'The Middle Market'

Middle Market to Regulators: Here's What To Do

Jennifer Leigh Parker, |Writer, CNBC.com
Government Regulation

Regulation, in the corporate world, is generally thought of as something to move around, over, or through.

Complying can be very costly, and many will do what they can to avoid red tape.

Yet others can’t imagine operating without some regulation, and go as far as to say they’re happy to pay for it.

Still others are somewhere in between, opting to influence regulators by speaking out, or even writing their own rulebooks. A birds-eye view of these actions reveals what works — and what doesn’t — for mid-sized companies.

An aerospace manufacturing and delivery company based in California, Composites Horizons, took matters into its own hands.

“The reality is, we have to comply to industry standards. We all fly. We all know what we want that airplane to do for us. So, the aerospace industry developed a voluntary, self-regulating system, which costs us $50,000 a year," says Jeff Hynes, the company's CEO.

The company uses standards from International Organization for Standardization (ISO) to evaluate its own safety performance, which the Federal Aviation Administration then uses to make its own judgment on how the company is doing. The process costs Composites Horizons five percent of its annual operating profit.

For Hynes, this is a no-brainer investment because ISO's reach — as the world's largest developer and publisher of international standards — lends credibility to his company.

“I’m a free market guy, but in our industry you just have to expect that you’re going to have audits. But if you keep your nose clean, a lot of these regulations are just good business requirements,” adds Hynes.

Food manufacturer Bellisio Foods is a private company that also sees regulation as necessary, and even positive. As a producer of meat and chicken products, the [], USDA maintains a daily inspection presence in their facilities.

"Our interest are aligned with the regulators — to protect the American consumer. Do they get it right all the time? No, but they do an amazing job keeping our food safe," says CEO Joel Conner. 

According to Conner, the cost of compliance is roughly 15 to 20 percent of the $200 million a year Bellisio spends on manufacturing. He claims the company would make this investment with or without the enforcement of regulators.

While food safety has an obvious link to Bellisio's bottom line, he says the food industry is not the only one that depends on regulators; "You can look at any number of industries, and say, we really rely on the government to establish and enforce minimum standards of consumer safety. I think the attitude that all regulation is bad is simply inappropriate.”

Conner's take on regulation, however, may put him in the minority. According to consulting giant Deloitte's new study of middle market executives, a majority perceive regulation negatively, citing it as an obstacle to American competitiveness.

Lighting Science Group 's Chief Technology Officer Fred Maxik puts it bluntly: "Products going on sale in foreign markets six to eight months prior to sale in the US means utility regulation is out-dated and onerous."

The mid-sized LED lighting manufacturer complies with “Energy Star”—run by the —which certifies the efficiency, quality, and longevity of their products. The company also complies with Underwriters Laboratories (UL), a safety regulator required by local municipalities around the country.

“Between the two [EPA and UL], they are really slowing down the ability of small companies to come out with products fast enough, and it is greatly increasing the expense of bringing products to market,” says Maxik.

The regulatory process of approving LED lighting prototypes takes approximately nine months, according to the company. At anywhere from $20,000 to $100,000 per product, Lighting Science Group spends $1-2 million annually on compliance.

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Maxik is convinced that if regulators adopted modeling software systems instead of the assembly line-type testing that is currently used, compliance costs could be cut in half.

"Software allows us the knowledge, abilities, and hardware to run simulations on what products will do two, three, four years down the line, Maxik says. "What we’re doing today in 6,000 hours could be done in 60 minutes on a super computer."

Chemical distribution business Harcros Chemicals, based in Kansas City, also pays a high price in order to keep up with regulations, a cost that is ultimately borne by their customers. 

"We’re selling to US manufacturers who are trying to compete overseas. Our customers will be negatively affected when they try and compete globally because of these [regulatory] costs," says Harcros CEO Kevin Mirner.

In 2010, the company spent $500,000 in legal fees to defend individual employees against claims of violations coming from both the EPA and theDepartment of Transportation, DOT. This sum is "typical" for the company, which spends between $400,000 and $600,000 a year on legal fees.

Mirner agrees that a chemical manufacturer making ingredients for household products such as shampoo and dishwasher soap should be closely scrutinized. But it is the approach regulators take, rather than their presence, which bothers Mirner.

"The EPA in our region was bragging about how much they had fined people. They should instead be looking to improve the environment, not just 'if we catch you doing something wrong, we’re going to fine you'," adds Mirner.

Mirner contends that his business would be better off if regulators made recommendations on how best to prevent violations, rather than simply doling out fines when they occur.

"Regulators have been very slow to adopt common sense changes to their standards which will ultimately help consumers," concludes Maxik.