The Economist
Business lobbyists complain that a regulatory tsunami is on its way. But some firms are embracing the proposed reforms
“WHEN people hear the word regulation, they feel stifled, delayed, and many times they believe that government is being intrusive,” said Hilda Solis, America’s labour secretary, on December 7th as she unveiled plans for 90 new regulatory initiatives to improve the lot of workers. If you doubt her word, try mentioning regulation to the boss of an American company. Then stand back and wait for the inevitable explosion.
Stifled, delayed and intruded upon are the least of the complaints you hear from America’s bosses these days. Their list of grouses includes ever-increasing regulation, stricter corporate-governance standards and the threat of higher taxes in response to the ballooning deficit. This week the Environmental Protection Agency announced that it considered carbon dioxide to be a dangerous pollutant, raising the spectre of clumsy administrative measures to reduce emissions—a prospect even more terrifying to business than the cap-and-trade scheme currently under consideration in Congress. Meanwhile, hopes of business-friendly reforms to America’s convoluted corporate-tax regime, among other things, have fallen by the wayside.
That said, bosses’ feelings about regulatory overkill are much more nuanced than excitable business lobbyists and outraged Republican politicians suggest. “The concern is pervasive but rather amorphous in the sense that different executives have very different worries,” says Joe Grundfest, a former member of the Securities and Exchange Commission (SEC) who now runs a “boot camp” at Stanford University for corporate directors. “Some fret over tax policy. Others agonise over cap-and-trade, or health-care reform. Many worry about additional corporate-governance regulations. It’s a smorgasbord of corporate neuroses out there.”
Corporate opinion on all these issues is divided. Ms Solis’s campaign on labour is a case in point. Her colleagues at the Department of Labour make it clear that they intend to be more active than their predecessors from the administration of George W. Bush, much as the Department of Justice has promised to be more aggressive in its enforcement of antitrust laws. This will surely increase the overall cost of employing people, undermining Barack Obama’s goal of creating lots of new jobs in the private sector. Yet as Ms Solis points out, the goal of her initiative is in large part to create a level playing field by obliging firms that flout the rules, thereby gaining an unfair advantage over their law-abiding peers, to shape up. Moreover, even at a time of high unemployment, plenty of bosses feel that a reduction in the number of jobs that endanger the health of those who do them would be no bad thing.
A more vigorous antitrust regime will create winners as well as losers. If done well—admittedly a big if—the result could be a more competitive economy that allows smaller, newer firms a fairer shout against sluggish monopolies. Likewise, although there have been plenty of shrill voices complaining that health-care reform will set America on the path to socialism, many business bigwigs, including Jeff Immelt of General Electric and Howard Schultz of Starbucks, have described the current health system as a drag on America’s competitiveness.
Much the same is true of climate-change legislation, currently becalmed pending health-care reform. The United States Chamber of Commerce, the most venerable of corporate lobbies, had been fierce in its denunciation of proposed cap-and-trade laws. But it has somewhat moderated its rhetoric lately, after four prominent firms (Apple, PG&E, Exelon, and PNM Resources) quit, Nike resigned from its board and another board member, Duke Energy, cut its contributions in protest. Clean-energy firms, not to mention all manner of companies that simply want more clarity about the future, are keen to see a climate bill passed.
There are even splits over the Employee Free Choice Bill, which aims to increase union membership (and reduce employees’ freedom of choice) by replacing secret ballots of workers about whether they should unionise with public ones. Despite what is generally reckoned to be the best funded corporate-lobbying effort ever seen, the Obama administration seems determined to press ahead with this legislation next year, although opponents have vowed to filibuster it in the Senate.
On top of all these changes comes the likelihood of sweeping reforms to America’s system of corporate governance. Various laws under consideration in Congress would introduce such measures as obligatory (but non-binding) votes on executive pay and golden parachutes at all public firms. Another proposal would ban executive pay of more than 100 times a firm’s average wage unless 60% of shareholders approve.
Congress is also considering requiring the separation of the roles of chairman and chief executive, annual elections for all board members and the establishment of a committee on every board to focus on risk. The SEC, meanwhile, is expected next year to adopt much-delayed rules allowing big shareholders to nominate candidates for board elections. A new rule introduced by the New York Stock Exchange will end discretionary voting by brokers who hold shares on behalf of clients; these votes have tended to be cast consistently in favour of incumbents.
A recent report by Wachtell, Lipton, Rosen & Katz, a Wall Street law firm, claims all this will “impede the ability of boards to resist pressures for short-term gain and tie their hands at a time when the need for effective board leadership is particularly acute.” It is true that ill-designed attempts to promote prudent and far-sighted management can have the opposite effect. But the report’s lead author, Martin Lipton, is an inveterate defender of management against shareholders (he invented the “poison pill” to deter takeovers in the 1980s).
In practice, corporate opinion is again divided. Several companies have voluntarily adopted “say on pay” policies. Microsoft, for example, has agreed to give shareholders a vote on pay every three years, Prudential Financial has agreed to a biennial vote and Verizon Communications, Intel, AFLAC, Apple and others have adopted an annual vote on pay policy, if not on the actual sums involved.
There is no doubt, however, that all this upheaval will create turmoil for America’s boards at a time when firms already have lots to be getting on with. And the longer the economy struggles, the more wayward politicians are likely to become.
Stifled, delayed and intruded upon are the least of the complaints you hear from America’s bosses these days. Their list of grouses includes ever-increasing regulation, stricter corporate-governance standards and the threat of higher taxes in response to the ballooning deficit. This week the Environmental Protection Agency announced that it considered carbon dioxide to be a dangerous pollutant, raising the spectre of clumsy administrative measures to reduce emissions—a prospect even more terrifying to business than the cap-and-trade scheme currently under consideration in Congress. Meanwhile, hopes of business-friendly reforms to America’s convoluted corporate-tax regime, among other things, have fallen by the wayside.
That said, bosses’ feelings about regulatory overkill are much more nuanced than excitable business lobbyists and outraged Republican politicians suggest. “The concern is pervasive but rather amorphous in the sense that different executives have very different worries,” says Joe Grundfest, a former member of the Securities and Exchange Commission (SEC) who now runs a “boot camp” at Stanford University for corporate directors. “Some fret over tax policy. Others agonise over cap-and-trade, or health-care reform. Many worry about additional corporate-governance regulations. It’s a smorgasbord of corporate neuroses out there.”
Corporate opinion on all these issues is divided. Ms Solis’s campaign on labour is a case in point. Her colleagues at the Department of Labour make it clear that they intend to be more active than their predecessors from the administration of George W. Bush, much as the Department of Justice has promised to be more aggressive in its enforcement of antitrust laws. This will surely increase the overall cost of employing people, undermining Barack Obama’s goal of creating lots of new jobs in the private sector. Yet as Ms Solis points out, the goal of her initiative is in large part to create a level playing field by obliging firms that flout the rules, thereby gaining an unfair advantage over their law-abiding peers, to shape up. Moreover, even at a time of high unemployment, plenty of bosses feel that a reduction in the number of jobs that endanger the health of those who do them would be no bad thing.
A more vigorous antitrust regime will create winners as well as losers. If done well—admittedly a big if—the result could be a more competitive economy that allows smaller, newer firms a fairer shout against sluggish monopolies. Likewise, although there have been plenty of shrill voices complaining that health-care reform will set America on the path to socialism, many business bigwigs, including Jeff Immelt of General Electric and Howard Schultz of Starbucks, have described the current health system as a drag on America’s competitiveness.
Much the same is true of climate-change legislation, currently becalmed pending health-care reform. The United States Chamber of Commerce, the most venerable of corporate lobbies, had been fierce in its denunciation of proposed cap-and-trade laws. But it has somewhat moderated its rhetoric lately, after four prominent firms (Apple, PG&E, Exelon, and PNM Resources) quit, Nike resigned from its board and another board member, Duke Energy, cut its contributions in protest. Clean-energy firms, not to mention all manner of companies that simply want more clarity about the future, are keen to see a climate bill passed.
There are even splits over the Employee Free Choice Bill, which aims to increase union membership (and reduce employees’ freedom of choice) by replacing secret ballots of workers about whether they should unionise with public ones. Despite what is generally reckoned to be the best funded corporate-lobbying effort ever seen, the Obama administration seems determined to press ahead with this legislation next year, although opponents have vowed to filibuster it in the Senate.
On top of all these changes comes the likelihood of sweeping reforms to America’s system of corporate governance. Various laws under consideration in Congress would introduce such measures as obligatory (but non-binding) votes on executive pay and golden parachutes at all public firms. Another proposal would ban executive pay of more than 100 times a firm’s average wage unless 60% of shareholders approve.
Congress is also considering requiring the separation of the roles of chairman and chief executive, annual elections for all board members and the establishment of a committee on every board to focus on risk. The SEC, meanwhile, is expected next year to adopt much-delayed rules allowing big shareholders to nominate candidates for board elections. A new rule introduced by the New York Stock Exchange will end discretionary voting by brokers who hold shares on behalf of clients; these votes have tended to be cast consistently in favour of incumbents.
A recent report by Wachtell, Lipton, Rosen & Katz, a Wall Street law firm, claims all this will “impede the ability of boards to resist pressures for short-term gain and tie their hands at a time when the need for effective board leadership is particularly acute.” It is true that ill-designed attempts to promote prudent and far-sighted management can have the opposite effect. But the report’s lead author, Martin Lipton, is an inveterate defender of management against shareholders (he invented the “poison pill” to deter takeovers in the 1980s).
In practice, corporate opinion is again divided. Several companies have voluntarily adopted “say on pay” policies. Microsoft, for example, has agreed to give shareholders a vote on pay every three years, Prudential Financial has agreed to a biennial vote and Verizon Communications, Intel, AFLAC, Apple and others have adopted an annual vote on pay policy, if not on the actual sums involved.
There is no doubt, however, that all this upheaval will create turmoil for America’s boards at a time when firms already have lots to be getting on with. And the longer the economy struggles, the more wayward politicians are likely to become.
