How to keep “license to operate”

Complex regulations will remain a fact of life for most industries. How to cope?

By IMD Professor Carlos A. Primo Braga, with Sanja Fabrio

A new era of government activism poses serious challenges to leaders in the corporate world and may lead to unintended consequences in terms of global economic activity. Regulations are on the rise as a consequence of the global financial crisis, increasingly negative public opinion towards large corporations, and scandals involving household brand names.

In the aftermath of the financial crisis (2007-08), there was a rush towards retooling the regulatory environment for the financial sector. Efforts both at national and global levels proliferated with a view to tighten financial regulation and supervision. For example, the Basel Accord of 1988 (Basel I) – the first international prudential regulatory agreement for the financial sector – was only 30 pages long. Basel II (2004) encompassed 347 pages. Basel III (2010), in turn, is 616 pages long. It is not only a question of quantity, but also of increasing complexity as illustrated by the exponential increase in the related calculations required to estimate risk weights for internationally-active banks.

On a parallel track, as many countries entered into recessions and unemployment increased, there was also an increase in governmental interventions, including many beggar-thy-neighbour measures (such as subsidies, localization requirements, and state-aid) that discriminate against foreign companies. These interventions have not only increased complexity, cost and regulatory burdens, but also have often delayed needed structural adjustment.

If one adds to this mix the increasingly negative public perception of large enterprises based sometimes on facts and sometimes on misunderstandings of how markets operate, one can speculate that public opinion will continue to broadly support more regulation. In such an environment, to the extent that the “license to operate” needs to be continuously earned and that it doesn’t take much to tarnish a corporate reputation, attention to proper regulatory engagement strategies is a must.

How is business responding to these regulatory challenges and what can one learn from different approaches to regulatory engagement? These questions were asked to corporate public affairs officers, regulators, and academics at the IMD’s “Regulation and License to Operate” conference on October 22nd in Lausanne, Switzerland. Here are some of the highlights:

On engagement

A regulatory strategy is an important component of a comprehensive business strategy just as regulatory risk is one of the key considerations in mapping corporate risks. When properly developed, a regulatory strategy should be able to address most of the WHATs, WHYs, WHOs, WHEREs and HOWs of relevance to a company in terms of the regulatory environment. The design starts with a comprehensive stakeholder mapping, appropriate message development, execution planning, and – last but not least – adequate funding for regulatory engagement.

Engagement with the regulator, just as with any other stakeholder, is only effective when based on trust and a professional relationship. That allows adding value through collaboration and providing insights that help regulators understand the ways business operates and the constraints faced by companies in implementing regulations. Staying on message, being consistent over time, and choosing one’s battles improves the likelihood of being taken seriously.  continue reading

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