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The False Promise of Regulatory Reform (Repost from

[My colleague Justin O’Brien recently launched a new portal for his Centre for Law and Regulation at the University of New South Wales. He invited me to post some thoughts about corporate accountability and regulatory reform — and I delivered a two part analysis. Here is the second part — the original is found at]

I have argued thus far that much of the global policymaking rhetoric emerging in response to the 2008 financial market collapse has been based on the two simple narratives that stress the role of corporate accountability as both cause and cure. Together these comprise the “policy theory” that underlies current government responses to the crisis.

Students of public policy are taught that the policymaking process is a messy business involving a clash of interests engaged in bargaining and compromises. But in many cases — especially those related to particular events or crises — policymaking also involves explicit or implied theories of cause and possible cures. The implied policy theory reflected in responses to the financial crisis triggered by the 2008 bankruptcy of Lehman Brothers has been relatively clear: the economic turmoil resulted from deregulation and the subsequent lack of responsible behavior on the part of the banking community and especially major investment houses. It followed that what was needed was a reconstruction and reinvigoration of a stronger regulatory regime with the intent of strengthening corporate accountability in the financial industry and throughout the corporate world.

In an ideal world, theories are grounded in facts and constantly put to the test; in the world of policymaking they are often based on pure speculation and supported primarily by an unwarranted but strong belief in the theory and its veracity. The problem is that in policymaking such strong beliefs often trump efforts to weigh the evidence against a dominant theory or in support of alternative policy approaches.

At this juncture I have no intent to argue against the causal (explanatory) part of this policy theory, other than to note that most analyses indicate that the issues underlying the events of 2008 and the Great Recession that followed were more systemic than the theory implies. Deregulation and the lack of corporate accountability certainly factor into any explanation, but there is little evidence to back the argument that a future recurrence of the crisis will be prevented if we rebuild the regulatory regimes that began to dissipate from the late 1970s onwards. If that is the only major response, then we have certainly learned little of value from the economic collapse.

At the same time, I do not intend to argue against the cure part of the theory, for certainly any coherent policy response must take into account the need for greater corporate accountability in the future. The issue is whether regulatory regimes — new or reconstructed — are the only or appropriate policy responses to the need for a greater sense of corporate responsibility for the actions they take. There are alternative approaches that can be seriously considered.

Before outlining the alternatives, however, let’s revisit the issue of corporate accountability to place it in historical perspective. The issue itself is a creature of the “managerial revolution” that took root in the early 20th century. It  became a major cause for concern as corporate decisions and control passed from ownership to the emerging technocracy within the more successful enterprises. Throughout the 1920s and 1930s, the problems of accountability were primarily within corporations. They were typically resolved through policies based on such concepts as fiduciary responsibilities and other legalistic instruments that made mangers accountable to shareholders. In the public sector, similar concerns were being raised as governments turned increasingly to quangos and other forms of autonomous public enterprises. It was in this context that corporate accountability first emerged as a public policy issue in the form of how to make those public authorities and crown corporations more responsive to the public interest.

But it was not until the 1950s and 1960s that the public impact of private sector corporate decisions became increasingly evident and calls for greater corporate accountability found a place on the political agenda of most advanced economic systems. Because many of the issues being raised involved specific areas of corporate behavior (e.g., auto safety, the environment), regulatory solutions seemed most relevant. But there were those, like John Kenneth Galbraith, who were warning that the rise of corporate power and influence in the “new industrial state” called for more than just regulatory solutions. On this reading corporate accountability was a more systemic challenge. It required policies that went beyond merely making and enforcing rules. (Ironically, in the aftermath of the 2008 financial market collapse, those who turned to Galbraith’s writings ignored his warnings about the new industrial state and focused instead on his classic analysis of the 1929 stock market crash.)

What emerges from this brief overview is the idea that we need a multifaceted approach to the issue of corporate accountability, one that reflects the scope and range of the problems we are attempting to resolve. There is no doubt a place for (re)regulation where we are dealing with specific arenas of corporate behavior where malfeasance (criminal acts) or market indifference (externalities of corporate decisions on the environment and public health and safety) are possible or likely without government intervention. But such regulatory approaches are not designed to handle the broader, macroeconomic threats posed by irresponsible corporate decisions and behavior.

One such approach is the option of creating more responsible behavior through a “managed” economy in which corporations become part of an overall governance scheme that attempts to hold them accountable for their role in the general economy. Such a managed approach is often associated with now discredited (but at one time widely advocated) national economic planning policies. Nevertheless, in more subtle forms (e.g., industrial policies, economic development policies) the approach remains a viable and active means for inducing corporations to take the public impact of their decisions into consideration.

Another approach — one more often implied than explicitly advocated — is to alter the parameters and rules of the environment in with corporations operate. It involves reconstituting (or fiddling around with the design of) what organization theorists call the “task environment” of corporate enterprises. Underlying this approach is the assumption that accountability does not have to be created, but rather changed. “Moral beings are accountable beings,” wrote Adam Smith in 1759; it is in our social nature to be accountable, both as individuals and as organizations. Under this “constitutive” strategy, it is a matter of reshaping and redirecting the accountableness that already exists — to develop policies that foster and nurture a more desirable (i.e., moral?) sense of corporate accountability. We see this approach implied in the work of public choice theorists as well as in the work of the growing cadre of behavioral economists who seek to “nudge” rather than regulate or manage. On a practical level, we see it in the US with the development of B-corporation charters in a growing number of states that alters the fiduciary relationships required under traditional corporate law. Done mostly under the radar of mass media news coverage, this new charter allows B-charter firms the freedom to modify their operating norms away from the bottom line in order to explicitly serve more than shareholder interests.

Sadly, simple narratives and simplistic policy theories often carry the day when it comes to reform. Perhaps with a bit more public reflection and debate that can be changed. In the case of corporate accountability it is not too late.

March 12th, 2012 Posted by | accountability, accountabilitybloke, accountable governance, corporate accountability | no comments