tag:theconversation.com,2011:/ca/topics/regulatory-capture-34922/articlesregulatory capture – The Conversation2022-06-01T19:29:19Ztag:theconversation.com,2011:article/1827502022-06-01T19:29:19Z2022-06-01T19:29:19ZTo prevent disasters like Lac-Mégantic, private interests cannot be allowed to affect regulations<figure><img src="https://images.theconversation.com/files/466417/original/file-20220531-12-upxzmj.jpg?ixlib=rb-1.1.0&rect=4%2C0%2C2982%2C1836&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A policy decision to allow the Montreal, Maine & Atlantic Railway — a company with a poor safety record – to run its trains through a town in Québec with single person crews resulted the fourth deadliest railway disaster in Canadian history in 2013. Eight years later, Transport Canada is still suffering from safety issues.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Graham Hughes</span></span></figcaption></figure><p>On July 6, 2013, the <a href="https://www.chapters.indigo.ca/en-ca/books/the-lac-m%c3%a9gantic-rail-disaster/9781459413412-item.html">fourth deadliest railway disaster</a> in Canadian history took place. A train hauling 72 tankers filled with crude oil derailed in Lac-Mégantic, Que., killing 47 people.</p>
<p>The roots of the Lac-Mégantic rail disaster can be traced to a combination of corporate negligence and regulatory failure. It is what spurred the publication of my <a href="https://www.chapters.indigo.ca/en-ca/books/corporate-rules-the-real-world/9781459416956-item.html">recently edited volume</a> about how Canadian corporations have co-opted government agencies for private interests.</p>
<p>Just prior to the disaster, the Canadian railway lobby had redrafted the <a href="https://tc.canada.ca/en/rail-transportation/rules/2021-2022/canadian-rail-operating-rules">Canadian Rail Operating Rules</a>, permitting freight trains to operate with a single-person crew. </p>
<p>Transport Canada then granted permission to the Montreal, Maine & Atlantic Railway — <a href="https://www.thestar.com/news/canada/2013/07/10/lac_megantic_disaster_mma_railway_had_poor_safety_record_in_us.html">a company with a poor safety record</a> — <a href="https://montrealgazette.com/news/montreal/railway-companies-scaling-down-to-single-crew-member-on-some-lines">to run its trains through Lac-Mégantic with single-person crews</a>.</p>
<p>This policy change was a significant contributing factor to the disaster. It exemplifies why regulatory capture is so dangerous and why it needs to be stopped.</p>
<h2>Defining regulatory capture</h2>
<p>Regulatory capture occurs when regulations are taken over, or captured, by the <a href="https://www.investopedia.com/terms/r/regulatory-capture.asp">private interests of an industry</a>, instead of being used to <a href="https://www.canada.ca/en/government/system/laws/developing-improving-federal-regulations/requirements-developing-managing-reviewing-regulations/guidelines-tools/cabinet-directive-regulation.html#toc3">protect citizens’ health and safety, and the environment</a>.</p>
<p>This primarily occurs when industries are the ones shaping policy, legislation and regulations, instead of the government. Industries often frame regulations as being <a href="https://www.hsa.ie/eng/topics/health_and_safety_myths/myth_3_red_tape_hindering_business/">detrimental to job and wealth creation</a>. This enables them to block or delay new regulations, and exert pressure to remove or dilute existing ones.</p>
<p>The increase in regulatory capture can be traced back to Prime Minister Stephen Harper’s 2012 <a href="https://www.canada.ca/en/government/system/laws/developing-improving-federal-regulations/requirements-developing-managing-reviewing-regulations/guidelines-tools/cabinet-directive-regulatory-management.html">Cabinet Directive on Regulatory Management</a> policy that framed regulations as an administrative burden and a business cost that needed to be “streamlined.”</p>
<p>The policy’s centrepiece was the <a href="https://www.cbc.ca/news/politics/red-tape-report-touts-one-for-one-regulatory-rule-1.1261264">“one-for-one” rule</a>, which mandated regulatory agencies to offset each new or amended regulation by removing at least one existing regulation. </p>
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<img alt="A man in a suit gesturing while he speaks" src="https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=439&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=439&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=439&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466414/original/file-20220531-20-uq2ner.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Stephen Harper’s Cabinet Directive on Regulatory Management policy involved the ‘one-for-one’ rule which mandated regulatory agencies to offset each proposed new or amended regulation by removing at least one existing regulation.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Graham Hughes</span></span>
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<p>The one-for-one rule put regulators in an awkward — and potentially dangerous — position. If regulators want to propose new regulations, they have to remove an already existing regulation, with potentially dangerous health and safety consequences. Unsurprisingly, this policy has resulted in catastrophic accidents and is in desperate need of reform. </p>
<p>Since the introduction of Harper’s policy, regulatory capture has spread far and wide in Canada. Experts in my edited volume illustrate how embedded it has become in various areas, from the pharmaceutical industry, as illustrated by pediatrician and clinical pharmacologist <a href="https://cfe.ryerson.ca/people/mich%C3%A8le-brill-edwards">Michèle Brill Edwards</a>, to the petroleum industry, as illustrated by the <a href="https://www.corporatemapping.ca/">Corporate Mapping Project</a>’s co-ordinator, <a href="https://www.sfu.ca/sustainabledevelopment/People/william-k-carroll.html">William Carroll</a>.</p>
<h2>Confronting and overcoming regulatory capture</h2>
<p>Until the Cabinet Directive on Regulatory Management is reformed, regulators need to take the necessary steps to offset regulatory capture. My book offers <a href="https://www.chapters.indigo.ca/en-ca/books/corporate-rules-the-real-world/9781459416956-item.html">concrete suggestions that regulators can follow</a> to ensure regulations are once again made in the public interest.</p>
<p>As a result of regulatory resources being defunded over the years, many agencies have been forced to become dependent on corporations to develop and manage their own safety oversight regimes. To overcome this issue, regulatory agency resources must be bolstered, including hiring more personnel and increasing research capacity.</p>
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<img alt="Two oil pumps silhouetted against the sky as the sun sets" src="https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466415/original/file-20220531-22-qsckx8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Pump jacks extract oil from beneath the ground east of New Town, N.D., in May 2021. Regulatory capture has spread to a number of industries, including the petroleum industry.</span>
<span class="attribution"><span class="source">(AP Photo/Matthew Brown)</span></span>
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<p>Regulators must also develop <a href="https://www.ourcommons.ca/Content/Committee/412/ETHI/Reports/RP6365946/ethirp01/ethirp01-e.pdf">more robust conflict-of-interest provisions</a> <a href="https://www.mqup.ca/too-critical-to-fail-products-9780773551619.php">to clear up oversights</a>, along with whistleblower protections. </p>
<p>In 2021, two international bodies <a href="https://whistleblower.org/wp-content/uploads/2021/03/Are-Whistleblowing-laws-working-REPORT_02March21.pdf">ranked Canada in last place</a> among 37 countries for the effectiveness of its whistleblowing frameworks. It is clear that we need to do better as a country.</p>
<p>Similarly, law professors <a href="https://uniweb.uottawa.ca/members/1009">Steven Bittle</a> and <a href="https://uniweb.uottawa.ca/members/404">Jennifer Quaid</a> found that regulatory enforcement and accountability provisions have been hollowed out in Canada, allowing corporations to avoid serious legal liability — including criminal wrongdoing and corruption. </p>
<p>To counteract this, civil and criminal liability regimes must be reformed to hold senior government officials, corporate executives, directors and owners accountable for actions that result in accidents, destruction, illness and death.</p>
<h2>Citizens must be involved</h2>
<p>The vast majority of citizens expect their governments to take the necessary measures to protect their health, safety and environment. Understandably, opinion polls regularly indicate that the <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.582.613&rep=rep1&type=pdf">public does not trust corporations to regulate themselves</a>.</p>
<p>Regulatory capture is likely to happen in a <a href="https://doi.org/10.1111/capa.12412">revolving door fashion</a>, where people move seamlessly between private and public sector jobs and influence policies to suit the interests of both parties. </p>
<p>One way to stop the revolving door is by improving <a href="https://ottawacitizen.com/opinion/beeby-world-press-freedom-day-its-time-canadas-access-to-information-law-was-enforced">public access to information legislation</a>. This would ensure that information shared between corporations and regulators under the veil of “<a href="https://www.priv.gc.ca/en/privacy-topics/privacy-laws-in-canada/the-personal-information-protection-and-electronic-documents-act-pipeda/pipeda_brief/">commercial confidentiality</a>” would publicly accessible.</p>
<p>Citizens should also be involved in the regulatory process, since regulations are supposed to be created to protect them. <a href="https://www.ohchr.org/sites/default/files/Documents/Issues/ToxicWaste/RightToInformation/AarhusConventionUNECE2.pdf">Effective public participation</a> means the right to know, the right to participate in decision-making and the right to remedy or compensation for regulatory breakdowns.</p>
<p>Regulators should improve mechanisms for public participation in regulation-making processes, including <a href="https://www.bangthetable.com/public-engagement-software/">online engagement</a>. </p>
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<img alt="A man looking at a bulletin board covered in photos and scraps of writing" src="https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/466416/original/file-20220531-26-o97rim.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A man looks at photos of some of the victims of the Lac-Mégantic rail disaster in 2014. Corporate negligence and regulatory failure has lead to a number of fatal disasters in Canada.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Ryan Remiorz</span></span>
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<p>Overcoming regulatory capture will require widespread mobilization, from citizens to members of industry alike. It will require a broad toolbox of collective actions from the public, including non-violent protest, advocacy, campaigns and more. Courageous parliamentary and bureaucratic leadership is also vital to achieving fundamental change. </p>
<p>At a time when the threat of potential disaster looms on the horizon, the stakes could not be higher. Last year — eight years after the Lac-Mégantic disaster — <a href="https://www.thestar.com/opinion/contributors/2021/07/05/eight-years-after-the-lac-mgantic-disaster-the-window-for-a-recurrence-is-still-open.html">an auditor general report on railway safety expressed serious concern</a> about defects in Transport Canada’s safety oversight regime. If we are to prevent future disasters from happening, regulatory capture must be overcome.</p><img src="https://counter.theconversation.com/content/182750/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruce Campbell is affiliated with
The Group of 78; the Canadian Centre for Policy Alternatives; the Polaris Institute; Rideau Institute for International Affairs</span></em></p>Industries have blocked or delayed new regulations and pushed to remove or dilute existing regulations by framing regulations as detrimental to creating jobs and wealth.Bruce Campbell, Adjunct Professor, Faculty of Environmental and Urban Change, York University, CanadaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1675322021-09-14T05:13:21Z2021-09-14T05:13:21ZASIC, now less a corporate watchdog, more a lapdog<figure><img src="https://images.theconversation.com/files/420675/original/file-20210913-26-s6ed4x.jpg?ixlib=rb-1.1.0&rect=0%2C1077%2C3979%2C1993&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The implosion of Australia’s corporate watchdog, the Australian Securities and Investments Commission, under the federal government’s new directions, has gone from tragedy to farce.</p>
<p>ASIC was described as “<a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/ASIC/Final_Report/index">weak, hesitant and timid</a>” in a 2014 Senate review of its performance. To be fair, that was before ASIC’s current leadership. Now any assessment could add “dazed and confused”. </p>
<p>Last week we got a dose of that in the doublespeak of ASIC’s new chair Joseph Longo and deputy chair Sarah Court in their “first significant media interview” — with the Australian Financial Review. </p>
<p>The pair were asked about ASIC’s commitment to the “why not litigate?” approach recommended in 2019 by the Hayne royal commission into misconduct in the financial services industry.</p>
<p>Following the litany of revelations where the corporate regulator had failed to take action against illegal behaviour, royal commissioner Kenneth Hayne made it clear that when ASIC saw a law broken, its obligation, in deciding on a response, was to first ask itself “why not litigate”?</p>
<p>“I love litigation,” <a href="https://www.afr.com/companies/financial-services/we-love-litigation-say-new-asic-chiefs-20210831">Longo told the AFR</a>. “It’s what I used to do and Sarah is an expert at it.” </p>
<p>But in the same interview Court — ASIC’s head of enforcement — <a href="https://www.afr.com/companies/financial-services/asic-enforcer-dishes-out-warning-to-banks-20210902">said</a> the why-not-litigate strategy “has had its day”.</p>
<h2>Regulatory doublespeak</h2>
<p>Confusion is to be expected when a regulator is told to both enforce and refrain from enforcing the law — which is effectively what the federal government <a href="https://theconversation.com/frydenbergs-directions-to-asic-throw-the-banking-royal-commission-under-a-bus-166813">did last month</a> in the “statement of expectations” it handed ASIC. </p>
<p>The previous statement, issued <a href="https://asic.gov.au/about-asic/what-we-do/how-we-operate/accountability-and-reporting/statements-of-expectations-and-intent/statement-of-expectations-australian-securities-and-investments-commission-april-2018/">in 2018</a>, began with acknowledging “the independence of ASIC and its responsibility for market conduct regulation”. </p>
<p>The <a href="https://asic.gov.au/about-asic/what-we-do/how-we-operate/accountability-and-reporting/statements-of-expectations-and-intent/statement-of-expectations-australian-securities-and-investments-commission-august-2021/">new statement</a> begins by saying ASIC is expected to “identify and pursue opportunities to contribute to the Government’s economic goals”.</p>
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Read more:
<a href="https://theconversation.com/frydenbergs-directions-to-asic-throw-the-banking-royal-commission-under-a-bus-166813">Frydenberg's directions to ASIC throw the banking royal commission under a bus</a>
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<p>ASIC accepted the banking royal commission’s <a href="https://asic.gov.au/about-asic/news-centre/speeches/asic-s-approach-to-enforcement-after-the-royal-commission/">why-not-litigate recommendation</a> in 2019. But the federal government’s view of this was underlined last Friday when Longo fronted the House of Representatives’ standing committee on economics. </p>
<p>The committee’s chair, Tim Wilson, slammed the “why not litigate” approach as <a href="https://parlview.aph.gov.au/mediaPlayer.php?videoID=554090&operation_mode=parlview">binary, wrong-headed and farcical</a>. He also disputed that ASIC was too close to regulated companies, despite the <a href="https://journals.sagepub.com/doi/full/10.1177/0067205X18816240">overwhelming evidence to the contrary</a>. </p>
<h2>Return to enforceable undertakings</h2>
<p>The answers Longo and Court gave the AFR also suggest ASIC is backing away from the Hayne royal commission’s recommendation on “enforceable undertakings” — by which transgressors negotiate a settlement without an admission of wrongdoing. </p>
<p>A regulator might think using enforceable undertakings was better than taking a company to court, Commissioner Hayne said <a href="https://www.royalcommission.gov.au/system/files/2020-09/fsrc-volume-1-final-report.pdf">in his final report</a>. </p>
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<p>But that view cannot be formed without having first given proper consideration to questions of deterrence, both general and specific. A regulatory response to a breach of law that does not deter, generally and specifically, will rarely be a more effective regulatory outcome.“</p>
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<p>Court, however, told the AFR:</p>
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<p>My own view is that an enforceable undertaking can be completely appropriate in the right circumstance. Infringement notices can be completely appropriate.</p>
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<h2>Royal commission’s fading influence</h2>
<p>The impression gained is of an attempt to pay some lip service to the royal commission but also demonstrate fealty to the federal government.</p>
<p>The federal government repeatedly resisted the royal commission, <a href="https://theconversation.com/ideology-triumphs-over-evidence-morrison-government-drops-the-ball-on-banking-reform-153529">then backed away</a> from its commitment to act on all the recommendations. What has changed since the royal commission? Not much. </p>
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Read more:
<a href="https://theconversation.com/ideology-triumphs-over-evidence-morrison-government-drops-the-ball-on-banking-reform-153529">Ideology triumphs over evidence: Morrison government drops the ball on banking reform</a>
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<p>Last week the Federal Court <a href="https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2021/2021fca1008">fined Westpac</a> A$10.5 million for deceptive behaviour towards members of the Westpac-owned BT Superannuation Fund - a ruling stemming from litigation initiated by ASIC in 2016. This is the same BT ordered two weeks ago by the <a href="https://www.abc.net.au/news/2021-08-31/retirement-savings-investing-superannuation-funds-yoursuper-list/100419844">Australia Prudential Regulatory Authority</a> to advise about 500,000 members of its Retirement Wrap fund that they should leave the fund, <a href="https://theconversation.com/my-super-fund-just-failed-the-apra-performance-test-whats-next-166956">so bad have their returns been</a>.</p>
<p>In his judgement, Justice Michael O'Bryan criticised Westpac for failing to fix its compliance failures, tardiness in compensating customers and lack of apology: "Westpac has not expressed regret for the conduct, does not appear to have taken steps to remedy the compliance deficiencies and has been tardy in progressing a remediation plan.” </p>
<p>At least, though, ASIC litigated against Westpac — successfully pursuing an appeal when it lost its first case. What chance would there be of achieving a fair outcome for consumers from a “no-regrets Westpac” had it not gone to court? Not much.</p>
<p>Australia’s battered and bruised financial consumers have every right to say to the regulator, and the government: enforce the law, or get out of the way.</p><img src="https://counter.theconversation.com/content/167532/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Schmulow is the founder & CEO, Clarity Prudential Regulatory Consulting, Pty Ltd, he is an Associate Partner, Senior Advisor & Thought-Leader on Financial Services to DB & Associates, a joint Australian-South African Consultancy, he is a member of the Independent Committee of Experts convened by the South African National Treasury for the drafting of the Conduct of Financial Institutions Bill, a Secretariat member for the All Party Parliamentary Group for Personal Banking and Fairer Financial Services, House of Commons House of Lords, a member of the European Banking Institute (EBI) research work-stream on EU financial supervisory architecture, and an independent consultant to Luis Silva Morais/Sérgio Gonçalves do Cabo – Law Firm, for the jurisdictions of Australia and South Africa. He has received funding from various universities, associations and think tanks, most notably CGAP (a division of the World Bank) and the Banking Association, South Africa. He is affiliated with ACAC and the Accountability Round Table. He serves on the Boards of two charities.</span></em></p>The implosion of the Australian Securities and Investments Commission, has gone from tragedy to farce.Andrew Schmulow, Senior Lecturer, Faculty of Law, University of WollongongLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1555412021-03-05T20:14:26Z2021-03-05T20:14:26Z10 years after Fukushima, safety is still nuclear power’s greatest challenge<figure><img src="https://images.theconversation.com/files/387881/original/file-20210304-13-1jbe3ct.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3008%2C1999&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An International Atomic Energy Agency investigator examines Reactor Unit 3 at the damaged Fukushima Daiichi plant, May 27, 2011.</span> <span class="attribution"><a class="source" href="https://flic.kr/p/9MsNf9">Greg Webb, IAEA/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Ten years ago, on March 11, 2011, the biggest recorded earthquake in Japanese history hit the country’s northeast coast. It was followed by a tsunami that traveled up to 6 miles (10 kilometers) inland, reaching heights of over 140 feet (43.3 meters) in some areas and sweeping entire towns away in seconds.</p>
<p>This disaster left nearly 20,000 people dead or missing. It also destroyed the <a href="https://www.world-nuclear.org/information-library/safety-and-security/safety-of-plants/fukushima-daiichi-accident.aspx">Fukushima Daiichi Nuclear Power Station</a> and released radioactive materials over a large area. The accident triggered widespread evacuations, large economic losses and the eventual shutdown of all nuclear power plants in Japan. A decade later, the nuclear industry has yet to fully to address safety concerns that Fukushima exposed.</p>
<p>We are scholars specializing in <a href="https://viterbi-web.usc.edu/%7Emeshkati/">engineering</a> and <a href="https://www.researchgate.net/scientific-contributions/Kiyoshi-Kurokawa-2163025935">medicine and public policy</a>, and have advised our respective governments on nuclear power safety. Kiyoshi Kurokawa chaired an <a href="https://warp.da.ndl.go.jp/info:ndljp/pid/3856371/naiic.go.jp/en/report/">independent national commission</a>, known as the NAIIC, created by the Diet of Japan to investigate the root causes of the Fukushima Daiichi accident. Najmedin Meshkati served as a member and technical adviser to a committee appointed by the U.S. National Academy of Sciences to <a href="https://www.nap.edu/catalog/18294/lessons-learned-from-the-fukushima-nuclear-accident-for-improving-safety-of-us-nuclear-plants">identify lessons from this event</a> for making U.S. nuclear plants safer and more secure.</p>
<p>Those reviews and <a href="https://www-pub.iaea.org/MTCD/Publications/PDF/Pub1710-ReportByTheDG-Web.pdf">many</a> <a href="https://doi.org/10.1098/rsta.2014.0379">others</a> concluded that Fukushima was a <a href="https://carnegieendowment.org/2012/03/06/why-fukushima-was-preventable-pub-47361">man-made accident</a>, triggered by natural hazards, that <a href="https://thenewpress.com/books/fukushima">could and should have been avoided</a>. Experts widely agreed that the root causes were lax regulatory oversight in Japan and an ineffective safety culture at the utility that operated the plant. </p>
<p>These problems are far from unique to Japan. As long as commercial nuclear power plants operate anywhere in the world, we believe it is critical for all nations to learn from what happened at Fukushima and continue doubling down on nuclear safety. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/ZK8UBHMo04U?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">How the 2011 earthquake and tsunami crippled the Fukushima Daiichi nuclear plant, filmed one month after the disaster.</span></figcaption>
</figure>
<h2>Failing to anticipate and plan</h2>
<p>The 2011 disaster delivered a devastating one-two punch to the Fukushima plant. First, the <a href="https://www.britannica.com/event/Japan-earthquake-and-tsunami-of-2011">magnitude 9.0 earthquake</a> knocked out off-site electric power. Next, the tsunami breached the plant’s protective sea wall and swamped portions of the site. </p>
<p>Flooding disabled monitoring, control and cooling functions in multiple units of the six-reactor complex. Despite heroic efforts by plant workers, three reactors sustained severe damage to their radioactive cores and three reactor buildings were damaged by hydrogen explosions. </p>
<p>Off-site releases of radioactive materials contaminated land in Fukushima and several neighboring prefectures. Some 165,000 people left the area, and the Japanese government established an exclusion zone around the plant that extended <a href="https://www.britannica.com/story/nuclear-exclusion-zones">over 311 square miles</a> (807 kilometers) in its largest phase. </p>
<p>For the first time in the history of constitutional democratic Japan, the Japanese Parliament passed a law creating an <a href="https://warp.da.ndl.go.jp/info:ndljp/pid/3856371/naiic.go.jp/en/resources/">independent national commission</a> to investigate the root causes of this disaster. In its report, the commission concluded that Japan’s <a href="https://en.wikipedia.org/wiki/Japanese_Nuclear_Safety_Commission">Nuclear Safety Commission</a> <a href="https://warp.da.ndl.go.jp/info:ndljp/pid/3856371/naiic.go.jp/en/report/">had never been independent from the industry</a>, nor from the powerful Ministry of Economy, Trade, and Industry, which promotes nuclear power. </p>
<p>For its part, plant operator Tokyo Electric Power Company, or TEPCO, had a history of disregard for safety. The company had recently released an error-prone assessment of tsunami hazards at Fukushima that significantly <a href="https://royalsocietypublishing.org/doi/10.1098/rsta.2014.0379">underestimated the risks</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=572&fit=crop&dpr=1 600w, https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=572&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=572&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=718&fit=crop&dpr=1 754w, https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=718&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/387889/original/file-20210304-13-n1rm6p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=718&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Nuclear power generates about 10% of the world’s electricity (TWh = terawatt-hours). About 50 new plants are under construction, but many operating plants are aging.</span>
<span class="attribution"><a class="source" href="https://www.world-nuclear.org/information-library/current-and-future-generation/nuclear-power-in-the-world-today.aspx">World Nuclear Association</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Events at the Onagawa Nuclear Power Station, located 39 miles (64 kilometers) from Fukushima, told a <a href="https://thebulletin.org/2014/03/onagawa-the-japanese-nuclear-power-plant-that-didnt-melt-down-on-3-11/">contrasting story</a>. Onogawa, which was owned and operated by the Tohoku Electric Power Company, was closer to the earthquake’s epicenter and was hit by an even larger tsunami. Its three operating reactors were the same type and vintage as those at Fukushima, and were under the same weak regulatory oversight. </p>
<p>But Onogawa shut down safely and was remarkably undamaged. In our view, this was because the Tohoku utility had a <a href="https://www.japantimes.co.jp/opinion/2014/03/14/commentary/japan-commentary/culture-of-safety-can-make-or-break-nuclear-power-plants/">deep-seated, proactive safety culture</a>. The company learned from earthquakes and tsunamis elsewhere – including a <a href="https://www.britannica.com/event/Chile-earthquake-of-2010">major disaster in Chile in 2010</a> – and continuously improved its countermeasures, while TEPCO overlooked and ignored these warnings. </p>
<h2>Regulatory capture and safety culture</h2>
<p>When a regulated industry manages to cajole, control or manipulate agencies that oversee it, rendering them feckless and subservient, the result is known as <a href="https://doi.org/10.2307/3003160">regulatory capture</a>. As the NAIIC report concluded, Fukushima was a textbook example. Japanese regulators “<a href="https://warp.da.ndl.go.jp/info:ndljp/pid/3856371/naiic.go.jp/wp-content/uploads/2012/09/NAIIC_report_lo_res10.pdf">did not monitor or supervise nuclear safety</a>….They avoided their direct responsibilities by letting operators apply regulations on a voluntary basis,” the report observed.</p>
<p>Effective regulation is necessary for nuclear safety. Utilities also need to create internal <a href="https://www.sciencedirect.com/topics/engineering/safety-culture">safety cultures</a> – a set of characteristics and attitudes that make safety issues an overriding priority. For an industry, safety culture functions like the human body’s immune system, protecting it against pathogens and fending off diseases. </p>
<p>A plant that fosters a positive safety culture encourages employees to ask questions and to apply a rigorous and prudent approach to all aspects of their jobs. It also fosters open communications between line workers and management. But TEPCO’s culture reflected a Japanese mindset that emphasizes hierarchy and acquiescence and discourages asking questions. </p>
<p>There is ample evidence that <a href="https://doi.org/10.1177/108602669100500203">human factors</a> such as operator errors and poor safety culture played an instrumental key role in all three major accidents that have occurred at nuclear power plants: <a href="https://www.osti.gov/biblio/5395798-three-mile-island-report-commissioners-public-volume">Three Mile Island</a> in the U.S. in 1979, <a href="https://www-pub.iaea.org/MTCD/publications/PDF/Pub913e_web.pdf">Chernobyl</a> in Ukraine in 1986 and <a href="https://www-pub.iaea.org/MTCD/Publications/PDF/Pub1710-ReportByTheDG-Web.pdf">Fukushima Daiichi</a> in 2011. Unless nuclear nations do better on both counts, this list is likely to grow. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1366694917045690369"}"></div></p>
<h2>Global nuclear safety grade: Incomplete</h2>
<p>Today there are some <a href="https://www.world-nuclear.org/information-library/current-and-future-generation/plans-for-new-reactors-worldwide.aspx">440 nuclear power reactors operating</a> around the world, with about 50 under construction in countries including China, India, Pakistan, Bangladesh, Belarus, Turkey and the United Arab Emirates. </p>
<p>Many advocates argue that in light of the threat of climate change and the increasing need for carbon-free baseload electricity generation, nuclear power <a href="https://cen.acs.org/energy/nuclear-power/nuclear-power-help-save-us/97/i37">should play a role</a> in the world’s future energy mix. Others call for <a href="https://thebulletin.org/2019/08/the-false-promise-of-nuclear-power-in-an-age-of-climate-change/">abolishing nuclear power</a>. But that may not be feasible in the foreseeable future. </p>
<p>In our view, the most urgent priority is developing tough, system-oriented nuclear safety standards, strong safety cultures and much closer cooperation between countries and their independent regulators. We see worrisome indications in the U.S. that <a href="https://www.simonandschuster.com/books/Confessions-of-a-Rogue-Nuclear-Regulator/Gregory-B-Jaczko/9781476755779">independent nuclear regulation is eroding</a>, and that nuclear utilities are resisting pressure to learn and delaying adoption of internationally accepted safety practices, such as <a href="http://dx.doi.org/10.1126/science.aal4890">adding filters</a> to prevent radioactive releases from reactor containment buildings with the same characteristics as Fukushima Daiichi. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Man in protective radiation suit and respirator." src="https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=987&fit=crop&dpr=1 600w, https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=987&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=987&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1241&fit=crop&dpr=1 754w, https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1241&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/388064/original/file-20210305-19-otg7wg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1241&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Author Najmedin Meshkati holding an earthquake railing in a Fukushima Daiichi control room during a 2012 site visit.</span>
<span class="attribution"><span class="source">Najmedin Meshkati</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>The most crucial lesson we see is the need to counteract nuclear nationalism and isolationism. Ensuring close cooperation between countries developing nuclear projects is essential today as the forces of populism, nationalism and anti-globalism spread. </p>
<p>We also believe the <a href="https://www.iaea.org/">International Atomic Energy Agency</a>, whose mission is promoting safe, secure and peaceful uses of nuclear energy, should urge its member states to find a balance between national sovereignty and international responsibility when it comes to operating nuclear power reactors in their territories. As Chernobyl and Fukushima taught the world, radiation fallout does not stop at national boundaries. </p>
<p>[<em>Over 100,000 readers rely on The Conversation’s newsletter to understand the world.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=100Ksignup">Sign up today</a>.]</p>
<p>As a start, <a href="https://www.nytimes.com/2020/08/01/world/middleeast/uae-nuclear-Barakah.html">Persian Gulf countries</a> should set aside political wrangling and recognize that with the startup of a nuclear power plant in the <a href="https://www.nytimes.com/2020/08/01/world/middleeast/uae-nuclear-Barakah.html">United Arab Emirates</a> and others planned in <a href="https://www.neimagazine.com/news/newsconstruction-of-egypts-first-nuclear-plant-to-begin-in-2021-8100216">Egypt</a> and <a href="https://www.bloomberg.com/news/articles/2020-05-21/saudi-atomic-reactor-progresses-with-inspectors-still-frozen-out?sref=Hjm5biAW">Saudi Arabia</a>, they have a <a href="https://doi.org/10.1177/0018720815623143">common interest in nuclear safety</a> and <a href="https://doi.org/10.1007/s13753-016-0099-0">collective emergency response</a>. The entire region is vulnerable to radiation fallout and water contamination from a nuclear accident <a href="https://doi.org/10.1021/acs.est.7b00688">anywhere in the Gulf</a>.</p>
<p>We believe the world remains at the same juncture it faced in 1989, when then-Sen. Joseph R. Biden Jr. <a href="https://www.jstor.org/stable/43309384">made this perceptive argument</a>:</p>
<blockquote>
<p>“A decade ago, Three Mile Island was the spark that ignited the funeral pyre for a once-promising energy source. As the nuclear industry asks the nation for a second look in the context of global warming, it is fair to watch how its advocates respond to strengthened safety oversight. That will be the measure of whether nuclear energy becomes a phoenix or an extinct species.”</p>
</blockquote><img src="https://counter.theconversation.com/content/155541/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kiyoshi Kurokawa, MD, MACP, is Professor Emeritus at the University of Tokyo and Professor at the National Graduate Institute for Policy Studies, Tokyo. He served as Chairman of the National Diet of Japan Fukushima Nuclear Accident Independent Investigation Commission, which released its official report in July 2012. The English translation of his book, Regulatory Capture: Will Japan Change? is expected to be released in 2021.</span></em></p><p class="fine-print"><em><span>Najmedin Meshkati, Ph.D., CPE, is a Professor of Civil/Environmental, Industrial & Systems Engineering, and International Relations at the University of Southern California (USC). He teaches and conducts research on technological systems safety and has visited many nuclear power stations around the world, including Chernobyl (1997), Mihama (1999), and Fukushima Daiichi and Daini (2012). He served as a member and technical advisor on the U.S. National Academy of Sciences/National Research Council Committee on Lessons Learned from the Fukushima Nuclear Accident for Improving Safety and Security of U.S. Nuclear Plants.</span></em></p>On the 10th anniversary of the Fukushima nuclear disaster, two experts explain why human choices are more important to nuclear safety than technology, and why the job is far from finished.Kiyoshi Kurokawa, Professor Emeritus, University of TokyoNajmedin Meshkati, Professor of Engineering and International Relations, University of Southern CaliforniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1169182019-05-21T22:57:45Z2019-05-21T22:57:45ZThe new NAFTA’s assault on public health<figure><img src="https://images.theconversation.com/files/275157/original/file-20190517-69174-1yeydve.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C2396%2C1422&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">U.S. President Donald Trump, Prime Minister Justin Trudeau and Mexico's President Enrique Pena Nieto hold a news conference before signing the USMCA. The deal, if passed into law, poses dangers to public health.</span> <span class="attribution"><span class="source">(AP Photo/Pablo Martinez Monsivais)</span></span></figcaption></figure><p><a href="https://www.ctvnews.ca/politics/canada-agrees-to-new-trilateral-trade-deal-with-u-s-and-mexico-1.4115731">The negotiations were strained</a> and at times it looked like it would be stillborn, but the USMCA (the new North American Free Trade Agreement linking the economies of the United States, Mexico and Canada) was signed in November 2018 and awaits ratification.</p>
<p><a href="https://www.washingtonpost.com/business/economy/north-american-trade-deal-faces-early-headwinds-on-capitol-hill/2019/03/29/ef5b0d0c-5178-11e9-88a1-ed346f0ec94f_story.html?utm_term=.f984de2e42de">Its future is still uncertain.</a> Although U.S. President Donald Trump finally <a href="https://globalnews.ca/news/5291819/freeland-tariffs-the-west-block/">removed tariffs on steel and aluminium imports from Canada and Mexico</a>, something both countries and even some congressional Republicans were demanding for the deal to be ratified, <a href="https://www.ctvnews.ca/politics/new-nafta-deal-at-risk-as-u-s-democrats-want-negotiations-reopened-1.4363491">Democrats in the U.S.</a> are unhappy with its costly monopoly protection for new pharmaceuticals and weak enforcement measures for labour and environmental protection. </p>
<p>But beneath the political jockeying is a sleeper issue concerning public health that signals a bad agreement.</p>
<h2>Health impact assessment</h2>
<p>We undertook <a href="https://globalizationandhealth.biomedcentral.com/articles/10.1186/s12992-019-0476-8">a recently released health impact assessment of the USMCA</a>, focusing on three specific aspects of the agreement with direct or indirect health effects —pharmaceuticals, health and environmental regulations and labour and environmental protection. </p>
<p>For prescription drugs, <a href="https://www.healthsystemtracker.org/chart-collection/recent-forecasted-trends-prescription-drug-spending/#item-growth-in-price-and-utilization-of-pharmaceuticals-has-varied-over-time_2019">the costs of which have risen dramatically since the era of patent protection</a> in trade agreements, the USMCA contains provisions the Americans wanted in the <a href="http://www.ijhpm.com/article_3186.html">Trans-Pacific Partnership agreement</a>. </p>
<p>These provisions were suspended by the remaining countries when Trump pulled the U.S. out of that agreement. Now they’re back in, but with an even longer 10-year guaranteed monopoly for biologics, a new category of costly drugs used to treat cancers and autoimmune disorders. Generic equivalents known as “biosimilars” can <a href="http://www.pmprb-cepmb.gc.ca/view.asp?ccid=1304">cut the price by almost half</a>. </p>
<p>Canada currently offers eight years of market protection for biologics; the additional two years <a href="https://www.pbo-dpb.gc.ca/en/blog/news/CUSMA_prescription_drugs">could eventually add almost $170 million to each year’s drug costs</a>. Hardest hit would be Mexico, which presently offers no such monopoly rights for biologics. </p>
<p>The USMCA also locks in rules that make it easier for drug companies to “evergreen” their products through minor changes in their components or in how they’re administered, extending the years of patent protection and prevent regulators from using, for several years, the patent drug company’s test data when approving generic versions.</p>
<h2>Impact on health regulations</h2>
<p>A more subtle but critical set of changes in the USMCA imposes new constraints on the three countries’ abilities to enact health, safety and environmental policies or regulations. </p>
<p>It is these so-called <a href="https://journals.sagepub.com/doi/abs/10.1177/1468018117731415?journalCode=gspa">behind-the-border rules in trade and investment agreements</a> that have garnered the greatest public health concerns. The USMCA tries to assuage these concerns by affirming countries’ “inherent right to regulate” including “to protect public health, safety, the environment (and) natural resources.” </p>
<p>But it immediately undercuts this right by specifying that it must be exercised “in a manner consistent with this agreement.” That “consistent manner” includes provisions that could make it harder for Mexico to use existing safeguards under World Trade Organization rules to ensure domestic food security or <a href="https://www.iatp.org/blog/201902/fair-prices-and-bold-new-deal-mexico">to guarantee minimum food prices to reduce rural poverty and support small-scale Mexican farmers</a>. </p>
<p>It requires the three governments to ensure that any new international standards upon which new regulations might be based “do not create unnecessary obstacles to international trade,” suggesting trade issues will trump new health regulations. This became an issue even during negotiations, when <a href="https://theconversation.com/how-nafta-will-make-us-fat-if-the-u-s-has-its-way-94198">the U.S. wanted the agreement to ban any front-of-package nutrition labelling</a> that would warn consumers of unhealthy levels of fat, salt or sugar.</p>
<p>Canada and Mexico rejected this, but the USMCA contains several provisions on labelling that could lead to trade disputes should the two other countries choose to adopt new nutrition labels, <a href="https://www.canada.ca/en/health-canada/programs/consultation-front-of-package-nutrition-labelling-cgi/summary-of-proposed-amendments.html">as Canada is proposing to do</a>. </p>
<p>American and Canadian trade associations representing meat processors have already argued that <a href="https://www.regulations.gov/document?D=OMB-2018-0006-0007">Canada’s proposal violates the USMCA</a>, portending a possible trade challenge if the USMCA becomes law. </p>
<h2>Foxes guarding the hen house</h2>
<p>Other rules open the doors for “persons of another party” — in other words, primarily U.S.-based corporations — to have a seat at the table when Canada or Mexico decide to consult on new regulations. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/275748/original/file-20190521-23814-1p6twfg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Inviting corporations to help determine new regulations is a bit like asking the fox to guard the hen house.</span>
<span class="attribution"><span class="source">Scott Walsh/Unsplash</span></span>
</figcaption>
</figure>
<p>This runs the risk of <a href="https://www.investopedia.com/terms/r/regulatory-capture.asp">regulatory capture</a> by private vested interests, akin to inviting the foxes to guard the hen house. Unaware that your <a href="http://time.com/4832688/makeup-shampoo-toxic/">cosmetics are not always healthy or safe</a>? The USMCA would like to keep it that way, requiring governments to wait until a problem shows up and fix it later.</p>
<p>In a similar way, USMCA provisions require governments to submit detailed scientific evidence and explanation for any new government regulation, which is likely to lead to <a href="https://www.iatp.org/sites/default/files/2018-11/NewNAFTA_Stuart%20Trew.pdf">“regulatory chill,”</a> slowing down or preventing the introduction of novel health protection measures. This risk is compounded by an entire and enforceable chapter that aims to have the three governments harmonize their regulations to enable freer movement of goods across borders. </p>
<p>The economic elephant in the USMCA is, of course, the U.S., whose regulatory rules will likely set the tone for Canada and Mexico, and the Trump administration <a href="https://www.brookings.edu/interactives/tracking-deregulation-in-the-trump-era/">is keen to undo as many health and environmental regulations as possible</a>. </p>
<p>There are some less troubling glimmers in the new agreement. Controversial rules allowing foreign investors to sue governments over regulations that may undermine the value of their investment have been eliminated between the U.S. and Canada, apart from a three-year window for “legacy claims” to be made. </p>
<p><a href="https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2018/01/NAFTA%20Dispute%20Table%20Report%202018.pdf">Canada fared particularly badly under the old NAFTA</a> while the U.S. never lost a case, yet it was the United States that scrapped the rules while Canada wanted to keep them. So go figure. The Americans hedged their bets, however, by retaining the rules to protect U.S. investors in Mexico. </p>
<h2>Mandatory Mexican minimum wage</h2>
<p>The USMCA also contains provisions that claim to protect labour rights and the environment, often used by governments to sell trade deals to skeptical citizens. </p>
<p>A key labour provision, however, requires Mexico to amend its laws to allow workers to more effectively collectively bargain. The country <a href="https://www.washingtonexaminer.com/policy/economy/mexico-adopts-labor-reforms-advancing-trump-usmca-trade-deal">recently passed</a> legislation to satisfy this provision but questions remain over implementation and enforcement strategies. </p>
<p>A second provision mandates a substantially increased minimum hourly wage in Mexico’s auto-manufacturing sector, which could help relieve poverty for Mexicans, although Mexican exporters might opt instead to pay the low tariff the U.S. would levy if they fail to raise wages. </p>
<p>And while there’s lots of references to labour rights and multilateral environmental agreements in the USMCA, it’s unsurprisingly silent on climate change and the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">Paris climate accord.</a> And there are escape clauses — provisions only become enforceable if a country lowers its existing level of protection to gain a trade or investment advantage. This might prevent a race to the regulatory bottom, but it’s hardly a reassuring reach for the top. </p>
<p>In the end we have an agreement that binds governments’ future regulatory options in return for scant evidence of improved labour or environmental protection, or even economic gain. The IMF, for example, estimates <a href="https://www.imf.org/en/Publications/WP/Issues/2019/03/26/NAFTA-to-USMCA-What-is-Gained-46680">a net economic boost across the three countries of US$550 million a year</a>, chump change at best. </p>
<p>The U.S. International Trade Office (ITO), with some fanfare, begged to differ, announcing American gains of <a href="https://www.usitc.gov/publications/332/pub4889.pdf">US$62 billion and 176,000 new jobs</a>. The rub here is that these numbers rest on a unique modelling assumption, “reduced policy uncertainty,” that raised the eyebrows of most conventional trade economists. Remove this novel assumption and the American study actually shows a net loss in both income and jobs. Make America Great Again? Perhaps not so much. </p>
<p>As with any trade agreement, some economic sectors will be winners and others losers. But as far as protecting public health is concerned, the USMCA is a big step backwards.</p><img src="https://counter.theconversation.com/content/116918/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ronald Labonte receives funding from the Canadian Institutes of Health Research. </span></em></p><p class="fine-print"><em><span>Courtney McNamara receives funding from the Norwegian Research Council for her project ‘Trade, Labor Markets, and Health.’ </span></em></p><p class="fine-print"><em><span>Deborah Gleeson has received funding in the past from the Australian Research Council. She has received funding from various national and international non-government organisations to attend speaking engagements related to trade agreements and health. She has represented the Public Health Association of Australia on matters related to trade agreements and public health.</span></em></p><p class="fine-print"><em><span>Eric Crosbie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The collective public health of Canada, the United States and Mexico will take a hit if the new NAFTA becomes law.Ronald Labonte, Professor and Canada Research Chair, L’Université d’Ottawa/University of OttawaCourtney McNamara, Senior Researcher, Department of Sociology and Political Science, Norwegian University of Science and TechnologyDeborah Gleeson, Senior Lecturer in Public Health, La Trobe UniversityEric Crosbie, Assistant Professor, University of Nevada, RenoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1138922019-03-22T10:44:06Z2019-03-22T10:44:06ZBoeing 737 Max: The FAA wanted a safe plane – but didn’t want to hurt America’s biggest exporter either<figure><img src="https://images.theconversation.com/files/265143/original/file-20190321-93057-19m3e1w.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Boeing is accused of not being fully forthcoming about changes it made to the 737 Max.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Ethiopia-Plane-Crash-Boeing/658cb7a4c88e4e6d88f6ad3846dd6b0a/29/0">AP Photo/Ted S. Warren</a></span></figcaption></figure><p>Recent incidents aside, air travel <a href="https://www.usatoday.com/story/tech/2018/04/19/airlines-including-southwest-so-safe-its-hard-rank-them-safety/533166002/">is incredibly safe</a> these days. </p>
<p><a href="http://www.baaa-acro.com/statistics/death-rate-per-year?page=0">Global airplane fatalities averaged 840 a year</a> from 2010 to 2018, compared with almost 2,000 in the 1990s. In fact, this decade is on pace to see the fewest casualties since the dawn of jet travel in the 1930s. </p>
<p>Yet the <a href="https://www.cnn.com/2019/03/12/africa/ethiopian-airlines-flight-302-questions-intl/index.html">March 10 crash</a> of Ethiopian Airlines Flight 302 serves as a stark reminder that despite the significant safety gains in commercial aviation, accidents are still possible. And when they occur, the number of fatalities is often large.</p>
<p>What makes the most recent crash particularly concerning is that the airplane design <a href="https://www.washingtonpost.com/business/how-a-boeing-safety-feature-became-a-suspect-in-crashes/2019/03/19/904243b4-49fb-11e9-8cfc-2c5d0999c21e_story.html?utm_term=.5dcd549c4081">may have played a significant contributing role</a>. Perhaps even worse, there are early indications that regulators at the Federal Aviation Administration – the agency that oversees the development and certification of all U.S. airplanes – may have been more concerned <a href="https://medium.com/@dsaintgermain/the-boeing-debacle-is-the-latest-example-of-regulatory-capture-2a8e138a9c8b">about bringing the Boeing 737 Max to market</a> than about consumer safety.</p>
<p>As a result, <a href="https://www.washingtonexaminer.com/news/capt-sullenberger-737-max-crashes-reveal-cozy-relationship-between-boeing-faa">observers have accused</a> the FAA of being too cozy with Boeing. And <a href="https://www.cnbc.com/2019/03/19/transportation-secretary-asks-departments-inspector-general-to-audit-faas-certification-of-boeing-737-max.html">transportation officials in both the U.S.</a> and <a href="https://www.cnbc.com/2019/03/18/canada-re-examining-boeing-max-approval-after-faa-certification-probe.html">Canada</a> plan to review how the plane got certified to fly by the FAA.</p>
<p>As experts on the regulatory process, we see this as a tragic example of what happens when an agency must <a href="https://www.amazon.com/Bureaucracy-Government-Agencies-Basic-Classics/dp/0465007856">balance competing goals</a>. The FAA was supposed to protect air travelers and regulate aircraft makers. At the same time, it doesn’t want to make it harder for companies like Boeing to make money in a very competitive global market.</p>
<p>And a heated rivalry is exactly where Boeing’s current troubles began.</p>
<h2>Competing in a global market</h2>
<p>The global market for jetliners has been dominated by two major competitors: <a href="https://www.cnbc.com/2019/01/25/why-the-airbus-boeing-companies-dominate-99percent-of-the-large-plane-market.html">Boeing and Airbus</a>. Since the 1990s, they’ve been in a bruising battle over market share. </p>
<p>Competition has been particularly fierce in the narrow-body or single-aisle aircraft market. This segment historically has made up about two-thirds of deliveries for both <a href="https://www.airbus.com/aircraft/market/orders-deliveries.html">Airbus</a> and <a href="http://www.boeing.com/commercial/#/orders-deliveries">Boeing</a>. It also holds <a href="https://www.planestats.com/mro9_2018mar">significant growth potential</a> in the future. Altogether, they have sold and delivered almost <a href="https://www.forbes.com/sites/richardaboulafia/2018/03/14/how-the-airbus-boeing-single-aisle-jet-party-could-end/#60ce0ba95a53">20,000 aircraft</a> from the A320 or 737 families since their respective launches in the 1970s and 1980s.</p>
<p>When one company gains even a slight edge by offering a more efficient product, the implications can be massive. This occurred with the <a href="https://www.airbus.com/newsroom/press-releases/en/2011/06/airbus-with-new-order-record-at-paris-air-show-2011.html">highly successful launch of the Airbus 320neo in 2010</a>. The cost savings from reduced fuel consumption proved so significant that even <a href="https://www.nytimes.com/2011/07/21/business/global/american-places-record-order-with-2-jet-makers.html">American Airlines</a>, an exclusive Boeing customer at the time, ordered several hundred 320neos. Fuel is the <a href="https://www.investopedia.com/ask/answers/040715/what-are-major-expenses-affect-companies-airline-industry.asp">second-highest expense for airlines after labor</a>.</p>
<h2>Boeing playing catch-up</h2>
<p>Falling behind its rival, Boeing felt the need to update its 737 family. And it had to do it fast, <a href="https://www.newyorker.com/news/our-columnists/how-did-the-faa-allow-the-boeing-737-max-to-fly">particularly with regard to fuel efficiency</a>.</p>
<p>So Boeing decided to alter the position of the plane’s engines. But doing so changed the plane’s aerodynamics in a way that could cause the plane’s nose to tip upward into a stall, which is what appears to have happened repeatedly before the recent crashes. </p>
<p>Boeing sought to solve this engineering problem using an <a href="https://theaircurrent.com/aviation-safety/what-is-the-boeing-737-max-maneuvering-characteristics-augmentation-system-mcas-jt610/">automated correction system</a> known as MCAS. A <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">malfunction of this system</a> may have contributed to the crashes of <a href="https://www.reuters.com/article/us-ethiopia-airplane/ethiopian-crash-crews-voices-could-unlock-high-stakes-boeing-inquiry-idUSKCN1R0183">Ethiopian Airlines Flight 302</a> and <a href="https://www.nytimes.com/2018/11/09/world/asia/air-lion-crash-610.html">Indonesian Lion Air Flight 610</a> in October – although investigations are ongoing.</p>
<p>Boeing <a href="https://boeing.mediaroom.com/2019-03-18-Letter-from-Boeing-CEO-Dennis-Muilenburg-to-Airlines-Passengers-and-the-Aviation-Community">has put out a statement</a> saying that it working with investigators to determine the cause of the crash. </p>
<h2>The FAA and the Boeing 737 Max 8</h2>
<p>Even before these incidents, <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">there were concerns</a> that the FAA was delegating too much safety oversight to Boeing itself.</p>
<p>The FAA allowed Boeing to <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">handle much of the safety certification process</a>, and Congress <a href="http://fortune.com/2019/03/18/boeing-safety-vetting-faa/">supported doing so</a> – though recent events may be prompting lawmakers to <a href="https://chicago.cbslocal.com/2019/03/18/boeing-737-max-faa-congress-investigation">change their tune</a>. Reports have suggested that Boeing <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">even excluded FAA technical experts</a> from some of those decisions. </p>
<p>In addition, recent analyses suggest that <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">Boeing made several misjudgments when it designed MCAS</a> and <a href="https://www.seattletimes.com/business/boeing-aerospace/failed-certification-faa-missed-safety-issues-in-the-737-max-system-implicated-in-the-lion-air-crash/">hasn’t been fully forthcoming</a> with both the FAA and airlines about how it worked. The airline has also been accused of providing inadequate training for pilots. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=466&fit=crop&dpr=1 754w, https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=466&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/265146/original/file-20190321-93039-u4huwd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=466&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The National Transportation Safety Committee Chairman Soerjanto Tjahjono, right, spoke about a third troubled Boeing flight.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Indonesia-Lion-Air-Crash/8ac04371398647dd93df2a774c1c1648/1/0">AP Photo/Achmad Ibrahim</a></span>
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</figure>
<h2>‘Regulatory capture’ at the FAA?</h2>
<p>This has led <a href="http://fortune.com/2019/03/18/boeing-safety-vetting-faa/">critics to argue</a> that the FAA has gotten too close to the entity it was supposed to oversee. </p>
<p>This situation – when regulatory agencies created to protect the public interest become overly entangled with commercial and special interests – is known as “<a href="http://law.emory.edu/ecgar/content/volume-1/issue-1/essays/regulatory-capture.html">regulatory capture</a>.” Many see this <a href="https://tobinproject.org/sites/tobinproject.org/files/assets/Introduction%20from%20Preventing%20Regulatory%20Capture.pdf">as corrosive for society</a>. The 2010 <a href="https://www.newsweek.com/oil-spills-biggest-losers-74817">Deep Water Horizon oil explosion</a>, the <a href="https://www.britannica.com/event/Deepwater-Horizon-oil-spill-of-2010">largest marine spill in history</a>, is considered an example of this.</p>
<p>Yet, <a href="https://www.cambridge.org/core/books/preventing-regulatory-capture/reconsidering-agency-capture-during-regulatory-policymaking/73AD5D37B4A5769BB9B828818ECD3B81">capture is difficult to prove</a>, especially in an era when businesses must work closely with government to ensure that agency officials have the best and latest technical information to develop and issue appropriate regulations. </p>
<p>During this process, public regulators are supposed to act in the “public interest.” However, the term is inherently vague and open to a multitude of competing interpretations. Unless it involves outright bribes or other corrupt activities, business influence on regulators fails to amount to criminal conduct.</p>
<p>To us, it seems that the FAA was simply caught in an impossible position between the competing goals of protecting consumers and protecting American business interests. In this case, the pendulum may have swung too far to the side of the latter.</p>
<p>Unquestionably, we want our airplanes to be safe. And, to be clear, we believe <a href="https://www.boeing.com/company/about-bca/aviation-safety.page">Boeing does</a> as well. Yet we also want American companies to be successful, and regulations are inherently <a href="https://www.mercatus.org/publication/cumulative-cost-regulations">costly and time-consuming for businesses</a>, many of which are competing with companies worldwide.</p>
<p>It is not surprising that Boeing was eager to move forward with the 737 Max as fast as possible. Nor is it surprising that the FAA and other regulatory bodies are hesitant to impose excessive burdens on American companies – particularly on one of the <a href="https://www.seattletimes.com/business/u-s-facing-fresh-scrutiny-over-close-ties-with-boeing/">nation’s premier exporters</a>. </p>
<p>And generally, <a href="https://www.cambridge.org/core/journals/american-political-science-review/article/influence-and-the-administrative-process-lobbying-the-us-presidents-office-of-management-and-budget/638F34BC73235AB4833C852B24C431AF">business interests tend to be much more successful</a> in obtaining their preferred regulatory outcomes than public interest groups. Our own recent work shows that the White House – regardless which party controls it – <a href="https://doi.org/10.1093/jopart/muy033">is more likely to interfere</a> with regulations coming out of more liberal and arguably pro-regulatory agencies. </p>
<h2>The pendulum keeps swinging</h2>
<p>The existence of competing incentives confronting regulatory agencies is nothing new. Public agencies must serve a multitude of goals and objectives and somehow find an appropriate balance.</p>
<p>Yet, at times, the balancing act by public agencies may tilt too far in one direction. And unfortunately, when the imbalance occurs at agencies tasked with protecting public safety, the consequences can be exceedingly dire. </p>
<p>It seems likely that increased public scrutiny in the wake of the two crashes may force the FAA to take a more aggressive stance on the side of consumer safety in the future. Eventually, however, business interests are likely to begin pushing back, and once again the pendulum will swing the other way.</p><img src="https://counter.theconversation.com/content/113892/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Susan Webb Yackee has an Innovation in Regulatory Science Award from the Burroughs Wellcome Fund, and her research is also supported by the Russell Sage Foundation.</span></em></p><p class="fine-print"><em><span>Simon F. Haeder is a Fellow in the Interdisciplinary Research Leaders Program, a national leadership development program supported by the Robert Wood Johnson Foundation to equip teams of researchers and community partners in applying research to solve real community problems.</span></em></p>Some are calling the FAA’s relationship with Boeing an open-and-shut case of ‘regulatory capture.’ The reality is more complicated.Susan Webb Yackee, Professor of Political Science, University of Wisconsin-MadisonSimon F. Haeder, Assistant Professor of Political Science, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1012382018-08-08T05:17:34Z2018-08-08T05:17:34ZEmbedding regulators in banks can help change cultures of wrongdoing, despite the risks<p>The federal government’s <a href="https://www.theguardian.com/australia-news/2018/aug/07/asic-to-embed-staff-in-big-banks-to-enforce-compliance">adoption</a> of ASIC chair James Shipton’s proposal to embed ASIC supervisors in the banks is an important initiative. The Global Financial Crisis and the procession of corporate and financial scandals since then have led to what Shipton calls a “<a href="https://asic.gov.au/about-asic/media-centre/speeches/the-trust-deficit-and-corporate-australia-acsi-conference-2018/">trust deficit</a>”. The move to embed regulators in banks aims to drive much-needed cultural change and rebuild <a href="https://www.edelman.com/post/apacmea-trust-becomes-polarized">lost trust</a>.</p>
<p>The scandals and further evidence of misconduct uncovered at the <a href="https://financialservices.royalcommission.gov.au/Pages/default.aspx">Hayne Royal Commission</a> have turned the spotlight on the failures of senior executives, corporations and also regulators to combat white-collar crime. Increasingly, commentators <a href="https://asic.gov.au/about-asic/media-centre/speeches/corporate-culture-and-corporate-regulation/">identify “defective” culture as a prominent cause of corporate and financial misconduct</a>. Certainly, ASIC identifies corporate culture as being “<a href="https://asic.gov.au/about-asic/media-centre/speeches/outline-of-asic-s-approach-to-corporate-culture/">a key driver of conduct</a>”.</p>
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Read more:
<a href="https://theconversation.com/restructuring-alone-wont-clean-up-the-banks-act-99142">Restructuring alone won't clean up the banks' act</a>
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<p>That is the reasoning behind embedding ASIC supervisors in banks. But such action is not without its risks and problems.</p>
<h2>What are the risks?</h2>
<p>One such risk is “<a href="https://www.investordaily.com.au/regulation/43183-embedded-asic-agents-risk-capture-shipton">regulatory capture</a>”. Shipton has said he is “<a href="http://www.abc.net.au/news/2018-08-07/asic-to-be-given-powers-to-embed-staff-into-big-four-banks/10079630">attuned</a>” to this, but it remains a very real issue. </p>
<p><a href="https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=5262&context=faculty_scholarship">In the United States</a>, for example, “monitors” have been embedded under deferred prosecution agreements to ensure compliance with such agreements. Under these agreements, regulators suspend prosecution conditional upon specified terms, typically requiring the corporation to pay fines, compensate victims and reform their corporate governance. Indications are that monitors have become “too close” to those corporations and organisations. </p>
<p>The result is that the formal governance structures (often documented in codes of conduct and mission statements) may have improved, so that there is box-ticking of regulatory requirements, but <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674659919">substantive compliance remains wanting</a>. In other words, there is a disconnect between “stated” and “lived” values. </p>
<p>Many of the scandals that have engulfed Australian banks highlighted this problem even before the royal commission began. The Commonwealth Bank of Australia’s <a href="https://www.commbank.com.au/cs/newsroom/response-to-amended-AUSTRAC-and-class-action-claims-201802.html?ei=card=view">response</a> earlier this year to the criminal case brought against it by AUSTRAC is but one example. </p>
<p>Another problem is the difficulty of creating a consistent culture throughout an organisation. Shipton has made it clear that ASIC supervisors will start with the banks’ chief executive officers. That reflects the thinking that “tone from the top” sets the culture. </p>
<p>This is a positive step. While top management may not themselves perpetrate the wrongdoing, they have often been complicit in encouraging, condoning or, in some cases, concealing it.</p>
<p>However, there is a danger that the banks might see the embedding of ASIC specialists as just another imposition of bureaucratic burdens from outside. That’s how the banks have responded to previous attempts to scrutinise their operations. </p>
<p>In the first place, they, and the federal government, resisted calls for a banking royal commission until the pressure for one was overwhelming. Second, despite clear evidence, and some “acknowledgement”, that systemic failings have been at the heart of many, if not all, of the scandals that dog them, the banks overall remain in denial that systemic cultural issues are at play. </p>
<p>For example, Westpac’s attitude to the outcome of the case against it for the alleged rigging of the Bank Bill Swap Rate (BBSW) is telling. In April 2018, when the Federal Court found that Westpac employees acted unconscionably (albeit a less serious finding than market manipulation), the bank <a href="https://www.afr.com/business/banking-and-finance/westpac-wins-bbsw-interest-rate-rigging-case-20180523-h10gyn">claimed it as a victory</a>.</p>
<h2>A sign of more robust enforcement</h2>
<p>Nevertheless, the significance of embedding ASIC staff in the banks cannot be overstated. It signals a changed regulatory landscape – a more intrusive style of regulation – based on the conclusion that the banks cannot be left to regulate themselves. The hope is that ASIC has resolved to pursue more robust enforcement, including civil penalties and criminal proceedings against suspected wrongdoers. </p>
<p>In recent years ASIC has relied almost exclusively on enforceable undertakings in relation to wrongdoing by the banks. The only exception seems to be the BBSW rate-rigging case, in which ASIC launched civil penalty proceedings against Westpac, ANZ, NAB and CBA. All but Westpac reached settlements with ASIC. </p>
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Read more:
<a href="https://theconversation.com/apra-and-asic-have-the-legal-power-to-sack-bank-heads-but-they-need-willpower-95772">APRA and ASIC have the legal power to sack bank heads, but they need willpower</a>
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<p>It has been argued that enforceable undertakings avoid the uncertainty, time and expense associated with court action. They also arguably have the potential to work for prevention – by requiring corporations to change future behaviour, improve corporate governance and end wrongdoing cultures. But there is no reliable evidence to support such arguments. </p>
<p>In fact, the opposite seems to be the case. There is clear evidence of recidivism and other noncompliance by organisations that are subject to enforceable undertakings. </p>
<p>For example, in 2006 ASIC entered into an enforceable undertaking with AMP after it had been caught overcharging customers by switching them onto expensive and poorly performing products. This did not prevent AMP from engaging in further misconduct, notably the “fee for no service” scandal explored in the royal commission hearings.</p>
<p>ASIC, armed with <a href="https://www.smh.com.au/business/banking-and-finance/new-misconduct-laws-need-tough-regulator-experts-say-20180420-p4zaue.html">tougher jail terms and penalties</a> (both civil and criminal), should bring criminal proceedings in appropriate cases not just against corporations or organisations, but against their top executives as well. In this way, ASIC will show that it is not “<a href="http://www.abc.net.au/radio/perth/programs/worldtoday/new-powers-to-make-asic-the-top-cop-on-the-beat:-james-shipton/10082674">asleep at the wheel</a>” and is serious about tackling corporate crime. </p>
<p>The government, having <a href="http://www.abc.net.au/news/2018-08-07/asic-to-be-given-powers-to-embed-staff-into-big-four-banks/10079630">restored ASIC’s budget following previous cuts</a>, needs to ensure the regulator is properly resourced to do so. Only then will the fight against corporate wrongdoing be meaningful, because the most potent deterrent for white-collar criminals is jail.</p>
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Read more:
<a href="https://theconversation.com/heavy-penalties-are-on-the-table-for-banks-caught-lying-and-taking-fees-for-no-service-95210">Heavy penalties are on the table for banks caught lying and taking fees for no service</a>
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<img src="https://counter.theconversation.com/content/101238/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vicky Comino does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Putting regulators inside corporations isn’t new, and the US experience highlights risks of regulatory capture, but the move could make a difference if ASIC is shifting to more robust enforcement.Vicky Comino, Lecturer in Corporations Law and Regulation of Corporate Misconduct, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/957722018-05-01T00:57:41Z2018-05-01T00:57:41ZAPRA and ASIC have the legal power to sack bank heads, but they need willpower<p>The <a href="http://www.abc.net.au/news/2018-04-30/amp-chairperson-catherine-brenner-steps-down/9709874">chairwoman</a> and <a href="http://www.abc.net.au/news/2018-04-20/amp-ceo-craig-meller-steps-down-banking-royal-commission/9679138">CEO</a> of AMP have resigned after the company <a href="http://www.abc.net.au/news/2018-04-16/banking-royal-commission-financial-planners/9662166">admitted to charging for advice never provided</a> and lying to clients and regulators. But no banking CEOs have been toppled despite the Financial Services Royal Commission unearthing instances of fraud, bribery, impersonating customers, failures to report misconduct to regulators and other poor behaviour. </p>
<p><a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">Similar conduct</a> in the United States has resulted in bank executives and directors being forced to resign. That this is not happening in Australia shows how the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA) aren’t using their full powers to take action on the banks’ bad behaviour.</p>
<p>APRA already has the power under the <a href="http://www8.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ba195972/">Banking Act</a> to remove someone from a bank board and install its own nominee. The recently enacted <a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Banking Executive Accountability Regime</a> has given APRA more power to remove directors and install new ones. </p>
<p>So ASIC and APRA are not bedevilled by a lack of power, but by a lack of willpower. </p>
<p>In 1998 the <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP9697/97rp16">Wallis Inquiry</a> hived off the consumer protection and market conduct functions from the Australian Competition and Consumer Commission (ACCC) and gave these to ASIC. Professor Ian Harper, a member of the inquiry, <a href="https://www.fsca.co.za/Customers/Pages/Complaints-Compliments-Feedback.aspx">now concedes</a> that may have been an error. </p>
<p>The ACCC is an excellent regulator, with a long history of being a tough cop. Handing the consumer protection and market conduct function back to the ACCC is a step that federal Treasurer Scott Morrison should take now.</p>
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Read more:
<a href="https://theconversation.com/why-the-new-banking-laws-wont-be-the-slam-dunk-the-government-is-expecting-85530">Why the new banking laws won’t be the slam dunk the government is expecting</a>
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<p>The royal commission heard that a Commonwealth Bank subsidiary was <a href="http://www.abc.net.au/news/2018-04-19/cba-charged-fees-to-customers-who-had-died-commission-hears/9675922">billing customers for ongoing service after their deaths</a>. But no executives have been sacked for this. </p>
<p>Indeed, Matt Comyn, who was <a href="https://www.commbank.com.au/about-us/our-company/management/matt-comyn.html">responsible for this division from 2012 onwards</a>, has been promoted to Commonwealth Bank CEO. Former CEO Ian Narev has been permitted to sail off into the sunset with bonuses intact. </p>
<p>This shows ASIC is the same, or worse, than what it was in 2014: a timid, hesitant regulator, <a href="http://fsi.gov.au/publications/final-report/">too quick to accept the assurances of regulated entities</a>.</p>
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<a href="https://theconversation.com/australias-financial-regulators-need-policing-91396">Australia's financial regulators need policing</a>
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<p>Despite United States authorities being <a href="http://scholarship.law.uc.edu/cgi/viewcontent.cgi?article=1154&context=uclr">widely regarded</a> as weak in standing up to their banks, American CEOs are being held accountable.</p>
<p>Take the example of John Stumpf, chairman and CEO of Wells Fargo, the biggest retail bank in the US. Under his direction Wells Fargo <a href="https://www.nytimes.com/2017/08/31/business/dealbook/wells-fargo-accounts.html">staff had been opening multiple accounts for clients</a>, with neither their knowledge nor their consent, and then charged account-keeping fees.</p>
<p>When the scandal hit, Stumpf was <a href="http://www.abc.net.au/news/2016-09-23/head-of-wells-fargo-described-as-gutless/7868278">hauled before the US Senate</a>. He performed <a href="https://youtu.be/iCLIyXpV5K0">so disastrously</a> that the board told him he <a href="https://youtu.be/wm0Koz2zvXk">needed to go straight away</a>. </p>
<p>No one is suggesting Stumpf knew about the fraud, or that Comyn knew that CBA was charging fees for advice to dead people. But Stumpf’s misstep caused his departure. Why is no one suggesting Comyn must go? </p>
<p>This is the true state of the Australian financial sector: bank executives and CEOs who <a href="https://theconversation.com/heavy-penalties-are-on-the-table-for-banks-caught-lying-and-taking-fees-for-no-service-95210">could be facing criminal charges</a>, and should have resigned, don’t even acknowledge the buck stops with them.</p>
<h2>Regulatory failure</h2>
<p>And if there is any doubt about the need to get cracking, here is the knockout blow: <a href="https://www.businessinsider.com.au/westpac-ubs-downgrade-2018-4">UBS has downgraded Westpac shares</a> because the royal commission revealed that the percentage of “liar loans” in the bank’s A$400 billion loan book may be much higher than stated, or even than Westpac itself is aware of. </p>
<p>This is the culmination of ten years of cowboy behaviour in a financial system that now resembles the Wild West. </p>
<p>This is what happens when compliance culture breaks down, which in turn is a function of regulatory oversight and enforcement. Put differently, our regulators have failed to act for so long that the problem is assuming systemic proportions. </p>
<p>What will be interesting to see is whether the <a href="http://www.apra.gov.au/MediaReleases/Pages/17_34.aspx">APRA inquiry</a> is another whitewash. I half suspect that if it failed to excoriate CBA it would look pretty silly. </p>
<p>Let’s hope the panellists understand that. But if they don’t, then they must be called out.</p><img src="https://counter.theconversation.com/content/95772/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Andy Schmulow consults to Datta Burton and Associates. He is affiliated with Australian Citizens Against Corruption (ACAC), is an Executive Member of the Board of the Australian Law and Economics Association, and a committee member of the Banking and Finance Law and Studies Association (BFSLA) and the American Council on Consumer Interests (ACCI). He provides on-going ad hoc advice to members of the Australian Federal Parliament, principally in the Labor Party. He is currently a member of an expert panel of advisors convened to provide South Africa's National Treasury with advice on the drafting of the Conduct of Financial Institutions Bill, and made a series of submissions during the drafting of the Financial Sector Regulation Act.</span></em></p>ASIC and APRA don’t lack power to sack bank directors. They the lack the willpower to do so.Andrew Schmulow, Senior Lecturer, Faculty of Law, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/849612017-10-11T23:19:16Z2017-10-11T23:19:16ZTrump administration’s zeal to peel back regulations is leading us to another era of robber barons<figure><img src="https://images.theconversation.com/files/189824/original/file-20171011-9757-wrwcbn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">EPA Administrator Scott Pruitt is an unabashed ally of the fossil fuels – industry his agency is supposed to regulate. </span> <span class="attribution"><span class="source">AP Photo/Gene J. Puskar</span></span></figcaption></figure><p>The Trump administration has a clear economic objective: deregulate. Loosening regulations on industries, the White House believes, will lead to faster growth and more jobs. This is the <a href="https://www.whitehouse.gov/the-press-office/2017/06/01/statement-president-trump-paris-climate-accord">stated reason</a> for pulling the U.S. from the international climate accord, and the <a href="https://assets.documentcloud.org/documents/4081574/Repeal-of-Carbon-Pollution-Emission-Guidelines.pdf">economic justification</a> for seeking to rescind the EPA Clean Power Plan that limits carbon emissions from plants. </p>
<p>But an examination of history shows that government regulations are not always harmful to industry; they often help business. Indeed, government regulation is as central to the growth of the American economy as markets and dollars.</p>
<h2>Robber barons and the Progressive Era</h2>
<p>The late 19th century in the United States was the heyday of robber barons – John D. Rockefeller, Andrew Carnegie, Jay Gould and many others – who secured exorbitant wealth by building unregulated monopolies. They controlled the country’s oil, steel and railroads, and they used their wealth to bankrupt competitors, buy off politicians and fleece consumers. They manipulated a growing market economy that had weak rules and even <a href="https://global.oup.com/academic/product/the-republic-for-which-it-stands-9780199735815?cc=us&lang=en&">weaker legal enforcement</a>.</p>
<p>The <a href="https://www.gilderlehrman.org/history-by-era/progressive-era-new-era-1900-1929">progressive movement</a> of the early 20th century took aim at the robber barons, calling upon government to regulate their activities in the interest of the public welfare. Writing on the eve of the First World War, journalist Walter Lippmann <a href="http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.416.8041&rep=rep1&type=pdf">famously explained</a> that Americans had a choice to continue their economic drift into ever-deeper corruption and inequality, or they could empower their elected representatives to master the challenges of their age and create a more just and sustainable economic order. Lippmann and other progressives wanted a more active government, led by men of intelligence, who would regulate the most powerful corporations and ensure that they <a href="https://books.google.com/books/about/Drift_and_Mastery.html?id=PRwAcMYmcfkC&printsec=frontcover&source=kp_read_button#v=onepage&q&f=false">served the public interest</a>.</p>
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<a href="https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=445&fit=crop&dpr=1 600w, https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=445&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=445&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=559&fit=crop&dpr=1 754w, https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=559&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/189828/original/file-20171011-9751-1agebp1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=559&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">The Progressive Era arose in the late 19th century in part in response to poor working and living conditions for workers. This illustration from Puck Magazine shows industrialists Cyrus Field, Jay Gould, Cornelius Vanderbilt, and Russell Sage.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:The_protectors_of_our_industries.jpg">Library of Congress</a></span>
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<p>President Theodore Roosevelt was a creature of both the New York business elite from which he came and the progressive reform movement which he eloquently embraced with his calls for a “<a href="http://www.theodore-roosevelt.com/images/research/speeches/trsquaredealspeech.pdf">square deal</a>” to help the poor and “<a href="http://www.theodore-roosevelt.com/images/research/speeches/trstrenlife.pdf">strenuous</a>” efforts by the well-endowed to enter “<a href="http://www.theodore-roosevelt.com/trsorbonnespeech.html">in the arena</a>.” Roosevelt saw himself as part of an intelligent and energetic elite who would take the reins of government to improve society as a whole.</p>
<p>From the Executive Mansion, which he renamed the “White House,” Roosevelt pushed the federal government to expand its regulatory role over oil, steel, railroads and numerous other industries. He was not anti-business. His efforts proved that government regulation could improve the lives of citizens while allowing businesses to continue to prosper.</p>
<p>Historians of the period <a href="https://www.hachettebookgroup.com/titles/jeremi-suri/the-impossible-presidency/9780465051731/">like me</a> have, in fact, shown that the progressive era regulations often helped businesses by providing them with a more stable, predictable economic environment, where government regulations enabled increased capital investments and expanded consumer purchases. Progressive regulations of the robber baron market <a href="https://doi.org/10.1017/S0022050700104425">were good for businesses and consumers</a>.</p>
<h2>Regulatory ‘capture’</h2>
<p>The same is true for regulations a century later. Government activities to ensure competition, transparency and safety in various industries give the American economy stability almost unparalleled in any other country. </p>
<p>Investors send their capital to American companies because government regulations ensure that capital is not stolen or siphoned for corrupt purposes. Talented workers travel to the United States to work in American companies because government regulations protect safe and humane working environments, where businesses are held accountable for fulfilling their obligations to employees. Consumers buy products from American businesses – from food and drink to cars and houses – confident that they are receiving value for their money because of government regulations against cheating, lying and fakery in product sales. Investors buy stocks in the auto companies, workers seek employment in the auto industry and citizens buy cars because government helps <a href="http://www.nytimes.com/2010/09/20/books/20book.html">protect the integrity of the process at all levels</a>. The federal government bails out shareholders, workers and purchasers when everything goes wrong.</p>
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<a href="https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/189830/original/file-20171011-9777-1ldwjcu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Regulation can stifle innovation, which is why the type of regulation is more important than the number of them. The Bell telephone monopoly was broken up in the 1990s, which helped usher in competition for broadband internet services.</span>
<span class="attribution"><span class="source">EvgeniiAnd/Shutterstock.com</span></span>
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<p>This is not to say that all regulation is good. Sometimes regulation chokes innovation by slowing change and prohibiting risk taking. This was evidently true for regulated monopolies in mid-20th-century America, including the venerable <a href="https://doi.org/10.2307/3112937">Bell telephone company</a>.</p>
<p>In other circumstances, regulations empower special interest groups who gain power from laws that protect them and hurt potential competitors. This is true for pharmaceutical and insurance companies who drive the massive and troubled health care industry in the United States today. Government regulations <a href="https://books.google.com/books?id=iZytxUn2iEIC&pg=PT17&lpg=PT17&dq=health+insurance+disempowers+doctors&source=bl&ots=sHuRF1jkhf&sig=2mizoDk2H6-TRZsAXDvjkiTDFuo&hl=en&sa=X&ved=0ahUKEwiAhe2jvOfWAhXK4SYKHS3eA-84ChDoAQgzMAM#v=onepage&q=health%20insurance%20disempowers%20doctors&f=false">actually disempower</a> doctors, who have reduced control over treatments, and <a href="https://www.publishersweekly.com/978-1-59420-675-7/">patients, who cannot shop for price</a> when they are choosing health options.</p>
<p>Extensive <a href="http://heinonline.org/HOL/LandingPage?handle=hein.journals/glj101&div=42&id=&page=">research</a> shows that business leaders often “capture” regulation. Large companies – particularly in communications, real estate, pharmaceuticals and defense – use clever legal practices, control over information and often brute force to make regulators bend to their will. </p>
<p>The classic case is how lobbyists for Lockheed Martin, Boeing and other military contractors pressure members of Congress, with thousands of constituents employed in the industry, to <a href="https://books.google.com/books/about/Prophets_of_War.html?id=FLjNNTneVsoC">limit restrictions</a> on their production and sales. The <a href="https://tobinproject.org/books-papers/preventing-capture">regulators get bought off and bullied</a> into becoming the advocates of the companies they are supposed to control. </p>
<p>Perhaps college athletics is the best example. Does the NCAA really regulate the big college sports programs, or does it <a href="https://books.google.com/books/about/The_Cartel.html?id=nyJSUSDi-5QC">advocate for them</a>, and defend them when they bend the rules? As for the fate of the Clean Power Plan, EPA Administrator Scott Pruitt is an unabashed champion of the fossil fuel industry, <a href="https://www.washingtonpost.com/news/energy-environment/wp/2017/10/09/pruitt-tells-coal-miners-he-will-repeal-power-plan-rule-tuesday-the-war-on-coal-is-over/?utm_term=.77ec9d513a1b">declaring</a> the “war on coal is over” when announcing plans to roll back regulations to limit carbon emissions from power plants. </p>
<h2>Consumer benefits</h2>
<p>This short history of government regulation shows how complex the issue really is. </p>
<p>The historical record reveals that regulation is generally beneficial to big established businesses: It often solidifies their dominance in markets, stabilizing basic practices. However, regulation will frequently hurt small startup competitors, who cannot mobilize as much influence over the regulators as their bigger counterparts. For consumers, regulation can help or hurt, depending on how it is carried out.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=753&fit=crop&dpr=1 600w, https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=753&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=753&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=947&fit=crop&dpr=1 754w, https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=947&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/189832/original/file-20171011-9754-1go4u88.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=947&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Roosevelt spearheaded regulatory reform but made clear his actions were not anti-business, but were instead aligning business and public interests.</span>
<span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/File:T_Roosevelt.jpg">U.S. Library of Congress</a></span>
</figcaption>
</figure>
<p>With the determined political leadership of a leader like Theodore Roosevelt, regulations can indeed make workplaces safer and products more reliable for citizens, while providing the stable conditions corporations need to do business. But vigilance is necessary, and a number of government boards and agencies emerged to play this role. Hence the creation of federal bodies from the Federal Communications Commission (1934) and the National Labor Relations Board (1935) to the Federal Aviation Administration (1958) and the Environmental Protection Agency (1970), and many others. </p>
<p>When we look forward to the next decade, the question is not whether to have federal regulations. Less regulation will only mean more instability, uncertainty and losses for businesses and consumers. The real question is what kind of regulations, and how can federal, state and local governments administer them to serve the public interest as a whole, preventing excessive red tape, special interest domination and big business “capture.” </p>
<p>What the United States needs is less ideology and more detailed attention among politicians to matching regulatory processes with public purposes. That was, of course, the <a href="https://doi.org/10.1017/S0022050700104425">goal of the progressives</a> more than a century ago. If we don’t return to their model, chances are we will continue the current drift into another age of robber barons.</p><img src="https://counter.theconversation.com/content/84961/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeremi Suri does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Trump administration is committed to deregulating industry, as it’s done with the EPA Clean Power Plan. But a historian shows how regulations have actually benefited both industry and consumers.Jeremi Suri, Professor of History and Public Affairs, Mack Brown Distinguished Chair, The University of Texas at AustinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/783782017-06-26T00:15:46Z2017-06-26T00:15:46ZZombie Trans-Pacific Partnership agreement lurches on<figure><img src="https://images.theconversation.com/files/173660/original/file-20170613-30067-1xeuw1l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Did the TPP die - or is it now a zombie? </span> <span class="attribution"><a class="source" href="https://visualhunt.com/f/photo/10545775696/aa0cf53099/">(Visual Hunt/Killaee)</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>When Donald Trump pulled the United States out of the Trans-Pacific Partnership (TPP) agreement, the treaty appeared to die. Critics breathed a sigh of relief. In Canada, attention turned to Trump’s promise to renegotiate the 1994 North American Free Trade Agreement (NAFTA).</p>
<p>But wait.</p>
<p>Did the TPP die? Or is it now a bloody zombie? Many of the 11 remaining member countries have ratified the agreement, or plan to. Chile and Canada have both hosted meetings to consider <a href="https://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/tpp-members-to-decide-how-to-revive-pact-without-us/article35030576/?reqid=859df3ea-028a-43cd-a8ac-1b1089a81f7f">ways to resurrect it</a>. </p>
<p>NAFTA’s renegotiation also signals that the U.S. remains committed to new trade and investment treaties, so long as they are even more beneficial to American investors and export interests than they have been in the past. <a href="https://ustr.gov/sites/default/files/files/reports/2017/AnnualReport/Chapter%20I%20-%20The%20President%27s%20Trade%20Policy%20Agenda.pdf">New US trade objectives</a> are explicit on this point. The U.S. may never rejoin the TPP but will almost certainly export the provisions it likes into new bilateral trade deals.</p>
<p>Lurking in the shadows is the geopolitics at stake: the rising power of China and its role in another (very much alive) Asia-Pacific trade and investment negotiation, the Regional Comprehensive Economic Partnership (RCEP). The Obama administration’s adamant support for the TPP was based on a wish for American interests to forge a new Asia-Pacific agreement, not Chinese. Promises of increased growth, labour rights and environmental protection were window dressing for a wary public.</p>
<p>As Canada Research Chair in Globalization and Health Equity, and having spent four years studying the health impacts of the TPP, it’s worth recounting the zombie’s many weaknesses. </p>
<h2>Low economic growth, rising income inequality</h2>
<p>If, as claimed, the TPP really did boost economic growth that trickled down equitably, people’s health would likely benefit. But the most optimistic projections of the TPP’s impact on economic growth average only 0.5 per cent by 2025. The Canadian government estimates that the <a href="http://international.gc.ca/economist-economiste/analysis-analyse/tpp_ei-re_ptp.aspx?lang=eng">TPP would boost Canada’s growth by just 0.127%</a> (and not until 2040). The net dollar gains would be less than Canada’s losses on more expensive pharmaceuticals and adjustment subsidies to its dairy and auto sectors. </p>
<p>These projections all assume no changes to employment. They assume equal or rising incomes. In stark contrast, modelling that did not make these assumptions has estimated <a href="http://www.ase.tufts.edu/gdae/Pubs/wp/16-01Capaldo-IzurietaTPP.pdf">substantial employment losses</a>. A U.S. study further calculated that the TPP would <a href="http://cepr.net/documents/publications/TPP-2013-09.pdf">raise incomes for the 1% but drop those of everyone else</a>, an indication of who stands to gain with such treaties. </p>
<h2>Weak labour protection, silence on climate</h2>
<p>The labour chapter of the TPP only prevents countries from lowering existing standards if it affects trade or investment amongst member countries. It <a href="http://journals.sagepub.com/doi/10.1177/0020731416684325">does not guarantee health, safety or adequate pay for workers</a> whose share of economic product globally has plummeted since the 1980s. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=367&fit=crop&dpr=1 600w, https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=367&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=367&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=461&fit=crop&dpr=1 754w, https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=461&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/175511/original/file-20170626-13441-jv6eau.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=461&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A plane flies past the Peace Tower in Ottawa trailing a sign protesting the TPP agreement.</span>
<span class="attribution"><span class="source">(THE CANADIAN PRESS/Adrian Wyld)</span></span>
</figcaption>
</figure>
<p>The environment chapter similarly requires governments to uphold enforcement only if failure to do so affects trade or investment. It is silent on climate change and on greenhouse gas emissions from global trade driven by fossil fuels. </p>
<p>Trade treaty rules could work to reduce income inequalities and afford meaningful and enforceable protection of labour and environmental rights. The TPP zombie in present form does not.</p>
<h2>Unhealthy regulatory regime</h2>
<p>The TPP contains four especially troubling regulatory impacts:</p>
<p>– Tougher patent protection would <a href="http://www.ourcommons.ca/Content/Committee/421/CIIT/Brief/BR8384140/br-external/LexchinJoel-final-e.pdf">affect the price of drugs</a>, especially costly new “biologics” used in treating cancers and autoimmune disorders.</p>
<p>– Requirements to prove the necessity of, or scientific justification for, new <a href="http://dx.doi.org/10.15171/ijhpm.2016.41">health regulations</a> would be more stringent than those under the World Trade Organization (WTO) system. </p>
<p>– New obligations allowing “persons” (including private corporations) from any member country to participate in developing new technical regulations could potentially lead to <a href="http://www.investopedia.com/terms/r/regulatory-capture.asp">regulatory capture</a>. </p>
<p>– Contentious <a href="https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2016/06/Foreign_Investor_Protections_TPP.pdf">investor-state dispute settlement (ISDS) rules</a> would allow foreign investors to sue governments over new policies or regulations affecting the value of their investments. </p>
<p>The number and monetary value of ISDS disputes have exploded since the 1990s, with investors winning about 60 per cent of the cases.</p>
<h2>Time to reset the global trade agenda</h2>
<p>In the rush to prevent trade wars becoming world wars, <a href="https://www.wto.org/english/docs_e/legal_e/04-wto_e.htm">the initial intent of trade and investment liberalization</a> – to create full employment, raise living standards, and respect environmental sustainability – has been lost. The means have become the ends in themselves. It’s time to reset the global trade agenda.</p>
<p>To that end, may the TPP zombie rest in peace.</p><img src="https://counter.theconversation.com/content/78378/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ronald Labonte receives funding from Canadian Institutes of Health Research and the Canada Research Chair Secretariat. He is also a chief investigator on the Australian National Health and Medical Research Council funded Center for Research Excellence in the Social Determinants of Health Equity.</span></em></p>NAFTA renegotiations may see provisions from the Trans-Pacific Partnership revive like zombies. We must remember their failures - on income inequality, labour and environmental protection.Ronald Labonte, Professor and Canada Research Chair, L’Université d’Ottawa/University of OttawaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/711802017-01-16T15:02:49Z2017-01-16T15:02:49ZA new deal with capitalism requires a revolution in politics and markets<figure><img src="https://images.theconversation.com/files/152878/original/image-20170116-19298-11djhzn.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C1280%2C758&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/dayland/2434145217/in/photolist-pb5ySW-4H6CyZ-tzNyDQ">Dayland Shannon/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Many people feel that the capitalist economic system delivers wealth to a few and somehow cheats the rest of opportunity. I agree: our market system is being looted by a small minority and the only real solutions call for courageous measures.</p>
<p>It has been all too easy for things to slide to excess. Traders in financial markets manipulate prices to obtain higher bonuses. They and their managers take massive gambles with shareholders’ money because these are essentially one-way bets – governments and central banks <a href="https://theconversation.com/feds-focus-on-too-big-to-fail-wont-save-taxpayers-from-next-bank-bailout-61884">will bail them out</a> if things go awry. The management teams of large companies reward themselves with <a href="http://www.businessinsider.com/ceo-compensation-chart-2014-6?IR=T">larger and larger compensation packages</a> virtually independent of the performance of their enterprises. </p>
<p>In a more subtle strategy, and without perhaps considering the effects, business leaders can end up looting the future by investing insufficiently for the longer term. They are playing a game skewed towards the pursuit of short-term profits in order to achieve higher personal payouts. </p>
<p>In industry we see increasing forms of cartel-like behaviour everywhere. The big banks offer essentially similar services on similar terms and extract monopoly rents, often in egregious forms such as <a href="http://www.telegraph.co.uk/personal-banking/current-accounts/current-account-overdraft-fees-the-worst-offenders-among-popular/">massive charges</a> for late payments or unauthorised overdrafts for retail clients. Large pharma companies <a href="https://www.theguardian.com/society/2016/jan/26/big-pharmas-worst-nightmare">actively work</a> to extend patent protection on drugs and to limit the ability of generic drug makers to compete effectively. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152868/original/image-20170116-19289-5xgerq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Bitter pill.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/ellenm1/6050529448/in/photolist-bTcUYM-8knpCN-adExBf-adEAp1-BGFo9-adBJDH-8FBhwK-8FBhKR-68UN7T-4HcEMQ-5YY7bW-dtbC6E-kuRqzY-2jWYBu-9VPR5A-53wpf4-nRfD5y-5zrEXc-7FgjJX-5zrF26-dfUAM1-4jT6gP-nnkxdP">ellenm1/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<h2>Underdone oversight</h2>
<p>But how can all this happen when the institutions of the market system are supposed to prevent them?</p>
<p>Companies are overseen by boards of directors who represent the shareholders and determine management compensation. Investors control the capital base of enterprises and have the power to replace the boards of directors. Market activity is undertaken within a framework of laws and regulations overseen by central banks and by regulatory agencies staffed by civil servants and, over them, sit the elected representatives of the people. In theory, it should work flawlessly, but too often the structure fails, and it’s not all that hard to explain why.</p>
<p>Let’s start with publicly traded companies. Many are actually controlled by their management rather than by independent directors. In the US it is still common for the CEO to <a href="https://corpgov.law.harvard.edu/2016/07/26/chairman-and-ceo-the-controversy-over-board-leadership/">also be the chair of the board</a> and so play a major role in choosing those supposed to provide oversight. In any case, we typically see the same people serve on multiple boards while the CEO of one company sits on the board of another. No wonder boards endorse egregious compensation schemes. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152871/original/image-20170116-19286-122hsm0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Investors are lost in the numbers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-figure-prices-shares-newspaper-earn-130669775?src=2QxvVXXbHmD_-Aes3Ktd2A-1-60">Lisa S./Shutterstock</a></span>
</figcaption>
</figure>
<p>But shouldn’t the shareholders throw out all the rascals on the boards? If by a shareholder we mean someone with deep knowledge of a company and a commitment to enhance its long-term performance, then many large companies have no shareholders at all.</p>
<p>The investment logic of diversification and the <a href="https://www.ft.com/content/4cdf2f88-7695-11e6-b60a-de4532d5ea35">rise of passive investing</a> (where investors only track the performance of a share index like the S&P 500) drives individuals to spread holdings out on a global basis. Large investing institutions, often largely passive themselves, hold positions in too many enterprises to either understand or care about individual cases. </p>
<p>And a situation has emerged where <a href="https://www.ft.com/content/b450725c-7f2f-11e5-98fb-5a6d4728f74e">a handful of giant funds</a> own a large share of the total value of listed companies so that their executives become part of the same pattern of behaviour. The ultimate shareholders – pension plan holders like you and I – are often too busy, don’t care, or don’t understand. </p>
<h2>Revolving door</h2>
<p>Now let’s turn to the regulators. They have deep problems which we don’t like to acknowledge. First, they struggle to hire talent which can match the companies they are regulating. The ambitious and clever graduate can choose US$100,000 a year at a Central Bank or US$1m at the investment bank of their choice. This is made worse by the <a href="http://www.pogo.org/our-work/reports/sec-revolving-door.html?referrer=https://www.google.co.uk/">revolving door</a> problem. If you know that, in a few years time, you will be seeking a job at a bank, just how tough on them are you going to be now?</p>
<p>What of their political masters? Well, former politicians, <a href="https://www.washingtonpost.com/politics/how-the-clintons-went-from-dead-broke-to-rich-bill-earned-1049-million-for-speeches/2014/06/26/8fa0b372-fd3a-11e3-8176-f2c941cf35f1_story.html?utm_term=.4d3ce2d58868">ex-presidents</a> <a href="http://www.telegraph.co.uk/news/politics/labour/1575247/Tony-Blair-to-earn-2m-as-JP-Morgan-adviser.html">and ex-prime Ministers</a> perform the revolving door trick very well. </p>
<p>More important, it takes money to win elections. Who has the money to donate? The companies and their key executives. The US offers the <a href="https://www.opensecrets.org/overview/topindivs.php">extreme of this situation</a>. And the more regulated an industry is, usually the more concentrated it is among a handful of companies, meaning the reward for influencing regulation are concentrated in the enterprises that can do the most harm. The benign term for all this is <a href="https://knowledgeproblem.com/2013/01/04/what-is-regulatory-capture/">“regulatory capture”</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/152875/original/image-20170116-19286-1qvg54g.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">In control? London’s banking centre in Canary Wharf.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/green76/6808476499/in/photolist-bnDdRR-hyUhyH-9cw7yo-bEWygc-6g2hAi-4KrBLK-FZ3ADh-hBfcmY-bnD9d8-bnDkF6-bnDiQV-bnDcqV-5PPRzP-NcUQB-4KvLwd-dut1tp-heMSma-bnD9Xx-bt48Do-bnDfuk-bpFtbS-bnD2uK-hyVSZT-b5eXQr-bnDpHK-hjD5Na-hAJVLp-nXWbCA-hyUwzQ-hyU8Zt-5H8dwU-hAKNmJ-bnDqF4-bnDjuF-hARD8o-9WW93e-5H3Wxx-CGRBHt-boj7fa-bnDaCF-9pKiFb-hyVQ6X-hyVVyk-hyUjXk-hyUTPG-4QSoUt-hAQufy-hyUXN3-6jJcDJ-hyUu6G">Barry Chignell/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
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</figure>
<h2>Fishy business</h2>
<p>Enough said. As world leaders from business and politics prepare to meet at the <a href="https://www.weforum.org/events/world-economic-forum-annual-meeting-2017">World Economic Forum in Davos</a>, what should be done? Two cautions. Because the money and power in the system is controlled by the looters, every ameliorating action will be fought tooth and nail. And, there is no magic cure; the most we can aspire to is to make things incrementally, but materially better. </p>
<p>The fish stinks from the head so we should start there. We must dramatically curtail the role of money and patronage in politics. Only if this is done will it be feasible to rebuild the regulatory apparatus and break the cartels. </p>
<p>Now consider the comprehensive failure of corporate governance at large public companies. I suggest that the large public company has had its day. Public listing is not needed to raise essential capital, as was the case in its 19th and early 20th-century heyday. The stock markets today are for speculation, for games by competing algorithms and profit-taking for insiders. <a href="http://www.investopedia.com/ask/answers/06/ipoadvantagedisadvantage.asp">We should discourage “public” ownership</a> in favour of private ownership and partnerships. Then, more people with the power to control will also have an incentive to think long term and to contain risk.</p>
<p><em>This piece has been published in cooperation with the World Economic Forum to coincide with its annual meeting in Davos, Switzerland. <a href="https://www.weforum.org/events/world-economic-forum-annual-meeting-2017">You can read more here</a>.</em></p><img src="https://counter.theconversation.com/content/71180/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>George Feiger does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The system is rigged for a small minority to profit, but are we brave enough to deploy the solutions that would work?George Feiger, Executive Dean, Aston Business School, Aston UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/712642017-01-16T07:12:52Z2017-01-16T07:12:52ZWhat we can all learn from the VW emissions saga<p>A year and a half after the US Environmental Protection Agency (EPA) <a href="https://www.epa.gov/vw/learn-about-volkswagen-violations">alleged</a> Volkswagen had installed software to circumvent emissions standards, the company has <a href="https://www.justice.gov/opa/pr/volkswagen-ag-agrees-plead-guilty-and-pay-43-billion-criminal-and-civil-penalties-six">plead guilty</a> to three criminal felony counts. Volkswagen (VW) will pay US$4.3 billion in criminal and civil penalties, and six executives and employees have been indicted. </p>
<p>But the VW scandal is not indicative of systemic problems in the German Corporate Governance system. Rather it highlights huge issues with corporate influence peddling and regulatory capture in Brussels, Washington and Canberra.</p>
<h2>The German context</h2>
<p>German corporations have faced a number of scandals recently – on top of VW there have been <a href="http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html">international bribery allegations at Siemens</a> and <a href="https://www.theguardian.com/business/2016/sep/16/deutsche-bank-14bn-dollar-fine-doj-q-and-a">Deutsche Bank’s mis-selling of mortgage securities</a> in America. </p>
<p>But these are not examples of a systemic failure in German corporate governance at home, instead they highlight its weaknesses where those rules do not apply and managers feel less constrained. The scandals at Siemens, Deutsche Bank and now VW reveal the difference in scrutiny German managers face at home and abroad. </p>
<p>German corporate governance is built around the principals of co-decision making and social partnership. In <a href="http://en.dgb.de/fields-of-work/german-codetermination">this system</a> (called codetermination) managers are monitored from above by Supervisory Boards and from below by Works Councils.</p>
<p>Supervisory boards feature representatives elected by unions and employees, who sit alongside representatives of ownership. These boards oversee and appoint a second separate board made up of executive directors. </p>
<p>In all but the smallest workplaces, employees can elect a Works Council. Works Councils can’t initiate strikes but they have considerable influence over operational issues. In very large companies such as VW there can be a network of Works Councils to represent plants, divisions and the group overall. </p>
<p>Codetermination <a href="http://www.emeraldinsight.com/doi/abs/10.1108/01425450510612004">forces</a> German managers to focus on productivity and cooperation <a href="http://www.theage.com.au/victoria/mass-resignations-threat-after-power-plant-industrial-deal-scrapped-20170113-gtr500.html">rather than</a> short-termism, cost-cutting and industrial confrontation.</p>
<p>The business and governance model found in <a href="https://www.researchgate.net/publication/268085988_Trade_Union_Interests_In_Corporate_Governance_In_Anglo-American_Firms">Anglophone countries</a> - the UK, US and Australia, emphasises shareholder value and excludes unions if it can. Other hallmarks include aggressively outsourcing, offshoring and casualisation of labour, and preference for individual contracting arrangements. Even in the cut throat service sector the German approach <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1468-232X.2008.00521.x/abstract">results</a> in less precarious employment conditions and greater employee voice.</p>
<p>Germans view codetermination as <a href="http://onlinelibrary.wiley.com/doi/10.1111/1467-8543.00230/abstract">an important democratic institution</a> because it <a href="https://academic.oup.com/ser/article-abstract/12/3/517/1663134/Polarizers-or-landscape-groomers-An-empirical?redirectedFrom=fulltext">constrains corporate political donations</a>. This is what John Keane <a href="https://theconversation.com/the-origins-of-monitory-democracy-9752">calls monitory democracy</a>.</p>
<h2>Undermining the German system</h2>
<p>A number of factors combined to weaken Volkswagen’s corporate governance. A feud amongst the Porsche family, who own the majority of VW shares, resulted in controversial board appointments, <a href="https://theconversation.com/vorsprung-durch-realpolitik-what-vw-power-games-say-about-german-ceo-culture-40396">reducing oversight over CEO Martin Winterkorn</a>. But VW’s global production footprint also means that unions and employees could not monitor management in the US. VW attempted to introduce a Works Council style arrangement in the US <a href="https://www.bloomberg.com/news/articles/2015-02-19/volkswagen-s-sort-of-union-in-tennessee">but failed</a>. </p>
<p>Further, VW’s use of a standalone enterprise rather than the standard industry-wide collective bargain agreement has <a href="https://insiders.fortune.com/what-vws-bonuses-say-about-how-bogus-businesses-measure-success-71ba1acfe2ed#.gni8m1mvv">encouraged a creeping and corrosive Anglo-style bonus and incentivisation culture</a>. </p>
<p>In Germany industry-wide collective bargaining between the industry association and union <a href="http://www.emeraldinsight.com/doi/abs/10.1108/01425450510612004">reduces the temptation</a> for this kind of wage and executive remuneration policy.</p>
<p>Finally European Union (EU) competition law forced the German government to strip away additional layers of governance oversight at VW, allowing the German State of Lower-Saxony to exercise an effective veto over all board decisions. <a href="http://www.autonews.com/article/20130529/COPY01/305299972/germany-has-complied-with-ruling-on-vw-law-eu-court-adviser-says">This veto</a> warned off corporate raiders and stymied the Porsche family extending its influence at VW.</p>
<h2>What we can learn</h2>
<p>These scandals show that simply adopting Anglophone ideas of governance and labour market reform will not necessarily create better corporate governance in Germany. Rather, they <a href="http://link.springer.com/article/10.1007/s10551-010-0730-8">could spread bad practice</a> increasing inequality and <a href="https://academic.oup.com/ser/article-abstract/14/1/97/2362835/The-insider-outsider-divide-and-economic-voting?redirectedFrom=fulltext">threatening German democracy</a>.</p>
<p>Instead the German system should be bolstered. Regulators should curtail the erosion of industry-level collective bargaining, introduce statutory bonus and salary caps for executives and directors, and severely limit executive and employee share plans. Regulators might also have to scrutinise cross-border mergers that <a href="http://www.sciencedirect.com/science/article/pii/S1090951601000748">undermine the strengths of codetermination</a>.</p>
<p>There are also some striking similarities between the VW scandal and earlier ones in the car industry (<a href="http://www.bbc.com/news/business-37218510">Mitsubishi</a>, <a href="http://www.abc.net.au/news/2014-03-20/toyota-pays-1-3-billion-for-defect-cover-up-statements/5332894">Toyota</a> and <a href="https://www.bloomberg.com/news/features/2016-06-02/sixty-million-car-bombs-inside-takata-s-air-bag-crisis">Tanaka</a>). All these cases involve concerted attempts to either capture the regulator outright, or to mislead regulators who lack the resources or the political support to uphold legislated standards. </p>
<p>Brussels, London, Washington and Canberra are crawling with paid lobbyists on the payroll of corporations. In the VW case, the company (along with other carmakers) <a href="https://www.nytimes.com/2015/09/29/world/europe/volkswagen-scandal-highlights-european-stalling-on-new-emissions-tests.html?_r=0">lobbied EU regulators</a> in Brussels to adopt less stringent standards than the US. </p>
<p>In the US it <a href="https://theconversation.com/how-volkswagen-got-caught-cheating-emissions-tests-by-a-clean-air-ngo-47951">took an NGO and state regulator</a> to expose the defeat device rather than active policing by an under-resourced and politically hogtied EPA. </p>
<p>This alerts us to the capture of <a href="https://theconversation.com/how-vw-test-fixing-is-just-the-start-of-the-car-industrys-problems-48192">EU</a>, <a href="https://www.gpo.gov/fdsys/pkg/GPO-OILCOMMISSION/pdf/GPO-OILCOMMISSION.pdf">US</a> and Australian regulatory agencies, many of whom are now required to “actively engage” with “industry stakeholders”. </p>
<p>In Australia <a href="http://www.smh.com.au/business/revolving-regulators-how-one-door-opens-another-in-australias-financial-system-20150527-ghb6n4.html">this includes</a> staff secondment, appointment of industry insiders to head regulatory agencies and collaboration in the design of regulations and taxation regimes. This lobbying and influence peddling is <a href="https://theconversation.com/we-keep-choosing-cars-over-clean-air-thats-the-real-scandal-48108">likely to accelerate</a> as companies in carbon-intensive industries attempt to delay inevitable policy responses to climate change. </p>
<p>Across the western democracies laws need to be established to restrict or ban corporate political donations, and political lobbying. Reform of regulators is also necessarily, including introducing independent testing and questioning and revisiting the <a href="http://www.treasury.act.gov.au/documents/regulatory_impact_statement_guide.pdf">guidelines</a> that extend representation to “the potentially affected”. This would add an additional layer of safeguards to ensure corporations cannot unduly influence or undermine rules designed to protect the wider public interest.</p>
<p>In this regard the global car industry needs greater scrutiny, not less, as news of scandals <a href="https://www.bloomberg.com/news/articles/2017-01-12/fiat-chrysler-plunges-on-report-epa-to-allege-emissions-cheating">keeps rolling in</a>.</p><img src="https://counter.theconversation.com/content/71264/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Linden received funding from RMITs EU Centre <a href="http://www.rmit.edu.au/about/our-education/global-outlook/european-union-eu-centre">http://www.rmit.edu.au/about/our-education/global-outlook/european-union-eu-centre</a> to conduct his doctoral research. The Centre is funded by the European Union.</span></em></p>The Volkswagen emissions scandal highlights the benefits of the German corporate governance system, as well as the worst of lobbying around the world.Andrew Linden, Sessional/ PhD Candidate RMIT University, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.