Regulation for Business Success

Posted on April 27, 2013

World-class regulation helps the development of world-class business. We need more of it.

Last week, I was at a restaurant in Miami where I paid a $6 surcharge for, as it said on the menu, “EU Certified Organic Salmon.” The EU, it seems, is now exporting its regulatory system and commanding a premium for its certified products.

In the United States, the debate has long raged that regulation damages business and must be kept to a minimum. The Reagan/Thatcher era took this as part of the “rolling back the state” ideology and embarked on a deregulatory process that, eventually, led to the financial crash that has destroyed so much wealth and so many lives. Today, howls of anguish greet the idea that the Environmental Protection Agency might pass any form of regulation to protect the public from pollution that damages health and livelihoods.

This is all wrong-headed.

Besides protecting citizens, regulation has the ability to enhance business success and build more competitive economies. Yes, businesses will always tend to argue for the status quo. That is part of the inherent laziness that effects all of us in one way or another. Why make changes when you’re comfortable with—and making money off—the current situation? But the reality is that uncertainty is more damaging to business than good regulation. In the environmental field, we have seen endless debates about whether to regulate this or that. Sometimes the answer seems to be yes, other times no, almost always maybe. This uncertainty is damaging, because it does not allow business managers to plan and adapt. When faced with good, well-designed regulation, businesses adapt rapidly and continue on their profitable way. More than that, they become better businesses and more competitive in the long-term, compared to their counterparts in unregulated markets.

In some areas such as pharmaceuticals, the US is both the largest market and has some of the best—and toughest—regulatory regimes. As a result, regulation by the Food and Drug Administration has become the global gold standard. US companies used to dealing with such regulation have become the global leaders in the industry to the extent that competitors in other countries have, for all intents and purposes, been more or less wiped out. The foreign companies that remain now structure their businesses to FDA standards. Similar examples abound in other industries. When environmental regulation ratchets up, as it inevitably will, where will the industrial winners be? In Europe, where industries have had to deal with this for years and have learned how to provide appropriate products and services? Or in the US, where businesses have managed to put off appropriate regulation and languish in mid-twentieth century technology?

The reality is that high-quality, forward-looking, and clear regulation forces businesses to strengthen themselves. The result is the emergence of industries that are ahead of the game.

To be sure, there is plenty of bad regulation about. But the answer is not deregulation; it is building regulation that pre-empts the requirements of the future. By setting themselves up this way, regulators play a vital role in protecting the public and enhancing sustainable business success.

Sadly, many industrialists—and a fair number of politicians—are stuck parroting the old mind-set of “regulation is bad for business” or the even less credible “business can regulate itself.” Only last week, Clay Jones, outgoing CEO of Rockwell Collins, was quoted in Wall Street Journal article (note: paywall), suggesting that aircraft makers such as Boeing should regulate themselves because “their reputation and brand depends on it.” It is ironic that he was speaking in the context of the battery fires of Boeing’s 787 Dreamliner. Though it seems that Boeing’s belief in its brand reputation was insufficient to prevent the installation of dangerous battery systems in the first place, we are still subjected to the same tired and discredited mantra.

Regulators’ primary duty is to the citizen and the consumer. Their main role is to ensure that products and services are safe and appropriate. However, modern regulation has the opportunity to extend that purpose without diluting it. By being forward-looking, bold, clear, and decisive, regulators can also help lift the standards, and thereby the competitiveness, of the industries that they regulate. The task should be to improve regulation so that it achieves both of these aims. We should not, and need not, sacrifice one for the other.

For those who remain skeptical, I’ll end with two questions. Would you rather put your money in a well-regulated bank or in a totally unregulated bank? And which of the two do we think will still be around to compete on a global level in a few years’ time?

This post was first published on the Stanford Social Innovation Review.

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