Advertising Standards Authority: High Level Forum on Self-Regulation

  • John Luxton
International Trade

"Government has been a fossil, it should be a plant" RW Emerson 1844

If we want to influence human behaviour we need to understand what motivates people. This isn't always easy. We do know that people are influenced by many things when they make decisions on how to behave. If collectively we desire an outcome for the public good, then how do we best obtain it?

If we are to have a successful, cohesive society where individuals can be happy and achieve their potential, we need to have some sort of framework to establish rights, responsibilities and set parameters to allow practical life to progress. Government is expected to provide a major part of this framework. The Governments recent initiative "towards a code of Social Responsibility" highlights however that Government can only do so much. Individuals and communities must also be involved.

It is good to have debate about alternative ideas to capture opportunities, or to provide solutions to challenges that may arise. Self regulation is a viable alternative that I believe needs to be part of the mix of instruments that a government uses to enable and motivate society.

Today you have a range of speakers giving a range of perspective's on self regulation. I understand that this is the first time that such an expert panel of speakers on self regulation has appeared together in New Zealand. I welcome your input. I don't want to talk too much about New Zealand's specific experience as I know other speakers will talk about it. Instead I want to take a more general approach.

There has, of course, been a long debate over whether nature or nurture has the dominant influence on human behaviour. Obviously both influence behaviour.

As well as a human dynamic, we have other dynamics. Technology and globalisation mean that the ability of Governments to control the flow of capital, people, technology, skill and information is reduced. Societies are becoming increasingly complex. And the speed of change is quickening. In so many ways today's world is very different from even 15 -20 years ago. Governments therefore need to think differently from the past in order to remain relevant and effective. Government cant afford to become a fossil.

There is an increasing concern about over regulation, or what some have coined "regulatory creep", in our society. Individuals and business's increasingly question whether our approach to societies rules by statute and regulation is not too restrictive inhibiting freedom and economic growth.

So where does Government fit into all this? Where does self regulation fit in?

Government are expected to provide laws that influence behaviour for the benefit of society. They intervene to:

protect the consumer;
create property rights;
prevent specific activities (e.g., crime, cloning and driving on the right);
provide or fund services (e.g., defence, law and order, education and health); and
redistribute wealth.
In each of these areas, there are a number of options for intervention, including doing nothing, contracting out, providing guidelines, educating the public, developing codes of practice and other self regulatory instruments, and creating or amending Acts and regulations.

The track record tells us that there is an inherent bias within Government towards solving more and more problems by legal rules and fewer through voluntary accommodation. Some might say that self regulation is not a dominant part of the culture. This is for two reasons.

The first is the public sector, which has every interest to maintain and grow its position, and little incentive to ensure an optimal outcome from interventions. Its driver is to maximise, not optimise, regulatory interventions. In New Zealand, whilst the public sector has been downsized in personnel terms and restructured in organisational terms, the size of Government has never been bigger. The structural bias that creates a regulating culture has remained.

The second is the politicians, wanting to create a perception that they have done something to solve a problem and the expectation that they can cure the "ill". Voters expect "action" from their politicians. Expectations are created that regulation is the tangible solution. We politicians are often reluctant to stand up in front of voters and say the best solution is to let others solve the problem.

Recent "light handed regulation" has demonstrated the political paradox. While this framework has often delivered a better outcome for consumers than the more heavy-handed frameworks of other countries, there is ongoing pressure to change it. I am still a strong advocate of the light-handed approach and always look to the reasons behind advocates of a more interventionist approach.

A recent report on the "Reinventing Government" project of one Government puts it this way: "More Government may lead to chaos. As governments become bigger, they tend to dysfunction: the service to the community becomes ineffective, inefficient, unfriendly and costly. Big Government tends to become a self-serving organisation that loses its contact with the very public it is supposed to serve."

The same can also happen with large centralised corporations.

Technology and brains, in the end, will always outflank heavy handed regulation. Regulatory changes are too often introduced in hindsight and are too late anyway. We often regulate for the 5% problem and penalise the remaining 95%.

This is where I believe self regulation has a greater part to play in the future of successful democracies.

As President Bill Clinton has said on Government: "It is time to radically change the way the government operates - to shift from top-down bureaucracy to entrepreneurial government that empowers citizens and communities to change our country from the bottom up. We must reward the people and ideas that work and get rid of those who don't".

This comment suggests strong support for self regulation.

Self-regulation is not a new concept. No doubt when the bakers of biblical days first got together to work out how many loaves made a ?bakers dozen?, it was an exercise in self regulation. What is new is the organised and formalised response to moves to self-regulate, particularly as much traditional command-control regulation has proved less than satisfactory.

One of the key challenges for government is to find ways of dealing with issues that are more effective, less costly for business, and less costly to administer. The key is to find the mix that works, not what used to work. Self regulation offers one possible means to meet this challenge.

It is clear that governments and business are becoming more aware of the broader range of policy tools available to influence private behaviour to achieve public goals. There is an increasing recognition that incentives play a vital role in achieving desired outcomes. The focus in the New Zealand context is more on outputs, rather than prescribing inputs.

Alternative approaches such as self-regulation can be viewed as circumstances in which the state no longer exclusively assumes primary responsibility for regulation but rather transfers part or all of it to business or other parts of society.

Alternative approaches such as self regulation provide a number of benefits, relative to the traditional command-and-control approaches, for governments and business. These include:

responsiveness to a changing environment: governments in many cases do not have the time to regulate in traditional ways. For example, product cycles are often much shorter than the time governments need to change regulation. The need for responsiveness is particularly important in an internationally competitive environment. Similarly, there is a need for responsiveness and flexibility in addressing rapidly changing social and economic problems. Government agencies may lack the information necessary to make the best policy decisions; ( eg supermarket demands)

incentives to exceed requirements: with command-and-control regulations, there is no real incentives for business to go beyond what is required. That is, business becomes focused on strictly meeting specific requirements, often without knowing the overall policy objective. With joint ownership of the problem, the instrument and outcomes can create incentives for business to think about continuous improvement; (eg Du Pont and their Morrinsville plant)

increased peer pressure within industry, and extra oversight by business federations, for example, mean that compliance rates could increase, thereby reducing the cost of enforcement to governments; (Accountants)
Furthermore, rules may be more comprehensive in their coverage. A series of empirical studies of internal rulemaking and enforcement in over fifty large companies have convinced Braithwaite (1985) that internal corporate rules tend to cover a much wider range of industrial hazards and corporate abuses than do government regulation;

joint ownership of the problem, the regulatory instrument, and the outcomes: moving away from an adversarial relationship between governments and business allows the available expertise to be used in a positive way, rather than having a confrontational focus. This may increase compliance. As John Kenneth Galbraith (1967:77) has noted, ?...Nothing in American business attitudes is so iniquitous as government interference in the internal affairs of the corporation...?. If, for example, business is responsible for writing and enforcing its own code of conduct, they would perhaps be more committed to the rules they wrote; (Dairy Industry Standards)

shared responsibility may enhance the acceptance of the regulatory requirements and objectives by business. Seeing solutions found in partnership, firms may themselves be interested in finding cost-effective measures in meeting public policy goals; and (building industry standards)

fiscal benefits: With governments facing budget pressures, traditional command-and-control approaches are often costly and time consuming to develop, enforce, and keep up to date in a dynamic economic environment. (fisheries legislation and devolution)
Incentives for Business to Co-operate
What incentives does business have to co-operate with governments in adopting alternative approaches to command-and-control, such as self-regulation?

The primary incentive is the often negative experiences with command-and-control or prescriptive regulation. It can be costly to comply with and can interfere with the efficiency of business operations unnecessarily. Furthermore, the actual threat of command and control regulation by government provides a powerful incentive for business to participate.

In addition, governments are not the only organisations today that are monitoring the behaviour of businesses and industry. Interest groups, consumers, and other businesses are also demanding more and more performance from businesses with regard to issues such as the environment and consumer information. At the same time, firms in today?s competitive environment are very much focused on a positive market image that appeals to the public and consumers. It makes economic sense.

For example earlier this year a Palmerston North business making ready made salads folded, following the Consumer magazine report on the microflora in ready made salads.

Businesses know that the direct costs of developing government regulations are high and are borne by taxpayers and by business. In addition the opportunity cost of getting it wrong can be very high not only their business but wider society as a whole.

Self Regulatory Initiatives
Successful self regulation occurs because participants perceive some beneficial or advantageous result. Strong law and accessible remedies are also important contributing factors. Of key importance is that successful self-regulation is spontaneous and responsive rather than unnecessarily heavy handed. The impact of consumer or market perception is a very powerful motivator.

Examples of self-regulatory initiatives which are promoted by the Ministry of Commerce include work in the banking and insurance sectors to provide ombudsman, safety of products, and utilities such as electricity with the self regulatory framework for domestic electricity contracts for example.

The Advertising Standards Authority is a leading example of self regulation being very successful.

The increasing use of ISO accreditation and other systems of in house quality assurance reduce, or even remove, the requirement for outside regulation for many businesses and market environments.

Perhaps there should be an increasing use of an ability to opt out of the regulatory environment provided by government.

Concerns with Self-Regulation
Self-regulation is not a panacea for all regulatory problems. In some circumstances, self regulation will not be able to be practically implemented, nor provide the disciplines necessary to promote a fair and informed outcome. Some concerns about self regulation include; accountability for decisions may be unclear or lacking; monitoring and enforcement issues; possible negative impacts on competition; and potential risks of free riders not complying. However New Zealand's experience of self regulation to various degrees illustrates that self regulation can be a successful part of the regulation menu.

Regardless of how the Government intervenes, whether by regulating, taxing, owning businesses, or promoting voluntary action, the objective is to solve problems. The problems are created by the behaviours of various players. So, what the Government really wants is to change the behaviours that contribute to or create the problem.

However, there are powerful external factors (economic, social, and psychological) that influence how much the behaviours conform with what the Government wants; they may have a much greater impact than any intervention by government. The optimal strategy, therefore, is either to strengthen the factors that bring about the desired behaviours (the incentives), or to weaken or eliminate the factors that bring about undesirable behaviours (the disincentives).

The Government?s decision on how to handle a problem should be based on a systematic comparison of possible alternatives.

Traditional command-control regulation remains the dominant regulatory approach. However, the balance is shifting. The use of alternative approaches such as self-regulation is an evolutionary process and will be used more as knowledge and experience (of behavioural impacts) increases. A key pre-condition for the success of co-operative approaches is the need to build up trust and confidence with all parties concerned.

Furthermore, the increased use of alternative approaches sees government playing a less dominant role in the regulatory environment. One in which it facilitates the constructive regulatory participation of private interests. Under this system, the role of government is manipulating incentives in order to facilitate the constructive contributions of non-government interests. A role which requires governments to act as facilitator and brokers, rather than commanders.

Experience suggest that gains from approaches such as self regulation include increased compliance rates, reductions in administration costs, the promotion of innovation, increased responsiveness to changing conditions, and a less adversarial relationship between government and business.

Finally I would like to congratulate the Advertising Standards Authority for organising this seminar and also for 25 years of effective service to New Zealand society. Thankyou.