2025 Sustainable Investing Trends

Navigating Deregulation: The Evolving Role of Corporate Boards in Ensuring Stability and Growth

Some U.S. corporations and investors may view the second Trump administration as the dawn of a new “golden age” of governance. Deregulation lessens or removes restrictions and red tape that sometimes slow or prevent corporations from pursuing certain initiatives. This, in turn, can promote economic growth.

However, deregulation may also contribute to corporate and financial system failures by lowering or removing useful guardrails. When the government steps back from holding up guardrails, it increases the responsibility of boards of directors to be vigilant. In other words, just because you can do something doesn’t mean you should.

Our focus is on understanding how the board’s role may evolve in this era.

Historical Overview of U.S. Deregulation Events

The U.S. has experienced several significant periods of deregulation over the past 50 years. Notable examples include:

1. Late 1970s to early 1980s: Under Presidents Jimmy Carter and Ronald Reagan, essential industries such as airlines, trucking and telecommunications were deregulated to promote competition and reduce government intervention. The Airline Deregulation Act of 1978 and the Motor Carrier Act of 1980 are prime examples of these actions.¹

2. 1980s Financial Deregulation: The financial sector experienced significant deregulation during the 1980s, which reduced restrictions on the types of activities banks and thrifts could pursue. The goal was to increase competition and innovation in the financial industry.²

3. 1990s Telecommunications Deregulation: The Telecommunications Act of 1996, a major legislative overhaul, aimed to foster competition in the broadcasting and telecommunications markets by removing barriers to entry and allowing media companies to enter new markets.³

4. Late 1990s to Early 2000s Financial Deregulation: This period saw further deregulation in the financial sector, most notably with the repeal of the Glass-Steagall Act. This allowed commercial banks, investment banks and insurance companies to consolidate and offer a broader range of services.⁴

These periods of deregulation were driven by the belief that reducing government intervention would lead to greater efficiency, spur innovation and generate economic growth. While this did happen in many ways, with hindsight, deregulation also sowed the seeds of risk and had unintended consequences, such as financial instability and reduced consumer protections.

How Deregulation Affects Economic Stability

Deregulation can remove barriers, thus fostering competition that tends to benefit consumers. For example, deregulation in the airline industry led to new airlines entering the market, which resulted in lower fares and more choices for the flying public.

Removing regulatory constraints can allow companies to innovate more quickly and improve efficiency. The Telecommunications Act of 1996 led to significant technological advancements and enhanced services in the telecommunications industry. Deregulation can stimulate economic growth by allowing businesses to allocate resources more efficiently. This can lead to job creation and further investment, resulting in a virtuous growth cycle.

However, there are negative consequences, such as job losses, market instability and even financial crises. Deregulation in the financial sector in the late 1990s and early 2000s is often cited as contributing to the 2008 global economic crisis. Removing regulations and relaxing enforcement can hurt consumers.

For example, in the late 1990s, California’s deregulated electricity market led to price manipulation and blackouts. Some businesses, most notably Enron, generated excessive profits as consumers’ electricity bills rose by more than 270%.⁵ Looking back, we can see that deregulation played a significant role in Enron's collapse.

So, while deregulation can drive economic growth and innovation, companies must carefully consider potential risks and the need to maintain adequate safeguards to protect their reputations, uphold consumer safety and support systemwide stability. This is easier said than done when the “government as overseer” steps back, given that competitors could ignore these issues to pursue short-term gains.

The Importance of Board Oversight During Deregulation

In a period of deregulation, a company’s board of directors becomes even more critical in providing direct oversight and guiding senior management. In our view, boards should take a more active role in the following areas:

• Providing strategic leadership to help the company navigate new opportunities and risks arising from deregulation.

• Offering guidance and oversight on risk management to ensure that robust internal controls and risk management structures are in place to mitigate risks associated with deregulation.

• Fostering a culture of innovation and adaptability to capitalize on reduced barriers to entry, which may include adopting new technologies, investing in research and development, or expanding into new markets.

Ensuring Compliance and Governance Amid Deregulation

When regulations are relaxed or eliminated, the risk to a company's reputation can increase. To mitigate this, boards should pay closer attention to the needs of the company's various stakeholders. Building trust with these stakeholders can help prevent serious missteps, particularly in this age of social media, where news spreads faster than ever.

Of course, deregulation doesn’t mean abandoning ethics and transparency. Boards must work harder to ensure the company adheres to legal and ethical practices in its operations and dealings with suppliers, customers, employees and other stakeholders. This includes ensuring the company’s actions align with its values. Remember that auditing firm Arthur Anderson shredded documents to conceal potentially damaging evidence about its dealings with Enron. This lack of strong corporate governance and oversight brought down the 90-year-old firm.

In an era of deregulation, the role of a corporate board becomes increasingly complex. Boards should recognize that when teenagers' parents are away for the weekend, the likelihood of large parties increases, which can lead to unpredictable situations. While deregulation can offer various benefits, it also carries the risk of potential harm when government restrictions are lifted.

For example, reduced Federal Aviation Administration oversight over Boeing, which ceded certain regulatory responsibilities to the company, likely contributed to a series of major issues with the 737 Max aircraft. In the U.K., a fire in the 24-story Grenfell Tower resulted in the deaths of 80 people, a tragedy largely attributed to the deregulation of safety standards that allowed the use of flammable building materials.

In sum, while deregulation can help spur growth, it also means more responsibilities fall to corporate boards. By engaging more actively in a company’s strategic and operational aspects, boards can better navigate the challenges and opportunities of deregulation.

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Sarah Bratton Hughes

Head of Sustainable Investing

^{¹ Sarah Dudley, “A Brief History of Regulation and Deregulation,” The Regulatory Review, Penn Program on Regulation, University of Pennsylvania, March 11, 2019.
² Matthew Sherman, “A Short History of Financial Deregulation in the United States,” Center for Economic Policy and Research, July 2009.
³ Sarah Dudley, “A Brief History of Regulation and Deregulation,” The Regulatory Review, Penn Program on Regulation, University of Pennsylvania, March 11, 2019.
⁴ Matthew Sherman, “A Short History of Financial Deregulation in the United States,” Center for Economic Policy and Research, July 2009.
⁵ State of California Department of Justice, Corporate Fraud Section, Energy Unit, accessed March 4, 2025.}