How do we design 21st century regulatory schemes for responsible business? Regulatory culture must shift, not just corporate culture.
How do we design viable, principled but pragmatic regulatory systems that engage with business in pursuit of goals but are legitimate and trusted by all societal stakeholders?
In particular, what mix of 'enforcement' and 'guidance' is appropriate and effective on the part of the regulator?
The prompt for this post is the interim report on the EPBC Act, Australia's principal federal legislative scheme for environmental protection.
I study 'business and human rights' (social impact) but this emerging field has not done enough to learn from the bitter experience of the conservation and environmental movements and the history of regulation there. (The social and environmental are/ought not so easily be distinguished).
The EPBC Act review has various lessons of interest in my field (e.g. on recent reporting schemes on 'modern slavery' in supply chains), from federal/state coordination to questions about the adequacy and quality and availability of reported data. But what stands out are the lessons in the review about designing enforcement aspects of regulatory schemes where corporate activity may impact on public wellbeing and public interests.
The review condemns federal regulators for settling into a regulatory 'culture' of not using available enforcement powers, and for their over-reliance on a 'collaborative approach to compliance and enforcement' that is 'too weak'.
Last year in a related post on the Royal Commission report into the banking sector I noted the same pattern:
"The lesson is that regulators -- even where they have these powers -- appear reluctant to use them, and so err on the side of 'engagement' where sometimes demonstrative penalty seems more appropriate..."
There are many merits (as I wrote in that 2019 piece) to a regulatory approach that is judicious about the use of enforcement powers, and that privileges cooperative approaches that guides and educates and harnesses companies' own resources (etc) in pursuit of the public policy goal. Moreover, the regulator's dilemma is always 'when to punish and when to persuade'.
But the credible threat of non-negligible punishment may be vital to any strategy of dialogue and engagement. Moreover, enforcement is a form of 'guidance'. Theorists who promoted dialogic and collaborative problem-solving engagement made clear how such regulatory strategies to explain and foster compliance were defensible, but only where the regulated entities know the consequences of non-compliance or perfunctory compliance. A credible pattern of using punitive powers and a reputation for fair but decisive use of enforcement powers is, in this theory, inseparable from the other more 'cuddly' bits about cooperation. Australian regulators have only embraced the latter.
Parking inspectors and fines come to mind. I used to remind my eager 'business and human rights' students -- believers in regulatory capability -- that the Oxford city council has more parking inspectors than the staff at the UN HQ office in New York coordinating the [voluntary] UN Global Compact with business (not an inspector / enforcement entity). The interim review of the EPBC Act shows that since 2010 the total fines issued for breaching environmental approvals is less than the annual amount of traffic fines levied in a typical small local government area in Australia ...
From environmental impact to responsible banking to modern slavery in supply chains, public trust in the regulation of responsible business may require that 21st century regulatory models have some supposedly old-fashioned 'sticks', and use these to incentivise compliance and engagement. This doesn't require that EPBC-type regulators have the blunt 'revenue-raising' approach that parking inspectors do: there is more to regulation than this.
Schemes like the EPBC Act have a wider purpose as part of efforts to shift behaviours towards socially responsible ones. But the judicious use of enforcement powers clearly has a place in such a scheme.
Here is the related post on regulatory culture.