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Failures in regulation

One thing which is apparent is that the current financial crisis, much as previous ones, has highlighted failures in regulation just as much as failures in governance. Indeed this has been a focus of much attention and some have argued that the regulators are more culpable even than the perpetrators and should be sanctioned accordingly. Equally of course it is the function of government, in Lockean (1690) tradition to implement the Social Contract (Rousseau 1762) and introduce regulation to curb the exercise of power and to protect the less powerful for a better operation of the markets. Clearly this has not worked - not because the principle is flawed but because economic reality has changed, encouraged by the Washington consensus and fostered by such people as Gordon Brown, former Prime Minister of the UK.25 Indeed many people hold the policies of Brown, in relaxing regulation to impotence in order to encourage banks into the UK as being a prime cause of the ensuing financial crisis regarded as inevitable by many. The situation could be regarded as a house of cards ready to collapse at the slightest breeze. Inevitably this breeze did arrive in the form of the sub-prime lending scandal in the US! From this the contamination spread from one country to another as all economies are affected by both the consequences of dubious lending practices and by the ensuing crisis of confidence.

So it is wrong to single out regulators for blame. Their overseers must accept responsibility for encouraging profligacy. The crisis is of course made much worse by bank lending policy and financial profligacy,26 with bank lenders being secure in the expectation that there was no risk because governments would step in to rescue them27 from dire consequences of their irresponsibility. Indeed the government bodies - with press complicity - have sought to disguise the fact that such lending has been completely irresponsible by falling back on semiotics to create the term toxic debt to disguise the reality of complete irresponsibility bordering on lunacy. The language being used from these people tends therefore to be used as a device for corrupting thought (Orwell 1970) by being used as an instrument to prevent thought about the various alternative realities of bank lending policy.

The role of regulation is essentially to compensate for the inefficiencies and inequities of the market place. In other words it is to ensure that everyone gets a more fair chance in transacting with each other while seeking to minimise the costs of doing so. Unfortunately the transaction cost minimization imperative has assumed superordinacy at the expense of fairness. This is a part of the problem. The main part of the problem however is one which no-one seems to be addressing - or even recognizing. This is that the market based model of economic activity is a combative one - one in which the winner takes all is the basis for behaviour. This has led to the kind of recklessness which we have witnessed and which has led directly to the crisis.

Conclusions

The issues we have discussed in this chapter are important for the governance of companies. They are also controversial as there is a general agreement about some of the problems but no general agreement about possible solutions. Nevertheless these issues affect many aspects of governance which are referred to in other chapters of this book.

References

Becker B & Westbrook D A (1998); Confronting Asymmetry: Global Financial Markets and National Regulation; International Finance, 1 (2), 339-355

Crowther D E A (1996); Corporate performance operates in three dimensions; Managerial Auditing Journal Vol 11 No 8 pp 4-13

Grabel I (2003); Averting crisis? Assessing measures to manage financial integration in emerging economies; Cambridge Journal of Economics 27:317-336

Locke J (1690); Two Treatises of Government; many editions

National Consumer Council (1989) In the absence of competition: A consumers view of public utilities regulation, HMSO, London

Orwell G (1970); Collected Essays, Journalism and Letters Vol 4; Harmondsworth; Penguin. Rousseau J-J (1762); The Social Contract; many editions

Veljanovski, C. (1991) "The Regulation Game" in Veljanovski, C. (ed), Regulators and the Market: An Assessment of the Growth of Regulation in the UK, Institute of Economic Affairs, London

 
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