Ask directors about the governance duties they find most challenging, and you’re likely to hear many—if not most—cite regulatory compliance.
“There’s too much government interference in business,” explained one director in our latest Director Confidence Index survey conducted in August with Diligent Institute. “Too much time is devoted to defending.”
Adding to the complexity of U.S. regulations is the risk of failing compliance on the international scene. Companies operating in foreign markets must ensure they comply the varied sets of rules governing business in their countries of operation. And the increasing risk in certain markets has convinced some companies to withdraw from these regions.
But when we asked directors whether their companies had pulled (or considered pulling) operations from a specific region due to its regulatory complexity and risks—and if so, from which region—the answers were surprising.
Of the 46 percent of directors who said their company had withdrawn (or chosen not to enter in the first place) from certain regions, 57 percent listed California as the market in question—by far the #1 answer.
“Not pulled [entirely] but definitely reduced our exposure to CA,” said one director. “Used to be over 50 percent of our business, now closer to 20 percent.”
“CA regs are discouraging investment there,” added another.
“California is getting too difficult to do business in,” said another board member.
It is important to note that not every company covered by the survey operates internationally, so the U.S. markets noted may have been skewed by board members whose companies operate only domestically.
Still, the responses speak volumes to the current state of regulations in the United States.
“Leaders need to be well-versed on regulatory changes and what they might mean for corporate strategy now more than ever,” says Schindlinger. “Your calculus might be adhering to California’s climate law on one hand and waiving the potential benefit in having a large presence in the fifth largest economy in the world in the other.”
GETTING COMPLIANCE RIGHT
Since we launched our annual What Directors Think survey more than 20 years ago, directors have pointed to regulations as one of the major hurdles of a board. In our 2024 survey, for instance, 62 percent of public company board members surveyed said the regulatory environment was negatively affecting their company’s ability to execute on strategy—only surpassed by the two economic variables that have been plaguing companies for the past couple of years: inflation and labor.
The negative impact of the regulatory environment is such that directors rate it more of a burden than issues like corporate taxes and trade policies, geopolitics and supply chain disruptions.
When asked to provide a more detailed look into the rules and regulations that were most challenging to them, directors listed, far ahead of any other issue (68 percent of participants), “cybersecurity/data privacy” as most challenging.
In second place? Climate regulations—perhaps unsurprisingly considering both were the subject of new rules this past year.
“Our challenge is not complying with regulations,” said one director polled. “It’s that the regulatory environment is way too expansive and perpetually worsening.”
“The SEC is out of control,” echoed another.
Amid mounting regulatory pressures, three-quarters of polled directors said they could think of ways to improve their board’s compliance process. The most common answer, according to 41 percent of respondents, is to gain a better understanding of how current regulations relate to their company specifically. The second answer on the list: get better data.
“The expanding regulatory environment is impacting both company strategy and the board’s ability to oversee that strategy,” says Dottie Schindlinger, executive director of the Diligent Institute and partner in this research. “Step one is understanding the regulatory environment itself. Step two is getting the right data and insights both to comply and to advise management on the best course of action. You can’t afford to rely on outdated or incomplete information that may expose your business to unnecessary risks or missed opportunities.”
