What is Commercial Awareness? 📰💎

Commercial Awareness is highlighted as a key skill by employers and their clients, but what is commercial awareness?  

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Defining Commercial Awareness

“The Cambridge Business English Dictionary defines commercial awareness as, "the knowledge of how businesses make money, what customers want, and what problems there are in a particular area of business." The Cambridge Business Dictionary provides an inclusive definition, which can be broken into three parts.

Firstly, to obtain an understanding of how businesses make money, it is important to understand the business model/strategy and how an organisation uses its position in the market. For example, a number of businesses have become household names by adopting the blue ocean strategy - creating their own pathway to success by capturing an uncontested marketplace, therefore making the competition irrelevant.

The key to success for any organisation is to KYC (know your client). In order to be aware of what the consumer wants, an appreciation of how industries and businesses work is crucial. It is about knowing what's going on in the world and analysing the way it may impact your chosen sector and company. As a Solicitor, the skill of commercial awareness is demonstrated by being able to understand what makes a business or organisation successful, is it through buying or selling products or supplying services to a market and to whom? A general understanding of current themes in the business and political environment is helpful as it will aid in being able to see the bigger picture in the context of politics impacting a business. 

An Example:

An example of a current event is the Russian invasion of Ukraine on 24 February 2022. On the surface, it is understood that the war is politically motivated, with Putin declaring his goal to “liberate” Donbas, (Ukraine’s eastern regions of Luhansk and Donetsk) because Ukraine sits at what is known as the Rostov-on-Don line. The Rostov -on-Don as seen below stretches across from St. Petersburg down towards western Russia, from which it shares a border with the West. The invasion of Ukraine is a result of Russia wanting maritime security, (to protect its two warm water ports of last resort) and its control over the seas with an aim to reassert its regional influence, and seeks to do so by aiming to keep Ukraine unstable in the long term.

The European Peninsula and Russia, a map by the Geopolitical Futures portal 27

The Bigger Picture

Commercial Awareness requires delving deeper to understand the knock-on effect politics have on businesses, industry sectors and the economy as a whole. A more focused approach requires looking at what problems have arisen as a result of an event.

• Potential Russian Default on Debt

The Western nations have introduced waves of sanctions on Russia since the invasion. The most recent economic sanctions put forward by the European council today ban certain Russian banks, (VTB Bank, Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, and VEB), from the SWIFT system, (Society for Worldwide International Financial Telecommunications - a system that banks use to securely send messages to each other and through which international payments are initiated), and introduces further restrictions.

The European Council decided in particular to prohibit:

• Investment or participation or otherwise contribution to further projects co-financed by the Russian Direct Investment Fund.
• Selling, supplying, transferring or exporting euro-denominated banknotes to Russia or to any legal person, entity, or body in Russia, including the government and the central bank of Russia or for use in Russia.

The effect of the cut-off of Russian banks from SWIFT is a warning sign to international banks to enact their own sanctions on Russia to avoid being in trouble with their authorities, a message to boycott all transactions with Russian involvement. The larger banks are likely to walk away because of the regulatory obligations and potential cost of reputation and good relations with regulators. Smaller firms, on the other hand, without these worries may decide to read the rules closely and look for precision in what they may get away with.

The problem which has arisen is that Russia has international debt held by international investors and the imposed sanctions now increase the risk of Russia defaulting on that debt because of its limited access to hard currency because it is likely going to decide it does not want to pay that currency to international investors because the sanctions block it from using SWIFT to make payments.

If Russia does default it is likely to stop making payments on bonds but not consider negotiating a restructuring of the bonds and issuing new, less valuable bonds to international investors because of the sanctions. Also, the potential to lessen the risk of a Russian debt default through international investors owning credit default swaps may also not be as effective. As if Russia defaults, the credit default swap, (CDS) contracts will require an auction for the bonds to determine the CDS settlement price. However, if sanctions are introduced to make it illegal to trade Russian bonds on the secondary market then a Russian default on the debt will likely trigger both credit default swaps and prevention of the underlying bonds from being used for settlement. This will lead to confusion on if the bonds can be bought or sold and uncertainty as to what the clearing price of the auction would be. The ultimate global effect seems to be that Russia is heading towards becoming a pariah in the international financial investing world following Russian banks being cut off from SWIFT.

The greater effects of the sanctions from the European Council are likely to trigger rising inflation, and unemployment, Russia looking to crypto to prevent the use of sanctions and many western brands and businesses, (including law firms) fleeing in fear of sanctions and in solidarity of boycotting Russia, as well as problems with selling off Russian assets which are currently undesirable either to China which in the long term may affect control and influence over commodities by the West or the increase of levered global investors getting margin calls as a result of the significant loss in value of Russian stocks and the inability to sell Russian stocks in Russia because of the exchange being closed and brokers being told not to handle sales for international investors or abroad as the London Stock Exchange has also suspended trading in the depositary receipts making the entire possibility of selling Russian stocks impossible and Russian stocks uninvestable. 🥶

Why is Commercial Awareness so important?

Commercial Awareness helps provide context when delivering technical legal advice, as it puts the pieces together when dealing with the questions; WHY you are advising and HOW your advice will be used.

Lawyers, in particular, Corporate lawyers are business advisors. This means that it is important to be able to put yourself in the shoes of your client as it will help you ensure that you are able to explain all of the options that best suit your client's objectives. Law is a client service business, therefore the ultimate goal is to ensure your client's objectives are met.

Key Questions to ask when analysing a News Story

1. What is the key message of the story?
2. What does this mean for the particular sector/industry in question?
3. What does it mean for the economy?
4. Considering the Political context - in most cases, it may be appropriate to also consider the Social, Technological, Legal and Environmental factors]
5. How will this impact my client's objectives? What are the advantages and are there any potential implications? [SWOT Analysis - Strengths, Weakness, Opportunities and Threats]

How to develop your Commercial Awareness?

• Consistency is key. This means maintaining discipline and keeping a routine. This can be as little as 10 minutes a day.
• It is impossible to know everything, the best way to develop commercial awareness is to start by keeping updated on one particular practice area or industry which specifically interests you, as this will help create and maintain a habit of keeping updated.
•  It can be any area that interests you, and over time you will notice yourself become a specialist. An area I am currently looking at is the Technology Companies undertaking Mergers and Acquisitions. 
• Consider various ways of consuming information, commercial awareness is all around us. Some methods to consider are newspapers, reports produced by businesses, podcasts or even setting up a virtual stock portfolio.

Useful Resources to keep updated

Newspapers/Newsletters

•  The Financial Times
•  Morning Brew
•  Finimize
• Watson's Daily
•  The New York Times DealBook With Andrew Ross Sorkin

Podcasts - All found on Spotify

• Acquire: Every Company has a Story - By Ben Gilbert and David Rosenthal - An insight into the playbooks that built the world’s largest companies.
• Cloud 9fin - A Podcast by 9fin - discussing high-yield bonds, leveraged loans and distressed deals in the market and bringing the latest in documentation and ESG.
•  Finimize Daily Podcast - A daily 3-minute brief of the biggest global trends in Business and Finance.
•  Morgan Stanley: Thoughts on the Market - A variety of perspectives and voices within Morgan Stanley discussing recent events in the market.
•  Watson's Daily Podcast – A podcast discussing business and financial news through a commercial lens with Peter Watson
•  The Bid by Blackrock - provides an analysis of market trends and the economy.
•  The Wired Wig | Law and Technology Podcast by Annabel Pemberton - A legal tech podcast discussing the future of the legal profession and development in major sectors such as health and finance and how the law may react to new advancements in the future.
•  Thinking Commercially by Bright Network with Ben Triggs and Chris Stoakes - A monthly podcast discussing key business trends.

Books

• All you need to Know About Commercial Awareness by Christopher Stoakes - A simplified guide on how businesses work tailored to students and young professionals.
•  Blink by Malcolm Gladwell - Gladwell discusses behavioural finance and how individuals make decisions
•  Barbarians at the Gate: The fall of RJR Nabisco by Bryan Burrough and John Helyer - An insight into the Leverage Buyouts world.
• Shoe Dog: A Memoir by the Creator of Nike by Phil Knight - Nike Founder and CEO Phil Knight shares his story of how Nike was created from a start-up to the global well-known company it is now.
•   The New Tycoons: Inside the Trillion Dollar Private Equity Industry that owns everything by Jason Kelly - Kelly addresses how Private Equity firms were created, where the money comes from, where it goes and how everyday consumers play a role in the functioning of private equity firms, looking specifically at how a Private Equity firm manages companies.
•  The Smartest Guys in the Room: The amazing rise and scandalous Fall of Enron by Bethany McLean - An account of the rise of Enron to the top of the business world to its disastrous fall in the midst of an Accounting Scandal.

In Summary, the three main questions to ask when analysing a news story:

• What is the key message of the story?
•  What does it mean for the economy?
• How will this impact my clients?