Few companies have been as vilified in recent years as those in the oil and pharmaceutical industries, and now they could face legislative action in addition to harsh criticism as Democrats—following their mid-term election victory—took control of the House of Representatives for the first time in 12 years and eked out a narrow two seat majority in the Senate
For many public relations and lobbying professionals, the Democratic victory presents a new challenge. Many of those holding senior positions in Washington, D.C., have never had to deal with a Congress controlled by Democrats, and some are scrambling to bring on board counselors with ties to the new majority and to understand the issues that are likely to dominate the public policy arena over the two years between now and the presidential election of 2008.
“With a new sheriff in town, many industries and fields can expect greater scrutiny and oversight than they have faced for the last 12 years,” says Al Jackson, senior vice president and director of public affairs at Ketchum, who says the pharmaceutical industry and the oil industry are both likely to face real challenges. In addition, “the financial services, lending and credit card business will be under increasing scrutiny for high interest rates, predatory lending and interchange charges passed on to consumers. Executive pay will be questioned and legislation introduced to empower shareholders. And you can expect to see defense contractors grilled, and tobacco executives hauled back up to the Hill.”
The Democratic agenda is spelled out in a 32-page booklet called A New Direction for America, which includes six priorities that incoming House Speaker Nancy Pelosi, a California Democrat, says will be enacted within the first 100 hours of the new Congress. The Democrats call the six issues on which they plan to focus—real security at home and overseas, better jobs for Americans, college access for all, energy independence, affordable healthcare, and retirement security—their “consensus” agenda because they believe the majority of the American people support their plans and Republicans will have to either get behind them or risk casting unpopular votes.
“This country has spoken loudly and clearly,” says Senator Harry Reid, who is expected to be the new Senate majority leader. “There must be a change of direction in Iraq. We have to have results in doing something to make healthcare more affordable and more available. We have to do something to create energy independence.”
So while the public’s concern over the deteriorating situation in Iraq and Afghanistan was clearly a major factor in last week’s results, there are plenty of issues for business executives to worry about.
“While Democrats felt the need in ‘Six for 06’ to address their traditional disadvantage on national security issues, economic issues are the bread and butter of the Democratic agenda,” says a report prepared by BKS&H, the government affairs unit of Burson-Marsteller, which suggests that Democrats will ask a range of questions, including: “How well does an industry or employer meet the critical tests of income, job and pensions security? How does it stand up to gender and ethnic diversity review? Is it creating jobs that pay a ‘living’ wage and offer good benefits or is it downsizing and off-shoring positions? Is it a responsible corporate citizen?”
Democrats are particularly concerned, BKS&H says, about the growing feeling that America is becoming two economies, and that while share prices are rising and CEO compensation is soaring, ordinary Americans are being left behind.
“The stock market has reached record heights recently, but wages and salaries for the average American have been slow to rebound in this recovery,” says the report. “Many experts report a growing gap between the economic haves and have-nots.” Some of the more populist rhetoric of the Democratic campaign, on issues such as the minimum wage and free trade, as well as healthcare costs, clearly played to economic fears.
Having said that, while some of the new scrutiny of business could lead to legislation, the fact that most measures will need 60 votes in the Senate means that “much of what will be done on many issues will be about politics, not policy,” says Jackson.
Most observers expect the new Congress to take a balanced approach to business issues, rather than pursuing a radical liberal agenda.
“Dems clearly had a breathtakingly broad sweep on Tuesday, but you also have to consider its depth,” says Robert Mathias, managing director of the Washington, D.C., operations of Ogilvy Public Relations Worldwide. “With few exceptions, races were decided with fairly narrow margins, and they all need to be re-elected in two years. As a result, we will not be seeing any sort of broad, sweeping ‘liberal’ agenda in the traditional sense. Expect a fairly modest—and moderate—policy agenda going forward with aggressive and loud and highly visual oversight of existing Bush programs and policies including, but not limited to, the war.”
Former Democratic Representative Don Bonker, now an executive vice president with public affairs firm APCO Worldwide, agrees. “Democrats will be more vigilant, but not excessive, in dealing with policies affecting business,” he says, adding that business leaders should expect “more stringent policies and regulations in consumer safety and environmental areas,” and an increase in the minimum wage.
According to Gloria Dittus, president of public affairs consultancy Dittus Communications, which is part of international strategic communications firm Financial Dynamics, “This new class of Democrats knows that this year’s winning message of fiscal responsibility and moderation cannot simply be rhetoric: they must deliver concrete results.”
So while Democrats are expected to raise the minimum wage, they are also expected to show some support for the business agenda, increasing the research and development tax credit, for example.
“These new Democrats are true believers in their pro-business, pro-family, pro-community messages,” she says. “The voters in New York, Pennsylvania, Ohio, and Indiana as a group are not particularly liberal. Many are blue-collar, Reagan Democrats who aren’t necessarily anti-business, but they do believe the government has an obligation to provide a safety net for their future.”
The Democrats are likely to address the concerns of these voters—economic security and basic fairness—first, and most aggressively.
The Minimum Wage
Democrats have made it clear that they would like to raise the federal minimum wage from its current level, $5.15 an hour, to $7.25 or $7.50. Pelosi has pledged to take action on that issue within the first 100 hours on the new Congress, although there could be a battle over whether to index the increase to inflation or include what the GOP calls “compensation for small businesses.”
The minimum wage increase is one of the few Democratic priorities likely to attract broad bipartisan support, since it has broad public support. Ballot measures to increase state minimum wages passed in Arizona, Missouri, Montana and elsewhere. That’s unlikely to discourage affected industries—retailers such as Wal-Mart, fast food restaurants and small business owners—voicing their opposition.
“Business interests such as the U.S. Chamber of Commerce, the Business Roundtable, and the National Federation of Independent Businesses, will likely formally oppose a minimum wage increase on policy grounds and to protect their ability to argue against it next time,” says Jackson. “But everyone expects a minimum wage bill to pass and the President is already signaling he would sign it. He will likely want to couple it with something he and Republicans want in order to save face, but expect that to be one of the first bills introduced and passed in January.”
Dittus agrees. “A minimum wage increase may be the first agenda item Democrats bring to the floor for action. The Republican controlled house passed a minimum last year, and it’s likely that the Democrats will be able to get the 60 votes needed in the Senate to approve such a measure. And the idea is popular with voters. Republicans may feel hard-pressed to oppose the move, especially after President Bush said at his news conference that the minimum wage issue is an area where the administration could find common ground with the Democrats.”
With the Democratic victory, two of the strongest critics of the pharmaceutical industry are back in power. Henry Waxman is expected to be chairman of the health subcommittee of the House energy and commerce committee, and Pete Stark will likely chair the health subcommittee of the House ways and means committee. And both are likely to pursue a wide range of measures that could be detrimental to the health of large pharmaceutical companies.
Peter Pitts, who heads the health policy practice at Manning Selvage & Lee, is worried about “a reign of terror” against the pharmaceutical industry.
“I am concerned that, as far as FDA is concerned, we will lose whatever momentum there was towards an agency that was focusing on what [acting commissioner] Andy von Eschenbach calls ‘the three Ps of prevention, predictive tools, and the participatory Critical Path’ and we will move to a House of Representatives that is focused on payback and partisan politics. And that means hearings. Lots and lots of hearings couched in the word ‘oversight.’ And that’s deleterious and particularly dangerous right now because of PDUFA.”
The Prescription Drug User Fee Act, or PDUFA, was passed in 1993, in response to industry pressure for a faster and more predictable review of new drug applications and involves user fees, paid by pharmaceutical companies, which pay for more staff and thus speed drug approval—and now account for more than 50 percent of the FDA’s budget. Since 1993, PDUFA has been renewed three times, but when it expires again on September 30, 2007, and the Democrats could push for big changes.
A recent Institute of Medicine report identified numerous problems at the FDA, claiming that as a result of PDUFA, the FDA’s resources are “significantly skewed toward the drug-approval process, hampering the agency’s ability to monitor the safety of marketed medications” and pointing to recent cases—Vioxx in the most high-profile—in which approved medicines were recalled because of safety concerns.
The IOM report called for several new initiatives, including new labeling during the first two years after approval to alert patients and healthcare professionals that there may be uncertainties about a product’s risks and benefits; a moratorium on direct-to-consumer advertising during a product’s first two years on the market; and expanding FDA authority to allow fines and injunctions for non-compliance.
“Those first 100 hours are beginning to sound like a real reign of terror for Big Pharma,” says Pitts, who is also concerned about Democratic plans to reform the Medicare drug program, which would put an end to the windfall pharmaceutical and insurance companies enjoyed when the law—which forbids the government from negotiating drug prices with pharmaceutical companies—was enacted by the GOP Congress in 2003.
“The government negotiates big discounts for the prices of drugs for our veterans,” says Senator elect Amy Klobuchar of Minnesota, one of the Democratic freshmen who ran on a promise to reform the healthcare system. “But the drug companies got Congress to make it illegal to negotiate for lower prices under Medicare.”
Indeed, one of the reasons pharmaceutical prices are so much lower in virtually every overseas market is that they are negotiated—some would say fixed—by the governments of those countries. That means that American consumers effectively subsidize those in the rest of the world, but it also means that if the American government negotiated prices, pharmaceutical companies would be forced to increase the cost of drugs for everyone.
“Does anyone really believe that government can negotiate better than private industry—for anything?” Pitts wonders. “One need only look at the VA system to see how government ‘negotiating’ leads to restricted choice.” The VA offers 1,300 drugs on its formulary, compared to 4,300 for the average Medicare Part D plan.
It’s no surprise that in the days after the election, Wall Street has pushed drug and insurance stocks lower (Pfizer was down 5.8 percent in the three days after the election, Merck dipped 6.1 percent and HMO stocks were lower by 5.2 percent on average). But even supporters of negotiated Medicare drug prices say the new legislation faces challenges, including a potential presidential veto.
Perhaps a more serious threat stems from Democratic support for allowing the importation of cheaper drugs from other countries, most notably Canada, and expanding access to generic medications.
“Drug re-importation will be hard to stop and it’s not clear whether the President would veto it,” says Jackson. “It’s just too hard to explain or defend.”
Mathias anticipates action for two reasons. “First, the new Congress and Democratic chairs will want to do something and second, the 2008 presidential election is now just 727 days away. Both parties see a real and viable path to the White House that will most assuredly involve seniors, rising healthcare costs, and access and affordable to care, including pharmaceuticals.”
The Pharmaceutical Research & Manufacturers of America, meanwhile, has issued a statement from CEO Billy Tauzin, who says: “We believe Congress and the administration should carefully consider the impact that any legislation or regulation might have on pharmaceutical innovation. We support public policies that help promote an environment in which the innovation of new, cutting-edge treatments are valued and encouraged.”
The Oil Industry
The combination of soaring prices at the pump and even higher profits—ExxonMobil made more than $10 billion last quarter—have led to a growing American disenchantment with Big Oil.
“Oil companies are swimming in windfall profits and American consumers are sinking,” said Senator Dick Durbin last year as he introduced a bill to tax those profits. That bill died in committee, and there seems to be considerable disagreement within Democratic ranks about whether it should be revived during the next session.
John Dingell, the likely chair of the energy and commerce committee, is a Michigan Democrat and traditionally a big supporter of the automotive industry, but his stated priorities include air quality, implementation of the Energy Policy Act (which focuses on encouraging the use of alternative fuel vehicles), and action on climate change. That means the oil industry—and so-called windfall profits—are a likely first target.
“Going after ‘tax giveaways’ to oil companies at a time of higher energy costs will be popular with many voters,” says Dittus. “The policy reality, however, is that expanding domestic exploration and production is key to America’s energy security, and these incentives help companies do that. There are plenty of Democrats from energy producing states who recognize the value of the energy industry to the nation’s future.”
But incoming House Speaker Nancy Pelosi has said that ending the $2.8 billion in tax breaks and other incentives given to oil companies in last year’s energy bill will be among the six major tasks Democrats plan to tackle in the first 100 hours of the new Congress— possibly using the money to fund new incentives for conservation, renewable fuels and alternative energy technologies—and adds that Democrats will also enact tough laws to stop gasoline price gouging.
That’s led to optimism on the part of environmental groups.
“The American people’s vision of an energy future that is very different from current policies is the winner, and Big Oil is the big loser,” says Gene Karpinski, president of the League of Conservation Voters. But others question how much Democrats will be able to accomplish with a narrow majority and the threat of a presidential veto.
“While there will likely be some discussion and potentially hearings on the environment, I would think company profits will face far more scrutiny,” says Jackson. “Global warming is a much bigger deal outside the U.S., but it is not really a major issue for most U.S. voters.”
The conventional wisdom is that the majority of those Democrats who captured seats previously held by Republicans are moderates or even social conservatives, but on trade issues the majority is firmly in the protectionist—or economic nationalist—camp, and many of them ran on a promise to take a sterner look at free trade and globalization, both of which flourished under President Clinton.
Senator-elect Sherrod Brown of Ohio (a state that has lost 200,000 manufacturing jobs during the Bush administration) is the author Myths of Free Trade and told voters in one ad: “I’m for an increase in the minimum wage and against trade agreements that cost Ohio jobs,” while a voice over explains: “Sherrod Brown stood up to the president of his own party to protect American jobs, fighting against the Mexico and China trade deals that sent countless jobs overseas.”
Rep. Charles Rangel, the New York Democrat who will chair the House ways and means committee, has said that the U.S. needs to “be angry as hell and try to protect American industry.... We have to protect American jobs and American manufacturers.”
At the very least, the new Congress will mean more discussion of “fair trade” (a term used in Europe to denote fairness to producers in developing countries, but in the U.S. to denote protections for American workers), says Jackon. He anticipates an effort to place some limit on “cheap imports,” with discussion around child labor, unreasonably low wages and slave labor, and environmental and worker safety standards in other nations that give competitors an unfair advantage.
“Several victorious Democrats, including conservatives, argue that U.S. manufacturers are being battered unfairly by companies in China and other low-wage countries with weaker environmental and labor protections,” says Dittus. “In addition, this new class of Democrats will be seeking to demonstrate its support for rural and rust belt-Americans. Increasingly protectionist trade measures will likely be crafted to demonstrate support for this critical constituency.
“And now that they are in the minority, many Republicans may feel liberated to back some protectionism, depending on their district.”
She says the debate is likely to be particularly heated with regard to China, with likely issues including stricter enforcement intellectual-property rights and scrutiny of what critics say is “currency manipulation.” At the very least, the new Congress is not likely to extend the President’s “fast-track” trade negotiating authority, which expires this summer.
“The Democrats have some genuine concerns regarding trade issues,” says Bonker. “Thanks to organized labor, Democrats have turned the corner and are now on a path to protectionism. Pending and future free trade agreements will go nowhere in a Democratic-controlled Congress. There will also be minimal support of U.S. leadership at the World Trade Organization, which is needed to sustain the organization.”
But the discussion is unlikely to break down exclusively along party lines.
“Trade is no longer a Democrat versus Republican issue,” says Jackson. “But it is safe to say that Democrats are generally more protectionist than Republicans, and that is especially true as we head into a Presidential election race when the power and importance of U.S. labor unions—because of their leading role in Democratic presidential primaries—is at its highest.’
If the oil and pharmaceutical industries have reason to be concerned and if Democratic policies on the minimum wage and trade and more likely to please workers than their bosses, there are some areas where there’s cause for corporate optimism.
One issue on which there appears to be some measure of consensus is the reform of the Sarbanes-Oxley laws, passed in the wake of the Enron and Worldcom scandals, but widely criticized for imposing a heavy reporting burden on corporations.
Republican Representative Michael Oxley and Democratic Senator Paul Sarbanes both chose not to stand for re-election in 2006, and Barney Frank, incoming chair of the financial services committee has said that Section 404 of Sarbanes-Oxley—which requires companies to disclose more information about their internal financial control and outside auditors to issue opinions on those controls—“as administered has become too burdensome.”
More controversially, though, Frank could revive a stalled bill that would give shareholders a vote on executive compensation.
The technology industry, which enjoyed amazing growth during the Clinton years, has relatively little to fear from a Democratic Congress, observers say. Pelosi has made it clear that she would like to provide Americans with speedier and cheaper broadband Internet access, and industry leaders are also hopeful that Democrats will support renewal of the research and development tax credit, and an increased supply of visas for skilled foreign workers, as well as more funds for scientific research.
Other potential beneficiaries include companies in the homeland security sector, which could benefit from Democratic efforts to step up port security and implement other recommendations of the….
After the Iraq war, the issue that probably turned more voters against Republican rule than any others was the widespread corruption that has become apparent over the past couple of years. Three-fourths of voters told exit polls the scandals and corruption in the nation’s capital—which presumably encompasses a range of issues from the Jack Abramoff influence peddling scandal to the indictment of House majority leader Tom DeLay to the solicitation of young boys by high-profile members of the religious right—were very or extremely important to them. And those voters tended to lean strongly Democratic in this election.
“Corruption in government and high profile and inappropriate behavior by elected officials were cited in exit polls as important factors in motivating voters to cast their ballots against a number of Republican incumbents,” says BSKH, which cites a recent study by U.S. News & World Report and the Kennedy School of Government at Harvard, which asked respondents to quantify their trust in major institutions. State and local governments, Congress, and the executive branch were at the bottom of the list.
“All of this has contributed to a sour public mood and has collectively broadened public sentiment for a more effective, interventionist government role in protecting their interests,” says the government relations firm.
“Corruption comes out as the number one issue at exit polls, so expect to see a lot of emphasis on good government, anti-corruption measures,” says Mathias. “Marry the new Congress with [former state attorney general Eliot] Spitzer as the governor of New York and a very interesting dynamic comes into play. Voters—and consumers—are weary of the ‘quick cheat,’ the perception that their congressman or their CEO can and does get away with things that they cannot, that he or she is ethically challenged and that in many cases just plain and obviously wrong.”
Democrats were generally unhappy with the weak reforms proposed—but never passed, due to protracted wrangling between the House and the Senate—in the wake of the Abramoff scandal, and have offered a raft of proposals: banning gifts and travel paid for by lobbyists; doubling (to two years) the time that lawmakers and senior officials are barred from lobbying their former offices; forcing lawmakers to disclose when they are negotiating for private sector jobs; and imposing new transparency requirements on lobbyists.
Ross Eisenbrey, vice president and policy director for the Economic Policy Institute, says that if incoming Speaker Pelosi of California tackles corruption as she promised, “You could see a major change in the way corruption is treated in Washington, because the ability to influence members would be diminished substantially.”
Lobbyists, meanwhile, see a whiff of hypocrisy in the efforts to cast them as villains. “Let’s not place the entire blame on lobbyists, so you can have a press conference, and then call us the next day and ask for campaign contributions,” says Paul Miller, president of the American League of Lobbyists. “There are just as many Democratic lobbyists as Republican lobbyists.”
Public relations and public affairs professionals, meanwhile, are broadly optimistic about the implications of the Democratic victory for their own outlook.
“With gavel in hand, there’s no question House and Senate Democrats are going to use the committee process to focus on industries they believe have had an easy time during one-party rule,” says Rob Rehg, president of the Washington, D.C., office of Edelman. “It’s anybody’s guess what will make it to the president’s desk, but at a minimum we’re guaranteed a completely new political dialogue.
“From a PR standpoint, it’s important that companies don’t take their eye off their long term communications goals. They need to continue to be proactive with their positive messages at the same time they are dealing with the negative fallout resulting from an energized, adversarial Congress. The Democrats running the oversight committees know what they’re doing. They know how to use the press and push the right buttons to get the maximum play with the public.
“The smart corporate public relations professionals are going to spend the next 60 days huddling with their Washington people and their D.C. trade associations to make sure they’ve got a game plan.”
The very fact that there’s a divided government means that public relations activity will be more necessary than ever.
“The media loves conflict and, unlike the existing congress where not much of anything really happened other than the occasional scandal, the next congress will be full of conflict, across the aisle and with the White House,” says Ogilvy’s Mathias. “So there should be more and easier opportunities for business to insert its voice into debates through media coverage.”
The bottom line, according to Mathias: “Change is good for our business. New committee chairs, new issues being advocated and attacked, new constituencies in play, new audiences to be reached. So, for our business, next year should be healthy.”