Updated: Jun 22, 2021
What is ‘regulatory capture’? It is a situation where a regulated organization has too much power over the decisions of its regulator. The Boeing scandal is a great illustration of how bad regulatory capture can be.
Why does it happen? There is always a mismatch between the objectives of a regulated organization and its regulator. The job of the regulator is, generally speaking (a) to ensure the law is followed; (b) to put the public interest first; and (c) to maintain the public’s confidence in the regulator. The objectives of a company are to stay in business and protect its reputation. Which means making a profit. So you can see the potential for conflict!
If a company sees an opportunity to increase its influence with a regulator, why shouldn’t it seize it?
“We are going to push back very hard on this and will likely need support at the highest levels when it comes time for the final negotiation”.
Wrote one Boeing executive of the FAA’s likely requirement for certain simulator training.
That comment illustrates what a bad relationship with a regulator looks like.
Now, if you had asked the Boeing executive at the time if the relationship with the FAA was bad, they might well have responded: No! Boeing had been extremely successful in establishing a constructive working relationship with the FAA. But is it? Really? In hindsight, perhaps not.
What does a good relationship look like?
The uncomfortable fact: Companies have to accept that the regulator can and should have more power than they do. In the end the regulator has the full force of law enforcement and law-makers behind it.
This steers us into the complex waters of independence and conflict of interest. It is sooo tempting to cultivate relationships with regulators that will influence them to look more kindly on the company’s new ideas and submissions. Whether it is by way of gifts and entertainment or facilitating the employment of the right staff by the regulator. The hard part is not to say ‘no’ once to an opportunity to do these things, it is to say no every time. It’s a culture thing.
A relationship with a regulator is not like your relationship with your partner. It’s more like the relationship with your grandmother: She has a bigger view of the world. It might not be completely up-to-date and if you can help with that you should. But in the end what Grandma thinks is the right thing to do is the end of the story. Even if that means you lose an opportunity or have to take more time to find a way to make a new proposal work.
Regulatory oversight will always involve limiting your competitive options as a business. Embrace that! Humans are great at bringing out their best when confronted with inconvenient limits on their options. Company leaders have a vested interest in healthy relationships with regulators because, as Boeing starkly demonstrates, the company’s reputation is intimately interrelated with its regulatory relationships.
It’s a culture thing: The moral of the Boeing story is not that the execs were wrong to write what they did. The company was wrong to allow its staff and lobbyists to cultivate a relationship with the regulator that allowed its executives to think like that.
Take a moment to think about your organization’s relationships with its regulators: Are you proud of them?
CS&A’s crisis simulations and advisory services can give you the opportunity to assess how your organization’s relationships with key regulatory stakeholders work for, or against, you in a crisis. We can help you spot red flags and challenge the organization’s thinking on what a good relationship looks like and make sure that you can make the most of a good relationship when it really matters. Come chat with us.