23/06/2023

Business Ethics could save us from heavier regulation?

Business advisory Social responsibility

Jonathan Franks BA FCA, Hillier Hopkins LLP, United Kingdom

“There’s nothing neither good nor bad but thinking makes it so.” (W Shakespeare, Hamlet, c1600).  Although the context of this quote was in an effort by Prince Hamlet to address how to deal with the murder of his father, it speaks to the broadest of debates in business, and the oldest of questions: what is good and what is bad? According to Shakespeare, it is all a matter of context and perspective.

Businesses around the globe deal with this question daily. At the time of writing, a battle is brewing between regulators and global giants such as Meta (Facebook), which suffered a $1bn fine for breach of data regulations. The question of the flow of data looms large, as data has become the new real estate. To make economic sense data needs to flow to people prepared to pay for it, yet personal privacy conflicts with this need. This is not the first regulatory battle, and environmental, social and governance (ESG) will be the next, but in it we see how business interest can conflict with consumer interests.

Regulatory despair

As I talk to many businesses around the world, they share an element of despair at the number of rules by which they must abide. Procurement departments require suppliers to provide a short book explaining how they satisfy financial, IT security and ESG requirements.  Health and safety, engineering, building and professional regulations stifle imagination and creativity. James Watt could never have invented the steam engine under current regulations. GDPR rules have been implemented with such fervour as to make it impossible to talk to your own bank. Each new rule or regulation places a cost on business and slows down their ability to move to commercial success, as ultimately, it is the consumer who must pay for all these protections. This can price many products out of reach. Too much regulation, and business will grind to a halt. It isn’t hard to imagine that, in a world of too much regulation, we might have to prepare a risk-assessment before we get out of bed.  Most of us would roll over and stay asleep.

If our clients focus on their environmental, social and governance targets before they become law, and engage with regulators positively, they might avert unnecessary future over-regulation.

Go to the other extreme, and we create what economists tell us is a ‘perfect market’, where everyone knowns everything about everything and everyone all the time. This too can never be a reality, and thank-goodness for that! No business would ever be done, because everyone would know what everything is worth to the buyer and the seller, and all forms of bargaining would cease. In theory, that would be a good thing, but every business owner knows that risk gives rise to reward (hopefully), and without risk, capitalist markets inevitably must fail. Where is the place for risk and arbitrage when there is perfect knowledge?

So, if excessive regulation would grind business to a halt, and excessive free market knowledge would do the same, in a world where data is the commodity most coveted, should we assume that there is a central point, a ‘sweet spot’ which leads to the optimal environment? If this is the case, how do businesses find this sweet spot?

Positive collaboration

One of our core values at Hillier Hopkins, there is a role for business-owners to play here, for many reasons. Before I can address this, however, we need to consider how regulations come about, and why so many of them are impractical and ill-conceived. In general, regulations come about because governments perceive a problem. The problem may be to do with the independence of auditors, the construction of buildings, environmental issues, social impacts, governance, or a myriad of other problems. A regulation is often developed by intelligent, well-meaning people who have limited real-world experience in the area where the regulation is applied – government officials, usually advised by lawyers.

But usually, regulators consult with the industry they will affect, and the responses to consultation are usually given by the largest firms and trade associations who have their own self-interest to protect, and so their answers to consultations are commonly in the form “yes, and…”; they want to be seen to positive about new rules.

If, however, smaller businesses respond directly to consultations, their voices will be heard, and they may be able to influence what government imposes upon their industry. Silence is taken as agreement. So the first thing businesses can do is to engage with regulators or government and take the time to be heard, to help form any new rules.

The role of business ethics

Yet there is another, more positive action which businesses can undertake. If, as I suggest above, regulations arise because of a problem which needs to be solved, businesses can act to prevent the problem arising in the first place. If we go back to Meta’s enormous GDPR fine, the regulations which they seem to have breached only arose because of behaviours which were historically thoughtless (at best) or (at worst) exploitative. If internal governance had considered if these behaviours were ethically appropriate, perhaps the need to regulate could have been avoided. 

And it is this that brings me to a simple conclusion: business ethics – simply knowing right from wrong – can act to protect businesses from the worst excesses of government interference. Shakespeare’s words might be re-organised to say it is thinking that allows us to distinguish good from bad. By considering the impact of our business’s actions on the wider society, including the environment, we might avoid unnecessary regulation.

And if you’ve ever wondered why the TGS network is so committed to reaching ESG goals and is developing the tools to help our clients reach these goals, it is to help them before the heavy hand of government forces them to do so in a disruptive manner. If our clients focus on their environmental, social and governance targets before they become law, and engage with regulators positively, they might avert unnecessary future over-regulation. 

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