Nagging away beneath the huge growth in regulation the business world has seen in recent years is what is rapidly becoming a fundamental flaw. It is the centuries-old question of who regulates the regulators.
Independence is the goal, so independence has become the mantra. But behind the political scenes another motive has always been lurking, and that is for the politicians in government to be able to keep as much distance as possible between them and anything that might go wrong.
There was a startling example of this recently when a whiff of criticism reached a minister. In an interview with the Financial Times, transport minister Kim Howells said: “To me, it was insane that it is not the secretary of state who says how much can be spent on the railways every year but an independent regulator.” This is breathtaking. The inference is clear.
Independence can only be allowed if it agrees with government policy. It was simply a staggering admission of the bullying, bluff-it-out cynicism that lurks behind the facade of the public sector and independent regulation.
The other point about the huge growth in regulation and regulators is that it is unstoppable. This is not a matter of policy; it is a matter of human nature. If your continuing employment, rising level of income and incentives, and your subsequent pension depends on being a regulator, the only way you can sustain this is by expanding the areas and depth of regulation. It is the same with environmentalists. A Greenpeace or Friends of the Earth can never announce that rivers are clean or that air pollution is falling. To do so puts them out of a job. The same goes for regulators in business and finance.
So, although the immense amounts of cash which global companies claim to have spent on complying with the Sarbanes-Oxley legislation, for example, are probably exaggerated, the issue is not going to ease up.
The Financial Reporting Council has announced what people have termed ‘more Turnbullisation’. The implementation of the use of Operating and Financial Reviews in financial reporting is hedged about with many more rules than the original American idea on which it was based. The result will be more hassle and less information while the original intention was the opposite.
One solution to this is the use of the growing number of independent firms that will carry out a top-level audit of these procedures to check their effectiveness and reassure directors. But companies are increasingly feeling tied up by the process. It almost doesn’t matter whether they are or not. Internal perception is what counts. Traditionally, companies have always bellyached about regulation.
But the effects of this process are growing. Surveys are increasingly showing that people are less likely to see their ultimate goal as wanting to be an FD or CEO. They see the public humiliations meted out to people in positions that were once the peaks of business life. They wonder why, for example, Marks & Spencer’s every move is chronicled with as little sophistication and as many banner headlines as tacky football transfers.
The company may not be the giant it was, but it is a long way from going bust. And at the same time they look across to another part of the newspaper and notice that another private equity firm has just pocketed a huge amount of money from a relatively straightforward deal. People argue that the trend of taking public companies private is to do with different levels of liquidity or sharper management. It is, but it is also about people with the same types of brain as an FD or CEO doing deals quietly and sensibly, and without the daily press vilification or pressure from investors.
It is, in many ways, a trend which has come out of the growth in small enterprises. Increasingly the largest companies are solidifying into process- and rule-driven monoliths. The excitement of following an idea through to fruition can largely now be found in small entrepreneurial teams. Swift and effective management change is easier to bring about in a private rather than a public company.
These are the effects of the great tide of rules and regulation. Meanwhile, as Howells’ remarks show, people in the public sector act in a less and less professional fashion. Whitehall, the shadowy hand behind the regulators, feels it can just tough out any situation until it gets its way. The result is a serious change.
Regulation is no longer achieving its stated goals, and the best business brains are heading for safety and challenges in smaller and private companies.
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