WASHINGTON, DC – JUNE 13: Storm clouds fill the sky over the U.S. Capitol Building, June 13, 2013 in Washington, D.C.
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What corporate executives cite as the biggest risk to their business tends to vary, from specific moments in time when unpredictable events occur, such as a pandemic or global conflict, to more classic factors that ebb and flow throughout business cycles. In recent years, the C-suite has had its pick, from Covid to the Russia-Ukraine war, supply chain shocks, consumer demand and inflation, the latter of which over the past year was ranked as the No. 1 risk.
But all that’s now over, at least as far as topping the list.
It’s no surprise to see a vast majority of CFOs saying inflation has peaked — all but one CFO in the CNBC CFO Council Q3 survey holds this view. What’s more notable is where the risk balance has shifted, and just how quickly. The Q3 survey of corporate finance chiefs finds a sharp rise in CFOs pointing to government regulation as the biggest risk factor for their business.
From Q1 to Q3 2023, the percentage of CFOs saying government regulation is their biggest risk jumped from roughly 6% to 40%. In our Q2 survey, even amid signs that the Fed’s fight against inflation was making progress, inflation was cited by more CFOs (one-third) than any other factor as a top business risk (it was the same in Q1). This quarter, only 10% of CFOs cited inflation, while the 40% who pointed to regulation represented a more than doubling quarter over quarter.
The CNBC CFO Council survey for the third quarter was conducted among a representative sample of member companies from August 21–September 5. The CNBC Global CFO Council represents corporations with a combined market value of over $4 trillion.
There are plenty of recent headlines to choose from to support this heightened focus on the government. An aggressive Federal Trade Commission and the start of the antitrust lawsuit against Google, the biggest legal challenge to the tech industry since the Microsoft 1990s case, and an increasingly aggressive targeting of Amazon. The list of the first drugs to be subject to Medicare price negotiation — and the pharmaceutical industry’s legal pushback against it. An escalating geopolitical war with China which has regulatory implications for companies reaching consumers and enterprises in both nations, and operating supply chains across global markets. Then, there’s the looming government shutdown, and the beginning of a major election cycle.
But there’s a more fundamental aspect to the changed risk calculus, according to regulatory experts. After the existential threat of the pandemic and inflation not seen in four decades, government regulation isn’t as much a new threat as returning back to where it had ascended to before the recent surprises.
Analysis of corporate 10-K filings over the past decade conducted by the U.S. Chamber of Commerce, as well as by institutional brokerage and advisory firm Strategas, show that references to government regulation as a risk started taking off after the financial crash, then rose sharply starting in 2014. The elevation of government regulation as a risk wasn’t only in absolute number of references to it, but being more prominently placed by companies in these filings in the years before the pandemic. During 2018, when President Trump was waging his trade war against China, these mentions peaked. The pandemic and inflation, therefore, are best thought of as interruptions to a longer-term trend.
“I do think what’s happened is that because of the pandemic and inflation, which we haven’t seen in a generation, it subsumed the traditional concerns that the C-suite had, it crowded out most other concerns they usually worry about and now that’s starting to come back to normal,” said Sanjay Patnaik, director of the Center on Regulation and Markets at Brookings Institute.
For the business community’s biggest advocacy group, getting back to normal also means confronting a new normal. “There were so many other things going on it might have obscured how much government regulation has grown as a risk for business,” said Neil Bradley, the chief policy officer for the U.S. Chamber of Commerce. “The emergence of government policy as risk relative to other risks has been growing substantially over the past decade.”
It’s not that other general risks factors aren’t growing, such as consumer demand and brand reputation. But while the basket of more typical risks grew at a rate of just over 4% in the U.S. Chamber’s 10-K analysis, the mentions related to government policy and the space devoted to it as a risk factor increased by 27%.
A dysfunctional Congress and emboldened executive branch
One big issue behind increased corporate fears of government, according to experts, is the dysfunctional Congress, though not related to the looming shutdown specifically. The inability of Congress to pass major legislation on a bipartisan basis has resulted in an executive branch that has become much more aggressive in promulgating regulation through executive action across both parties.
Whether the issue is immigration — a critical regulatory issue for companies related to the health of the labor market over the long-term — or environmental policy, the lack of major legislation and the pendulum shifts register with companies, Patnaik said.
Case in point: auto industry fuel efficiency standards were increased under President Obama, then completely eliminated under President Trump, and then brought back under President Biden at stricter levels than the Obama rule. “Changed direction three times in six years,” Bradley said.
And it’s been a period of constant churn at the federal level, with ten of the past 12 elections resulting in a change in control in either the House, Senate or presidency. “That’s completely abnormal from a historical, post-WWII to 2000 view,” Bradley said. “There’s increased willingness for administrations to maximize their policy preferences in regulation and then when the opposite party is in control, they immediately undo it and go in the other direction,” he added.
Corporate lobbying spend is surging
The response from corporations can be seen in 2022 and 2023 through a sharp increase in lobbying dollars being spent by S&P 500 companies. The lobbying budget trend measured in dollars spent by the S&P 500 universe of companies had gone negative between 2019 and 2021, but in the first half of 2023, 44% of stock market companies increased their lobbying spend versus last year, led by communications, healthcare, financials and industrials.
Lobbying spend had been in what Dan Clifton, head of policy research at Strategas, calls a “10-year flat line.” But now Strategas is tracking “a massive surge” of lobbying in 2022 and 2023, through June 30. “We call it the lobbying renaissance and we believe it is being done as a proactive measure, so companies have a seat at the table,” he said.
Corporations have long had a strong lobbying presence, but now, Patnaik said, “I expect it to ramp up, especially in the tech sector, with the advent of gen AI where there is so much talk about regulation.”
The No. 1 lobbying issue in the spending resurgence to date, according to the S&P 500 data for the first half of 2023, is trade and the supply chain, which speaks to another important point in fear of government relation: it isn’t only about the U.S. government, but the geopolitics of China and risk of regulation for U.S. companies operating there.
“We are seeing a stronger assertion of regulations, especially in relation to China export controls, on advanced chips and that’s bipartisan,” Patnaik said. “And that’s something new. Maybe four, five … six years ago there was bipartisan consensus for maintaining the status quo with China, but we’ve seen both parties seeing China as a much bigger threat,” he said.
Apple, the market’s biggest company, is one way to look at how much of a factor international regulatory policy has become, from the fact that its new iPhone design has abandoned its Lightning connector and moved to a USB-C power cord due to European Union regulation, to the recent headlines (denied by China) that Chinese government employees were being told to not use iPhones.
“It’s not just China,” Bradley said. “Look at the EU, it’s been on a regulatory tear of late and they are writing a lot of rules with definitive impacts on U.S. companies.”
The FTC and antitrust scrutiny
Despite a recent string of court losses for the government, including the Amgen-Horizon Therapeutics deal and Change Healthcare with UnitedHealth — and even some big deals in tech, from Microsoft’s contentious acquisition of Activision moving closer to completion, to Cisco’s just announced $28 billion acquisition of cybersecurity firm Splunk — antitrust is part of the explanation.
“Give me a sector and I can give you two or three examples,” Clifton said. “When I speak to industry trade association groups, whether airlines or insurance or rails, pick the industry, they all want me to come talk about antitrust,” he said. In 25 years of consulting with companies across the market, “that hasn’t always been the case,” he said.
The CFO Council Q3 survey showed more CFOs (60%) saying companies will make deals in the best interest of shareholders despite antitrust scrutiny, but a notable minority (40%) said they think the FTC under chairperson Lina Khan is deterring deals.
“She’s tried to change the atmosphere and thinking, but in real outcomes so far we haven’t seen much yet, and the courts in the last few years tended to be more pro-corporate,” Patnaik said. “So I’m hesitant to think there is a fundamental shift.”
But Clifton says the data shows total number of M&A transactions trending down, as is average deal size, and a more cautious M&A environment will continue even if the government is being humbled by court losses because it is still achieving a major strategic goal: What used to be at most a 15-month process can now take up to 24 months.
“This is a totally different model,” Clifton said. “It’s not about stopping individual mergers, it’s about creating a two-year process to get a deal through and raise the cost of a merger from a time and financial perspective.”
The average size of mergers completed is now at the lowest level in 20 years. While companies may see recent court decisions as a bullish signal that they have the legal recourse to prevail, “Who wants to waste two years on a merger?” Clifton said. “It has to be the greatest merger to do it.”
“We miss part of this if we only focus on the cases that end up in litigation,” Bradley said. “There are a lot of deals people aren’t willing to take risk on.”
If the experts are not surprised that government regulation is back to No. 1 on the list of business concerns, they say the corporate sector is attuned to a growing belief that it’s not returning at the same level of risk.
“It’s getting worse and it’s accelerating more rapidly,” Bradley said. “A once-in-a-century pandemic and once-in-four-decades spike in inflation obscured the fact it is a large and growing risk for companies.”
Which helps explain why corporations are quickly increasing their lobbying spend with the pandemic and inflation peaks now behind them, and a presidential election ahead.
It’s easy to jump to the conclusion that companies see regulation as bad and therefore spend to stop it. But Patnaik says the market’s largest companies think about it at a deeper level. “The most sophisticated companies realize it can be a strategic benefit if they are able to shape it, so they engage very heavily. … If you put regulation in place that is costly for new entrants, you can keep them out of the market, so it’s not always bad, and they realize that.”