Catastrophic Risk: 5 Questions Every Board Should Ask Its CEO About Regulatory Threats

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Whereas regular evaluations of market risks and opportunities are likely baked into board meetings, an examination of the broader regulatory landscape in which a company operates can easily be overlooked. Here's how to get ahead of a coming storm.

Last week I got the email that no CEO wants to see: a note from my board chair entitled “Catastrophic Risk.” In an era with more than its fair share of tectonic shifts in the economic, political and societal landscapes, I wondered what new issue we possibly could have missed. 

And that, in fact, was the point — it was a request to think through some major regulatory risks we might not be looking for in our day-to-day operations. Were we ready?

Whereas regular evaluations of market risks and opportunities are likely baked into board updates and meetings, an examination of the broader regulatory landscape in which a company operates can easily be overlooked. 

But to ignore this influence is akin to leaving the house without checking the weather: Looks can be deceiving and changes can come quickly. 

So here are five questions to get ahead of a coming storm:

1.     What is the regulatory landscape? This is the starting point. The existing regulatory guardrails differ substantially by industry, as well as between companies within industries, depending on their business model. Understanding the broader regulatory environment and specific framework in which your industry operates can help frame key risks and bring hidden opportunities into greater focus. For example, industries such as manufacturing and finance are subject to a complex and well-established set of regulatory requirements whereas other industries—such as media and entertainment—are subject to general laws but operate with fewer industry-specific regulations. Where a company (or industry) sits within the current regulatory spectrum is important context.

2.     How volatile is the environment? Regulations change “slowly-all-at-once”. Although codifying new regulations takes time, the political and market sentiment that influences such change often pivots quickly, and sometimes overnight. Understanding the key players, pundits, and partisan influences is critical to the ability to future forecast what might “come next.” Keeping tabs on whether the environment is heating up can help management predict how quickly any impending change is likely to occur. The key is to not get caught short when rapid change, often long discussed, gets codified into law with a stroke of a pen and, often with implementation and compliance periods that are as short as weeks-to-months, not years-to-decades.

3.     What is the most aggressive regulatory action possible within the current framework, and how would it impact your business? Case scenarios are an effective way to explore the likely pace and extent of change, and to identify what near-term change is plausible. Once identified, you can plan for it. Surprises are inevitable, but planning is golden. For example, many federal funding streams are established – and eliminated – as a function of regulatory priorities. If the business relies on a regulated funding stream for growth, small changes to the eligibility requirements or to the overall level of funding available can have a fast and major impact. 

4.     Who wins and who loses? Like markets, regulatory frameworks create winners and losers. Even the most apparently radical or negative potential change is likely to create new opportunities for growth. The opposing ends of the regulatory spectrum often reflect what the market most fears — and what it seeks. Understanding these interests can offer rewarding insights for future market and product development. Consider recent debates over the regulation of “Big Tech.” Although individual social media companies don’t fit the traditional mold of economic regulation because they don’t charge for their services, rules around data privacy and censorship are poised to reshape the business of social media, and the specific business models and market approaches taken by each of the major platforms will likely lead to dramatically different end results.

5.     How do we fit into that equation? A deeper examination of the ways in which a company is alternately benefitted or constrained by the regulatory environment is an important first step in identifying defensive measures, as well as pathways for future growth. From a board perspective, such an exercise can also surface blind spots and areas where outside support may be helpful or necessary. 

The demands on the time and mental focus of boards and their CEOs are tremendous, and the need to deliver performance while avoiding major pitfalls can easily become all-consuming. But in today’s fast-moving and fluid business reality, creating an open dialogue and being proactive in your planning is one of the best ways to ensure that any future regulatory disruption is handled smoothly if (and when) it occurs.

The upside of that readiness might lead to some surprising competitive advantages.

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