Regulators often spend much of their time and energy trying to change the behaviour of large organisations, including huge companies and large public sector institutions such as hospitals and universities. It is therefore vital that regulators understand the likely behaviour of such organisations. The organisations' 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.
Regulators have too often failed to understand the risks that were being taken within their sector. The result has been a number of catastrophic failures involving large, heavily-regulated organisations, including the 2007 worldwide collapse of financial institutions, the Grenfell Tower fire, the 2010 Gulf of Mexico Oil Spill, the certification of Boeing's 737-Max, and the mis-management of the Mid-Staffordshire Hospitals.
It is a mistake to approach the regulation of large organisations as though they are merely supersized versions of individual-led smaller firms. Most senior managers 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. Internal communications difficulties, compounded by the incentive to report good results, and senior executives' aversion to taking responsibility for errors, mean that senior managers are often the last to learn what is going wrong. Regulators therefore need to take account of organisations' internal communications problems; the existence of herd behaviour and groupthink; and 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.
- 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.
- In conclusion, it is important to as why we so often Fail to Learn from previous tragedies.?
- And what could we do to Improve the Effectiveness of Regulation?