There have in recent years been a number of catastrophic failures involving large, heavily-regulated organisations, including the 2007 worldwide collapse of financial institutions, subsequent scandals involving major UK banks, the 2010 Gulf of Mexico Oil Spill, the collapse of Enron, Bernie Madoff's Ponzi scheme, and the mis-management of the Mid-Staffordshire Hospitals. There have also been far too many smaller scale but locally catastrophic failures of regulation, such as Grenfell Tower. Can any general lessons be learned?
Perhaps the most important over-arching lesson is that regulators need to understand the behaviour of large organisations. They are not merely supersized versions of individual-led smaller firms.
- Their Boards profess - and often believe - that they are excellent corporate citizens - even if Google no longer tells its employees to 'Do No Evil!'. But they almost always act in their own self-interest, whilst their Boards may be totally unaware of the risks being run by junior employees and/or distant parts of the organisation.
- And most of their senior managers also do not know (and some do not want to know) what is going on outside their head offices, nor what risks (financial, environmental and other) being taken by their staff.
- The perennial difficulty of speaking truth to power, compounded by the incentive to report good results, mean that senior managers are often the last to learn what is going wrong.
- Herd behaviour and groupthink are surprisingly common and exacerbate the culture and tensions that are typical of most large organisations.
Here are some notes which go into more detail:-
- Organisations contain multiple layers of senior managers, managers and staff. But the different layers seldom interact exactly as their Boards would wish This important insight is known as Principal-Agent theory and is discussed here.
- Organisations also often succumb to Group Think, Herd Behaviour and Cognitive Dissonance.
- And they often feel it necessary to prioritise Profits over Ethics.
- It is important, too, to remember that senior executives are not like the rest of us.
- In particular, they often fail to take a safe route or a safe decision for fear of being criticised for displaying excessive caution and causing unnecessary delay. This is known as the Prevention Paradox or MacWhirr Syndrome.
- It is very difficult, verging on impossible, for most employees to speak truth to power.
- Regulatory bodies and their executives can also exhibit similar behaviours. So here is a note about the psychology of regulatory institutions.
- Regulators' own failings, and their failure to predict the behaviour of those they regulate, has permitted numerous serious regulatory catastrophes such as those listed at the beginning of this web page, including ...
- the Grenfell Tower tragedy.
- Why do we so often Fail to Learn from previous tragedies.?
- And what could we do to Improve the Effectiveness of Regulation?
Finally - It would be a great mistake to seek to avoid all regulatory failure. Although it is clearly necessary to regulate the behaviour of organisations that can do so much damage to wider society, we must not over-regulate such organisations and so impede their growth and innovation which are in turn so important for employment and the wider economy. It is extraordinarily hard to get this balance right. Every significant regulatory failure is followed by calls for stronger regulation, inevitably followed some time later by equally strident calls for regulators to adopt a lighter touch, and be more pragmatic. But the catastrophes listed in the first paragraph of this note were surely so dreadful that they cannot be characterised as the result of risks which were worth taking.