Problems with prevailing ethics of regulation
01 August 2013
Chris van der Walt, ISS Compliance
Corporate South Africa is being force-fed an overdue diet of business ethics through regulation but scant attention is paid to the ethics of regulation. Whilst this should receive our undivided attention, a lack of regulatory ethics affects everybody.
The fundamental principles in business ethics are called the principles of utility, right and justice. An individual’s ethical view will favour one of these more than the others and this bias is informed by a personal context-based value system. The same applies in the case of a company, but here the value system is also shaped by the nature of the company’s business. There seems to be no good reason why the same should not apply in the case of regulators and legislation.
The problem with utility
The principle of utility means that we will regard conduct which allows us to generate the most amount of good for the largest number of people as ethical conduct. The principle of right means we will regard as ethical that which least interferes with our individual rights while the principle of justice means the most fair and equitable, yet variable solution in the circumstances.
Typical rights oriented companies would be those who rely extensively on contracts with customers such as insurers or supply companies. Justice is typically adopted by service oriented companies whilst most non-governmental organisations are utility based.
There are a few standard and fairly obvious criticisms of the utility principle:
- Who determines the good and how is it measured?
- Who is to say that the intended benefits actually bring about the good that they seek?
If regulations are made without adequate a priori answers to these questions, regulation becomes an end in itself, instead of a means to an end. In addition, one ends up with by way of example, a particular regulator who expressed surprise at being questioned on the measurement of benefits.
Utility-based regulation acknowledges that it cannot accommodate everyone and it therefore aims to satisfy the majority taking a might is right approach which always brings it into direct and mostly fatal conflict with the principle of right and also, more often than not with the principle of justice.
The force paradox
Regulatory powers are rooted in our social contract, in which we subrogate individual rights for a greater good as exercised by the state. This greater good we have in mind when we contract (vote) is not to be confused with the benefits of utility, but something for ourselves as selfish beings. Governments prefer to ignore this distinction.
The problem is that deep down we are only prepared to continue subrogating for as long as we gain greater benefit from subrogation rather than relying on our individual rights. Regulators must therefore exercise punitive powers to maintain such regulation and the more power is used, the more we agitate to overturn the existing order because the value we place on institutions decrease is proportional to the increase in force.
A regulator who is unwilling to entertain smaller splinter groups that advocate individual rights, is a prime indicator that some adjustment may be necessary to maintain an ethically sound environment.
One of the ways in which regulation is enforced is to create offences and penalties. The more offences created, the greater the likelihood that there will be breaches and thus criminals – which in turn makes the case for more regulation. If left unchecked, regulation will become an industry in and of itself rather than being informed by other possibilities.
Manner of enforcement
Ethical regulation can still be tarnished by improper enforcement. Regulators should take care to mitigate statements regarding the intensity and desired level of intrusiveness of a regulatory approach to avoid unnecessary reactions. Due regard in enforcement should be had to the scale, complexity and nature of an entity and penalties should reflect the same approach.
In summary
An ethical approach to regulation should allow at least the following:
- The validity of utilitarian principles to be questioned;
- Transparent measurement criteria to ascertain the optimum efficacy of regulation vs. the degree of force required to keep it in place;
- Checks and balances to prevent regulation from becoming an industry of its own; and
- Enforcement must be fair, just, proportional and independent.
The principles of right and justice may not be ideal alternatives for regulation, but an on-going recognition of their value blended with a responsible and transparent approach to regulation is necessary to avoid some of the more obvious pitfalls with utility maximisation. Willingness by our central planners and regulators to consider the complexities and dynamism from a stakeholder perspective will contribute substantially to the success of a blended and more responsible approach to regulation.