How to best regulate companies
The financial crisis of 2007-2008 exposed problems at corporations that helped derail the global economy. Despite their failings, companies fiercely resisted the idea of tighter regulations. What does this tell us, and is our current model of regulation fundamentally flawed? These are the questions on the mind of Floor Rink, Professor of Organizational Behavior and Identity Management at the Faculty of Economics and Business. Over the coming years she will examine how companies can be most effectively regulated through her project, Internal and External Regulation of Top Management Decisions, funded by a Vidi research grant from the Netherlands Organization for Scientific Research NWO.
How would you explain your project to a non-expert?
Important decisions about companies are made by a small group of top managers. Accountants and various supervisors check to make sure decisions at a high level are not harmful. Yet regardless of rules, there are still examples of companies that aren’t functioning well, where wrong decisions are made. I am interested in studying the psychology of regulation, specifically, what is the type of regulation to which people respond best.
What is wrong with the current model?
Economists traditionally have said that it’s important to have as much independence as possible in regulation, to avoid conflicts of interest and lack of objectivity. I think it’s a very valid argument to some extent. But the psychology and organizational behavior literature has often shown that those independent regulators are evaluated very negatively. They are seen as police officers who can sanction or punish you. People therefore are not open to sharing all information with them. This indicates that a certain level of trust is needed. My question is whether an organisation can be best regulated from within or from outside, and how to find a balance between trust and independence.
What is new about your approach?
I take a social identity perspective. People have all kinds of images about themselves, based on the groups to which they belong. Those groups influence our behavior. This theory could nicely explain why ‘who regulates who’ is a very important predictor of success. We are far more likely to open up and be honest about mistakes with people who we can identify with and who we trust, rather than with people who are threatening to us and who we do not want to identify or associate with. So two key questions are; How can we structure regulation, such that regulators outside organizations are trusted more, and regulators within organizations gain more independence?
Why did you get interested in this topic?
After the financial crisis, I became interested in how corporations are monitored. Our current regulation system is based on an assumption that human behavior is relatively simple: if you are subject to a rule you simply adhere to that rule. But over and over again we see that it’s not the case.. I thought this was interesting: why are people so against being supervised, and how can they best be regulated? This topic also fits into the Signature Area on Board Effectiveness [ed: one of seven research communities established by FEB to address pressing issues]. Separately from the Vidi project, I have been working in collaboration with the members of the signature area to examine when boards are also effective in their supervision role.
Contact
For more info on this subject, please feel free to contact Floor Rink.
| Last modified: | 11 February 2019 2.37 p.m. |