Co‐operative and competitive enforced self regulation. The role of governments, private actors and banks in corporate responsibility
| Date | 10 May 2011 |
| Published date | 10 May 2011 |
| DOI | https://doi.org/10.1108/13581981111123852 |
| Pages | 139-155 |
| Author | Marianne Ojo |
| Subject Matter | Accounting & finance |
Co-operative and competitive
enforced self regulation
The role of governments, private actors
and banks in corporate responsibility
Marianne Ojo
Center for European Law and Politics (ZERP), University of Bremen,
Bremen, Germany and
Oxford Brookes University, Oxford, UK
Abstract
Purpose – The primary purpose of the paper is to demonstrate how corporate responsibility and
accountability could be fostered through monitoring and the involvement of governments in the
regulation of firms.
Design/methodology/approach – In considering why practices which stimulate incentives for
private agents to exert corporate control should be encouraged, this paper highlights criticisms
attributed to government control of banks. However, the theory relating to the “helping hand” view of
government is advanced as having a fundamental role in the regulation and supervision of banks.
Findings – Governments have a vital role to play in corporate responsibility and regulation given the
fact that banks are costly and difficult to monitor – this being principally attributed to the possibility
that private agents will lack required incentives or the ability to supervise banks.
Research limitations/ implications – Banks are costly and difficult to monitor – this being
principally attributed to the possibility that private agents will lack required incentives or the ability
to supervise banks.
Practical implications – The paper illustrates how structures which operate in various systems,
namely, stock market economies and universal banking systems, function (and attempt) to address
gaps which may arise as a result of lack of adequate mechanisms of accountability.
Social implications – The paper also draws attention to the impact of asymmetric information
(generally and in these systems), on levels of monitoring procedures and how conflicts of interests
which could arise between banks and their shareholders, or between governments and those firms
being regulated by the regulator, could be addressed.
Originality/value – Through its supervision of banks, governments also assume an important role
where matters related to the fostering of accountability are concerned – not only because banks may
have the power to affect firm performance, but also because some private agents are not able to afford
internal monitoring mechanisms.
Keywords Management accountability, Banking,Regulation, Government
Paper type Research paper
Introduction
“Optimal governance”, it is contended, “requires a flexible mix of competition and
co operation between governmental actors, as well as between governmental and non
governmental actors” (Esty and Geradin, 2001, p. 31).
“Pigou’s 1938 statement on regulation views monopoly power, externalities and
informational asymmetries as creating a ‘constructive role’ for the government to help
offsetmarket failuresand encourage social welfare”(Barth et al., 2003, pp. 1-2; Pigou ,1 938).
The current issue and full text archive of this journal is available at
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Enforced self
regulation
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Journal of Financial Regulation and
Compliance
Vol. 19 No. 2, 2011
pp. 139-155
qEmerald Group Publishing Limited
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DOI 10.1108/13581981111123852
Sucha view, known as “the helpinghand view of government”[1], is contrastedwith that of
“the grabbing hand theory” (Shleifer and Vishny, 1998, p. 47)[2] which is put forward
by those who disagree with the helping hand view of government, who argue that
governments do not frequently implement regulations to deal with market failures
(Shleifer and Vishny, 1998). Furthermore, such a theory predicts that governments
focussing more on strengthening private sector control of financial institutions, namely,
banks,are more likely to promotedevelopment withinthese institutionsthan governments
taking a more hands-onapproach to regulation (Shleifer andVishny, 1998, p. 2).
Law enforcers are admonished to be responsive to citizens’ and/or corporations’
abilities to effectively regulate themselves before deciding whether to increase their level
of intervention (Braithwaite, 2002, p. 29; Gunningham and Grabosky, 1998). Responsive
regulation is not only regarded as a task which governments alone can undertake,
but also one which private actors can perform – to the exte nt that they are also able to
regulate governments responsively (Braithwaite, 2002, p. 29).
This paper addresses how the involvement of governments, private agents (through
private sector corporate control of banks and firms), and other actors such as standard
setting bodies in financial regulation and supervision, contribute to corporate
responsibility. It aims to highlight not only why the Enforced Self Regulation model is
preferred to government or self-regulation, but also the benefits of the Co-operative and
Competitive Self Regulatory model over that of the model based on Enforced Self
Regulation.
In considering why practices which stimulate incentives for private agents to exert
corporate controls (such practices being facilitated under the Enforced Self Regulation
model) should be encouraged, the paper highlights criticisms attributed to government
control of banks. However, it also points out the fact that banks are costly and difficult to
monitor – this being principally attributed to the possibility that private agents will
lack required incentives or the ability to supervise banks. Hence, it highlights how the
“helping hand” view of government could contribute in this respect. In so doing, it also
draws attention to the fact that even though government control of banks has its
weaknesses, a distinction should be drawn between both theories (the “helping hand
view” of government and “the grabbing hand” theory) as a means of highlighting the
role which government officials can assume in the regulation and supervision of banks.
The paper also highlights the benefits of government ownership of banks – as
compared to government’s mere supervision and regulation of banks. Such benefits of
governmentownershipinclude the“extensive control”which it providesto the government
in respect of the choice of projects being financed whilst leaving the implementation of
these projects to the private sector and its contribution in helping the government to rectify
failures which pose a threat toprivate capital markets (La Porta et al., 2000, p. 3).
Sections A and B draw attention to the principal advantage which Enforced Self
Regulation is considered to have over Self Regulation, namely accountability, through
an analysis of the advantages and disadvantages attributed to Enforced Self Regulation
and Self Regulation. In drawing a comparison between stock market economies and
universal banking systems, Section C not only highlights how such systems, t hrough
certain structures, serve as accountability mechanisms, but also considers the impact of
banks on firm performance – particularly in universal banking systems. Section D then
highlights the conflicts of interest attributable to asymmetric information and
introduces the concept of “regulatory capture”. Furthermore, it makes reference
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