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Companies that don’t plan for regulatory change learn to regret it: Kevin Thomas

Government regulations can change faster than you think. Smart companies don’t get taken by surprise

A DOT-111A tank car

There are more than 65,000 DOT-111A tank cars of this type on the rails in Canada. Companies that didn’t prepare for regulatory changes phasing them out are going to face difficulties down the road. (Robert Taylor)

Two big announcements last week highlighted the type of risks faced by businesses that don’t anticipate and adapt to better environmental, social and governance practices.

When Transportation Minister Lisa Raitt announced new regulations to phase out older rail tankers of the type that blew up at Lac Megantic last year, it wasn’t a surprise for anyone familiar with the industrt play. Regulation was coming, but many companies preferred to wait for the hammer to drop before taking steps to upgrade or sideline their existing rail fleet. And that’s too bad, because the costs of trying to comply may now be higher for those who waited.

Raitt’s three-year timeline to fully dispose of older DOT-111A tankers (and immediate phase-out of 5,000 of the most vulnerable cars) is going to be a difficult one to meet given the existing capacity for suppliers to build new tankers, as well as the desire of oil and gas companies to continue the exponential increases in oil-by-rail shipments into the future. There are upwards of 65,000 DOT-111As on the rails in Canada, and only a small number of companies that make the things. That spells delays and/or cost increases across the board.

And yet some companies will do better than others. Those companies that had already made plans to buy new tankers—rather than wait for regulations—are starting to look prescient. Those that waited, however, may be waiting for a long time, as the queue for new tankers grows longer, and may face problems shipping their products.

The other big announcement was Employment Minister Jason Kenney’s decision to place a moratorium on new approvals for restaurants to hire temporary foreign workers, in response to a myriad of complaints about abuses under the federal program. A new report from the C.D. Howe Institute found that the program had actually increased domestic unemployment in the provinces that relied heavily on it, especially in low-skilled sectors like restaurants and other service industries.

Regulatory changes had been in the wind for some time as the evidence against the program built up, yet employers relied on the lobbying efforts of the Canadian Federation of Independent Business to maintain the program rather than taking steps to improve domestic recruitment and training efforts or adjust wages and benefits to attract workers.

Now they’ll have to scramble to adapt as the spigot is suddenly turned off.

Responsible investors have for years talked about the risks of regulatory intervention where companies fail to address serious social or environmental problems that arise in their operations. Too often companies delay action under the belief that regulations will be stalled indefinitely or at very least won’t be adopted in the near future. Those that think in very short time horizons—like the next quarter—often miss the signs of change.

Yet circumstances can and do change, sometimes quite suddenly, and the regulatory environment changes with it. The Lac Megantic disaster last year and the series of revelations about the Temporary Foreign Worker Program are testament to that. Companies that didn’t use their time wisely to adapt and innovate at their own pace are then stuck trying to play catch up and often face much higher costs—and a loss of shareholder value—as a result.

It doesn’t have to be that way. Part of the job of responsible investment is to engage with companies to take a longer-term approach to the business, and to urge companies to address risks in a timely way, including regulatory risks.

As these new announcements make clear, that’s not just because better employment practices, safer transportation and environmental protection are the right thing to do (though they are). It’s also because taking early action to address environmental and social risks is the best way to protect and build shareholder value.

Kevin Thomas is the Director of Shareholder Engagement with the Shareholder Association for Research and Education. Follow him @kthomas_share