A New Era of Regulation

New government controls across a wide swath of industries are on the way
Illustration by Nick Dewar

At offices of the Environmental Protection Agency in Washington, some staffers are planning Inauguration parties. Their excitement is a harbinger of the sweeping changes in business regulation coming under President Barack Obama, for better or worse.

That an incoming Democratic Administration is calling for tighter controls on business isn't surprising. But this time the pendulum's shift isn't purely ideological. The past year alone has brought the financial meltdown, lead-laced toys, airplanes with dubious inspection records, vegetables contaminated with salmonella, and workers sickened by food flavorings—all of which buffeted businesses big and small. "There is clearly a recognition across the country that the deregulatory era has hurt America," says David Michaels, chairman of environmental health at George Washington University's School of Public Health.

With the political winds suggesting change is inevitable, many businesses profess to support increased regulation. The new mindset in Washington, says William Morin, director of government affairs at Santa Clara (Calif.) semiconductor gear maker Applied Materials (AMAT), "is the difference between people who want to make government work [and] a crew that viewed government as the problem."

Some companies are even asking for stronger oversight. Drugmakers are clamoring for a revitalized Food & Drug Administration. Some utilities are requesting limits on carbon emissions. "We are for strong regulation," says James C. Greenwood, head of the Biotechnology Industry Organization.

But behind the scenes, many executives are worried that regulators will go too far, imposing new rules so tough that they could threaten the economy. "There shouldn't be an overreaction and a stifling of innovation," warns R. Bruce Josten, executive vice-president for government affairs at the U.S. Chamber of Commerce.

First on the Obama Administration's to-do list: shoring up the financial system. Congress and banking regulators will consider proposals to help homeowners at risk of foreclosure. They're likely to tighten rules for making loans and boost banks' "capital requirements"—money held in reserve to backstop the loans they make. And they may impose new capital requirements on some hedge funds for the first time. Indeed, broad swaths of the "shadow financial system"—the lightly regulated derivatives markets—could come under tougher federal oversight, particularly credit default swaps.

Longer-term, Obama has said, financial regulation should be reshaped. Some agencies should be consolidated, and the risks big companies pose to the financial system should be monitored more closely. Proposals to merge the Commodities Futures Trading Commission, which regulates the futures markets, with the Securities & Exchange Commission are likely. And some are pushing for a government-wide watchdog to police consumer financial products.

Other regulators feel reinvigorated, too. At the Occupational Safety & Health Administration (OSHA), which has issued just one new occupational health regulation in 10 years, "there are some standards that have been on the shelf for a long time that could be dusted off and promulgated with new information quickly," says former OSHA official Adam Finkel. Elsewhere, the rulemaking in the next few years could be significant. New limits are expected on mercury and other pollutants. Trucking outfits could see shorter permitted hours for drivers and increased fuel-economy rules. Agribusiness might have to deal with new standards for farmers to prevent contamination.

UNCERTAINTIES AND OPPORTUNITIES

Of course, few rules will be issued without a fight. John Castellani, president of the Business Roundtable, is most concerned with the issue of climate change. "There's a lot of uncertainty about what is going to be the regulatory regime, how the technology will be supplied, what the impact on the economy will be," he says. "It will be a long, hard battle." In the pages ahead, we preview 10 of the fights to come.

How should companies get ready? At the most basic level, "the best thing for a company to do is make sure their compliance house is in order, so they are prepared when a federal enforcement officer comes calling," says Scott H. Segal, a partner at Bracewell & Giuliani, a law and lobbying firm.

But business shouldn't just play defense. Tighter rules and heightened enforcement also offer potential opportunities. There could be less competition from companies that cut corners and less of a chance that scandal will devastate an entire industry. For instance, in the wake of outbreaks of food-borne illnesses, which have cost companies hundreds of millions of dollars, "the industry realized it's only as strong as its weakest link," says William K. Hubbard, a former FDA official. In addition, companies can burnish their brands by staying ahead of the rules. "A company that exceeds the federal standard has something to boast about, such as Honda (HMC) on fuel economy," says Joan Claybrook, longtime president of Public Citizen and former National Highway Traffic Safety Administration chief.

Business should also be prepared to face tougher scrutiny—but that need not be a negative. "The Obama Administration will be full of smart people asking smart questions," says Bracewell & Giuliani's Segal. He says his business clients often easily reached agreement with the Bush Administration on environmental regulations, for example, only to have the process stall in Congress or elsewhere because of the Administration's lack of credibility on environmental issues. Now, says Segal, "I'm looking forward to this Administration, because once we get agreement, we might actually be able to reach lasting compromise." Business also is breathing a sigh of relief at Obama's choice of Harvard Law professor Cass R. Sunstein to oversee regulations, because he is a strong proponent of cost-benefit analysis, which companies favor.

Most of all, business hopes the Obama Administration will usher in an era of better, not just more, regulation. A simple step is to make the process more transparent. Gary D. Bass, executive director of watchdog group OMB Watch, always hears from small-business executives about how difficult it is to know which rules they must observe. "All of a sudden they get slapped with a fine," he says. The government's central repository for federal rules, Regulations.gov, "is abysmal. It needs a massive overhaul."

A bigger step is for regulators to work together. Conflicts between agencies are the norm. "So many people are used to being at odds with and battling these other agencies," says one veteran regulator. "We're starting to think more about the opportunities of working more collaboratively."

Throughout Washington, lobbyists and career bureaucrats say the mood is noticeably different. "Probably the biggest change will be newfound respect for government as being part of the solution," says OMB Watch's Bass. "We will overregulate," predicts Edward B. Cohen, vice-president for government affairs at Honda. "The hope is that with each swing of the regulatory pendulum, we will learn something."

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