Strategic CSR - Government Oversight

Over the summer, I thought a lot about the government’s role in overseeing business. As the oil spill in the Gulf of Mexico raced out of BP's control and the government could only sit on the sidelines, a pattern began to emerge:

Increasingly, where technologically complex industries are concerned, government is less and less able to regulate what it is businesses do.

As the push for profits has intensified, the best minds are attracted to industry positions that pay so much more than government jobs. With incentives in place, these people have pushed innovation in ways that employees at regulatory agencies do not fully understand and with which they cannot keep up.

The Securities and Exchange Commission understood as much about the complex derivatives that laid the foundation for the financial crisis of 2007-2009 as the Minerals Management Service did about the technical challenges of ocean drilling for oil at 5000 feet. Which is to say, not much.

In both cases, trust was placed in business to understand what it was doing and deal with any problems that arose. Firms, it was reasoned, have their reputations to protect, which should ensure self-interest in preventing serious damage. Executives reassured bureaucrats that this was the case, down-playing any risk to their activities.

If the mindset is that risk is absent, then that frees executives to push the boundaries in all aspects of operations.

The absence of risk means that investment is less necessary in back-up plans and fail-safe technology that, by this reasoning, will probably never be needed anyway.

The absence of worst-case-scenario planning and investment, in turn, lowers costs and generates higher short-term margins, which is what executives have to produce or else they will be punished by investors.

We are left to clean up in the aftermath.

What is the solution?

I do not think there is an easy answer:

If government cannot compete with private-sector pay to attract the best minds and spend enough to finance effective oversight, business will always be one step ahead.

If business executives are forced into avoiding worst-case scenario planning and spending in order to maximize short term profits, then there will be no back-up plan in place when the one-in-a-thousand (one-in-a-million?) accident happens on their watch. With substantial golden parachutes built into their compensation packages—what incentive do they have to care, either way?

If trust is outsourced from government to the private sector, yet the private sector is unwilling or unable to uphold its end of the bargain, we are left with a system that promotes maximum short term returns (for which everyone wants to take credit), punctuated by massive events that produce rapid corrections (crashes and accidents for which everyone wants to blame someone else).

It seems that the corrections, of late, are flowing more frequently and with greater severity.

Increasingly, however, due to ideological intensity and political gridlock, government seems unable or unwilling to fix the system. It seems more than content to plug the holes and hope the problem goes away long enough for them to get through the next election cycle and pass the problem forward.

Two questions:

What does all this say about the state of CSR and the role for the private sector in adding more social value than it takes away?

More importantly, perhaps, how long can the current economic/political/ecological system sustain these shocks?

I am not sure I like the answers I come up with in response.

Take care
David

Bill Werther & David Chandler
Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)
© Sage Publications, 2011
http://www.sagepub.com/strategiccsr2e/

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For some further reading and related thoughts, see these three excellent articles:

Cutting costs so often leads to cutting corners
By John Kay
Financial Times
23 June 2010
http://www.johnkay.com/2010/06/23/cutting-costs-so-often-leads-to-cutting-corners/

Gulf oil spill offers a lesson in capitalism vs. socialism
By E.J. Dionne
The Washington Post
May 27, 2010
http://www.washingtonpost.com/wp-dyn/content/article/2010/05/26/AR2010052604013.html

Obama and BP at Risk Over Oil Spill
As the Gulf spill threatens to sink BP and damage a Presidency, it's time for Obama to rally the U.S. around tough, fair regulation—for the good of capitalism
BusinessWeek
By Paul M. Barrett
June 3, 2010
http://www.businessweek.com/magazine/content/10_24/b4182007924028.htm