Regulation – A Threat or An Opportunity?

After decades of deregulation companies from each and every industry are now facing reversing trends. Regulatory pressure, a direct consequence of crises, scandals, globalization and resource depletion, is on the rise across the board.  And it is, inevitably, taking its toll on corporate operations. So how can a company mitigate this operational risk and ensure a more predictable operating environment?  While there is no easy answer, a proactive and politically astute approach to stakeholder and issue management is already moving the needle.  

Photo by Tom Eversley

Regulatory oversight and scrutiny can delay a merger deal, lengthen time to market of a new and innovative product, increase the cost for company to remain compliant or reduce productivity. But regulation is here to stay and we had better learn how to deal with it. In the last 10 years (2004 – 2013) in the US alone the Code of Federal Regulations has increased by over 30,000 pages, three times more than in the decade earlier. Like “old” industries, new, innovative industries are facing the rising tide of regulation:  bitcoins, the internet, ‘Airbnb’, genome editing, 3D bioprinters… join the debate and brace for regulatory impact.

Weight of public opinion

Beyond governments and politicians, civil society has become one of the key stakeholders when it comes to regulation.  If we trust the recent YouGov internet opinion poll, more than two-thirds of the polled internet users believed that businesses would misbehave towards staff and consumers if there were no regulation.  In today’s interconnected world where any piece of news is available instantaneously, it doesn’t take much to perpetuate such views. With government institutions retreating from a number of regulatory activities and public functions, non-governmental organizations have progressively started to be more active in that space. NGOs have turned their attention toward the powerful private sector and have exercised the high level of public trust they enjoy to secure an important place in the process of crafting public policy.

Remember Greenpeace’s palm oil campaign that pointed finger at Nestlé in May 2010?  The company was put in the spotlight in spite of the fact that Nestlé’s share of consumption of global palm oil production was less than 1%. Daniela Montalto, an international forest campaigner with Geenpeace, said to The Economist with reference to the video from Greenpeace’s KitKat campaign, “We had been asking Nestlé to stop buying products from rainforest destruction for two years before we launched our campaign. Nestlé cracked within just two months because the overwhelming public response made the company listen.”  While Nestlé has reacted quickly and made significant progress to date in traceability of its supply chain and sustainable manufacturing certification, the campaign initially hit its reputation hard. Being one of the biggest food and beverage companies in the world made them an easy and visible target.

The regulatory response followed a year later:  In the EU, a new law on food information to consumers was adopted by the Council of the European Union on 29 September 2011. It requires explicit labelling of the types of vegetable oil used in food products. This means that manufacturers will no longer be able to include palm oil in their ingredients under the generic term ‘vegetable oil.’ With the attention that the palm oil campaign has attracted over the years, the new labeling might negatively impact EU palm oil consumption, warned the Dutch Board for Margarine, Fats and Oils representing the industry. Consumers are likely to scrutinize more the product labels and to be more sensitive to sustainability of this ingredient source.  The law comes into effect on 13 December 2014.

Proactive stakeholder engagement  – showing the way

Even when the company’s reaction to a crisis is prompt and measured, it is just that – a rapid reaction on a hot topic. Its effectiveness is limited as is the time to prepare it, to build meaningful bridges with key stakeholders and to weigh the impact of some strategic alternatives on the company’s business. The associated risks of reputational damage, lost business opportunities or immediate out-of-pocket costs are often high.

Photo by Tom Eversley

To mitigate these risks in today’s business environment, where regulatory pressures and public scrutiny are on the rise in all industries, a regular horizon-screening for the next potentially contentious issue alone will not do the job.  Business decisions need to be informed by the political and public policy environment.  Companies need to be reaching out to regulatory, social, academic and value chain stakeholders in a proactive and politically astute manner. Focus on common regulatory issues within the value chain not only amplifies the industry voice and broadens the reach, but also strengthens trust and cooperation among the value chain partners – and ultimately with customers and consumers. Government affairs officers need to be integrated into the C-suite and business units’ management teams and their input reflected in a long-term corporate strategy. The key government affairs skills and capabilities need to be built in-house to allow optimal issue management and continuity. A cross-departmental team focused on a regulatory issue will both offer a holistic impact analysis to relevant stakeholders and, once the regulation is adopted, reduce compliance costs through higher awareness of the requirements and their quicker integration in company’s business processes.

Overall, proactive stakeholder and issue management creates a more predictable operating environment, diminishes the risk of an unfavorable regulatory development and allows for early identification of upcoming opportunities. Spotting opportunity where others see risk is often a key to success.