Thursday, June 23, 2011

Why good companies create bad regulatory strategies

By: Thei Geurts

In the McKinsey Quaterly, June 2011 edition, Andre Dua, Robin Nuttall, and Jon Wilkins discuss possible reasons why good companies create bad regulatory strategies. The authors argue as follows:

“The field of behavioral economics is rapidly making its way into the tool kits of regulators. In stark contrast, we’ve rarely heard, in our work with more than 300 companies over the past three years, a senior executive consider the impact that cognitive biases might be having on his or her company’s regulatory posture. That’s understandable—people don’t like to think about the mistakes they could be making—but it’s also a missed opportunity. Our sense is that looking at regulatory strategies through the lens of behavioral economics can help clarify the missteps corporate leaders make and the corrective measures they should pursue.

We’re not suggesting that leaders are downplaying the importance of setting an effective regulatory strategy. On the contrary, in a survey of roughly 1,400 global executives we conducted in January 2011, more than half of all respondents agreed that governments and regulators will be among the stakeholders with the biggest economic impact on their companies over the next three to five years. An even larger proportion expects governmental involvement in their industries to increase over that period—all this despite recent conservative shifts in the United States and the United Kingdom.

Nonetheless, a surprising number of corporate leaders and companies continue to take positions that may seem credible internally but are totally incredible to outside observers and regulators. Simply put, there’s a disconnect between external perceptions and internal beliefs that often undermines efforts to engage productively with regulators. For evidence of this disconnect, consider some other results from our January 2011 survey. Seventy-six percent of global executives responding said they believed that regulators would rate their companies’ reputations as positive. Yet less than a quarter said that their companies frequently succeeded in influencing regulatory decisions. These executives think they’re doing right in the eyes of regulators, but their own, self-reported results say otherwise…”

“A related challenge for companies in regulatory strategy is putting themselves into the shoes of policy makers…”
“Another issue for regulatory strategists is the prevalence of “stability” biases that create a tendency toward inertia. The impact of such biases is acute in regulatory settings because the typical career track of successful executives in many industries—save highly regulated ones, such as telecommunications or electric utilities—doesn’t involve exposure to government issues. As a result, those executives often are personally ill-prepared for shifting political winds that boost the importance of regulatory issues and are prone to underinvest in the regulatory skills of their organizations or to delegate without exercising sufficient oversight. That’s one explanation for the frequency with which companies must rapidly scale up their government-relations function when they or their industries enter the crosshairs of regulators—a phenomenon we saw during 2009 and 2010 as the US health care reform debate heated up.”

Source: Why good companies create bad regulatory strategies
About the authors: Andre Dua is a director in McKinsey’s New York office, Robin Nuttall is a principal in the London office, and Jon Wilkins is a director in the Washington, DC, office.

These arguments led to the following comment by the Be Informed International Business Development Consultant Thei Geurts. The comment is after scrutiny published in the McKinsey Quaterly on the 15th of June 2011.

“Reading this article makes one wonder what the state of companies’ internal regulatory mind-set really is. How sophisticated are their systems for translating strategic goals into policies, of tracking and measuring the output of these policies, of establishing a well-functioning continuous feedback loop, and of using predictive analysis? One may expect a serious gap between strategy and execution, because internal and external strategies require similar attitudes, capabilities, methods, and tools. As in the public sector itself, it must be quite difficult to close the gap between purpose and practice in these circumstances. In other words, one is tempted to assume that creating bad external regulatory strategies could be directly linked to having bad, or at least weak, internal regulatory strategies. By experience I have seen that there are ways to tackle this problem once it is understood and once the company has the capabilities to visualize, perform, and execute the solution.”

“Do you see this connection between external and internal regulatory strategies as well?”