The Repeal of Chevron: What’s an IRO to do?

By Sheila Ennis

For companies of all shapes and sizes, regulatory uncertainty is a feature not a bug. With rapid cycling of regulatory regimes, companies will do well to design thoughtfully and execute carefully their financial disclosure policies. While the recent repeal of the Chevron doctrine has been characterized as a landmark decision that could offer corporations a new level of freedom from regulation, we believe its impact is likely to be far narrower. Chevron had, for 40 years, directed the courts to defer to governmental agencies as subject matter experts in interpreting whether a defendant’s conduct was prohibited by a statute duly passed by Congress. The Loper Bright decision reverses that deference and mandates that it is, in fact, the court that bears the responsibility to decide whether a defendant has gone afoul of a regulation.

We could speculate about the merits of the decision, and whether the change will in fact lessen regulation, but we will refrain from that sport and focus on the task at hand: Managing financial disclosure though uncertainty.

What is an issuer to do? Should they change their current or planned financial disclosure practices? Should they take advantage of the confusion and ambiguity and halt or alter their efforts to comply with the SEC’s newer mandates like the climate impact disclosure mandates?

The simple answer is no. With apologies to issuers hoping to lighten their disclosure load, the decision changes very little for you. Much of the current framework around financial disclosure is a function of agreement between issuers and financiers, not exclusively a matter of compliance with SEC regulations. It is therefore unwise to walk back or reduce any previous disclosures.

While the Chevron change has made it harder to handicap how challenges might be decided, no specific regulations have been repealed. The power to interpret compliance with regulation has simply shifted, creating a double-edged sword. While some may relish the idea that it will be easier to avoid penalties when there is no settled law, uncertainty opens the door to criticism and accusations that you are failing to comply, potentially damaging reputation regardless of who turns out to be deemed correct.

Keep in mind a few guiding lights. First and foremost, preserve trust with investors. Second, protect or even advance your ability to compete. Compliance with some of the newer regulations like climate, Board composition and consumer protection-oriented mandates is essential because it aids in attracting the best talent, establishing the right supply chain partner network, and of course winning business. Third, remember, the stricter mandates of other jurisdictions like the European Union and California are not going away.

Below we offer a few recommendations to help mitigate risk.

• Keep your eye on the ball. All communications and stakeholder engagements must support business goals. Develop policies suited to win business, talent and partnerships. Refrain from speculating about potential regulatory changes and how they may impact your business in stakeholder engagements.
• If at some point it is determined that taking a high-profile stand to influence a policy is appropriate, build a campaign to do that. Take care to run it separately from your normal-course engagement with stakeholders about the health of the business.
• Maintain fidelity to the commitments made with investors. Change disclosures only when the business has changed, and precedent metrics no longer tell the growth story. If change is warranted, provide historical data for the new metrics.
• Articulate the rationale for the metrics and cadence selected. Demonstrate alignment with how performance is measured and incentivized internally and with how your industry measures performance. Where you differ, prepare a rebuttal matrix to consistently explain the rationale for your differences.
• Be consistent. Don’t cherry pick.

We are in a period of elevated uncertainty. Shareholder proposals, employee activism, and nastier short attacks are all on the rise.  Everyone has a megaphone now. Recognize you need a ready defense. If you do the work before you have an activist or regulator knocking on your door, you are likely to fare better in the eyes of all your stakeholders.