Reading List: Module 6 – Regulatory Strategy 2: Selection and Design Of Instruments

  • Chapter 5: Regulating in the Dark, in Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation – Cary Coglianese (2012)

Available via Docushare

  • Chapter 1: The Puzzle, in Constructing Private Governance: The Rise and Evolution ofForest, Coffee, and Fisheries Certification – Graeme Auld (2014)

Available via Docushare

  • Policy Analytical Capacity and Evidence-Based Policy-Making: Lessons from Canada: Canadian Public Administration – M. Howlett (2009)

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  • Compliance, Enforcement, and Regulatory Excellence: Penn Program on Regulation - Neil Gunnigham (2015)

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Supplementary/Reference:

  • Science Advice for Government Effectiveness (SAGE) - A Report of the Council of Science and Technology Advisers (1999)

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  • Playing Chicken – The Walrus. Sasha Chapman
  • Justin Trudeau v. Oil Tankers – Christopher Pollon
  • How blockchain could revolutionize the food industry, The Globe and Mail, Sylvain Charlebois

Available via Docushare

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Module 6 - Executive Summary of Readings

Chapter 5: Regulating in the Dark, in Regulatory Breakdown: The Crisis of Confidence in U.S. Regulation – Cary Coglianese (2012)

In chapter 5, Cary Coglianese questions what it is about the financial sector that is different from other regulatory domains that make financial regulations more challenging, and crisis responses more prone to legislative failure. He uses three recent examples of financial regulation to address these questions, First, Sarbanes-Oxley; the response to the accounting scandals and bankruptcies that resulted in the sharp stock market decline in the early 2000s. Secondly, Dodd-Frank; the response to the global financial crisis of the late 2000s, and thirdly, the Basel Capital Accords; through which central banks and banking regulators sought to harmonize international financial regulation since the 1980s.

During any crisis, legislators have a sense of urgency to respond quickly, but in the financial emergencies, they are forced to respond even when they are unable to determine the best policy to adopt with the large amount of uncertainty. However, without an understanding of the causes of a crisis, regulatory fixes are bound to fail. With Sarbanes-Oxley, this statue was highly glorified by policy entrepreneurs for its governance mandates of independent audit committees, restrictions on auditor services, and other initiatives, but had very little support in academic literature. However, those professed reforms had no bearing on financial institutions’ ability to withstand the 2007-9 financial crisis. Yet, its mandates are still law, imposing considerable costs on firms. With Dodd-Frank, its delegation strategy seemed to be attentive to the informational concern regarding decision-making in a crisis, but the law created a heavy burden on agencies. Members of the business and academic communities view Dodd-Frank as having exacerbated the severe economic downturn that followed the global financial crisis. As banks spend billions on Dodd-Frank compliance regulations, the statute adversely affects the price and availability of credit. The statute poses unanticipated operation issues that have created new risks, complicating implementation.

Coglianese argues that the best means of responding to the typical pattern of financial regulation (where legislation occurs in crisis atmospheres under uncertain conditions) is for Congress and regulators to include in those regulations, “procedural mechanisms that require automatic subsequent review and reconsideration of those decisions” within a fixed period after enactment. Also, Congress should include a regulatory exemption or waiver powers that create flexibility in implementation that encourages small scale, discrete experimentation to better inform and calibrate the regulatory apparatus. Coglianese finds that an approach such as this could mitigate, at least at the margin, errors that habitually accompany financial legislation and rulemaking originating in a crisis atmosphere.

Questions Provoked

1. The financial sector is not the only area that suffers from crises and emergencies that lead to a weak policy-making environment; can the tools proposed by Coglianese (such as creating a sunset clause for periodic review and avenues for small-scale experimentations) be applied in other sectors during a crisis?

2. What mechanisms have your department put in place to capture foreseeable or hidden risks that could turn into an emergency, and minimize its impacts?

Key Takeaway

  • Peter Drucker, the management writer and expert describes management as involving four things; planning, doing, checking, adjusting. Coglianese, in this piece stresses the importance of three and four.

Chapter 1: The Puzzle, in Constructing Private Governance: The Rise and Evolution of Forest, Coffee, and Fisheries Certification – Graeme Auld (2014)

Certification programs supply the consumer market with regulated products – particularly in the forest, coffee, and fisheries sectors; industries are confronting the challenges of balancing the benefits of economic activity against the need for sustainable practices and equitable access to resources and economic returns. Certification programs – private governance systems – were constructed following struggles to determine the distribution of societal benefits and costs, and the ultimate consequences of these initiatives for global environmental and social problems. Membership of major players can bolster the legitimacy of certification programs; different membership rules can create different opportunities for voice. Certification groups exist in a middle ground between markets and politics.

These programs allow those who practice responsibly to differentiate their operations and products from those who do not – this creates incentives for improved performance. Market incentives are commonly used to reward operators deemed to be helping address global environmental and social challenges in their sectors. Differences in how quickly respective programs ascend to become global governors, and how many programs are implemented in some sectors in comparison to others, are based upon the distinct origins of the individual certification programs.

Certification programs have common purposes and organizational forms: they define standards of responsible business practices, require third-party audits and product tracking through global supply chains, and include product labeling. However, there are differences in how quickly respective programs ascend to become recognized global governors, and how many programs are implemented in some sectors in comparison to others. For example, there are two global programs in the forestry sector, but five and six in the more fragmented coffee and fisheries sectors, respectively.

Certification works as a model of private governance. Programs need not be global; some are better suited to the local or national level. It is necessary to examine how collective action in markets is affected by market demand, particularly in program development stages. The impact of path dependence is paramount in determining how programs evolve and whether new ones emerge. The form that programs take depends on a number of factors, notably political and economic opportunities and the way in which certifiers understand a sector’s issues – that is, the ways in which they see certification as a solution. Key features include relative openness of domestic and international policy fora, levels of international trade, barriers to market entry, and comprehension of fundamental issues.

Early adopters to a certification program may seek to prevent competitors from being able to certify in order to maintain competitive advantage. Market demand for certification programs can create spillovers that increase the value of forming alternative programs, similar to an open-access good. When participating firms obtain a premium for a certified product, they have an incentive to participate in the program to the point when private marginal costs of achieving program requirements are equal to their marginal benefits. Thus, more participants in a certification program, that is to say, a less exclusive reputation, may drive the benefits to zero if the firm ceases to collect private benefits. Two forms of market failures are important to distinguish: the information problem (public disclosure) and the coordination problem (development of common standards). Distributional conflicts may arise over what standard to adopt since different producers will gain relative to their competitors with one versus another standard. If the private cost of the socially or environmentally responsible product outweighs the private benefit, society is left with an under-provision of the public good. There is a shift to empowering consumers with information on the products they consume: ethical consumerism.

Questions provoked:

1. How can public regulators work alongside private certification institutions to develop standards?

2. How can private certification programs be encouraged to ‘check’ and ‘adapt’ to changing circumstances?

Key takeaways for CPRL:

  • The rise of certification programs is highly contested: different forms and paths will have different distributional consequences.
  • Certification programs are heavily impacted by early institutional buy-in and path dependence.

Policy Analytical Capacity and Evidence-Based Policy-Making: Lessons from Canada: Canadian Public Administration – M. Howlett (2009)

The goal of evidence-based policy-making is to avoid or minimize policy failures. A significant factor affecting the ability of policy-makers to engage in evidence-based policy-making pertains to both governmental and non-governmental “policy analytical capacity.” Governments require a high level of “policy analytical capacity” to manage the policy process by implementing evidence-based policy-making models and avoiding common sources of policy failure.

Policy failure often occurs in particular circumstances, and they originate at different stages of the policy cycle, such as when;

  1. An overreaching government attempts to address “unaddressable” or “wicked” problems, where neither the cause nor the solution is well known.
  2. Governments fail to properly anticipate the consequences of the proposed courses of action or its susceptibility to collapse.
  3. Implementation failure occurs as the aims of decision-makers fail to be accurately translated into practice, without adequate oversight on implementers
  4. Policy-makers fail to effectively evaluate policy processes and outcomes, and/ or fail to learn appropriate lessons from their own and other government’s previous experiences.

Policy capacity can be thought of as extending beyond analysis to include the actual administrative capacity of a government to undertake the day-to-day activities involved in policy implementation. While “policy analytical capacity” is a more focused concept related to knowledge acquisition and utilization in policy processes. It refers to the amount of basic research a government can conduct or access. Its ability to apply statistical methods, applied research methods, and advanced modeling techniques to this data and employ analytical techniques like environmental scanning, trends analysis, and forecasting methods to gauge broad public opinions and attitudes, as well as those of interest groups and other major policy players, to anticipate future policy impacts.

The portrayal of an impoverished, low capacity community in Canada pushes the emphasis for the prospects of evidence-based policy-making back onto governments, which have access to the kinds of personnel and organizational resources that would allow them to construct substantial policy analytical capacity. Federal policy development processes now contain mandated criteria for consultations, while political leaders and administrators typically access polling data and conduct focus groups as part of the standard process of policy development. This has created a far more complicated policy-making environment for governments, as different strategies for building arguments and policy initiatives require far more consultation than in past eras.

Policy analytical capacity at the federal government has substantially improved since the 1980s; however, capacity at the provincial, territorial and local levels is much weaker, leading to short-term policy programs adopted at these levels of government. The weak policy capacity found amongst major actors is very problematic especially when it comes to dealing with challenges of improving policy-making. Governments and non-governmental actors in Canada are being asked to design effective long-term policy measures to deal with such problems without the kinds of resources and evidence-based analytical techniques required to avoid policy failures successfully. Without efforts to enhance policy analytical capacity, failure may be the only option available to governments in their efforts to deal with policy challenges.

Question provoked:

How would you measure the level of “policy analytical capacity” present in your department and what particular constraint is preventing that capacity from being enhanced?

Key takeaway for CPRL:

  • Creating policy analytical capacity is not just a challenge faced by the policy community in government but also by the regulatory community. Regulators have a responsibility to ensure that they have access to analytical capacity, either created by themselves or secured in partnership with others in the agency, and non-governmental organizations, if they are to serve ministers well.

Compliance, Enforcement, and Regulatory Excellence: Penn Program on Regulation - Neil Gunnigham (2015)

Exactly how should an excellent regulator intervene in the affairs of regulated organizations to ensure compliance (and arguably over-compliance) and facilitate enforcement? What intervention strategies can be used to achieve such compliance and enforcement? Compliance and enforcement are core concerns for regulators because regulatory laws implemented ineffectively and inefficiently will rarely achieve their social and economic goals. This paper summarizes seven different intervention strategies and identifies their strengths and weaknesses.

These intervention strategies are as follows;

  1. Advice and Persuasion – Negotiation, information provision and education characterize this strategy. The threat of enforcement will be invoked only in extreme cases where the regulated entity is uncooperative and intransigent. However, this strategy may prove disastrous against those not disposed to voluntary compliance. It may discourage improved regulatory performance if agencies permit lawbreakers to go unpunished.
  1. Deterrence – This strategy is accusatory and adversarial and devotes its energy to detecting violations and establishing guilt. It assumes profit-seeking firms must face costly measures to comply with public policy goals. However, deterrence is more effective against smaller and more rational organizations than larger companies. It could prompt firms to develop a “culture of regulatory resistance.” Overwhelming evidence shows rewards and punishments accomplish short-term compliance while undermining long-term commitment.
  1. Responsive regulation – Regulators encourage capacity building by escalating sanctions when previous steps are unsuccessful or when dialogue fails, it de-escalates and provides support and rewards for firms when positive responsesare received.
  1. Risk-based regulation – This strategy targets resources based on the degree of risk that firms pose to the regulator's objectives. It applies principles of identifying, assessing, and controlling risks in determining how inspectors should intervene. This method enables regulators to prioritize their efforts and maximize cost effectiveness. Although it helps to detect high-risk actors, it does not identify modes of intervention needed to secure compliance.
  1. Smart regulation – This form of regulatory pluralism embraces flexible, innovative forms of social control by harnessing businesses and third parties to act as surrogate regulators. Essentially, it uses multiple policy instruments and a range of regulatory actors to improve regulations. A major challenge here is coordinating the mechanisms by which the government and all other parties involved adequately exert pressure to achieve compliance.
  1. Meta regulation – This strategy involves “regulating at a distance” by risk managing the risk management of individual enterprises. The goal is to induce companies to acquire the skills and knowledge needed to self-regulate, while the regulators’ main intervention is to oversee and audit those self-regulating plans. This intervention requires specialized, high-quality regulators to supervise the risk management strategies of the organization. In this case, a receptive corporate culture is necessary for successful compliance
  1. Criteria strategies – This strategy provides inspectors and other decision-makers with a list of criteria they should consider before making a decision. There is no rigid formula, and mechanisms used will depend on the circumstance.

The approach or approaches an “excellent” regulator would adopt depends on the sheer variety of regulatory programs, rules, market structures, political environments, and social contexts. However, there are some “signposts” that can assist regulators in achieving regulatory excellence.

Invoke different strategies to engage effectively with different circumstances – An excellent regulator must evaluate the strengths and weaknesses of different intervention strategies and determine how one or more strategies can fit a particular regulatory challenge.

Take account of the drivers of regulated enterprises - Regulatees are motivated by fear of detection and punishment, fear of humiliation in the eyes of peers, and internalized sense of duty. Regulation induced fear of punishment and social license pressures are sufficient to produce high level of compliance.

Apply combinations of compliance and enforcement strategies - There is value in using a combination of complementary strategies, thus compensating for the weaknesses of one strategy with the strengths of another. However, the policy mix may vary over time, especially as a firm’s motivation, corporate culture, or regulatory license changes.

Encourage regulatees to Go Beyond Compliance- Excellent regulators should seek opportunities to help enterprises go beyond compliance, to lift the performance of all regulates.

Harness Third Parties – Third parties are sometimes more potent and have a greater impact than government regulators. They are also often perceived as more legitimate. Moreover, with limited government resources, facilitating and catalyzing the participation of third parties can improve regulatory outcomes cost-effectively.

Develop Adaptive Learning and Resilience – An excellent regulator needs to be constantly self-evaluating, learning and adapting its approach, identifying emerging problems and acting promptly when it does. This avoids the danger of “model myopia,” where regulatory officials committed to historically captured set of risk indicators and criteria are inhibited from taking account of relevant data not captured by that model.