When businesses set the rules for an industry, who wins? Self-regulation can present efficiencies and cost savings that can be a win-win for both businesses and government. Businesses benefit from regulations that are predictable and reasonable, as opposed to command and control rules that are often burdensome and expensive to comply with. Regulators benefit from more efficient enforcement approaches, which allow them to better manage their scarce resources. When implemented effectively, industry-led regulation can be useful in developing countries where the capacity to develop and implement effective regulation is often constrained.
The incentive for the private sector to develop and comply with standards lowers costs of resource-constrained governments and for industry at large by partially shifting the burden of consumer protection to the private sector. Customer expectations incentivize firms or industry-level organizations to set and enforce rules and standards that protect consumers, uphold rights for employees and improve public trust. Self-implemented standards span jurisdictions. Implementation across locations makes industry-developed standards more predictable and consistent, and therefore less costly than government regulations. Moreover, self-regulation can also help less risky industries lower compliance costs by permitting businesses to observe self-prescribed standards often developed with more technical expertise than government regulations.
Standards set by the private sector can also “raise the bar” by being even more stringent, well-implemented and monitored than government regulations. For example, Yum! Brands maintains an “ industry leading food safety program that minimizes food safety risks” in the over 43,000 restaurants in 130 countries and territories in which the company operates. Regardless of a country’s food safety requirements, Yum! Brands meets global best practices across a range of food safety issues including employee health and hygiene, pest control and product handling. The company also conducts “ annual audits from third party food safety professionals” to promote compliance with their food safety standards and local regulatory requirements.
However, there are a number of legitimate concerns regarding businesses self-regulating, or setting their own compliance rules. Most prominent, and perhaps most obvious, is the worry that having private industry set its own regulatory requirements is like “putting the fox in charge of the hen house“, with a strong potential for a conflict of interest. Many fear industry associations will not collaborate to protect public interests, but rather collude to protect vested interests. Not unlike government regulation, industry-created standards run the risk of advancing commercial interest over public interest. Industry standards can even pose artificial trade barriers if not implemented to achieve specific consumer protection objectives.
Studies have shown that self-policing can complement, but not substitute for, government regulatory inspections. Government agencies can justify outsourcing their authority to the industries only if there is willingness on the industry side to identify, admit and correct failures. There are examples in which government programs promote more cooperative relationships between regulators and industry and encourage firms to monitor their own regulatory compliance. For example, a study on EPA’s violation self-disclosure policy showed facilities in the study were more likely to self-disclose violations if they were recently inspected. Hence the motivation for self-disclosure remains coercive regulatory enforcement.
While being mindful of the risks related to self-regulation, it can undoubtedly be an important tool to reduce compliance costs for businesses while improving government efficiency.
This post is part of the blog series "Businesses for the Business Environment."
The incentive for the private sector to develop and comply with standards lowers costs of resource-constrained governments and for industry at large by partially shifting the burden of consumer protection to the private sector. Customer expectations incentivize firms or industry-level organizations to set and enforce rules and standards that protect consumers, uphold rights for employees and improve public trust. Self-implemented standards span jurisdictions. Implementation across locations makes industry-developed standards more predictable and consistent, and therefore less costly than government regulations. Moreover, self-regulation can also help less risky industries lower compliance costs by permitting businesses to observe self-prescribed standards often developed with more technical expertise than government regulations.
Standards set by the private sector can also “raise the bar” by being even more stringent, well-implemented and monitored than government regulations. For example, Yum! Brands maintains an “ industry leading food safety program that minimizes food safety risks” in the over 43,000 restaurants in 130 countries and territories in which the company operates. Regardless of a country’s food safety requirements, Yum! Brands meets global best practices across a range of food safety issues including employee health and hygiene, pest control and product handling. The company also conducts “ annual audits from third party food safety professionals” to promote compliance with their food safety standards and local regulatory requirements.
However, there are a number of legitimate concerns regarding businesses self-regulating, or setting their own compliance rules. Most prominent, and perhaps most obvious, is the worry that having private industry set its own regulatory requirements is like “putting the fox in charge of the hen house“, with a strong potential for a conflict of interest. Many fear industry associations will not collaborate to protect public interests, but rather collude to protect vested interests. Not unlike government regulation, industry-created standards run the risk of advancing commercial interest over public interest. Industry standards can even pose artificial trade barriers if not implemented to achieve specific consumer protection objectives.
Studies have shown that self-policing can complement, but not substitute for, government regulatory inspections. Government agencies can justify outsourcing their authority to the industries only if there is willingness on the industry side to identify, admit and correct failures. There are examples in which government programs promote more cooperative relationships between regulators and industry and encourage firms to monitor their own regulatory compliance. For example, a study on EPA’s violation self-disclosure policy showed facilities in the study were more likely to self-disclose violations if they were recently inspected. Hence the motivation for self-disclosure remains coercive regulatory enforcement.
While being mindful of the risks related to self-regulation, it can undoubtedly be an important tool to reduce compliance costs for businesses while improving government efficiency.
This post is part of the blog series "Businesses for the Business Environment."
Join the Conversation