IR Café

As Congress and the new President grapple with the economic crisis, one outcome seems certain: re-regulation of US businesses.

Regulation Redux is at hand, and investor relations people need to think about how to discuss changing regulatory risks with shareholders. No doubt, upcoming 10-Ks should address the surge in regulatory activism. CEOs should be prepared to speak plainly about the evolving environment.

With the economic cycle causing pain on a massive scale – what folks in Washington call “market failure” – politicians are in full fix-it mode. At his inauguration, President Obama voiced confidence in steering government and skepticism about leaving business to its own devices:

The question we ask today is not whether our government is too big or too small, but whether it works … Nor is the question before us whether the market is a force for good or ill. Its power to generate wealth and expand freedom is unmatched, but this crisis has reminded us that without a watchful eye, the market can spin out of control …

I think it’s fair to say the opposite of out of control is under control. The administration and Congress are looking at many sectors to bring under control. Some examples:

• Banking. Many of America’s banks have a new shareholder in Uncle Sam. And just as Carl Icahn may have a few ideas for management when he buys into your company, it’s a cinch that Barney Franks, Tim Geithner and others are going to start writing new rules for banks. Attacking executive pay and cutting dividends to a cent is just the start.
• Autos. Different bailout, same basic deal. Accepting the big bucks means making adjustments to satisfy the folks who sign the checks. Today’s announcement that Obama’s EPA may encourage stricter limits on greenhouse gases from cars and trucks points the way. My guess is the auto bailout will usher in policies that perpetuate the US industry’s uneconomical cost structure and subsidize politically correct cars.
• Healthcare. Reform, a popular campaign promise in ’08, will be very expensive if it means universal coverage. Amid many fiscal demands, the low-hanging fruit of healthcare reform in ’09 may be regulations aimed at cutting costs to consumers. We might expect, say, tougher federal negotiation on drug prices and genericization of biotech drugs. Or maybe new rules to assure “fairness” in health insurance.
• Securities markets. Amid the rush for bailouts, giant investment banks have accepted a tighter regulatory regime by converting to commercial banks. Next on the agenda is an effort to fix what many see as the SEC’s failure to prevent the meltdown of 401(k)s, implosion of Wall Street and notorious frauds exposed by the bear market. Even the Republicans last year proposed a major expansion of regulatory powers, revamping the SEC and perhaps the CFTC and Federal Reserve. A couple of likely regulatory targets: derivatives and hedge funds.
• Labor. The Employee Free Choice Act, endorsed by Obama, would change the rules for achieving union representation. If the law is enacted, labor will be able to organize workers by soliciting signatures on cards rather than submitting to secret-ballot elections. The likelihood poses a risk to companies in healthcare, manufacturing, retailing and other services.
• Energy and environment. Companies that are heavy energy users or impact the environment are accustomed to disclosure of risks on those issues. Legislative and regulatory changes will be on the watch list.
• Taxes. A weak economy puts tax increases on the back burner and tax cuts, even for business, front and center. But there is tension between a desire for stimulus and an impulse to take away business “breaks.” Risks remain, amid soaring deficits, that efforts to capture more revenue may come at the expense of investors or unpopular industries.

Obviously, I’m no expert in policy challenges for specific industries. But I do know IR people need to talk to our companies’ experts about Washington and what may be coming our way.

Feel free to offer your own comments on regulatory risks and how we should discuss them with investors. (Comments can be anonymous.)

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