What a divided government means for business

With inflation, rising energy costs and a looming recession, Republicans were anticipated to win at least one chamber of Congress, but an uptick in voter registration in response to recent political events made the election slightly more unpredictable. 

Democrats outperformed expectations, and a few crucial victories helped them hold onto the Senate. After several days of careful counting, the Republicans will take control of the House of Representatives. These results fall in line with historical outcomes after a president’s first two years in office; the president’s party typically loses seats, it’s often a matter of how many and where. The change in power wasn’t as extensive as past midterm elections, but nevertheless, it resulted in split control of the federal government.

Divided government control—with one party controlling the executive branch and the other party controlling at least one body of Congress—will limit the scope of new legislation.

According to our just-published PwC Pulse Survey, most executives welcome this result. Fifty-two percent of respondents believe having the House under Republican control will have a positive impact on the business environment, compared to only 8% who believe it will have a negative impact. The same holds true for the impact on their company—53% view the change positively, while 8% do not.

  • Most executives view a flip of the House to Republican control as a positive change for both the business environment and their company.

  • Forty-three percent of executives are very concerned about a more active regulatory and legislative environment.

  • With split control of the federal government, the Biden administration will likely push policy through regulation and executive order, while congressional Republicans will likely increase oversight.
  • Raphael Warnock narrowly defeated Herschel Walker in the Georgia runoff election, giving Democrats 51 seats in the Senate. While they had already managed to retain control of that chamber of Congress, the extra seat has the potential to shift the balance of power within the party.

Execs worry about a more active regulatory and legislative environment

The 118th Congress begins January 3, and Americans should likely expect to see a quick halt to any major partisan legislation. The House will be able to block bills with a simple majority and propose cuts to Democratic priorities. But since the Democrats narrowly held the Senate, they can prevent the Biden agenda from being dismantled. 

With continued political tensions, significant bipartisan legislation will be more challenging. Businesses should keep a watchful eye as the Biden administration will likely push policy by regulation and executive order, while congressional Republicans will likely increase oversight. 

Our Pulse Survey indicates that 43% of executives are very concerned about a more active regulatory and legislative environment, and some companies are strategizing to stay ahead of these changes. More than one-quarter (27%) of executives plan to hire more compliance staff over the next 12 to 18 months.

What lies ahead

Tax, climate and cybersecurity are all on executives’ radar. Business leaders need to be agile, as Republican control of the House may impact business in these areas.

Since the House flipped to the Republicans, the upcoming lame-duck session will be active for Democrats. One of their most pressing agenda items will be funding the federal government beyond December 16 to avoid a shutdown. Additionally, they’re expected to pass legislation on a defense authorization bill. The current Congress may also consider a year-end tax package, electoral college count reforms, a marriage protection proposal and energy permitting legislation. 

Though Democrats may try to reach an agreement on a year-end tax package to restore business-favorable provisions like the business research expenditure deduction, it will likely require bipartisan support. Republicans are expected to stall action on tax legislation until the new Congress takes control, and Democrats are opposed to addressing business tax provisions without restoring all or parts of the American Rescue Plan Act (ARPA) enhanced child tax credit.

After January 3, a Republican-controlled House will likely block any new tax increases and certain other Democratic tax proposals. But now that the Inflation Reduction Act is in place, tax legislation is expected to be limited as both parties position themselves for the next election. 

Your company’s tax function needs to be agile to react to all of these changes, particularly in today’s challenging economic environment. Businesses and individuals will want to assess the impact of the 2022 midterm elections, but according to our Pulse Survey, 81% feel either mostly or completely prepared for US tax policy changes. Furthermore, 83% agree or strongly agree that their company has the appropriate talent to successfully tackle changing tax policies.

A Republican-controlled House will likely move the arena of action on cybersecurity from legislation to executive and regulatory action. Cybersecurity, which has benefitted from a small, determined bipartisan coalition, may not be at the top of the Republican legislative agenda. 

Nevertheless, cybersecurity is the top policy area that C-suite executives are most actively engaged in (33%) and monitoring (53%). That’s not surprising. Cyber is on the radar of senior business execs in terms of risks, investments and transformations. 

With a Republican House, the Biden administration will likely need to rely on executive and regulatory action to continue the momentum. 

  • New cyber positions have been filled at the White House with Chris Inglis as the National Cyber Director and Anne Neuberger as Deputy National Security Advisor for Cyber and Emerging Technology, and at the State Department with Nathan Fick as US ambassador at large for Cyberspace and Digital Policy. Together with existing executive branch agencies, they have focused on private-public sector partnerships such as the Joint Cyber Defense Collaborative and NSA’s Cybersecurity Collaboration Center.
  • The Cyber Incident Reporting for Critical Infrastructure Act of 2022 (CIRCIA), signed into law in March 2022, requires organizations in 16 critical infrastructure sectors to report major cyber attacks and breaches within 72 hours and to report within 24 hours any ransomware payments they make. Now in the drafting phase, CISA’s proposed rules are not due until March 2024, with final regulations due by September 2025.  
  • A raft of regulatory proposals for greater transparency into cyber incidents, strategy and risk management is on the table, including mandatory disclosure rules from the Securities and Exchange Commission and other agencies. These would push federal requirements further in a space where robust state regulation, like the NYS Department of Finance Part 500, already exists.
  • As directed by the Executive Order (EO) on cyber, the federal government is modernizing its approach to cyber. It has published guidance on software supply chain security, critical software security and zero trust architecture. By wielding its massive purchasing power, the administration can have a cascading impact on the private sector. In addition, the Cyber Safety Review Board, called for in the EO, is now operational.
  • The administration has also signaled action through initiatives like directives to pipeline and rail operators, and the Industrial Control Systems (ICS) Cyber Security Initiative.

Cyber is more than a compliance concern. Boards and C-suite executives know that as they make technology the backbone of their strategic transformations, they need to focus on managing cyber risks better. Companies are right to be engaged today, including in commenting on CIRCIA rulemaking, participating in partnerships and improving their external cyber reporting.

The corporate ESG movement has progressed in recent years, but advocates for these changes may face challenges from a Republican-led House. With legislation subject to the Biden administration's veto, Republicans will likely increase oversight on regulators and private companies seeking to advance ESG initiatives.

In particular, Republicans may attempt to prevent efforts put in motion by the SEC. Rep. Patrick McHenry (R-NC), expected to become chair of the House Financial Services Committee next Congress, has mentioned that Republicans could use the appropriations process to drain funding for ESG-related rules.

In March 2022, SEC Chair Gary Gensler proposed new rules for climate-related disclosures—an effort that has been both praised and scrutinized. Critics have raised questions, including whether the SEC has the authority to adopt this regulation, whether it violates the Administrative Procedure Act and whether it violates the “major questions doctrine” requiring a clear congressional mandate to enact rules of economic and political significance. 

It seems likely that the new Republican House majority would try to put a pin in it, as they have already asked the SEC to preserve and provide documents related to its proposed rule. They can attempt various measures to limit or overturn this rule, but President Biden would likely veto what he can. The agency has not yet voted on the final climate rule, but political and legal challenges likely await whatever is put in place.

Our Pulse Survey asked board members about the SEC proposal, and 65% told us they know how the proposed climate disclosure requirements will affect their companies, while 64% said their company’s processes and controls over ESG information are adequate.

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