Self-Regulation vs. Government Regulation

For years there has been the deliberation as to whether corporations should be self-regulating, or if the government should implement regulations that holds a tight grasp on business practices.  It must however also be considered how influential these regulations would be.  As the businesses continue to change at more of a rapid pace and become increasingly complex, would these regulations be too retroactive?  There are many things to be considered when determining the best path for corporate governance.

Since the 1930s, self-regulating organisations have been in charge of creating the very laws that govern other corporations and ensuring their enforcement, such as the NYSE.  As an increasing number of scandals brought the failure of corporate governance to light though, this system became increasingly under scrutiny.  Is self-regulation sufficient (as the name suggests, it seems there is little accountability)?  If self-regulation is allowed, when and for what is it appropriate?  What other options should be considered or implemented?  These are all questions that have been under questioning for years.

In 2003, Forbes wrote an article titled Failure of Corporate Governance, highlighting the significant issues that had come up within the financial sector, particularly firing at the New York Stock Exchange.  Wall St firms were caught running deals that were particularly beneficial to themselves, while in the process deliberately crossing over banned lines.  The article ended with the question, “Will these scandals lead to genuine reform and a truly democratic marketplace?”  This was a warning sign, as the industry remained unchanged.  However, it should be noted that though the financial industry is the most notorious for sidestepping corporate governance, this remains an issue within many other industries as well, ranging from oil to fashion.

There are five distinct benefits of allowing corporations to abide to their own rules, including proximity, flexibility, compliance, collective interests of industry and resources.  This means that because companies always have insider information first, it becomes easier for them to regulate, whereas governments often fall behind.  Theoretically, organizations that are able to formulate their own rules, are most likely to comply with them.  However, that is often more idyllic than realistic.  It is also easier and more flexible for corporations to self-regulate because there aren’t the same procedural requirements.

Despite the positive aspects to allowing corporate governance, there are several disadvantages.  Allowing businesses to form their own regulations as well as monitor them is a significant conflict of interest.  There is little accountability and penalties for improper conduct on part of the company and are very rarely harsh enough.  Expecting a company to punish themselves for wrongdoing is like expecting that of a child.  They will continue with their actions until forced not to.  Global competition and insufficient resources are also reasons that highlight the disadvantages.  Governance by organizations means not only that they abide by the regulations, but also prioritises the shareholders, stakeholders, employees and everyone in between.  It must extend beyond compliance.

As said in the book, The Fractal Organization, “Regulation is too slow and too reactive to be adequate.  And this problem is getting worse as the complexity and rate of change increases of organizations’ operating environments.”  Government regulators do not have the ability to be as efficient and thorough in order to maintain a high level of integrity and orderly conduct of every organization.  However, in order for self-regulation to work, businesses must give more priority to their corporate social responsibility.

Harvard Source


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