Oxford Professor announces Government-backed proposals for a “transformative” approach to business ethics and regulation

02 June 2017

On 31 May, Oxford Professor of Justice Systems Chris Hodges delivered the third FLJS Max Watson Annual Lecture by announcing his Cabinet Office endorsed proposals to transform business ethics through a trust-based approach to regulation.

Professor Hodges outlined the proposals in a wide-ranging tour d’horizon of current theories and enforcement practice in his lecture at Wolfson College, drawing on new findings in behavioural psychology and economics to present some challenging new directions to an audience of policymakers, regulators, business leaders, and academic experts.

FLJS Board Member John Howell introduced the lecture by remembering Max Watson's fierce intellect and influential career as a high-ranking official of the British International Monetary Fund (IMF) and Economic Adviser to the European Commission, as well as Fellow of Wolfson and St Antony’s Colleges and FLJS Board Member.

Professor Hodges opened his lecture with reference to scandals in the banking sector which Max Watson was instrumental in tackling in his work to mitigate the effects of Ireland’s banking and sovereign debt crisis, arguing that “we have been unable to stem the tide of major scandals in corporate behaviour” in recent years. He made the case for a new approach to business regulation, citing the corporate cases of LIBOR fixing, subprime derivatives, the VW emissions cheat device, Payment Protection Insurance, and – in public life – MPs expenses, phone hacking, doping in sport etc. He went on to predict that “in America at the moment, where they are deconstructing regulation and removing barriers to private enforcement, in a few years’ time they are bound to have a number of major corporate scandals.”

 

In America, where they are deconstructing regulation and removing barriers to private enforcement, in a few years’ time they are bound to have a number of major corporate scandals

 

This rather negative picture presented what Professor Hodges identified as a “transformative opportunity” for the regulation of business, through his proposals for more collaborative relations between businesses, their stakeholders, and public officials, based on a shared ethical approach.

Professor Hodges argued that neither traditional, ‘command and control’ approaches to regulation based on deterrence, nor self-regulation have proven to be effective in recent years. Instead, he mapped out his new approach to co-regulation, arguing that effective regulation should foster a business culture in which desirable behaviour is supported by businesses themselves, which ‘own’ the risk of non-compliance and support employees to act ethically.

The research draws on new breakthroughs in behavioural psychology and the thinking around trust and social relationships by the philosophers Onora O’Neill and Francis Fukuyama, and follows the model successfully implemented through the application of so-called ‘nudge’ theory to policymaking. Professor Hodges developed the basis of fairness and trust which is fundamental to his new approach: “trust is increasingly regarded as critical by many regulators and by companies, and has become about more than merely stopping people and businesses from engaging in bad behaviour, now to include helping people to act ethically." He went on to confront the prevailing orthodoxy in regulation, stating that "Many legislators, enforcers, and judges seek to respond to wrongdoing by increasing deterrence. The truth, however, is that there is little empirical evidence that deterrence is effective in affecting future behaviour, certainly in the regulatory context: it is a widely-held myth.”

 

The truth is that there is little empirical evidence that deterrence is effective in affecting future behaviour, certainly in the regulatory context: it is a widely-held myth

 

The UK, through its Better Regulation Executive and Delivery Office, along with recent work by the Committee on Standards in Public Life and the Department for Business Innovation & Skills, which have endorsed Professor Hodges’ research, has become a leader within Europe in driving this shift away from deterrence. By contrast, Professor Hodges argued that the EU’s approach to regulation is “ completely dysfunctional”, owing to the principle of 'subsidiarity', and that “it does not, in fact, have any coherent enforcement policy, which is extraordinary, given the amount of EU legislation in operation.”

Professor Hodges drew his lecture to a close by demonstrating how fundamental trust is to all human interactions, and that it is our ability to distinguish between right and wrong, derived from a genetic mutation to help us identify whether we can trust those around us, and, therefore, identify with whom to collaborate in social relationships, that distinguishes us from other animals. Citing recent theories to suggest that the internet age is currently driving us to new, and largely unregulated forms of global collaboration, he posed the provocative question – How do we implement a regulated self-assurance policy at a global level? – and commended his trust-based approach to wider support among policymakers, regulators, and the business community alike.

The Max Watson Annual Lecture was the final event of the FLJS 2016-17 programme before the summer break. A podcast of the lecture will be available to download from our Podcast pages next week, and our 2017-18 events programme will begin with a free film screening on 23 October, followed, on 6 November, by a panel discussion of Ivan Krastev’s new book After Europe, which provocatively interrogates the future of the European Union.

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Professor Chris Hodges presents new proposals for business ethics
The truth is that there is little empirical evidence that deterrence is effective in affecting future behaviour, certainly in the regulatory context: it is a widely-held myth