Platt Perspective on Business and Technology

Making regulation work 1: predictability and the cost and benefits of regulatory oversight

Posted in macroeconomics by Timothy Platt on October 8, 2012

I have written repeatedly about regulatory law and oversight, and its costs and benefits in this blog and particularly over the past year or so. See, for example:

• My series Considering a Cost-Benefits Analysis of Economic Regulatory Rules (at Macroeconomics and Business, postings 64 and loosely following for Parts 1-14,
Conflict of Interest and the Need for Layered Due Diligence Regulatory Separations in the Age of Online Social Media, and
• My series Addressing a Common Thread Running Through our Recent Economic and Marketplace Challenges (at Macroeconomics and Business, postings 112 and following.

I have written on an ongoing basis in this about the basic parameters that would go into developing and drafting effective regulatory control, and to site one aspect to that, discussed in detail in the above cited series:

• The absolute levels of potential risk and benefit are not as important as the symmetrical distribution of risk and benefit shared – equally at least ideally, by all involved stakeholders.
• The real risk of instability and crisis comes from risk and benefits distribution asymmetry.

I turn here in this posting to consider a very real and significant cause for concern that both business leaders and political parties raise, and certainly when questioning and challenging regulatory law and oversight, and initiatives to maintain and even strengthen regulatory law.

• Effective regulatory law needs to be predictable for its impact and for what it would require as a matter of business best practices, and both operationally in what businesses would do and consequentially as they carry out those activities.

I could site virtually any major regulatory law as a working example here, of what can and does happen when this principle is not adhered to. So my selection of the Sarbanes–Oxley Act as developed and enacted in the United States is simply one of many I could have made note of here and both for its complexity and its contentiousness.

The legislative process, virtually as a requirement for action, creates complexity and even bewildering complexity as rules are hammered out and exceptions are added in, and both for general application and to please special interests. Some regulatory laws might arguably be cited as being simple and straightforward but they would constitute rare exceptions. The more standard regulatory law can end up being passed as a maze of detail, and business leaders can find it very difficult at times, and even with expert legal counsel to know precisely what they can and cannot do, and what they should, or must do. And one consequence of this is that both legislators that draft and pass regulatory law and businesses that seek to follow it can face the added uncertainties of predicting precisely how the courts will interpret those laws, and for what cases and in what jurisdictions. I cite as a famous example there, that the Sherman Antitrust Act of 1890 was initially enacted with a goal of limiting corporate monopolies but it was primarily understood and used in courts to break labor unions.

• Effective regulatory law needs to be consistent and equitable – fair in how it is drafted, and in how it is interpreted and enforced if it is to work and not simply serve as grounds for divisiveness and discord.
• And in order to meet that standard it has to first and foremost be readily understood and it needs to be predicable. It needs to be framed in such a way as to enable and not simply complicate business due diligence and risk remediation.

One crucial factor in determining how a proposed regulatory would work, or fail to work is in how it is drafted: as a positive set of guidelines as to what can and should be done or as a negative set of guidelines indicating what is disallowed. I am going to look into some of the complexities that this raises in a follow-up posting in a few days, and as a foretaste of that, note that both approaches have their pros and cons and that both validly apply as best for specific types of contexts. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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