Risk 10: Risky business

Two years ago, we warned that customers, employees, and investors—mostly on the left—were bringing the US culture wars to corporate boardrooms (please see Eurasia Group's 2022 Top Risk #9). That's still happening.

Since then, courts, governors, state legislatures, and activist groups—mostly on the right—have started to punch back. In 2021, Texas banned state investment funds from working with financial firms that boycott fossil fuel companies to comply with ESG standards. In 2022, Florida revoked Disney's long-standing special tax status in retribution for the company's criticism of the “Don't Say Gay” law signed by the state's Republican governor. In 2023, conservatives nationwide launched a boycott of Bud Light after transgender influencer Dylan Mulvaney promoted the beer on Instagram, causing sales to plummet and forcing out two senior executives. The year closed with a knock-down fight against elite university presidents over their response to campus activism, antisemitism, and the Israel-Hamas war.

America's growing political polarization is fragmenting the internal market along party lines. Red and blue states increasingly diverge on issues as varied as LGBTQ rights, education policy, and even whether companies can require on-site employees to be vaccinated, making it costlier for companies to operate in all states. Last March, for example, after Walgreens decided it would not distribute the abortion pill mifepristone, California Governor Gavin Newsom announced his state would no longer do business with the pharmacy chain (though he could not ultimately follow through on the threat). A couple of months later, seven Republican state attorneys-general sent a letter to Target warning that the retailer's Pride Month merchandise could violate their states' child protection laws. Since 2021, 18 states have passed laws or issued orders to ban or limit the teaching of race, gender, and sexuality issues in schools.

This year, as the November elections approach, Donald Trump's megaphone grows louder, and new fronts open in America's culture wars, conservatives will continue to jettison their free-market instincts in favor of retaliatory, “anti-woke” political activism, doubling down on their use of state legislatures and the courts to assert states' rights over federal regulatory authority.

For instance, last year's ruling by the US Supreme Court banning affirmative action in university admissions opened the door for conservative politicians, activists, and attorneys-general to ramp up legal challenges against corporate diversity, equity, and inclusion programs. Groups such as the National Center for Public Policy Research and America First Legal are already filing shareholder complaints and bringing lawsuits against major corporations such as Starbucks and McDonald's. Legal battles will also play out across states over transgender protections, environmental regulations, abortion restrictions, gun control, and other hot-button issues. As the Supreme Court continues to rule in ways that shift decision-making authority toward states (such as in the Dobbs v. Jackson Women's Health decision on abortion rights) in these and other divisive policy areas, more legal and regulatory fragmentation will ensue.

Companies will also face growing risks from a widening red vs. blue divide among America's state capitals this year as the shades of each color darken within states and the number of state government trifectas reaches its highest level in decades. In 2024, one party or the other will control the governor's mansion and both legislative chambers in 40 of the 50 US states, home to about four in five Americans. In all these states, the same party that holds the trifecta will also hold the top three executive positions: governor, attorney general, and secretary of state. This consolidation of one-party rule will play out in the policy space as state lawmakers press the advantage conferred by their dominance to impose maximally conservative or liberal policies on the nation's thorniest issues, leaving little room for bipartisan compromise and deepening policy polarization even further.



Firms operating in both blue and red states (read: most of the Fortune 500) will struggle to adopt cohesive nationwide strategies that satisfy Democrats and Republicans alike. Increasingly, these companies will face a tough choice: comply with laws and regulations that offend their corporate and customer values and risk getting “canceled,” or exit certain state markets. And with the GDP of some US states rivaling that of sovereign countries—California's economy is larger than the UK's, Texas's GDP tops Italy's, and New York's economy is bigger than Russia's—these are expensive decisions.

While the decentralization of US politics—and the resulting free market of political and economic strategies—may be both a growth driver and a stabilizing feature during a contentious election year that will result in significant dysfunction at the federal level (please see Top Risk #1), companies caught between conservatives and progressives will nonetheless see their decision-making autonomy limited and their cost of doing business rise. Forced to navigate conflicting laws, regulations, and court rulings across red and blue states, business leaders will find themselves in a lose-lose environment of higher policy uncertainty and regulatory risk.