Can Government Regulate Private Sector?

Ethics Resource Center (ERC) recently issued a white paper titled “Too Big To Regulate? – Preventing Misconduct in Private Sector.” (www.ethics.org) . The title of the white paper addresses the question in mind of every corporate employee – “whether the U.S. government’s regulatory and enforcement mechanisms can keep pace with the lightning fast pace of change and the often complex and vast challenges that change create?”

The views expressed in the paper are quite candid and acknowledge the various problems in building an ethical culture in the private sector. The government and private sector need to partner to improve ethical conduct to build investor confidence. Government’s primary responsibility is to deter misconduct and crime, to enforce the law, and uphold market place integrity. As U.S. Deputy Assistant Attorney General Greg Andres said that “We would rather prevent crime than show up after the train wreck.”

The participants acknowledged that increasing regulations will not deter misconduct if the enforcers do not have the backbone to walk the talk. Hence, vigilance and enforcement are key to curtailing misconduct. The cost of monitoring also should be considered, because some irregularities will escape and that risk will remain. Hence, balance needs to be maintained between cost of enforcement and benefits from the same.

Secondly, the fine line between ethical and legal need to considered. What maybe unethical or considered misconduct may not be illegal. Hence, it would be difficult for government to legally pursue such cases. The participants explained with examples from Wall Street debacle, that sometimes behaving badly may not be against the rules, hence these organizations and people involved would not get prosecuted. Former federal prosecutor David Siegal explained the problem – “You have to prove that somebody intended to defraud their investors as opposed to just being horrible at their jobs.”

The participants indicated that whistle blowing would improve since now there is a financial reward for the same. However, they highlighted the concern that large organizations are going to hire the best defense, hence legal action maybe difficult. This will continue to be a daunting and difficult task for the government.

The other aspect mentioned by University of California criminologist Henry Pontell  was – “A central concern about white-collar and corporate crime is that the risk-reward ratio is out of balance – that is, potential rewards greatly outweigh the risks. Given the low probability of apprehension and the likelihood of no, or light punishment, white-collar crime is seen as a ‘rational’ action in many cases.” Hence, as the stakes are high, where is the right motivation for ethical conduct?

Some recommendations given to improve ethical culture and enforcement are:

  1. Establish rules and regulations which set clear expectations from the private sector. The rules and regulations should give no escape routes and loop holes which can be misused;
  2. Devise and implement penalties for white-collar crime in line with the level of crime;
  3. Government and private sector need to have continuous dialogue and communication; 
  4. Form advisory groups with eminent professionals from government, academics and private sector to have regular discussions and develop best practices;
  5. Private companies and enforcement agencies should share data and case studies which show the benefits of ethical conduct.

The white paper is a good read and discusses relevant concerns of building and enforcing ethics. The issues and recommendations are applicable to all countries.

My question is with the number of scams discussed in Indian media, should Government of India initiate similar steps to reduce corruption and build an ethical culture in the government departments and private sector in India? Share your opinion here.

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5 comments on “Can Government Regulate Private Sector?

  1. Thanks, Sonia, for this.

    This remains a very significant piece of work in progress for all governments. Unfortunately, the science of penalties is at a relatively primitive stage. Regulatory capture (the came to prominence with Stigler’s studies) remains a key problem, as well. This is an area (enforcement) where ethical failure in the private sector joins with ethical failure or incompetence in the government sector.

    Significant scope for improvement remains even in the best of governments. India’s case is beyond redemption at this stage. The reforms needed in India, if only to catch up with current best practice, boggle the mind.

    Regards
    Sanjeev

    • Thanks Sanjeev for sharing your viewpoint. I agree with you that corruption in India is extremely high. But I also beleive that end of every dark tunnel there is light. And some action is occuring in respect to the scams. So let us not loose hope in our country.

      India is capable of progress, it has shown that in 3 generations after gaining Independence, acutally lifetime of one person born in 1947, it can make great strides economically. It will I am sure, with dedication of some people, improve on ethics also.

      Sonia

  2. Hi Sonja

    Important questions! They’ve been endlessly debated on MIT’s http://www.baselinescenario.com blog and the consensus is not positive.

    However, as I remarked here http://tinyurl.com/2ejwm22, institutions like MIT are taking some steps to re-inject ethics and morality into the discourse.

    Yes we need “a fence at the top of the hill not an ambulance at the bottom” but regulation ain’t it because, as always, who regulates the regulators – Madoff had to hand himself in, the regulators weren’t going to do anything.

    But the Yala, see http://www.yalaworld.net, is that sort of a fence.

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