1. Compliance By Fire Alarm: Regulatory Oversight Through Information Feedback Loops
- Author
-
Orozco, David
- Subjects
Regulatory compliance -- Methods -- Research ,Information asymmetry -- Management -- Research ,Feedback loops (Systems theory) -- Research -- Usage ,Company business management ,Business ,Law - Abstract
'They paint a deeply disturbing picture of the lengths Boeing was apparently willing to go to in order to evade scrutiny from regulators, flight crews and the flying public... even as its own employees were sounding alarms internally.' (1) This Article contributes to the growing body of compliance law theory and scholarship. It does so by introducing a new and third approach to compliance called the fire-alarm approach. This approach is grounded in the theoretical perspectives of negotiated governance and director primacy. It also contrasts but complements two other well-known compliance approaches discussed by scholars: the policing and architectural approaches. The fire-alarm approach is executed throughout the compliance system that includes regulators, firms, executives, and third-party relationships. A virtue of the fire-alarm approach is that it helps reduce agency costs by increasing transparency and information flows across the various system elements. This is achieved through what are called information feedback loops. These information flows, or feedback loops, reduce agency costs that lead to opportunism, shirking of duties, and conflicts of interest. This, in turn, promotes the goals of regulation that are designed to ensure trust in the marketplace and the protection and integrity of public welfare, health, and safety. Part I discusses the fundamental problem of compliance as an agency cost problem related to information asymmetries. This part will examine how each subsystem within the compliance system generates its own unique set of agency costs. This part will also highlight the need for information feedback loops to address the significant information asymmetries created by the various principal-agent relationships that inure within the compliance system. Part II discusses the policing and architectural compliance approaches. These two approaches are vital yet fail to capture the entire portrait of effective compliance. Part III introduces the fire alarm approach to compliance that the scholarly literature has neglected. Part IV describes information loops and provides a list of examples that can reduce agency costs and improve the compliance system. Part V discusses various theoretical, normative, and policy implications that flow from this analysis., I.INTRODUCTION 99 II.PERVASIVE AGENCY COSTS WITHIN THE COMPLIANCE SYSTEM 104 A. Regulators 105 1. Overview 105 2. Agency Costs 108 B. Firms 109 1. Overview 110 2. Agency Costs 113 [...]
- Published
- 2020