The Bloom of Regulation

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Geoffrey J. Gouinlock, CFA

March 23, 2017

Image used with permission: iStock/Jorgenmac


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The Bloom of Regulation

Early this year, we exited our position in M&T Bank (MTB- NYSE). It had been a very successful holding. However, after review by our investment committee, it was determined that we were already well represented in the banking sector and that MTB faced strategic issues that could eventually prove challenging.

But while we don’t own MTB anymore, we still enjoy the “Message to Shareholders” letter penned by MTB’s chairman and principal shareholder, Bob Wilmers. Running to 38 pages, it is equal parts an explanation of the specific achievements and challenges of MTB, as well as a thoughtful and pointed commentary on doing business in middle America.

As a shareholder of Nexus, I identify with the challenges of operating a small business that Wilmers describes in the 2016 version of his “Message to Shareholders”. In particular, his examination of what he calls “the bloom of regulation” certainly resonated with me.

At M&T, we surveyed our small and medium-sized business clients in an effort to understand the challenges they face. One might expect them to express traditional concerns—such as the cost of materials or the pressure of competition. Instead, 55% cited the cost of employee healthcare benefits as their greatest hurdle, while 36% cited the not-unrelated challenge of complying with government regulation. To underscore: notwithstanding the slow growth environment of the post-recession economy, our own business clients view regulation as a greater concern than sales growth, the lifeblood of any business.

As we have found in our own markets, so has a national survey conducted by the National Federation of Independent Business (“NFIB”). Indeed, since 2009, that survey has cited regulation as the single greatest challenge facing small businesses across the country. This suggests that their core problem is not a lack of opportunity, but government-imposed obstacles that limit their ability to capitalize on the opportunities they identify. If concern over new regulation seems justified and plausible, the record confirms this. It shows that a bloom of regulation and regulators has accelerated since the 2008 recession. The extent of the growth in regulation is both impressive and staggering. Since 2010, the average number of pages of new regulations issued has exceeded 25,000 annually, up nearly 60% from the level of the 1980s. …The scope of regulation facing the businesses we serve has dampened and diverted their energies. It is very much uncertain whether the benefits of the ever-growing volume of regulation outweigh its drag on economic growth. One especially worrisome insight from a 2012 NFIB study: 55% of small business owners would not again choose to open shop. The declining rate of small business formation reflects this growing caution on the part of would-be entrepreneurs. The number of new small businesses has declined from an annual average of 529,055 during the period 2003-2007 to 399,483 during 2010-2014—a 25% decline.1

In our most recent Investment Review, we included a graph marking the sharp increase in small business optimism since Mr. Trump’s election. It’s clear evidence that at least one factor in Mr. Trump’s improbable success has been the hope that the burden of regulation will be rolled back.

Time will tell whether the pendulum of regulation will change direction under Trump’s Presidency. But if it does, it will broaden the base of economic expansion and be unambiguously positive for small businesses and those companies that service them.

Source: M&T Bank “2016 Annual Report Message to Shareholders” March 9, 2017.

2 Source: National Federation of Independent Business, period ending February 28, 2017.

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