy,’ she adds.

Although a recession has not been officially announced, some of the hallmarks of an economic downturn are already being felt. In 2022, it’s estimated that the world’s ‘Big Tech’ companies – including Meta and Amazon – collectively cut over 150,000 jobs. This trend has continued into 2023, with large companies in certain sectors laying off employees in considerable numbers. Multinational investment bank Goldman Sachs also announced the loss of up to 3,200 jobs in January, representing around seven per cent of its global workforce, as part of efforts to cut costs.

The severity of the economic downturn caused by the Covid-19 pandemic led the US National Bureau of Economic Research to deem two months in spring 2020 to be a recession. For Wladimiroff, there are lessons to be learnt from the large-scale unforeseen reorganisation seen across businesses in 2020, when companies were faced with unprecedented challenges during the pandemic’s onset. Throughout the pandemic, businesses were forced to innovate. Human resources departments’ plans to cope with the reduction in business activities and the restrictions imposed by governments to stop the spread of infection included furloughing employees and other temporary measures.

‘Many businesses will have been experiencing a prolonged crisis mode since the outbreak of the Covid-19 pandemic […] and only adjusting to a “new normal” when the global economy was impacted by the Russian invasion of Ukraine in early 2022,’ adds Bradley. She says that companies ‘have had no option but to embrace change. By 2022, they were already more responsive to change than in 2020. And better placed and prepared to tackle the risk, the business uncertainty, and the economic volatility with which they were confronted’.

The great uncertainty

The pandemic has also led to several global trends, including the so-called ‘Great Resignation’, coined by US academic Dr Anthony Klotz, to refer to the significant number of employees expected to resign from their roles as a result of the pandemic. Klotz commented in 2021 that pandemic-related ‘epiphanies’ about family time, remote work, commuting and life and death, have changed the way employees think about work and would lead to a wave of voluntary resignations. This could have implications for national economies. For example, Peter Talibart, a former Co-Chair of the IBA Employment and Industrial Relations Law Committee and a partner at Seyfarth Shaw in London, highlights that in the UK, ‘there is a clear skills shortage and the Government is obviously very concerned about that’.

One in five respondents to PwC’s Global Workforce Hopes and Fears Survey 2022 were planning to quit. It seems that after an extended period of working from home with no commute, many have reassessed their work-life balance. The consultancy’s survey, of more than 52,000 workers in 44 countries and territories, also found that pay is the main factor causing people to want to change jobs.

In the wake of this revolution in the way employees see their jobs, more than ever the pressure is on companies to be flexible and fair with their employees. This can be difficult with a reduced workforce and the ongoing uncertainty caused by a difficult business environment.

Talibart draws attention to the challenge to mental resilience caused by the global pandemic. ‘Businesses and people have carried heightened stress levels now for a couple of years, so naturally the impact of economic uncertainty will present further challenges to everyone, but particularly to those whose livelihoods are under threat or who actually lose their jobs now, on top of everything else,’ he says.

Talibart explains that this can have a knock-on effect on almost everything that an employer does that could conceivably cause stress. ‘Many employers have invested heavily in mental health support systems for employees, for this reason,’ he says. ‘One of the greatest risks of harm relates to circumstances where these support systems are suddenly withdrawn because of downturn-related job losses, and in structuring separation packages, employers may have to take such support into consideration.’

Given the likely increase in employee anxiety levels in these times of uncertainty, these support systems remain important within companies. ‘In-house counsel are much more likely to be utterly overwhelmed by the issues that any downturn presents, so if your legal team is small, consider getting them the assistance that they need in order to be properly able to deal with these complex issues,’ says Talibart. ‘Even the finest lawyers only have one pair of hands.’

Forward planning

Some companies will have put together sophisticated plans ready for recessions, which will help decision-makers identify the possible areas of impact across the business and to evaluate responses. Typically, companies with multiple business areas will have formulated specific scenarios for each depending on its vulnerability to recession, as well as quantitative scenarios mapping falls in revenue and earnings before interest and taxes. The plans will link certain courses of action to each scenario as the company tries to find a balance between protecting margins in the shorter-term without damaging the long-term prospects of a business.

In the midst of a recession, in-house teams will need to become more agile and focus exclusively on the firm’s top priorities. There are new technologies available to help increase efficiency and make cost savings, such as the automation of routine tasks, but investing in new or more advanced technology will have to be balanced against the upfront costs. Companies are advised to examine processes to address inefficiencies and to impose cost control measures. Bradley explains that ‘It will be essential to capitalise on internal expertise and only engage external counsel selectively. In addition to this, ongoing support and training for in-house teams will continue to be important for risk management and regulatory purposes. Aligning with the overall objectives of the business should be a priority’.

On the flip side, some companies may be in a position to benefit from the recession. For instance, Wladimiroff suggests that well-leveraged companies may be able to take advantage of the distressed assets of third parties and lean forward on mergers and acquisitions (M&A) to acquire at a discount, in order to leverage growth later on.

Law firms may also find themselves playing a larger role in advising smaller companies in a recession. ‘Law firms acting for mid-sized and larger companies would, I think, be more involved in executing on the actions defined in response to the recession, for example on reorganisations,’ says Wladimiroff. ‘A good firm will have invested time in understanding their clients and therefore should not be surprised with (and therefore should be ready to respond at short notice to) the needs of the client. Flexibility on resources and cost in a time of need is surely to be rewarded longer term.’

ESG backsliding

Commentators raise concerns about the potential for cutbacks to affect important areas that might be deemed non-essential by businesses, such as environmental, social and governance (ESG) projects that aren’t currently mandated by regulation, but which nevertheless could have an impact on a business reputationally if neglected. ‘As a trustee of a human rights charity as well as an international employment lawyer, l do fear that things like vetting supply chains for human rights violations, especially given the (shameful) lack of real teeth in the UK’s Modern Slavery Act, will not be seen as mission critical by corporates or by overrun legal departments, and will be put on a back burner,’ Talibart says. ‘It is very easy at such times to forget about those who need us the most, or the more frightening issues like the perilous state of our planet.’ He imagines that the same applies to other sanction-free ethical or societal corporate initiatives.

KPMG’s 2022 CEO Outlook, which surveyed more than 1,300 CEOs at the world’s largest businesses about their strategies and outlook for the year ahead, found that as economic uncertainty continues, companies’ ESG ambitions are slowing. The survey found that half of respondents said they’d be pausing or reconsidering their existing or planned ESG efforts in the next six months, and 34 per cent have already done so due to the increasing economic pressure.

With the slowing of inflation and the EU, for example, showing greater resilience than expected, businesses could find themselves with greater opportunities and shorter cutbacks in 2023 than expected. That said, in any scenario in-house teams will face a multitude of pressures. The lessons learnt from the Covid-19 pandemic should be utilised to help businesses act quickly and confidently when responding to the challenges ahead.