When you think about the risks you manage for your business, your mind likely goes to market risk, reputation risk, and data risk. But do you consider public policy risk? Policy risks are at least as important as the other threats you face as a leader and deserve to be understood and managed so your business can continue to thrive.
Congress or the Administration may pass laws or regulations that could test your organization by impacting (or even upending) your investments, your governance, or your operations. For example, beyond market swings – perhaps because of the Federal Reserve’s actions or inactions – in recent years Congress has passed hundreds of tax laws, some adding new taxes while others changing existing ones. And they all have the potential to directly hit your bottom line, unlike most other legislative changes.
Policy risk can also be disguised in tantalizing legislative packages. This is a big year for blockchain technology and digital assets like crypto. Congress and the Administration are getting down to business and separately working on regulatory frameworks and legislation for this frontier. President Biden, in an historic action, issued an Executive Order calling on agencies within his Administration to collaborate on a “whole of government strategy” to ensure “… responsible development of digital assets.” Wow. You likely cannot get a bigger acknowledgement that digital assets have gone mainstream than the leader of the most innovative economy on the planet making a statement like this on a strategy that will ensure the US remains the financial leader of the world.
And also this year, Senators Kirsten Gillibrand (R-NY) and Cynthia Lummis (D-WY) announced they plan to unveil a sweeping bill that provides a framework for regulating crypto and other digital assets. Both the President and the Senators have made it clear that they want input from all stakeholders.
But know that with big, ambitious regulatory and legislative projects come risks. Risks that your piece of the puzzle is overlooked or, worse, shaped without input from your business or industry.
In addition to market conditions forcing public policy changes and associated business risk, they can also be driven by headlines and scandals that hinge on what is or may be perceived to be unfair. Lawmakers and policymakers react to conditions that are seemingly inequitable or a playing field that is considered overly tilted.
When I worked in the Senate on Capitol Hill, every morning the press team would be up at 5am compiling a press packet for the Senator of relevant stories from our home newspapers, but also from the big three – the Wall Street Journal, the New York Times, and the Washington Post. I can tell you that headlines alleging that CEOs and billionaires were availing themselves of special deferred compensation rules, or avoiding taxes because of fancy trust vehicles, would have gone to the very top of his press packet. And by 8am I’d have gotten a call about just what the heck this was all about. That reaction is exactly why some in Congress are considering far-reaching rules to tax wealth (which is very difficult to measure) in addition to investment income (which is a lot easier to measure).
This attack on wealth is not going to blow over. Wealth inequality is uneven and accelerating. Couple that with the fact that over the next 20 years, over $70 trillion of this accumulated wealth – held by a small group of people – will be transferred to younger generations, and it’s likely that tax and estate laws for business owners and executives will be in the crosshairs.
So, what to do? To properly address your exposure, let me suggest you do three things:
First, understand which assets are most valuable to your business. Second, get curious about what lawmakers are targeting that could put those assets at risk, and consider engaging professional assistance. By staying informed about the political risks you face, you’ll reduce blind spots and surprises. Third, get to know your representatives. Make some friends so you have a deep reservoir of trust and relationships to draw upon should you need them.
As we say in Washington, you don’t want to have to make a friend when you need a friend.
Authored by Sandra Swirski.
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