Introduction and Executive Summary
Successful business management requires successful risk management. Entire industries have been built to help businesses quantify, mitigate, and insure against risk. In some cases, risks are relatively easy to quantify—like the risk of debt default or property loss. Even with potential impairments that are harder to assign a dollar value to—such as reputational risk—businesses have still found ways to measure, track, and actively manage risk.
Despite all the recent advances in measuring risk, one area that has defied easy quantification is risk emanating from changes in public policy, such as changes to laws, regulations, or legal enforcement.
In this report, the U.S. Chamber of Commerce seeks to measure public policy risk to determine whether the level of public policy risk is rising or falling relative to other risks companies face.
In order to assess public policy risk, the Chamber reviewed a decade (2011 to 2021) of 10-K filings (comprehensive reports filed annually by publicly traded U.S. companies) from the S&P 500. This survey calculates the number of times companies referenced terms commonly associated with public policy risk (like “regulation” or “Congress”) compared with the mention of terms associated with non-public policy risk (like “reputation” or “economic conditions”).
The survey finds that companies have seen a large uptick in public policy risks.
The mention of terms in 10-K filings associated with public policy risk (“regulation,” etc.) has increased by 27% in the last decade. Over the same time, the mention of terms associated with non-public policy risk (“economic conditions,” etc.) has remained mostly constant.
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The most prominent drivers behind this significant jump in public policy risks are constant shifts in power in Washington, an increasingly partisan approach to lawmaking, and a growing willingness by both parties to pursue aggressive policy changes through regulation rather than congressional legislation.
Public Policy Risks Have Dramatically Increased Over the Last Decade as Compared With Other Risks
According to data in publicly available reports, large publicly traded companies’ concerns about public policy risks—like changes in taxes, regulations, and enforcement—have increased dramatically over the past decade, compared to other risks. This sentiment was measured by tracking terms found in regulatory filings with the Securities and Exchange Commission (SEC).
The SEC requires public companies to file an annual 10-K report which includes a section on risk factors that could potentially impact the company. Risk factor disclosures often include mention of changes in economic or market conditions, exchange rates, reputational risks, and so forth. They also include risks from public policy such as changes in the tax code, regulations, or tariffs.
Given that a 10-K is a required annual disclosure and includes both public policy and non-public policy risks, it provides a unique data set to benchmark public policy risk over time.
To establish a benchmark of public policy risk, we created a basket of public policy-related terms and names of government entities whose actions impact companies and measured how frequently they appear in the 10-Ks for the S&P 500 companies over a decade. We then compared that basket with the frequency that a basket of terms commonly associated with non-public policy risks was mentioned. For our purposes, the total number of mentions of terms was less important than the change over time. In other words, has public policy become a bigger or smaller risk to corporate performance over the past decade? (See Methodology for terms used in each basket.)
Our analysis found that 10-K mentions of words commonly associated with public policy increased by 27% from 2011 to 2021. The frequency of these public policy terms mentions peaked in 2017 at 39% above the 2011 level. The mention of terms associated with other risks was relatively stable, increasing only 4.3% over the same period.
In the public policy basket, broad terms like “law,” “regulation,” “trade,” and “environment” produced the most references over the decade. Terms that saw the greatest percent increase in mentions were: “data privacy,” “immigration,” “labor,” and “intellectual property.”
Companies more frequently mentioned well-known tax, regulatory, and environmental agencies. Top-cited government agencies mentioned (besides the SEC and IRS) include the Department of Justice, Environmental Protection Agency, and the Federal Trade Commission (mentions of the FTC increased 62% over the decade).
In the control basket of non-public policy terms, the slight increase in mentions between 2014 and 2017 was driven by “investment,” “price,” and “capital.”
Public Policy Risk by Industry
A benefit of analyzing public policy risk using 10-Ks is the ability to compare relative changes in risk perception by industry. To do so, we mapped North American Industry Classification System (NAICS) codes to firms and took the average keyword hits in each industry over time.
As indicated in the chart below, the “health care and social assistance” (+48%), “utilities” (+36%), and “other services” (+35%) sectors saw the largest increase in public policy risk over the decade. Given the public policy changes emanating from the enactment of the Affordable Care Act and other developments in energy policy, it is not surprising that these sectors saw such a large increase in policy risk.
Some industries, such as “finance and insurance,” have been highly regulated for decades and the mention of terms associated with public policy risk was largely stable over the last 10 years.
Analyzing public policy changes by industry also highlights how public policy risk can rise and fall over time. This is a reflection of changes in actual policy risks (e.g., proposed regulations being abandoned or changed by a new administration) as well as new risks being incorporated into baseline operations. For instance, when the Trump administration imposed tariffs on a broad range of goods, mentions of tariffs jumped nearly 50% in 10-K disclosures. As those tariff policies have largely remained in place, companies have had to adjust operations to reflect the increased costs. As a result, tariffs became more of an operational issue and less of a future risk resulting in a decline in mentions of tariffs in 10-Ks.
As Congress Control Grows More Unpredictable, Executive Actions Add To Public Policy Risk
Public policy risks are increasing for various reasons. Perhaps the most prominent drivers are constant shifts in power in Washington, a more partisan approach to lawmaking and a growing willingness by both parties to pursue aggressive policy changes through regulation rather than congressional legislation.
Our country conducts federal elections every two years. Elections that produce a change in party control in the White House or Congress typically indicate a shift in public policy. The period from 1960 to 2000 was one of relative stability. From 1960 to 1998, only 7 of 20 elections resulted in a change in control of the House, Senate, or White House.
In comparison, the period since 2000 has been one of increasing electoral instability. From 2000 to 2022, 10 of 12 elections have resulted in a change in control in one of the three elected entities in the federal government. As a result, policy direction and the likelihood that specific policies might be adopted change more frequently, increasing public policy risk and creating more uncertainty for businesses.
Brief periods of single-party control of Congress and the White House at the beginning of each administration have allowed both parties to pursue a maximalist and partisan legislative agenda (e.g., Obamacare, the 2017 tax reforms, and the Inflation Reduction Act). These periods were quickly followed by periods of divided government where much time is spent relitigating partisan legislation that was previously enacted. Maximalist and partisan legislative changes can at the same time produce the most dramatic public policy changes and be the least durable, again, increasing uncertainty and risk (e.g., changes to Obamacare and the risks associated with the expiration of some of the 2017 tax changes).
Administrations of both parties have shown not only an increasing willingness to pursue policy changes through regulation but also a desire to reverse regulatory policies imposed by the opposite party. After his party lost control of Congress, former President Obama said, “I’ve got a pen, and I’ve got a phone,” as he announced that he intended to pursue his major policy objectives through executive actions rather than through legislation that would require finding compromise in divided government.
When former President Trump took office, he reversed course and overturned nearly 200 regulatory actions from the Obama administration in areas like environmental policy, labor, and immigration. Former President Trump also pursued his own regulatory agenda, especially in immigration, environmental, and energy policy, which, in turn, were quickly reversed once President Biden took office.
One way to measure the growing regulatory risk attached to executive action is by looking at the number of economically significant rules issued each year. Economically significant rules are those estimated to have an annual impact on the economy of $100 million or more or that adversely affect the economy or a sector of the economy materially. While administrations from both parties follow a similar trajectory of fewer regulations in their first year and more regulations in their last, the overall trend is more economically significant regulations with each successive administration. The increasing frequency of major regulatory changes increases public policy risk for companies.
Management of Public Policy Risks
Like other risks, companies must anticipate, monitor, manage, and, when necessary, mitigate risks posed from changes in public policy. This includes closely monitoring public policy developments, engaging with policymakers, and—as we saw for example in response to trade restrictions—adjusting their business operations.
Against the backdrop of this unprecedented increase in public policy risks impacting businesses of all sizes, the U.S. Chamber has also stepped up its efforts to help companies navigate legislative and regulatory risks and fight back against government overreach. We engage policymakers and participate in the legislative and regulatory processes. Through our Litigation Center, we challenge in court governmental actions that exceed what is permitted by the Constitution or law.
In addition, the U.S. Chamber works proactively to establish a public policy environment that is more predictable, more certain, and more conducive to economic growth and job creation. For instance, policy reforms to our tax code, permitting process, and tort system can reduce risks for companies.
