Regulators also face governance challenges

Last week I was lucky enough to be in Seoul, where I was a member of a panel discussing the governance of regulators at the OECD’s annual Asian Round Table.

When you consider the impact – for good or ill – that regulators can have on those they regulate, the way they are governed can make a significant difference.

In a sense, regulators are a sort of ‘second board’ for the organisations they regulate. When run well, they can provide a clear and stable framework within which those organisations can operate. Run badly, they can keep changing direction and fall prey to the temptation to micro-manage.

Many of the governance issues that regulators face are exactly the same as those faced by ‘proper’ boards. For example, the question of how to strike the right balance between independence and expertise is an issue for many regulators.

On the one hand, there is a real benefit in having people at all levels of the regulator who have experience of working in the type of organisations they are regulating. It means they are better able to understand the impact of their actions and what sort of regulation is most likely to lead to a positive response.

On the other hand, there is the perception – and, indeed, a real risk – that such people might be unwilling to take tough action when needed either because they will subconsciously side with those they regulate, or because they want to leave open the option of a future career in the sector.

Getting the balance right is a challenge. One of the company regulators at the OECD event said that the government had introduced a rule banning their staff and directors from being employed by any company for two years after they left. Although intended to address concerns about independence, it had made it impossible to recruit anyone with any experience and left current staff feeling trapped and disaffected.

Independence from government is also a major issue for regulators. If in this analogy the regulator is the board, then the government is the majority shareholder.

There is general agreement that it is better for regulators to operate at arm’s length from government, to reduce political interference in operational matters. But just because the controlling shareholder does not sit on the board, it does not mean they do not exert influence.

Knowing that government has the ability to approve or remove your powers, funding or you personally – as effectively happened to Martin Wheatley of the FCA last year – is bound to affect how you think about things.

As with other aspects of independence, it is a question of balance. Regulators need to be politically aware in order to operate effectively. But they also need to have a culture and consistency of approach that prevents awareness becoming simple expedience. Because political expedience in a regulator can easily lead to short-term decision-making that may undermine longer-term objectives and unnecessarily complicate the lives of those they regulate.

Before joining ICSA's policy team as a consultant, Chris Hodge was the FRC Director of Corporate Governance

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