A regulatory system that learns and improves

Category: Business & Economics | NGOs & Government
Published on Jan 20, 2011

In my previous post I discussed why the Obama administration is right to make renewing America’s regulatory system a priority.

We already have a situation where citizens armed with information are drawing attention to many important fissures in the global economy that threaten to undermine global peace and stability, issues such as climate change, food security, water scarcity, and corruption. They are increasingly willing and able to contribute to solving these issues, and they are also acting as watchdogs who scrutinize each step or misstep governments and corporations make along the way. The question now is how to make these citizen watchdogs an effective extension of the regulatory system, thereby solving the capacity issues that hamper today’s agencies.

This post describes how to build a new system that embodies values of openness, empowerment, inclusiveness, and knowledge sharing:

1) Fostering a culture of openness and innovation by improving transparency and fostering greater participation in rule-making.

Leaders in business and government often fail to recognize and tackle tough issues because they lack the right experience and perspectives to guide them through new challenges. Fault partly lies in organizational cultures that rarely encourage or reward managers or employees for pursuing innovation.  It is also unfortunately common for organizations to only look inward for new ideas and approaches, thus ignoring a much richer tapestry of capability in society that could be leveraged to achieve the government’s policy objectives. The net result is that most instances of regulatory innovation in the last decade have been driven by entities acting outside the purview of traditional regulatory frameworks and bodies. So the first objective for regulators, then, is to establish an enabling environment for learning, engagement and innovation. This means instilling the desire to seek out new information, consider other perspectives, engage other stakeholders, and be more transparent about policies and activities.

2) Shifting from a prescriptive, rules-based approach to a process of continuous improvement.

The point of participatory regulation is not necessarily to secure prescriptive regulations, but to define a process through which firms can learn and continuously improve their performance. The challenge in aligning public and private value, as Charles Sabel of Columbia University suggests, “is to find a way of using experience to create a framework that suggests what’s allowable from the point of view of the world’s consensus on moral values, and what’s feasible by way of improvement [in industry].” Over time, this dialogue between firms and society is updated continuously as experience helps inform realistic expectations. Firms reinterpret society’s values, while society re-specifies what’s required by way of improvement. Both judgments become more nuanced as firms learn more about what society wants, and society learns more about what firms can do in different contexts.

3) Building platforms for participation that arm citizen monitors with information and create space for the inclusion of new issues and voices.

One of the best and most expeditious ways to enable regulatory innovation is for government to embrace the kind of platform openness that has driven the success of entities like Wikipedia, Apple and Amazon. In other words, governments should open up their data to broader scrutiny for the same reason organizations such as Global Forest Watch do: arming interested parties with information so that they can hold both industry and regulators accountable for better outcomes. The rationale is simple. Regulators will need to bring considerably greater agility and dynamism to public responses to monumental challenges such as climate change, food scarcity and the spread of infectious disease. In this context, government can’t always anticipate how society’ needs may change or all of the creative ways in which regulatory objectives could be achieved in the future. Nor can government necessarily afford to supply an ever-growing field force of inspectors and investigators with the capacity to stay current with the latest technical, scientific and industry trends.  By open sourcing their approach, and particularly their data, regulatory agencies to stay more attuned to emerging issues and social expectations and also leverage the complementary resources and capabilities needed to address them.

4) Measuring and reporting corporate performance.

Measuring and reporting corporate performance in social, environmental and financial dimensions plays an important role in institutionalizing the process of learning and continuous improvement. A robust system of measurement and reporting serves two purposes. On one hand, it satisfies internal requirements to assess the effectiveness of corporate policies, improve business processes, and adapt strategy to changing circumstances. On the other hand, it satisfies external communities of stakeholders that firms are learning and improving as they listen to stakeholder feedback and develop the capacity to respond. That being said, there is an urgent need for a paradigm shift in the nature of corporate reporting. Nobody reads voluminous paper-based reports and everybody knows it. What’s needed is a far more dynamic, interactive and useful approach that provides timely and comparable information in formats that make the data easy to interpret and act on.

5) Organizing collective action to broaden the social gains achieved by entrepreneurial leaders. The success of participatory regulation will often depend on the ability of influential leaders to rally other firms in the industry around shared goals and challenges. Environmental leaders in industry, for example, often have strong incentives to encourage like-minded companies to join them in adopting higher standards and, where possible, to organize widespread industry cooperation. The success of collective action will depend on many factors, including the size of the group, the degree of stakeholder interdependence, the ability of lead firms to influence laggards, and expectations about cooperation and reciprocity. While not impossible, it takes a combination of dexterity and diplomatic leadership. Roger Martin, dean of the Rotman School of Business suggests that “the most significant impediment to the growth of corporate virtue is a dearth in vision among business leaders.” Perhaps, on the positive side of the equation, this lack of vision leaves the playing field open for a new generation of creative and courageous corporate leaders. Their task will be to promote the notion that by working together as industries, and by enrolling the support of civil society and government, they can extend and enhance the benefits of economic activity for society.

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