The Government, Regulation and Litigation

Jera Logo white with caption centeredThis blog often notes the rapidly expanding sphere of matters that manufacturing managers need to be constantly aware of. The importance of these matters has long been recognized. Now, however, Important has become Urgent and Important – moving from Dr. Covey’s Quadrant 2 to Quadrant 1 — hence much more likely to create action.[1] Here are a few of those issues:

It’s the Economy, Stupid!

To beg the obvious, government and the economy are tightly intertwined. Government depends on citizens for its continuity and citizens expect government to promote their economic well-being. Government actions such as fiscal policy, monetary policy, international trade policy, modes of public sector spending and regulatory activities all strongly affect the state of the national economy, as well as the creation of wealth.

Industry – and the electorate — expects government to maintain a healthy economy and a positive policy of general support, which encourages the creation of wealth (and jobs). The creation of wealth encourages more investment, creating even more wealth, more jobs, and so on.

Wait! — It’s the Government, Dummy!

The American system fosters an approach / avoidance relationship between government and industry. Government, on the other hand, usually has a mixed view of industry. While, in Government’s view, the creation of wealth is to be encouraged, the distribution of that wealth (primarily as jobs and as taxes) and the externalization of costs of production (social costs, depletion of the Common Wealth,[2] etc.) require regulation. So, there is a continuing dynamic between industry and government, realized as a dynamic between encouragement and regulation. Perhaps mutual dependence. Perhaps codependence.

Manufacturers’ interests aren’t always (or, rather, are rarely) all that high on Government’s priorities list. So manufacturers, jointly and severally, clamor for Government’s attention. However, the interests and priorities of smaller manufacturers aren’t always coincident with those of larger manufacturers And bigger companies have bigger budgets, hence more clout.

Manufacturing Policy 

The Information Technology and Innovation Foundation (ITIF) is a non-partisan think tank that studies the relationship between government and manufacturing. ITIF’s Charter for Revitalizing American Manufacturing advocates the adoption of a “coherent national manufacturing strategy” that explicitly includes smaller manufacturers.[3] Why? ITIF says:

“Manufacturing is indispensable to the health of the U.S. economy, for four reasons:

>> Without a robust manufacturing sector, the U.S. will have great difficulty balancing its foreign trade;

>> Manufacturing is a key source of above-average-paying jobs;

>> Manufacturing, R&D, and innovation go hand-in-hand. In fact, manufacturing is the principal source of innovation and R&D activity in the U.S. economy;

>> Manufacturing is vital to U.S. national security and defense”

The formulation of a national manufacturing policy is a contentious matter among manufacturers. Many manufacturing managers hold that the less government has to do with manufacturing, the better things will be. However, in a globalized economy, government is going to be increasingly involved with manufacturing. A “coherent national manufacturing strategy” (i.e. manufacturing policy) is, like it or not, simply expedient in today’s realities.

Commerce is Global: Politics are Local

Commerce has, in fact, been globalized. An American manufacturer’s suppliers, competitors, customers or financiers may be almost anywhere. The World Trade Organization, NAFTA and a host of other international trade agreements already exist; more will likely follow. Governments, on the other hand, are not globalized. They have regional, national, state, city or whatever jurisdiction, and, generally speaking, governing entities remain in office at the indulgence of their constituents – not the global population’s

This disconnect – globalized commerce and local politics — results in dissonance on several levels. Here are two examples:

>> Multinational Companies – Dow Chemical Company operates in many countries. Consequently, Dow must operate under the laws of each of those countries. And each of those countries expects to benefit as much as possible from Dow’s presence (via taxes, jobs, technology and so on). Various countries vie for additional manufacturing plants and R&D facilities, and each expects Dow not to play favorites (except them). Make It In America, an interesting book by Andrew Liveris, Dow’s CEO, explains the pressures multinational companies encounter in operating globally while trying to please governments locally.[4] By the way, Dow Chemical is headquartered in the U.S. Dow’s CEO is an Australian.

What does a smaller American manufacturer care about multinational companies? First, some of your customers or suppliers may be multinationals. Second, a company need not be as anywhere near as big as Dow to become multinational.

>> Cash for Clunkers – When the depth of the recent financial crisis became apparent, the U.S. government introduced a package of expenditures intended to “jump start” the U.S. economy. “Cash for Clunkers”, part of that package, offered incentives to replace older cars with new ones. The idea was to stimulate demand for new cars, helping American car manufacturers, which were in dire straits. However, international trade agreements prevented that program from being restricted to cars built in America. Much of the money went to the purchase of imported cars. Globalized commerce can limit the extent to which local government can aid its constituents, regardless of the ramifications.

Regulation, Criminalization and Litigation

“Did The Most Expensive Regulation Ever Just Arrive At The White House?”, a recent blog on Forbes magazine’s website,[5] reports that new EPA regulations on NOx will carry costs estimated to be from $100 billion to $270 billion per year to implement. If this regulation passes final White House scrutiny, it will join at least 300,000 other regulatory statutes that carry criminal penalties.

The Economist asks “Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The Peoples Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all of these are less grasping than America’s regulatory system. The funds extracted under threat of criminal prosecution under those 300,000+ regulatory statutes exceed $14 billion in 2014 to date!”[6]

Civil litigation doesn’t directly threaten jail time. On the other hand, civil litigation doesn’t require proof beyond a reasonable doubt either. Civil suits, especially class action suits, can find companies liable for huge sums, even without a clear showing of real damages to anyone.

Litigation, be it criminal or civil, almost always result in negotiated settlements. Often, those settlements come after years of legal fees and really substantial diversion of management’s attention from the operation of the business. The good news for smaller firms is that bigger firms are more likely to be charged or sued (they have more money). The bad news is that smaller firms are usually not well positioned to defend themselves.

For Smaller Manufacturers

The point to this post is the rapid increase in serious issues that demand management attention. Larger firms can support overhead activities like a legal department or a public relations department. Smaller firms need other ways to remain aware of these issues and to cope with them as they arrive (without neglecting the on-going business).

Two possibilities come to mind:

Outsourcing: Most manufacturers already have a relationship with an outside accounting firm and an outside legal firm. This approach can be extended to public relations, risk management, etc. at reasonable cost.

Joint Actions: This blog has previously suggested that the scope of activities at trade associations be increased. Today, most manufacturing sector trade associations deal with specific technical, market development or government relations issues. As the sphere issues requiring constant management attention continues to increase (as it will), the scope of involvement for trade associations should increase apace.[7]

Capture - Chuck Joan and Cat - Ventura 2014Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about pursuing Sustainability … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.

============

[1] Stephen Covey, Seven Habits of Highly Effective People, Free Press (1989)

[2] “Common Wealth” is a term I use to refer to public property. National Forests are an obvious example. Aquifers, rivers, electromagnetic spectra and the atmosphere are others.

[3] Learn more about  ITIF and the Charter at www.ITIF.org

[4] Andrew Liveris, Make It In America, John Wiley & Sons (2011)

[5] Chris Prandoni, “Did The Most Expensive Regulation Ever Just Arrive At The White House?”, posted on-line by Forbes. See http://onforb.es/1z8VEum

[6]  “The Criminalisation of American Business”, in The Economist, 30th August – 5th September 2014 issue, page 9, pages 21 – 24.

[7] For more on joint actions, see On Joint Actions, this blog, http://jerasustainabledevelopment.com/2012/07/26/on-joint-actions/