Response to Self-Regulation Proposal
Standards and Culture in Self Regulation

Introduction

The pitfalls of self-regulation are not unknown: object lessons abound in Tyco, WorldCom, Enron, Arthur Andersen, and several others (Pritchard, 2003). What to make then of a proposal for the implementation of self-regulation, thus decreasing regulatory oversight of our company? On the one hand, few firms are going to reject such a proposal as it means less red tape for them; on the other hand, compliance is culture and a culture without it can quickly turn into a slippery slope down the same path taken by the companies already mentioned. Yet, as Omarova (2011) points out, an industry without self-regulation is one unlikely to address the problems that plague it: at some point, accountability and firm responsibility is needed to address issues that by and large elude regulators by more than a few paces. The problem of relying regulators and compliance has been seen again and again—particularly in the global context: regulators rely upon political accountability, civil support and competitive marketplaces—and if any of those are lacking, it makes regulation and enforcement virtually impossible (Arnone & Padoan, 2008). Omarova (2011) describes the problematic nature of third-party regulation best in our industry: “Given the complexity and global nature of the modern financial market, any government's attempt to regulate it in a purely unilateral command-and-control manner will inevitably encounter the fundamental problem of regulatory arbitrage, whereby financial institutions find new ways to get around government rules, thus creating a never-ending spiral of rulemaking and rule evading” (Omarova, 2011, p. 416). With that point in mind, it does well to consider whether self-regulation can be an answer to the never-ending spiral of rulemaking and rule evading described by Omarova (2011). This paper will discuss the issue and show why, ultimately, I am in favor of self-regulation—on the one condition that certain standards and concepts are applied to ensure that self-regulation does not turn into a license to act unethically.

For Self-Regulation

One of the best reasons for self-regulation is that existing regulation regime is simply not an effective option (Greene & Odorski, 2015). The SEC for example will typically fine offending firms, but in many cases these fines do not cover the losses caused by the offending firm’s actions—nor are they more than a wrist-slap in financial terms (Greene & Odorski, 2015). The Fair Funds provision of the Sarbanes-Oxley Act (2002) was meant to ensure that fines were placed into a disbursement fund that would then pay out to victims of fraud or abuse. Since 2007, those funds have been decreasing—even though the number of firms being charged by the SEC has increased (Greene & Odorski, 2015). This is but one example of many that indicate the need for regulation of the regulators—which, of course, is the crux of the problem. Regulation can be piled upon regulation, but unless personal accountability and ethical leadership is demonstrated, the entire issue of regulation can never truly be saved. Thus, regulation is ultimately a culture issue. A company’s culture must be firmly planted on standards and concepts that promote accountability and ethical leadership. Only in this way can self-regulation be effective.

In the light of existing regulatory systems failing to produce the desired outcomes, it is reasonable to accept that self-regulation is a viable alternative. The way it would work is this: instead of complying with external standards, codes and rules, the company complies with internal standards, codes and values that both drive the company’s culture and the company’s performance. The firm must develop its own standards of conduct, and it must hold itself accountable: everyone from top level executives to lower level staff must be held to the same standards of conduct, the same principles guiding the company’s vision, and the same expectations of behavior inherent in ethical leadership. However, the firm must still be able to monitor activity internally and identify potential abuses or fraudulent activity, both through monitoring and routine internal and external auditing. Self-regulation is not a...…communicated throughout the organization and embraced and embodied by the leaders of the organization—for it falls to them to set the example for the rest of the workers in the firm.

The culture must then be supported by practical, every-day communications and activities—messages that inspire and motivate workers to seek compliance and to honor the code that the firm puts forward. The firm must not be remiss, however, in giving workers an avenue or means of reporting if they do observe unethical practices in their line of work. A whistleblower hotline has become one option that firms use to allow workers to report misdeeds without fear of blowback: a hotline protects the reporter’s identity and allows anonymous reports to be made that the administration can then investigate and verify if true. However, the culture of honesty should be promoted to facilitate this type action—as many employees will fear retribution if they perceive that leadership does not care about ethical violations. Unless the culture of compliance is promoted and demonstrated from the top down, employees are not likely to want to assist in the process of self-regulation.

Conclusion

Self-regulation is not only a viable alternative to external regulation by third party agencies, it is also a necessary step towards the reduction and management of risk. Companies alone have the most access to records and numbers, to workers and actions that may need investigating: external regulators do not generally have this access, and it can take substantial time for them to gain it and put a case together. Companies alone also have the power to monitor their own actions on the international stage. Third party regulators do not. Companies also have the means to monitor and regulate: RegTech has advanced to a point where information can be monitored, collected, analyzed and evaluated nearly instantaneously thanks to Big Data analytics. Finally, the company itself has the capacity to create the internal culture of compliance through ethical leadership needed. For these reasons, self-regulation is recommended.

References

Arner,…