Ethical Business Practice & Regulation: Advancing Regulation, Enforcement, and Compliance

1. Ethical Business Practice & RegulationA Revolution in Regulation, Delivery, Enforcement and Compliance Christopher Hodges MA PhD FSALS Professor of Justice Systems, and Fellow of Wolfson College, University of Oxford Head of the Swiss Re/CMS Research Programme on Dispute Resolution Systems, Centre for Socio-Legal Studies

2. Outline: Converging Strands • Policy and theory on regulation • Policy and theory on enforcement • Enforcement practices • Lessons from Behavioural Psychology • Genetic evolution, collaboration and trust • Adding the ethical dimension • From shareholder value to EBP • The EBP&R model • Examples of regulation through relationships • Taking EBP&R Forward

4. Policy and theory on regulation • Top down: command-and-control • Bottom up: self-regulation • A combination: co-regulation • Regulated self-assurance

5. Regulatory Futures Review “We propose a general shift towards what we have termed ‘regulated self-assurance’” “Where regulated self-assurance is feasible, government should implement fully its existing policy of funding regulators through charges on those they regulate, rather than through Exchequer funding. It is still the case that around half the cost of running regulators is met by government grant rather than through charges, largely due to lack of legislative powers, time limitations, and because of history and circumstance.” 5

6. 2. Policy and theory on enforcement • command-and-control • self-regulation • co-regulation • regulated self-assurance • deterrence • honour and reputation • ? • ?

8. Picture of ogre with club

10. Assumptions • Most people want to do the right thing most of the time “We believe that most businesses aim to treat their customers fairly and comply with consumer protection law and that OFT aims to enable and encourage them to do so, and to take enforcement action only where there is no better route to securing compliance.” Statement of consumer protection enforcement principles (Office of Fair Trading, 2010), OFT1221. • They might not know what to do, or how to do it, but could be helped Lightening the Load: The Regulatory Impact on UK's Smallest Businesses (Department for Business Innovation & Skills, 2010); Consumer Rights and Business Practices (IFF Research, March 2013) • A small number of people do bad things “An important finding from criminology is that the vast majority of crimes are committed by a small minority of people. The evidence tells us that there is nothing inevitable about criminality – no one is doomed to be a criminal by their upbringing. But there are some circumstances, like low levels of self-control, which are associated with a higher likelihood of offending. And we know that those characteristics can be influenced by what children experience growing up. So if we are to reduce the likelihood of future criminal behaviour, we need to build positive characteristics and resilience, particularly in young people at risk of harm or offending.” Speech by Home Secretary Theresa May launching the Modern Crime Prevention Strategy at the International crime and Policing Conference 2016, 23 March 2016

11. Annual FCA fines 2011/12–2015/16 £million (NCA, 2016)

12. Ofgem: shift from fines to redress

13. HSE: making people own the risk ‘to leverage influence within the industry supply chain in high risk areas, engaging and forming partnerships with parties able to effect widespread change (such as company directors or strategic bodies focused on particular interest groups or sectors). HSE’s role was as a catalyst, utilising its unique overview from official data of the harm being caused industry-wide and expertise in understanding reasonably practical controls (but explicitly relying on those who created the risk ultimately to control it). …. The new approach centred on influencing or triggering changes, reliant on the action of others. For the theory to work in practice it was crucial that the risks to be addressed could be recognised by industry as being significant (what), and that the parties engaged with (who) were relevant and influential.’ This was based on earlier successful pioneering projects in the 1990s, such as the engagement with parties in charge of steelwork erection, which led to recognition of the safety benefits of using nets and the elimination of deaths and serious injuries from related falls.’ M Webster and H Bolt (Frontline Consultants), The effectiveness of HSE’s regulatory approach: The construction example (HSE, 2016), RR1082.

14. Assessing H&S outcomes - Dr Florentin Blanc [1] Due to change in methodology in 2008, this average is only for informational purposes. Last line is for EU 27.

15. Equality & Human Rights Commission ‘Rather than taking expensive and confrontational enforcement action, we decided to work with, and support, the industry to improve their recruitment and employment practices. We began by writing to processing firms setting out the main findings of the inquiry, relevant recommendations and encouraging them to draw up an action plan to tackle the challenges the industry faced. We also set up a representative industry taskforce chaired by the Ethical Trading Initiative. The aim of the taskforce was for the industry to take the lead and work together to tackle the challenges it faced, supported by the Commission. The solutions for business came from business. The supermarkets and industry bodies identified and agreed management practices and key performance indicators (KPIs) to deal with many of the problems identified in our inquiry. These have already been adopted by meat and poultry processing firms supplying most of the major supermarkets.’ Meat and poultry processing inquiry review. Report of the findings and recommendations (Equality and Human Rights Commission, 2012).

16. Cognitive and Behavioural Psychology • Humans make most decisions based on ‘gut feel’; and then rationalise them. • Most humans break rules regularly. There are many reasons why people will do the wrong thing. • Humans can be reminded not to break a rule by a perception that they will be identified. TR Tyler, Why People Obey the Law (Yale University Press, 2006) D Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins, 2008) D Kahneman, Thinking, Fast and Slow (Allen Lane, 2011) J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012) D Gentilin, The Origins of Ethical Failures. Lessons for Leaders (Abingdon and New York, Routledge, 2016) R Barrett, The Values-Driven Organization (Routledge, 2013)

17. Genetic Evolution, Collaboration and Trust The mutation in homo sapiens of the ability to distinguish right and wrong (an ethical gene). The basis of trust. The ability to collaborate and specialise.

18. Adding the Ethical Dimension • The rule is made fairly • The rule is applied fairly • The rule corresponds to the individual’s internal moral values • Process: predictable, fair, open, transparent, consultation, participation, democratic • Enforcement policy and practice: occurs when required, predictable, consistent, even-handed, proportionate responses • Agreed, shared ethical principles • Substance of moral values is seen to be shared and applied

19. From Shareholder Value to Stakeholders and EBP Maximising shareholder value. Treating Customers Fairly, Corporate Social Responsibility, Human Rights …. Evidence of values-based businesses driving commercial success A single model of EBP

21. UK Regulatory Futures Review, January 2017 Regulators should move towards (and report on): ‘Regulated self-assurance’ and ‘earned recognition’ Influence of EBR:

22. Existing examples of Ethical Relationships • Aviation safety an open culture • The Primary Authority scheme assured advice • Food Standards complex chains • Water in Scotland prices

23. To achieve data flow, you need a no blame culture Aviation safety case study • Open culture of questioning decisions and sharing knowledge of mishaps – extensive free sharing of information • Just culture of no blame, non-punitive environment and response • Maintain accountability by constantly, visibly contributing • Aims • constant monitoring of performance • constant learning and improving the system and its human operation. • ‘No blame’ must operate in every context: system regulation, professional regulation, employment discipline, liability for harm, social

24. The Primary Authority Scheme

25. Primary Authority A co-regulation solution for small enterprises? Trade associations, up to 38,000 members 25

26. Implementing EBRBuilding evidence for a relationship of trust

27. Implementing EBRStudies