Regulation and Accountability – Comprehensive Study Notes

Key Definitions

• Regulation

  • Broadly: any system of norms, rules or restrictions that control, govern or direct behaviour.

  • Working definition (Deakin & Cook, 1999): “The control of corporate and commercial activities through a system of norms and rules which may be promulgated by government, private actors, or a combination of both.”

  • Key insight: state involvement is not essential; industry associations and professional bodies can create binding rules.

  • Dictionary anchors (OED)

  • Regulate = to control, govern, direct.

  • Regulation = the act/fact of regulating.

• Accountability

  • Two indispensable elements (Nicholson et al., 2017):

  1. An obligation to justify, explain, or take responsibility for actions against an expected standard.

  2. The explanation must be open to debate, challenge, and consequences.

  • OED: “Liability to account for and answer for one’s conduct, duties, or performance.”

  • A simple heuristic: Accountability = Obligation + Justification + Consequences

Regulation ↔ Accountability Interplay

• They are two sides of one civilisational coin:

  • Regulation without accountability ⇒ toothless / potentially harmful (no enforcement).

  • Accountability without clear regulation ⇒ unfair (people judged on unknown standards).

• Everyday arenas of accountability:

  • Legal – courts, statutory penalties.

  • Market – consumer response to products/services.

  • Managerial – HR processes, committees, performance reviews.

• Visual mnemonic: “Regulation sets the standard; accountability supplies the answer sheet & marking rubric.”

Sources & Forms of Regulation

• Continuum of individual choice (high ➔ low)

  1. Self-regulation – e.g. company codes of conduct, policies.

  2. Voluntary adoption – e.g. ASX Corporate Governance Principles, industry codes.

  3. Contractual adoption – e.g. supplier-imposed standards.

  4. Societal (legal) regulation – e.g. \text{Corporations Act 2001 (Cth)}, negligence law, consumer norms.

• Key takeaway: Law is only one form; expectations can be layered, dynamic, and organisation-specific.

The Special Nature of the Firm

• Created under \text{Corporations Act 2001 (Cth)}; registration by ASIC gives birth to the company.

• Two defining characteristics:

  • Separate legal entity (Salomon v Salomon): can own property, sue/be sued, contract, issue shares (s124).

  • Limited liability: shareholders’ loss capped at unpaid share capital; contrasts with unlimited liability of sole traders/partnerships.

• Problem of personhood: a company is a legal fiction – it cannot be imprisoned; thus accountability must locate human decision-makers.

Who is Accountable?

• The Constitution (statutory contract under s140) binds members (shareholders), directors and management; can rely on Replaceable Rules (s134, s198A).

• Directors hold residual decision power; often delegate to CEO & Officers.

• Accountability mechanisms include:

  • Directors’ & Officers’ duties (Module 12).

  • Internal committees, board oversight, shareholder votes.

Regulatory Mechanisms in Organisations

• Three archetypes (think of overlapping circles, not silos):

1. Hierarchical (Rule-Bound)

• Central authority ⇒ top-down control; formalised rules, sanctions, rewards.

• Pros: clear expectations, consistency, traceable accountability.

• Cons: rigidity, slow response, higher admin cost.

• Examples: traditional reporting lines; legal fines; dismissal letters.

2. Clan-Based (Normative)

• Governance via shared values, culture, peer pressure.

• Pros: flexible, low formal cost, adaptable.

• Cons: ambiguity, reliance on group cohesion, difficult to scale.

• Examples: board culture, agile work teams, professional ethos (e.g. medical rounds).

3. Market-Based (Incentive/Competition)

• Behaviour shaped by economic signals from affected parties.

• Pros: efficiency, scalability, low direct cost.

• Cons: information quality critical; risk of regulatory capture.

• Examples: Uber’s star-rating system; open customer reviews; emissions-trading schemes.

Illustrative Shift – Uber

• Traditional taxi industry = hierarchical (licensing, quotas).

• Uber introduced a market-based feedback loop (rider ratings) & clan elements (driver community norms) ➔ blurred the old hierarchy.

Integration Principle

• Real firms blend mechanisms:

  • Hierarchy: internal compliance office.

  • Clan: board/partner culture.

  • Market: shareholder activism, brand reputation.

Theories of Regulation

• Central policy question: “Should we regulate? If yes, how much & why?”

• Two big umbrellas:

  1. Public Interest Theories – regulation pursues collective welfare.

  2. Private Interest Theories – regulation often serves narrower, self-interested groups.

Public Interest Theories

(a) Welfare Economics Approach

• Trigger: market failure – when unregulated markets misallocate resources.

• Failure types & examples:

  • Monopoly/Oligopoly – energy, telecom; leads to \text{Competition Law}.

  • Network effects – telephones, social media (value ↑ with users). Regulation can maintain openness/interoperability.

  • Public goods – non-rival, non-excludable (street lighting, national defence). Private supply leads to free-rider problem; regulation (taxes) funds provision.

• Conceptual formula: \text{Total Social Welfare} = \text{Consumer Surplus} + \text{Producer Surplus}; regulation seeks to maximise this sum under failure conditions.

(b) Political (Social Justice) Approach

• Normative driver: fairness, redistribution, irreversible risk prevention.

• Examples:

  • Income tax & social security (wealth transfer).

  • Anti-discrimination statutes, animal welfare.

  • Environmental laws tackling climate-change (inter-generational equity).

Private Interest Theories

• Assumption: actors maximise self-interest; regulation can be hijacked.

• Phenomena:

  • Regulatory failure – costs > benefits (e.g. constant jaywalking fines impractical).

  • Regulatory capture (Posner): agency drifts toward the industry; voices of wealthy/noisy interest groups dominate.

• Implication: scepticism toward “pure” public-interest claims; need checks & balances.

Australian Regulatory Landscape

• What is a regulator?

  • Government itself (ministers, departments).

  • Industry bodies.

  • Statutory authorities – semi-independent, created by Acts, funded & report to Government.

  • Core functions: investigate, enforce, gather complaints, educate.

Three Key Federal Regulators

• ACCC (Competition & Consumer Act 2010)

  • Competition policy, consumer protection, educational campaigns, infringement notices, court action.

• ASIC (ASIC Act + Corporations Act)

  • Oversees companies, financial markets, services, credit, superannuation.

• ATO (Tax & Super systems)

  • Revenue collection, issues binding Tax Rulings (quasi-precedent), possesses wide audit powers.

Non-State Stakeholder Accountability Mechanisms

• Framework (Frooman 1999): Resource Control vs Decision Influence.

1. Resource Control

• Withholding resources – consumer boycotts, supplier embargos, labour strikes.

• Over-supply / targeted purchasing – buy-cotts supporting ethical firms (e.g. Fair-Trade coffee).

2. Decision Influence

• Direct power – shareholder resolutions, board seats, employee representation.

• Indirect power – coalition-building, media campaigns, NGO partnerships.

Practical & Ethical Implications for Managers

• Recognise multi-layered regulation: legal minima + soft-law + cultural norms.

• Map which mechanism (hierarchical, clan, market) dominates each issue.

• Guard against capture: diversify advisory inputs, rotate personnel, ensure transparency.

• Balance efficiency (market signals) with equity (political goals) & stability (hierarchy).

• Anticipate stakeholder strategies: design proactive engagement pathways.

Links to Earlier & Future Modules

• Module 10 (Business Structures): limited vs unlimited liability context for accountability.

• Module 12 (Director & Officer Duties): personal legal responsibilities anchoring the constitutional delegation of power.

• Ethics module: interplay of normative claims (political public-interest) with utilitarian cost-benefit (welfare economics).

Quick Recall Grid (Flash-Review)

Mnemonic

“H-C-M ⇒ P.I. vs P.I. ⇒ A-A-A”

• Hierarchy, Clan, Market mechanisms ⇢ balance.

• Public-Interest vs Private-Interest theories ⇢ motive lens.

• ACCC, ASIC, ATO ⇢ core regulators.

End of comprehensive study notes.