The Role of Stakeholder Relationships in Regulatory Excellence

I find it extraordinarily interesting and thought provoking to be at this gathering of illustrious academic thinkers here at the University of Pennsylvania as we collectively consider what constitutes regulatory excellence and how it can be measured. As a practicing regulator, it is also fairly challenging and not a little daunting when I consider the extent to which we at the UK Civil Aviation Authority (CAA), measure up against the standards you are espousing. But I want to start by saying that regulating day by day, identifying the right risks and taking the right actions, is tough. I am grateful for the general recognition among the experts gathered here, and in the various discussion papers prepared for this dialogue, that it is a hard business. Over the fifteen years or so that I have been involved in regulation, I have developed a few rules of thumb as to what makes a good regulator. First, it is helpful to have a clear objective in law. Second, to deliver your task effectively, you need to have staff members who are real experts, with deep knowledge of the industry which you are regulating. Third, you must be engaged with all the varied stakeholders and genuinely listen to them. Finally, you should be transparent in everything you do because that is the way in which you can be judged by your stakeholders as to whether you are fulfilling your mission. When I was chairing the UK Food Standards Agency (FSA), one of my Board members had, in a previous life, been Global Marketing Director of Unilever. He used to recount that his previous colleagues often commented to him that life on the FSA Board must be very mundane compared to the excitement of working at a company like Unilever. His response was that at the FSA he helped make decisions that were more far reaching, more costly and more complex than anything he had done at Unilever. And that it was all made more difficult by the huge complexity of the stakeholder environment. That remark has always stayed with me because the complexity of stakeholder relations is one of the factors that distinguish regulatory bodies from private-sector organizations and which makes regulation so tricky. Experience suggests to me that no matter how clear your objectives, or how expert your staff, none of that will suffice without the right relationships with that web of external interests. I thought that in my remarks I would try to consider regulatory excellence through the prism of stakeholder relationships, addressing what sort of relationship a regulator should have with each category of stakeholder. Consumers Consumers want to know in whose interests the regulator is operating. We are fortunate at the CAA to have an unambiguous legal duty to protect consumers and the public – that is, those who fly and those who are overflown. This duty is fortunate because consumers pick up very quickly on even apparent conflicts of interest, and they do not so readily trust a regulator with equal duties to other, conflicting interests, such as the promotion of the industry. I want to be clear, though, that the duty to protect consumer interests is not the same as doing what consumers are interested in. It is a much more complex construct which contains within it the idea of what is, in the end, to the benefit of consumers in society as a whole. It is also important always to remember that consumers pay in the end. They are the final “purse” which pays for the consequences of regulation. Wherever there is poor quality or unnecessary regulation, it will cost them, perhaps in pure monetary terms or perhaps in a reduced choice of goods and services. So my starting point for excellent regulation with consumers in mind is to keep the following principles firmly in mind: Understanding consumers is a good backdrop to a critical regulatory skill, namely choosing the right regulatory tool and understanding which one to use when and with whom. In choosing the right regulatory tool, the regulator should first consider whether information might serve just as well as new regulations. One of my favorite forms of “regulation” is to give consumers the information and tools they need to be empowered to act as their own regulator. An example of this informational approach to regulation is the CAA’s practice of publishing comparative information about such things as the differing charges airlines make to put baggage in the hold. Possibly the CAA could find some way of managing those charges, but how much better to give consumers the ability to make that choice for themselves. Second, if you have decided that something more than information provision is needed, can you nudge industry into behaving better through incentives? For example, if a particular company is operating to a high standard, perhaps they could be rewarded with fewer inspections, thus taking up less management time. Third, regulators are inevitably less efficient than industry in understanding the process that leads to an outcome. So give companies clarity about desired outcomes and the parameters within which they should operate, and let them get on with reaching the outcome. Fourth, only go for more prescriptive rules where the risk justifies it, where none of the other types of regulation will work and, importantly, where you can enforce the rule. Too often merely passing a rule is thought of as the end of the process. It is not; it is the beginning, and passing a rule that cannot be enforced will damage the credibility of the regulator while not achieving the desired outcome. Finally, it is important to use the full weight of regulation to get rogues and crooks out of the business. Allowing them to “get away with it” is only a bad example to others, and it will damage the reputation of the regulator and will reduce others’ incentive to perform legally and ethically. Most critically, in food and aviation, people die as a consequence of rogue operators. Industry Let me move on to industry. Consumers have a real interest in flourishing competitive innovative industries, as does the economy of a country. Interestingly, it is a view not always shared by companies who have sometimes managed to achieve an advantage through poorly framed regulation that inhibits real competition. There is a very delicate balance in the relationship with industry. On the one hand, the relationship may be framed as co-working, perhaps especially when both the regulator and the industry are confronted with new problems that have not previously been explored. In the CAA context, this might be the new field of space planes. On the other hand, the relationship might be more of a partnership where, jointly with industry or consumers (or both), you are wrestling with a problem which you all have a joint interest in solving. Or, finally, you might be acting as a stern objective regulator. All of these, and many other variations, are valid but it is important that at all times there is clarity in the minds of the regulatory officials and the industry as to what mode of relationship you are in. It is helpful to industry if the regulator sets a clear long term direction, makes clear what are the desired regulatory outcomes, and also establishes what their regulatory culture or style is. Regulators should be consistent internally. But they should also be consistent with other regulators who impact on their field, or with international regulators in the same field. Aviation is a global business, so the CAA liaises with the European authority as well as the global authority in Montreal. We put a great deal of effort into working at both the European and international levels to ensure consistency and, of course, to try to frame international regulations to suit our market. But the point is that inconsistency makes it difficult for the well-intentioned businesses to act well and it allows the ill-intentioned businesses to seek to exploit regulatory arbitrage. Think about de-regulation. Most regulators have accreted rules perhaps born out of a different time and different risks that are no longer relevant and are merely burdensome. But de-regulation should be done on the basis of principle and not as a consequence of a pick-and-mix push from industry. In the UK, we have been looking at de-regulation for general aviation but rather than just start looking at individual rules, we started by agreeing on a principles paper as to what it was we really needed to protect. This set of principles then provided the framework against which we could assess individual rules. To regulate effectively you must have real expert knowledge of the market; you must know how your industry works, what drives it and what shapes it. The regulation that will work best is that which sits easily alongside the way in which industry works. Regulating against the grain of the industry is hard work and usually less effective. Finally, it is very helpful if there is a good reporting culture in the industry. Aviation has historically had an excellent record in reporting incidents. All the airline staff, whether cabin crew, engineers, or pilots, have access to reporting systems and use them. The challenge for the regulator is then to collate those disparate reports to pick up trends and identify what might be leading indicators of risk. Government In the UK, regulation is independent of government, normally with a statutory base. The CAA is not a government department. It is a public corporation funded by industry and neither I, nor the staff, are civil servants. That does not mean a divorce from government but rather a relationship that needs to be constantly worked at. There should certainly be respect between the regulator and government, and there is sometimes inevitably tension. There are probably three main reasons for that tension. As a regulator, I am clear that if you don’t take government with you, you are likely to fail. So work out what really matters to y

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