These dos and don’ts aid governance during trade turmoil
Corporate governance and trade policies enacted by the federal government are colliding as new tariffs imposed by the Trump administration have company boards dealing with issues they haven’t encountered in decades.
Trump’s tariff rollout is dramatically altering the business environment by ending a long period of low-tariff trade that began with the implementation of the North American Free Trade Agreement in 1994.
Tariffs are roiling supply chains, increasing costs and creating pricing quandaries for companies in many industries. The uncertainty associated with the administration’s constantly changing tariff plans has made it difficult for company leaders to make short- and long-term plans.
As the body charged with oversight of companies’ financial well-being, boards have a responsibility to ensure that management teams examine tariff-related volatility with the appropriate urgency. Grant Thornton Business Consulting Principal Jonathan Eaton discussed these issues with board members recently while preparing for a National Association of Corporate Directors presentation.
During a recent Grant Thornton webcast on navigating tariff uncertainty, Eaton said boards are asking management to describe the frequency of its scenario planning activities, which scenarios are being defined and considered, and how management is optimizing its strategy based on those scenarios.
Here are some dos and don’ts to help boards provide steady governance over organizations’ responses to the imposition of tariffs.
Do make sure management has the right tariff strategy
Boards should verify that management has a comprehensive strategy for managing tariffs that has been properly vetted and communicated throughout the organization. The litmus test for success is how well key stakeholders, employees and shareholders understand the strategy.
This strategy is so crucial that it demands significant attention from the board, which should challenge management to:
- Articulate the alternatives that were considered
- Present the results of their analysis of those alternatives
- Explain why they chose the tariff strategy they ultimately adopted
Boards should also pressure-test the effectiveness of the chosen strategy by questioning the management assumptions underlying the strategy.
Don’t make tariff oversight a one-time occurrence
Boards need to have management explain the metrics that will define the success of the tariff strategy — and how those metrics will be proactively tracked.
Boards should ask management about its process for ongoing analysis of the tariff strategy and how course corrections will be made if needed. Proper oversight also requires establishing a cadence for management for ongoing analysis and presentation of findings and recommendations to ensure business resilience related to tariffs.
Do urge management to conduct frequent scenario planning
The uncertainty caused by the administration’s frequently shifting tariff pronouncements requires almost constant attention to scenario planning. Eaton compares these activities to the tabletop exercises that are common in risk management business continuity and business resilience planning.
“You identify the scenarios and the optionality, and you come to understand what’s easy to change and which actions require extensive planning,” he said. “You need to consider the pros and cons of each action and define the financial implications.”
Where appropriate, the options in scenario planning might include alternative supply chain strategies, new pricing options, and even facility relocation — and the tax implications of any move should be scrutinized. Before approving a strategy as expensive and time-consuming as facility relocation, though, management and boards need to do a careful appraisal of how long they expect tariffs to be in force.
Don’t let management get paralyzed by uncertainty
Because tariff news is changing so rapidly, Grant Thornton CFO Advisory National Managing Principal Paul Melville said some company leaders are focusing so intently on scenario planning that there’s no time to actually run the business.
“The finance function may be running so many different scenarios that focusing on some of the other challenges in front of them may be difficult given the resource constraints that exist within the CFO environment,” Melville said during a recent interview.
Boards need to make sure that management has the staffing it needs to manage the day-to-day activities despite the chaotic forecasting environment. Tariffs can have limited effects on some business fundamentals, including digital transformation, cybersecurity, non-tariff compliance activities, domestic service-based work, and customer service endeavors. Boards should verify that management isn’t losing focus on these areas.
Do ensure that management has a process in place to ensure compliance with tariff requirements
Failing to comply with tariff requirements can result in heavy fines. To reduce this risk, boards need to make sure that management has processes in place for vigilant monitoring of updates from trade authorities such as the U.S. Customs and Border Protection Agency.
In addition, processes should be in place to thoroughly review tariff classifications for all of a company’s products. Some companies may consider adjusting their invoicing to show customers the effect tariffs are having on prices. Because tariffs can significantly complicate transfer pricing, boards need to make sure that management is consulting with appropriate tax specialists to determine the best strategy for handling these challenges.
Don’t neglect to consider tariff implications for M&A opportunities
Tariffs can make it more difficult to predict future costs and performance related to historical results. Grant Thornton has seen some deals go on pause because of tariff uncertainty. In other situations, more diligence is being sought.
“We’re seeing more businesses with live M&A deals in the tariff-impacted industries have a slowdown between the letter-of-intent phase and the close to see, ‘Can we get more information?’” said Grant Thornton Transaction Advisory Principal Eric Young. “‘Can we do further diligence to understand the impact of tariffs on the target acquisition?’”
But the right deal also can enhance a company’s ability to respond to the challenges that tariffs create.
An increase in scale can give a company leverage to renegotiate with vendors on more favorable terms — a critical advantage at a time when tariffs have thrown supply chains into chaos. But be aware that tariffs add complexity to the due diligence process, as new details will be needed to fully understand how tariffs affect an acquisition target’s costs and a deal’s profit potential.
Do make sure management plans for the broader economic implications of tariffs
It’s a mistake to limit planning for tariffs to the direct impacts they will have on your business, such as supply chain costs. Boards should make sure that management also is considering the potential for tariffs to affect inflation and interest rates — and by extension, consumer behavior.
Management should also evaluate the impact of tariffs on currency. But here’s where it gets tricky. It was expected that U.S. tariffs not met with retaliatory tariffs would strengthen the dollar, which could benefit U.S. importers but harm U.S. exporters. However, in the immediate aftermath of Trump’s April 2 “Liberation Day” tariff announcement, the value of the dollar tumbled.
If this trend continues, companies need to consider currency impacts on import costs and inflation. In addition, whether the dollar weakens further or bounces back, management at organizations with international operations needs to evaluate the currency effects on financial reporting. Currency fluctuations also affect taxes, and boards should make sure management’s tax strategy includes capital deployment plans that appropriately anticipate the effects of exchange rate changes on their tax liabilities.
The effects and magnitude of all these factors can change if other countries enact retaliatory tariffs. This convergence of uncertain factors makes forecasting even more difficult — which is why boards need to closely monitor the frequency of management’s scenario planning.
“When there’s great uncertainty, there’s a lot of risk,” said David Sites, National Managing Principal for Grant Thornton’s Washington National Tax Office and International Tax Solutions. “Risk rewards people who deal with risk well.”
Don’t miss opportunities to turn tariffs into a competitive advantage
When economic conditions turn sour, companies that make the best adjustments often move ahead of their competitors, grabbing market share and developing brand loyalty with long-term staying power.
The opportunities to do this will be different for each company, but boards need to ask management how it plans to turn the tariff difficulties into an advantage. Maybe your company developed industry-leading flexible supply chain practices during the COVID-19 pandemic that can help you succeed while others struggle. Perhaps you are better equipped than your competitors to improve the quality of your products to justify the higher prices you might need to charge.
Whatever your advantage is, boards should encourage management to lean into it at this time.
Contacts:
David E. Sites
National Managing Principal,
Washington National Tax Office and International Tax Solutions
Grant Thornton Advisors LLC
David leads the firm's International Tax practice, which focuses on global tax planning, cross border merger and acquisition structuring, and working with global organizations in a variety of other international tax areas.
Washington DC, Washington DC
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