The #MondayMusings, Digital Transformation blog series provides insight and analysis for executives from the previous week’s briefings, events, and publications @LNSResearch.
Click here to see image in full-size
Click here to speak to Peter Bussey
A central tenet of President-elect Donald Trump’s campaign platform was reducing the regulatory burden on business, with the desired effect of facilitating business expansion, job creation, and economic growth. This raises questions about how the regulatory landscape will change and the impact on the industrial sector.
Regulatory compliance costs have a major impact on the global manufacturing landscape. In the U.S. alone, manufacturers spend an estimated $192 billion per year to comply with financial, safety, and environmental regulations. This is the equivalent of an 11% “regulatory compliance tax.” Much of this is from environmental emissions regulations. (Source: Manufacturing Institute.)
In many cases, U.S. manufacturers spend more on regulatory compliance than those elsewhere in the world. This has major implications for competitiveness, and decisions on where production facilities and jobs will be located.
We’ll focus this discussion on regulations directly impacting the operations of manufacturers, energy producers, and other industrial enterprises. Prime examples are regulatory requirements related to Environment, Health and Safety (EHS), which are regulated mainly by OSHA and EPA. Of course, there are many other types of regulations impacting business, but let’s stick to use this as a case in point.
What’s Likely to Happen?
Based on statements made during the campaign and post-election actions, “de-regulation” in the Trump administration is likely to include these key elements:
- Roll-back and elimination of existing regulations, especially those issued by executive order
- Fewer new regulations, with more Congressional involvement in major regulations
- A shift towards performance-based regulations (what must be accomplished) from specification regulations (how it must be accomplished)
- Reduction in regulatory agency budgets and resources
- Less enforcement, based on a combination of policy and lack of resources
Clearly, regulatory reform will occur, and industry is likely to face less regulation in an environment of reduced enforcement.
Regulatory Reform is Not a Silver Bullet for Competitiveness
Overall the regulatory burden should ease, providing additional flexibility in compliance. However, this won’t necessarily make life much easier for businesses overnight. There are several factors that will tend to make compliance at least as challenging as it was pre-Trump:
1. Regulatory Requirements are the Tip of the Compliance Iceberg- Compliance obligations are the entire set of requirements and standards that an organization chooses to meet. Regulations and legal requirements are just one type of compliance obligation. Many others come from a variety of sources and stakeholders, such as customers, employees, supply chain partners, NGOs, industry standards, and the community. Enterprises will still need to deal with an increasingly complex set of compliance obligations, regardless of incremental regulatory reduction in the U.S. 100% regulatory compliance does not mean compliance obligations will be met.
2. Global Operations Require a Global Compliance Approach. Many manufacturers are multi-national companies with operations, customers, and supply chains that span the globe. Less regulation in the U.S. doesn’t guarantee the aggregate global regulatory compliance burden will be less. Some companies have a policy of adopting the most stringent regulatory requirement anywhere in their operations, for all their operations. So, a U.S. regulation or lack thereof wouldn’t necessarily set the standard for the entire organization, unless it is most stringent.
3. The Cost of Risk Management is Still There - Organizations have governance and enterprise risk management processes. Under these umbrellas, management systems are in place to manage operational risk and compliance, as well as various aspects of the business such as quality, safety, environment, asset management, and so on. Management systems standards, notably the ISO family of standards, are becoming more widely deployed. These standards include increasingly standardized processes for managing risk and “compliance obligations”, not just regulatory compliance. A reduction in regulations and enforcement in the U.S. is not going to relieve the need of businesses to continue to invest resources necessary to sustain execution of these vital systems in global operations.
4. Optics and Value of Sustainability Initiatives - many organizations have implemented long-standing EHS improvement initiatives, and in recent years, sustainability initiatives. Most large enterprises have publicized these initiatives and reported performance towards targets in their annual and integrated reports, including the CEO’s letter. If these initiatives are truly strategic to an organization in terms of business performance and reputation, most likely they will continue. Even if a sustainability initiative is mostly green-washing, back-tracking based on reduced regulatory burden probably won’t look good to investors, customers, employees, and other stakeholders.
Implications for Industry
Given the high cost that regulation imposes on business, regulatory reform and de-regulation have the potential to help U.S. manufacturing be more competitive, and achieve the Trump administration’s goals of business expansion and job growth.
Any significant weakening of environmental regulations, enforcement, or policies could have an especially big impact. Strategic changes such as killing the Clean Power Plan or policy changes like backing the U.S. out of participation in the COP21 global climate change agreement could create an opportunity for major financial and operational benefits to industry, at least in the short term.
On the other hand, a lessening of workplace and process safety regulations and enforcement would be less likely to offer short-term benefits. In this realm, risk management is more important than “compliance” per se. The impacts of safety failures (i.e., fatalities, injuries, explosions, production interruptions, community impacts) are more visible and clearly unacceptable than changes in air and water emissions levels. Cost reductions from incremental de-regulation would likely be insignificant compared to the on-going costs, and benefits, of maintaining and improving current safety and risk management systems.
De-regulation might be a case of being careful what you ask for. To the extent regulation and enforcement are relaxed, operations and EHS leaders will have some tough decisions to make on how to capitalize on the situation. Even if there are cost savings to be had, will it be worth it? What will the impact be on risk profile, productivity, and reputation? In turn, what impact could these have on profitable growth?
Smart regulatory relief is good for industry. But regulatory compliance is near the bottom of the risk management food chain. Industry leaders will still focus on strategic issues of competitiveness, risk, sustainability, and operational excellence to determine the total set of compliance obligations. In the big picture of business performance and shareholder value, regulatory compliance is likely to be a relatively minor factor.
EHS leaders facing uncertainty that comes with de-regulation that focus on how EHS management improves operational excellence will fare better in terms of keeping and getting resources for improvement initiatives. Organizations that plow the cost savings of de-regulation into better risk and EHS management systems will be better positioned for the long haul.