Outcome-Based Cooperation: In Communities, Business, Regulation, and Dispute Resolution 9781509962488, 9781509962518, 9781509962501

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OUTCOME-BASED COOPERATION How do we cooperate – in social, local, business, and state communities? This book proposes an Outcome-Based Cooperative Model, in which all stakeholders work together on the basis of trust and respect to achieve shared aims and outcomes. The Outcome-Based Cooperative Model is built up from an extensive analysis of behavioural and social psychology, genetic anthropology, research into behaviour and culture in societies, organisations, regulation, and enforcement. The starting point is acceptance that humanity is facing ever larger risks, which are now systemic and even existential. To overcome the challenges, humans need to cooperate more, rather than compete, alienate, or draw apart. Answering how we do that requires basing ourselves, our institutions and systems on relationships that are built on trust. Trust is based on evidence that we can be trusted to behave well (ethically), built up over time. We should aim to agree common goals and outcomes, moderating those that conflict, produce evidence that we can be trusted, and examine our performance in achieving the right outcomes, rather than harmful ones. The implications are that we need to do more in rebasing our relationships in local groupings, business organisations, regulation and dispute resolution. The book examines recent systems and developments in all these areas and makes proposals of profound importance for reform. This is a new blueprint for liberty, solidarity, performance and achievement. Volume 13 in the series Civil Justice Systems

Civil Justice Systems Series General Editor: Christopher Hodges OBE, Centre for Socio-Legal Studies, University of Oxford This series covers new theoretical and empirical research on the mechanisms for resolution of civil disputes, including courts, tribunals, arbitration, compensation schemes, ombudsmen, codes of practice, complaint mechanisms, mediation and various forms of Alternative Dispute Resolution. It examines frameworks for dispute resolution that comprise combinations of the above mechanisms, and the parameters and conditions for selecting certain types of techniques and procedures rather than others. It also evaluates individual techniques, against parameters such as cost, duration, accessibility, and delivery of desired outcomes, and illuminates how legal rights and obligations are operated in practice. Volume 1: The Costs and Funding of Civil Litigation: A Comparative Perspective edited by Christopher Hodges, Stefan Vogenauer and Magdalena Tulibacka Volume 2: Consumer ADR in Europe Christopher Hodges, Iris Benöhr and Naomi Creutzfeldt-Banda Volume 3: Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Compliance and Ethics Christopher Hodges Volume 4: A Comparative Examination of Multi-Party Actions Joanne Blennerhassett Volume 5: Redress Schemes for Personal Injuries Sonia Macleod and Christopher Hodges Volume 6: Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement Christopher Hodges and Ruth Steinholtz Volume 7: Delivering Collective Redress: New Technologies Christopher Hodges and Stefaan Voet Volume 8: Pharmaceutical and Medical Device Safety: A Study in Public and Private Regulation Sonia Macleod and Sweta Chakraborty Volume 9: Delivering Dispute Resolution: A Holistic Review of Models in England and Wales Christopher Hodges Volume 10: Regulatory Delivery Graham Russell and Christopher Hodges Volume 11: Access to Justice for the Chinese Consumer: Handling Consumer Disputes in Contemporary China Ling Zhou Volume 12: Public and Private Enforcement of Securities Laws: The Regulator and the Class Action in Australia’s Continuous Disclosure Regime Michael Legg Volume 13: Outcome-Based Cooperation: In Communities, Business, Regulation, and Dispute Resolution Christopher Hodges

Outcome-Based Cooperation In Communities, Business, Regulation, and Dispute Resolution

Christopher Hodges OBE

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2022 Copyright © Christopher Hodges, 2022 Christopher Hodges has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2022. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. Library of Congress Control Number: 2022941435 ISBN:  HB: 978-1-50996-248-8 (Hart Publishing) HB: 978-3-406-79870-2 (Beck) HB: 978-3-8487-7569-9 (Nomos) ePDF: 978-1-50996-250-1 ePub: 978-1-50996-249-5 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

ACKNOWLEDGEMENTS This book could not have been written without the input and support of many friends, and would not have been written without the intervention of the Covid pandemic. As my previous books have acknowledged, the ideas and much detail reflected here has been generated and affected by conversations, ideas and suggestions from many people over many years. They include officials, regulators, judges, ombudsmen, people in business, consumer representatives and academic colleagues. It is just not possible to mention them all here, but my thanks for all this collaboration are warm. I need to single out a few who have made contributions of major substance. The intellectual trajectory to Outcome-Based Cooperation (OBC) flows directly from work that I have undertaken over the past 20 years at the Centre for Socio-Legal Studies at Oxford, where Linda Mulcahy, Fernanda Pirie, Marina Kurkchiyan, Denis Galligan and colleagues, and members of the European Justice Forum, have provided tangible support for me to research and think freely. Particular thanks are due to Charmain Cole for her research and support. The ideas here flow directly from work that Ruth Steinholtz and I did on Ethical Business Practice (EBP) and Ethical Business Regulation (EBR), and from work led by Graham Russell and colleagues at the Office of Product Safety and Standards and the International Network for Delivery of Regulation (INDR) on the Regulatory Delivery Model (RDM). As appears below, EBP, EBR and the RDM all remain, in my view, fully relevant for success in business, organisations and regulation. From the perspective of OBC, they are essential elements. Ruth also kindly read and provided essential comments on various chapters, and an updated text on the Barrett Cultural Values Assessment model. Hilary Sutcliffe has also read a number of chapters and also kindly provided stimulating and pertinent comments. Srikanth Mangalam and I have discussed the central ideas in this book almost daily over the past couple of years. My debt of gratitude to him is immense, for his intellectual engagement, warm enthusiasm and friendship. We have also been able to apply the ideas directly in a series of regulatory situations, and thanks are due to those who engaged with this. The situations have involved the systems for food regulation in Australia and New Zealand, for measurement in Canada, and for cooperation in data sharing in food systems globally with the Global Food Safety Alliance. There are almost too many people to thank, but warm thanks in relation to those projects are due in particular to Jim Dodds, Brian Witherspoon, Estelle Donse and Samantha Lay Yee; David Spicer and Charmaine Kuran; and Erica Sheward and Anne Girardi. Thanks also to friends who have contributed information, and checked the case studies in chapter 13: Ben Alcott of the Civil Aviation Authority, Ed Humpherson of the Office of Statistics Regulation, Adam Wilson of ESCOSA, Michelle Ashford of WICS and Terry A’Hearn formerly of SEPA. The ideas in chapter 16 on dispute resolution come from a different stream of research, where I would like to thank especially Matthew Vickers of Ombudsman Services, Sir Ernest Ryder, formerly Senior President of Tribunals, Judge Siobhan McGrath, President of the First Tier Tribunal (Property) and my academic colleagues Sonia Macleod and Charmaine Cole.

vi  Acknowledgements The opportunity to devote two years of serious reading into fresh material was a consequence of having to remain locked down at home, avoiding the Covid virus. In this situation, one appreciates even more than usual the support of one’s family and friends. Thanks to Tom McEvoy of Studio Quercus Limited for the design of the essence of OBC. Lucy Mitchell has kindly helped on permissions. My gratitude to Fiona knows no bounds. My ideas on OBCR crystallised in mid-2021 when the UK Government was considering its policy of future regulation. By great good fortune, Advisers to the Prime Minister, Alex Hickman and Tony Curzon-Price, and I were able to engage and develop ideas around practical implementation of OBCR. The initiative was supported by a number of friends and contacts in business and regulation, of whom special thanks for imaginative engagement are due to Peter Ellingworth, Phil Brown and Richard Devereaux-Phillips at the Association of British Healthcare Industries. It has once again been a delight to work with the team at Hart: Sinead Moloney, Roberta Bassi, Tom Adams and Helen Kitto. After the book had gone into production, I was honoured to be appointed by Her Majesty’s Government as Chair of its Regulatory Horizons Council. The usual disclaimer applies: The research, views, ideas and recommendations here are those of me personally and not of HM Government, the Regulatory Horizons Council, or of its members.

CONTENTS Acknowledgements�������������������������������������������������������������������������������������������������������������������������������� v Tables and Figures�������������������������������������������������������������������������������������������������������������������������������� ix List of Abbreviations���������������������������������������������������������������������������������������������������������������������������� xi 1. Introduction: Supporting Cooperation������������������������������������������������������������������������������������������ 1 2. The Outcome-Based Cooperation Model������������������������������������������������������������������������������������ 29 PART A THEORIES AND SCIENCE 3. Evolution of the Means of Cooperation �������������������������������������������������������������������������������������� 49 4. Human Motivation������������������������������������������������������������������������������������������������������������������������� 73 5. Trust ������������������������������������������������������������������������������������������������������������������������������������������������� 90 6. Morality and Values���������������������������������������������������������������������������������������������������������������������� 120 7. Purposes and Outcomes ������������������������������������������������������������������������������������������������������������� 150 8. Cooperative Culture��������������������������������������������������������������������������������������������������������������������� 172 PART B REFRESHING COOPERATIVE MODELS B.I  COOPERATION IN SOCIETY 9. Cooperation in Society: Challenges of Economic, Political and Social Inequality ������������� 213 B.II  COOPERATION IN BUSINESS ORGANISATIONS 10. Cooperation in Capitalism and Businesses������������������������������������������������������������������������������� 259 11. Motivation, Reward and Remuneration of People������������������������������������������������������������������� 294

viii  Contents B.III  COOPERATION IN REGULATION 12. Cooperation in Regulation ��������������������������������������������������������������������������������������������������������� 335 13. Cooperative Regulatory Models ������������������������������������������������������������������������������������������������ 357 14. Traditional Approaches to Enforcement and Compliance������������������������������������������������������ 422 15. Intervention and Accountability������������������������������������������������������������������������������������������������� 456 B.IV  COOPERATION IN DISPUTE RESOLUTION 16. Cooperative Dispute Resolution������������������������������������������������������������������������������������������������� 481 17. Concluding Thoughts: Cooperative Co-Creation by Stakeholders���������������������������������������� 528 Index�������������������������������������������������������������������������������������������������������������������������������������������������� 531

TABLES AND FIGURES Figure 2.1

The Problem-Solving Cycle������������������������������������������������������������������������������������������ 39

Table 4.1

Summary of Major Theories of Behaviour����������������������������������������������������������������� 75

Table 6.1 Barrett’s Seven Levels of Organisational Consciousness and Associated Values and Behaviours������������������������������������������������������������������������������������������������ 141 Table 6.2 Organisational Values and Elements of Professionalism for Ontario Officials����������������������������������������������������������������������������������������������������������� 145 Box 7.1

References to Purpose in Corporate Governance��������������������������������������������������� 154

Figure 7.1

A Measuring Purpose Framework���������������������������������������������������������������������������� 157

Box 7.2

UN Sustainable Development Goals������������������������������������������������������������������������� 164

Table 8.1

The Basic Frameworks of Ethical Business Practice������������������������������������������������ 201

Figure 8.1

The Barrett Seven Levels of Organisational Consciousness����������������������������������� 207

Box 9.1 Good Practice Principles for Deliberative Processes for Public Decision Making (OECD, 2020)�������������������������������������������������������������������������������� 244 Table 9.1

The UK Levelling Up Missions���������������������������������������������������������������������������������� 248

Box 10.1

The UK Stewardship Code 2020: Principles������������������������������������������������������������� 274

Box 10.2 UK Corporate Governance Code 2018��������������������������������������������������������������������� 280 Box 10.3

Summary of Tools to Mitigate Misconduct Risk: FSB 2018����������������������������������� 281

Figure 12.1 Public Risk Management: Multi-Stakeholder Context������������������������������������������� 343 Figure 12.2 The Continuous Performance Improvement and Problem-Solving Model��������� 350 Figure 13.1 Public Risk Management: Multi-Stakeholder Context������������������������������������������� 370 Figure 13.2 Accountability Relationships of a Regulatory Authority���������������������������������������� 371 Table 13.1

Model for Measuring Regulatory Outcomes and Impacts������������������������������������� 372

Figure 13.3 Balance of Public Benefits and Risks in Regulation������������������������������������������������ 374 Figure 13.4 Flowchart of Reasons and Intentions Guiding Regulatory Interventions������������ 376 Table 13.2 Comparison of the Statutory Purposes and Mission Statements of Selected UK Regulatory Authorities������������������������������������������������������������������������� 381 Box 13.1

Ontario Operating Engineers Regulatory Alternative Paths��������������������������������� 389

x  Tables and Figures Figure 13.5 The Primary Authority Structure������������������������������������������������������������������������������ 404 Figure 13.6 An Authoritarian Regulatory Model������������������������������������������������������������������������� 411 Figure 13.7 Proposed Allocation of Regulatory Responsibilities in Financial Services���������� 412 Figure 14.1 Segmentation of Offenders: Spectrum of Compliance by the Scottish Environmental Protection Agency���������������������������������������������������������������������������� 448 Table 16.1 Incidence of Major Claims in the Leading Consumer and Public Ombudsmen 2018/19 to 2019/20������������������������������������������������������������������������������ 506 Table 16.2

Incidence of Major Claims Receipts in Courts and Tribunals������������������������������� 506

Figure 17.1 The Basic elements of OBC���������������������������������������������������������������������������������������� 528 Figure 17.2 The Cooperative Co-Creation Cycle������������������������������������������������������������������������� 529

LIST OF ABBREVIATIONS ABHI

The Association of British Healthcare Industries

ACAS

Arbitration and Conciliation Advisory Service

ADR

Alternative dispute resolution

AI

Artificial Intelligence

AML

anti-money laundering

API

Application Programming Interface

ASA

Advertising Standards Authority

ATCs

air traffic controllers

BBfA

Better Business for All

BCAP

The Broadcast Committee of Advertising Practice

BCAP Code

UK Code of Broadcast Advertising

BREXIT

Exit of the UK from the European Union

BTE

before-the-event legal expenses insurance

CAA

Civil Aviation Authority

CAFCASS

Children and Family Court Advisory and Support Service

CAP

Committee of Advertising Practice

CAP Code

UK Code of Non-broadcast Advertising and Direct & Promotional Marketing

CEDR

Centre for Effective Dispute Resolution

CEO

Chief Executive Officer

CFA

conditional fee agreement

CGC

corporate governance code

CSPL

Committee for Standards in Public Life

CSR

Corporate Social Responsibility

CTF

counter-terrorist financing

CVA

cultural values assessment

DAA

Delegated Administrative Authority

xii  List of Abbreviations DBA

damages-based agreement

DLT

Distributed Ledger Technology

DNA

deoxyribonucleic acid

DWI

Drinking Water Inspectorate

EAS

Employment Agency Standards

EBP

Ethical Business Practice

EBR

Ethical Business Regulation

ENE

early neutral evaluation

ESCOSA

Essential Services Commission of South Australia

ESG

Environmental, Social and Governance

EU

European Union

FAR

Financial Advisers Register (Australia)

FATF

Financial Action Task Force

FCA

Financial Conduct Authority

FMM

financial motivation model

FRC

Financial Reporting Council or fixed recoverable costs

FSB

Financial Stability Board

FSF

Financial Stability Forum

FSMA

Financial Services and Markets Act 2000

FPC

Financial Policy Committee

FTSE

Financial Times Stock Exchange

G30

Group of 30

GCA

Groceries Code Adjudicator

GDPR

Regulation (EU) 2016/679 on general data protection

GFC

Global Financial Crisis

GLAA

Gangmasters and Labour Abuse Authority

GFIN

Global Financial Innovation Network

HM

Her Majesty

HMCTS

Her Majesty’s Courts and Tribunals Service

HMRC

Her Majesty’s Revenue and Customs

ILO

International Labour Organization

IMF

International Monetary Fund

List of Abbreviations  xiii KPIs

key performance indicators

LEI

legal expenses insurance

LEP

Local Enterprise Partnership

LGSCO

Local Government and Social Care Ombudsman

MAS

Monetary Authority of Singapore

MOJ

Ministry of Justice

MSV

maximising shareholder value

NAO

National Audit Office

NGO

non-governmental organisation

NHS

National Health Service

NLW

National Living Wage

NMW

National Minimum Wage

OBC

Outcome-Based Cooperation

OBCR

Outcome-Based Cooperative Regulation

OC

Online Court

ODR

online dispute resolution

OECD

Organisation for Economic Co-operation and Development

OFWAT

Office of Water Regulation

OSC

Online Solutions Court

PAC

Public Accounts Committee

PCA

Pubs Code Adjudicator

PHSO

Parliamentary and Health Service Ombudsman

PRA

Prudential Regulatory Authority

PSR

Payment Services Regulator

QOCS

qualified one-way cost shift

RDM

Regulatory Delivery Model

RTA

road traffic accident

SARs

suspicious activity reports

SARS

Severe Acute Respiratory Syndrome

SBC

Small Business Commissioner

SDGs

Sustainable Development Goals

SGB

System Governance Body

xiv  List of Abbreviations SME

small or medium sized enterprise

SM&CR

Senior Managers and Certification Regime

TRC

Truth and Reconciliation Commission

TSSA

Technical Standards and Safety Authority of Ontario

UK

United Kingdom

UN

United Nations

UNCTAD

United Nations Commission on Trade and Development

USA

United States of America

USDAW

Union of Shop, Distributive and Allied Workers

WEIRD

Western, Educated, Industrialised, Rich and Democratic

WHO

World Health Organization

WICS

The Water Industry Commission for Scotland

1 Introduction: Supporting Cooperation Humans achieve more when we cooperate. This simple fact drives the inquiry in this book into how cooperation is best achieved, and, therefore, how we can do this better. We face some massive challenges, which can only be overcome through cooperation. So how do we do that? The basic answer is that things boil down to a system based on trust and outcomes. If we produce evidence that we are trustworthy, this is the foundation for multiple cooperative engaged groupings. The evidence should cover our competence and resources, and show that our behaviour and culture is ethical and that we can be relied on in future. We then need to co-create agreements on our purposes, objectives, functions and outcomes, and then measure the outcomes that are produced to see if we are achieving them, and improving our performance, or not. The result is a framework in which we constantly evaluate relevant evidence that we are delivering the outcomes that we want to achieve. The system will energise and empower those who can be trusted to behave in accordance with shared ethical purposes, and differentiate those who do not. In the trust group, responding to things that go wrong is collaborative and automatic to share information, improve performance and reduce risk. But we still need to take adequate steps to protect ourselves from those who cannot be trusted and who cause harm. The means of trust-based cooperation, and its language, change to concepts like sharing, support, engagement, behaviour, culture, ethics, learning, resolving and performance, instead of concepts like law, compliance, breaches, enforcement, punishment and deterrence. If we really want to cooperate to achieve more, we have to continue to make some big changes. This is because how we do things matters for how well we succeed. This book assumes that (more) cooperation is a Good Thing.1 It aims to outline both an approach (how humans cooperate, based on our inherent understanding of fairness and what is right) and some structures and institutions (in some cases reformed from existing ones) that would logically help us achieve more, stronger and effective cooperation. This is not (another) book on philosophy – what distinguished thinkers have thought about cooperation and what makes people behave in certain ways.2 Instead, the analysis in this book attempts to collate what we know – what we can scientifically prove – about how humans behave and either cooperate or don’t. It is firmly science-based. I am not a scientist (but nearly read science at university), so my identification, understanding and explanation of the scientific evidence might have obvious failings. But we need to try. I asked some distinguished scientific academic colleagues recently if it is possible to summarise what we know about how humans behave, in order to be able to apply the knowledge in designing regulatory and corporate systems, and they said that there just isn’t any

1 WC Seller and RJ Yeatman, 1066 and All That: A Memorable History of England (Methuen & Co, 1930). 2 There is one major exception in this book, which is an analysis around the concept of trust, where I try to summarise some writing that is essentially philosophical rather than scientific, as it is helpful.

2  Introduction easily accessible general summary of many silos of scientific research. So here goes. I welcome further contributions, updates and corrections! I have deliberately chosen to write a book that tries to summarise the scientific knowledge on how we behave and cooperate – or don’t – rather than a more populist book, since the science needs to be understood, debated and applied. I make no apology for the rather serious nature of the text. We need to know what we know, and we need to avoid unsubstantiated assertion, so that we can challenge our preconceptions about theories on how people behave and why, if we are to change our ideas, behaviours, cultures and institutions in order to be able to cooperate more. So some sacred cows might be challenged – such as on control, laws, compliance, deterrence, enforcement, punishment – but the scientific basis for doing this should be clear. To repeat, this inquiry is about scientific truth, not about theoretical assertion. However, Part B of the book becomes more practical, since it tries to evaluate current efforts and changes in various practices, to see if we need to do more (and we do). I have chosen to focus here on four contexts: society and communities; business and its organisations; regulation; and dispute resolution. In each of them, it seems to me that the scientific evidence points to how we can cooperate and achieve more – by adopting an Outcome-Based Cooperation (OBC) model. In the case of regulation, I have spelt the practicalities out as a specific Outcome-Based Cooperative Regulation (OBCR) model. But the approach is basically the same in each of the four contexts, and it needs to be. How we relate to each other should be the same in social, work, business, regulatory and dispute conflict situations. Adopting the same approach in each should build a more trusting and higher-achieving society. But there are some serious challenges that need to be addressed, such as in how we incentivise, control, reward or punish others. Much of the detail in Part B gives an overview of important shifts that have occurred – such as in increased localism, corporate governance, a broadening in corporate purposes, evolutions in regulatory delivery and enforcement, and in dispute resolution systems and techniques – but in most cases shows that more change is needed if we are to be able to benefit from achieving more in a more cooperative environment. The factual focus is primarily that of the situation in the UK, but the lessons should be universally applicable.

It’s Serious and Urgent It is critically important that we give serious attention to enabling ourselves to cooperate more since there are now very serious risks to our continued existence and stability. If we do not change now and cooperate more, the future looks really bad. The risks have been getting bigger and there are several risks of systemic proportions that threaten our existence:3 (a) The planet: carbon emissions and global warming.4 (b) Life and health: pandemic SARS viruses, such as Covid-19 (2020–22).

3 Planetary Emergency 2.0. Securing a New Deal for People, Nature and Climate (The Club of Rome, 2020); I Goldin, Divided Nations. Why Global Governance is Failing, and What We Can Do About It (Oxford University Press, 2013). Goldin, head of the Oxford Martin School, has argued for some time that new global means of cooperation are needed. His 2013 analysis of five global risks – climate change, cybersecurity, pandemics, migration and finance – concluded that a new form of global governance is required. See recently I Goldin, Rescue. From Global Crisis to a Better World (Sceptre, 2021). 4 Intergovernmental Panel on Climate Change, AR6 Climate Change 2021: The Physical Science Basis (Cambridge University Press, 2021).

It’s Serious and Urgent  3 The financial system: Global Financial Crisis 2008–09 (GFC).5 Cyberthreats, uncontrolled and uncoordinated artificial intelligence and gene editing. Mass migration: refugees seeking refuge from war, asylum and economic disaster. Diverse risks and consequences of widening inequalities and societal fragmentation, including disparities in health outcomes, technology or workforce opportunities, rising unemployment, widening digital divides and youth disillusionment.6 (g) Secretive and uncoordinated risk management systems.7 (h) National and political introversion, driven by perceived threats arising from economic austerity of inability to progress and frustration of personal and social expectations and from apparent inability to control immigration and communities. This typically leads to populist-driven instability and resentment over continuing economic inequality. (c) (d) (e) (f)

State-to-State destabilisation is another serious threat. It has recently been proved naïve to imagine that the risk of war remains negligible since 1945 – or the end of the Korean war in 1953, or Vietnam in 1975. We have had two world wars in the twentieth century, and multiple other conflicts.8 The United Nations does not look like the answer to the emergence of either large states that wish to dominate or interfere with others (China, Russia) or rogue states or fundamentalist groups (North Korea, Iran, Islamic State, Syria, Taliban). Wars have continued in internal civil state conflicts and wider and proxy conflicts.9 The Chief of the Defence Staff highlighted in January 2022 that a Russian attempt to interfere with undersea cables could be considered an act of war.10 Just as this book was being completed, Russia invaded Ukraine and issued a threat of nuclear escalation. Some argue that the state of political conflict in the United States is close to civil war.11 There is clear evidence that States seek not just to steal the secrets of others – or identify future surprises12 – but also seek actively to destabilise others. There were large cyber-attacks in 2021, attributed to Russian criminal gangs: a pipeline in America, the Irish healthcare system, and on JBS, the world’s largest meat processor, which halted its operations in America and Australia.13 The UK Home Secretary said in 2021: The threat from hostile activity by states is a growing, diversifying and evolving one, manifesting itself in a number of different forms: from cyber-attacks, attempts to steal intellectual property and sensitive government information, threats to critical national infrastructure, and attempts to interfere in democratic processes.14

5 M Carney, ‘Turning Back the Tide’, speech given to FICC Markets Standards Board Conference, 29 November 2017; Banking Conduct and Culture. A Permanent Mindset Change (Group of Thirty, 2019); A Nesvetailova and R Palan, Sabotage. The Business of Finance (Allen Lane, 2020). 6 The Global Risks Report 2021 16th Edition (World Economic Forum, 2021). 7 M Rees, ‘After Covid, Britain Must Learn to Plan Properly for Extreme Risk. The Current System Dooms the UK to Remain Perpetually Unprepared’ Financial Times 21 February 2022. 8 See T Pettersson and P Wallensteen, ‘Armed Conflicts, 1946–2014’ (2015) 52(4) Journa1 of Peace Research 536. 9 eg the Imperial War Museum lists: Suez Crisis, 1956; Brunei Revolt, 1962–63; Indonesian Confrontation, 1963–66; Aden Emergency, 1963–67; The Troubles, 1968–98; Falklands War, 1982; Gulf War, 1990–91; Sierra Leone Civil War, 1991–2002; Bosnian War, 1992–95; Kosovo War, 1998–99; War in Afghanistan, 2001–14; Iraq War, 2003–11; Libya Conflict, 2011–present; Syria Conflict, 2011–present; Yemen Conflict, 2014–present; Global Coalition to Defeat ISIS, 2014–present. See www.iwm.org.uk/history/timeline-of-20th-and-21st-century-wars. 10 M Hill, ‘Russia Cutting Underwater Cables Could Be an Act of War, says UK Defence Chief ’ Independent 8 January 2022. 11 B Walter, How Civil Wars Start (Viking, 2022). 12 D Ormand and M Phythian, Principled Spying. The Ethics of Secret Intelligence (Oxford University Press, 2018). 13 The Economist, 5 June 2021, 10. 14 Legislation to Counter State Threats (Hostile State Activity). Government Consultation (Home Office, 2021).

4  Introduction There has been much media coverage about the murder of Alexander Litvinenko in 2006, the Salisbury Novichok poisonings in 2018, disinformation campaigns especially linked with elections.15 Banks’ value-at-risk from operational and cyber risks has been estimated to vary between 6% and 12% of total gross income.16 In 2020, Parliament noted the curious motivation of Russia in being seemingly fed by both paranoia and a desire to be seen as a resurgent ‘great power’, and concluded that the West is strongest when it acts collectively.17

Cooperation is Essential Now We can only solve these problems by choosing between attempts at conquest, repression, isolation, competition or enhanced cooperation. As the distinguished cultural anthropologist Geert Hofstede said as long ago as 1980: ‘The survival of mankind will depend to a large extent on the ability of people who think differently to act together.’18 This means that we have to change things, and do so quickly – more urgently than we have been. I set out in the second half of this book a lot of evidence that we have been changing many things, such as corporate governance, communities, regulatory systems and enforcement practices. But the fact is that, in many instances, the speed of change is just not fast enough, and the degree of change is currently inadequate. We need to act quickly in order to protect ourselves. There are several bits of good news. First, if we look across various scientific specialisms and research findings, a considerable consensus emerges about what we should do. Second, the science says that we can consciously change how we behave, and switch into a sustainable cooperative mode. This involves focusing on values, ethics, behaviours, culture, institutions and relationships. In many ways, changing our institutions is the most challenging task to achieve – but it is going to be vital. Third, the basic mental tools that we need are ones that are very familiar and ones that our species has always used, namely trust, values, ethics, a sense of purpose and use of factual evidence. We just need to think more clearly about using these concepts in a focused, purposeful manner. We need to use practical tools like agreeing common purposes, agreed ethical values and principles, reliable evidence of trustworthiness and the means of providing it, mechanisms for co-creation and coordination of roles, responsibilities, oversight, problem-identification and problem-solving, and mutual accountability. A short summary of how we need to cooperate might be that we need to be nice to each other and more supportive. It turns out that use of authoritarian force or making others afraid is not helpful. What is really helpful is to make others feel good, supporting the internal motivation of all of us to do the right thing, in other words to behave ethically, thoughtfully, considerately, and in accordance with the Golden Rule that is well-established in all major religions – treat others the way you would like to be treated. This is not just an idealistic or philosophical notion. The scientific evidence on why this approach works is compelling, and consistent across multiple

15 Disinformation and ‘Fake News’, House of Commons Digital, Culture, Media and Sport Committee, HC 1791, 18 February 2019. 16 A Aldasoro, L Gambacorta, P Giudici and T Leach, Operational and Cyber Risks in the Financial Sector. BIS Working Paper No 840 (Bank for International Settlements, 2020). 17 Russia (Intelligence and Security Committee of Parliament, 2020), HC 632. 18 G Hofstede, Culture Consequences. Comparing Vales, Behaviors, Institutions, and Organizations Across Nations 2nd edn (Sage, 2001), Preface to 1st edn 1980, xv.

Cooperation is the Solution  5 different fields, like psychology, sociology, corporate culture, business and personnel management and legal enforcement. But it is not always easy to do, and we need to work hard on doing this well, especially through changing our institutional and collaborative arrangements, through re-emphasising our clear ethical values, and using our mental and emotional mechanisms – revising how we cooperate. This is not new. Our species has constantly evolved how we interact, doing this more effectively than other species through our ability to differentiate the difference between right and wrong – ethical knowledge and evaluation. Our internal ethical values and evaluation mechanism have allowed us to use language and concepts of values and acceptable behaviour in constructing different contexts, such as families, kin groups, tribes and ever larger groups. Initially, our ability to cooperate enabled our species to dominate all other species. We have changed how we cooperate over time, enabling us to do so in increasingly large contexts, but we still rely on the same mental mechanisms of trust, evidence, shared values and ability to evaluate whom we trust. Evolutions in cooperation have been supported by developments in our social and organisational arrangements (institutions), for example supporting trade between different groups, but critically also by developments in our mental and emotional faculties. Working together is a core element of competency in fuelling innovation.19 It would be easy to think that the implication is that we all turn ‘soft’. That is not the idea. Cooperation needs robust engagement between people who may well have different beliefs, interests, goals and ways of doing things. A fascinating thing about cooperation is that there can be – in fact, should be – more debate and conflicting issues to resolve. But how we do that is important. It should be through respectful engagement and exchange, which turns out also to be more effective and efficient. And above all, we still need to protect our groups, societies and values from those who seek to harm us, so robust defence mechanisms and actions are needed where justified.

Cooperation is the Solution The basic propositions are that the scientific evidence supports the following ideas. We need to survive, and our means of doing this is built into our genes and brains. It involves our reliance on the mental mechanism of trust, which allows us to cooperate with others, and is based on evidence that they behave as we expect, as evaluated against our internal (ethical) sense of right and wrong. Over time, we have altered our approaches to evidence and supportive institutions as we have been able to cooperate in ever larger groups. Although self-protective forces remain, competition between groups is ultimately destructive and does not enable growth. It is cooperation at group level that enables us to learn, grow and achieve more. If we are to learn and achieve more, we need to strengthen our reliance on trust mechanisms, ethical values and forms of cooperation. We will expand below on these points, which are all interlinked. The detailed evidence is set out at different points throughout the book, where more extensive footnote references are given to sources. Here is a summary of the argument.

19 Skills, attitudes and behaviours that fuel public innovation (Nesta) at http://media.nesta.org.uk/documents/Nesta_ CompetencyFramework_Guide_July2019.pdf.

6  Introduction

Summarising the Evidence and Ideas Needs and Modes: Competition versus Cooperation The need for self-preservation is widely known, and drives responses to conflict and self-­ preservation, including aggression and warfare with others, at both individual organism (cells, genes, individual animal) and collective group (family, tribe, community, nation) levels. However, self-protection and thriving at collective levels also drives a need for cooperation between members of a group. Competition and cooperation are conflicting forces. The twin but conflicting forces of competition and cooperation have driven life on earth (chapter three). Competition arises because of the need to survive that applies to cells, multicellular organisms such as individual people, and groups. The need and drive to survive necessarily involves, at a basic level, dominance over others and their subjection or extinction. Cooperation, on the other hand, involves individuals and groups working together. Cooperation is ultimately essential for survival, whereas competition threatens it. Competition may cause survival of the ‘winner’ of a contest but not of the ‘losers’, whereas with cooperation, not only do all participants survive but they can also evolve, learn and improve their performance and outputs through higher levels of organisation and innovation, and achieve more.20 In simple terms: cooperation is ultimately vital for sustaining life and group activities, whereas competition can be destructive. Moderate levels of controlled nonviolent intergroup competition can strengthen impersonal trust and cooperation; but extreme forms of within-group competition encourage selfish behaviour, envy, and zero-sum thinking; however, when disciplined by intergroup competition, moderate levels of within-group competition can inspire perseverance and creativity.21 Thus, competition within a group will ultimately be destructive, whereas moderate competition between groups can be inspiring. Conflict arises in both competitive and cooperative modes, possibly even more in the latter, but what matters is making the discussion productive rather than destructive. Cooperators do not punish, losers punish. Our reliance on punishment and sanctioning group members has changed over time and can now evolve further. Earlier groups of humans relied on punishment to maintain the adherence of members and social cohesion. Leaders and elites maintained their power by punishing subjects and inferiors. But we can support increased cooperation and achievement by producing evidence that others observe the same norms and standards as we do, that others cooperate and behave well, and by supporting people’s intrinsic motivation to achieve the same common, ethical purposes. We can create an ecosystem of support for this. Stimulating cooperation through intrinsic motivation of individuals and groups will be the most effective strategy in achieving performance and transformation. Research into the motivation of behaviour of individual humans (chapter four) identifies certain essential needs and attributes (mastery, competence, confidence, motivation,

20 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 280; M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 11. 21 J Henrich, The Secret of Our Success: How Culture is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (Princeton University Press, 2016) 349. J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020).

Summarising the Evidence and Ideas  7 willpower).22 Theories of self-determination23 and self-regulation24 focus on the importance of intrinsic motivation (competence, autonomy) and also how that is influenced by external factors (standards, social practice). Attempts at external control or regulation will always be less effective and efficient than an individual’s activated and focused intrinsic motivation. Such external controls usually depress individuals’ needs for and senses of competence and autonomy through emphasis on the individual’s intrinsic ethical values and sense of relatedness to others. These psychological and behavioural theories clearly contrast with the theories of pure economics and law in which individuals make all decisions based on a rational cost-benefit calculation,25 so need to be incentivised and controlled through rational cost-benefit levers such as financial targets and remuneration rewards (agency theory),26 and are controlled by sanctions through deterrence. The extensive evidence from psychological and empirical studies largely ousts earlier rationality theories. Groups that cannot cooperate are incapable of learning, evolving or innovating.27 Competition within a group will ultimately be destructive, whereas moderate competition between groups can be inspiring. However, stimulating cooperation through intrinsic motivation of individuals and groups will be the most effective strategy in achieving performance and transformation. We do not learn unless we spontaneously share information, and we will not do that if we fear criticism or sanctioning (ie in a ‘blame culture’28), so the best performing groups and organisations operate with cultures of psychological safety. The history of our species has followed an historical trajectory away from defensive and aggressive competition towards increasing cooperation. The cooperative mode of (social) interaction has developed integrally, linked with developments in our psychological reliance on ethical values, forms of engagement (institutions) and the evidence supporting levels of trust that others will act as expected. As we have evolved, so have our mechanisms. There is a trajectory towards our becoming less aggressive, more cooperative and more ethical. The arc of our evolutionary history ‘bends towards goodness’, because we learn (and accordingly our genes adapt) that moral behaviour is better for cooperation.29 Unmoderated competition is coming under attack for producing undesirable social and economic outcomes.30 Humans have inherently competitive impulses, which can lead to great attainments, but the way that market and legal competition has been operated, linked with ‘rugged individualism’ per Martin Luther King, leaving the poor

22 A Bandura, ‘Self-Efficacy: Toward a Unifying Theory of Behavioral Change’ (1977) 84(2) Psychological Review 191–215. 23 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017). 24 H Leventhal, D Nerenz and D Steele, ‘Illness Representations and Coping with Health Threats’ in A Baum and J Singer (eds), A Handbook of Psychology and Health Vol 4 (Erlbaum, 1984). 25 eg J Bentham, An Introduction to the Principles of Morals and Legislation (JH Burns and HLA Hart, eds) (Methuen, 1789/1982). 26 MJ Jensen and WH Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’ (1976) 3(4) Journal of Financial Economics 305; see also LA Stout, ‘On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)’ (2013) 36 Seattle University Law Review 1169. 27 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020). 28 See S Dekker, Just Culture. Balancing Safety and Accountability (Ashgate Publishing 2007) 103; RL Helmreich, ‘Building Safety on the Three Cultures of Aviation’ in Proceedings if the IATA Human Factors Seminar (Bangkok, 1999) 39–43; D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011). 29 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019). 30 M Heffernan, A Bigger Prize. Why Competition isn’t Everything and How We do Better (Simon & Schuster, 2014); ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020).

8  Introduction to struggle for themselves whilst permitting a ‘bounty of gifts for the wealthy’,31 has led to toxic results and ‘drained any ethical or moral content’.32 Noble competition has been devalued. Garrett Hardin and Elinor Ostrom have identified that the destruction of essential common goods (the tragedy of the commons) arises inevitably from selfish behaviour, and coordinated control is required to prevent this, not least by creating the right institutions.33 However, change has occurred that raises more serious threats, such as to our species and the planet, that can only be overcome with increased cooperation. Various challenges arise, including a contraction in our community-based social structures, in global expansions of trade, in technological interventions like nuclear weapons and digital-based instant communications, and in some societies becoming increasingly secular, replacing the socially-cohesive forces of religion, whilst other societies are energised by fundamentalist religious ideas, terrorism, populism and fake news. The result is expansion in global groupings with greater opportunities for engagement but without clear trust-based and ethical-based mechanisms of providing reassurance through evidence that others can be trusted. The basic mechanisms for cooperation currently need to be strengthened and reinvented in order to avoid the risks that we currently face, which are now existential to our species. It is helpful that the evolutionary trajectory of transmitted genes and behaviour is towards increased cooperation, and towards increasing reliance on strong ethical values, since these elements are inextricably linked.

Mechanism: Trust, Values and Evidence The mental mechanism that supports how humans think and behave, and that drives cooperation, is our reliance on the mental bridge of trust, which is based on our evaluation of evidence against our intrinsic values – especially fairness and justice. Trust enables us to plan and act where we believe that we have adequate belief that others will act in a particular way. We cannot know how others will act in the future but we can trust them to a greater or lesser extent. Trust is based on evidence, which ideally builds up over time, on others’ actions, capabilities and intentions. We evaluate this evidence against our internal value system. Spontaneous altruistic actions build stronger trust and social capital than transactionally negotiated trust. ‘When we became cooperative animals, we abandoned the right-of-the-strongest principle and moved on to a rightof-the-contributor principle.’34 Modes of organisation and evidence affect trust in politics, communities, work organisations, contracts, public administration, regulation, dispute resolution and so on. Our reliance on particular values and forms of trust has changed over time in order to match our changing forms of societies. We can in turn affect our values and behaviour through choice and selection of our modes of living and our institutions. We do this unconsciously but can also do it consciously. Sztompka has suggested that six moral bonds – that people value simply because they feel happier to live in a society pervaded with good inter-relations – are crucial: trust, loyalty, reciprocity, solidarity, respect and justice.35 31 JE Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future (WW Norton, 2012). 32 ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020), 233. 33 G Hardin, ‘The Tragedy of the Commons’ (1968) 162 Science 1243; E Ostrom, Governing the Commons: Evolution of Institutions for Collective Action (Cambridge University Press, 1990). 34 FBM de Waal, ‘How Selfish an Animal?’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 66. 35 P Sztompka, ‘Trust in the Moral Space’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021).

Summarising the Evidence and Ideas  9

Trust Trust (chapter five) is the mental ability to have confidence in how people will act in the future, so that we can make our own plans and actions.36 In placing trust, we look for knowledge and evidence of the reliability of things in the past and present on which to base our mental predictions about the future. The mental state of trust bridges the gap caused by lack of knowledge. We can strengthen trust by producing more evidence that we can be trusted, based on our history of behaviour and our present competences and intentions. Various sets of criteria for characteristics of trust evidence can be built on,37 such as competence, predictability, moral benevolence, ethical integrity and concern for safety. These criteria have driven the type of evidence that people and organisations that wish to be trusted try to produce about themselves so as to build a convincing and consistent narrative. Thus, businesses rely on brand reputation and endorsements, regulatory systems include quality management and inspections mechanisms and consistent results over time, advisers rely on professional integrity mechanisms and rituals, and traders rely on contracts and legal systems. There is a distinction between trust (expectations of benign behaviour based on inferences about a partner’s personal traits and intentions), and assurance (expectations that are based, instead, on knowledge of an incentive structure that encourages benign behaviour).38 Linda Molm and colleagues drew on this distinction to differentiate between reciprocal exchanges and negotiated exchanges. In negotiated exchanges, ‘actors engage in a joint decision process, such as explicit bargaining, in which they reach an agreement on the terms of the exchange.39 Both sides of the exchange are agreed upon at the same time, and the benefits for both exchange partners are easily identified as paired contributions that form a discrete transaction.’ In reciprocal exchanges, actors spontaneously perform individual acts that benefit another (altruism), without knowing whether, when or to what extent the other will reciprocate in the future. Exchange relations develop gradually over time in social contexts or fail to do so. In a laboratory experiment, Molm and colleagues found that reciprocal exchange produces stronger trust and affective commitment than negotiated exchange, and that behaviours signalling the partner’s trustworthiness have greater impact on trust in reciprocal exchange. Negotiated exchanges with binding agreements provide assurance, while reciprocal exchanges enable trust. It follows that a society in which individuals engage in spontaneous acts of giving will generate stronger trust and affective commitment40 than markets that are based on contractual arrangements. Molm and colleagues concluded that, ironically, the very mechanisms that were created to reduce risk in transactions – the negotiation of terms and strictly binding

36 O O’Neil, A Question of Trust (Cambridge University Press, 2002). Many other sources include N Luhmann, Trust and Power (John Wiley & Sons, 2018); BA Misztal, Trust in Modern Societies (Polity Press, 1996); AB Seligman, The Problem of Trust (Princeton University Press, 1997); P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999). 37 DH McKnight and NL Chervany, ‘Conceptualizing Trust: A Typology and E-Commerce Customer Relationships Model’, Proceedings of the 34th Hawaii International Conference on System Sciences (IEEE 2001); DH McKnight and NL Chervany, ‘What Trust Means in ECommerce Customer Relationships: An Interdisciplinary Conceptual Typology’ (2001) 6(2) International Journal of Electronic Commerce 35–59. 38 T Yamagishi and M Yamagishi, ‘Trust and Commitment in the United States and Japan’ (1994) 18(2) Motivation and Emotion 129–66. 39 LD Molm, N Takahashi and G Peterson, ‘Risk and Trust in Social Exchange: An Experimental Test of a Classical Proposition’ (2000) 105(5) American Journal of Sociology 1396–427. 40 EJ Lawler and J Yoon, ‘Commitment in Exchange Relations: Test of a Theory of Relational Cohesion’ (1996) 61 American Sociological Review 89–108.

10  Introduction agreements – have the unintended consequence of reducing trust in relationships. Thus, the forms of social and relational exchange affect the extent of trust and social cohesion. A generous warm society is preferable to an individualist contractual society. Trust is ethically neutral (it is the basis of cooperation in criminal gangs) and it has to be moderated by ethical criteria.41 More than ‘Can I trust you to do this?’, ‘Is what we are doing the right thing to do?’. Values have to be central. Values involve a ‘co-primacy of right and good’.42 There is mounting evidence that higher levels of integrity are correlated with commercial success in many contexts.43 This is recognised by major investors.44 Countries that have high trust relationships have high social capital,45 commercial cooperation and success (eg Germany46 and Japan47). There is also recognition that the culture of an organisation has a powerful moderating (regulating) effect on behaviour and outcomes.48 Modern market exchange is inconceivable without moral values.49 A major objective since the GFC has been to try to rebuild destroyed trust in the financial sector and business generally.50 However, the forces of globalisation, digitisation through the internet, and intermediary platforms have produced a commodification of trust sources and confusion over the reliability of trust in strangers. In this world, trust is intermediated by technology owned by private trust producers (online reputation management, distributed ledgers and AI-based predictive systems), where the trustee is the trust-producing technology itself, whose trustworthiness may be impossible to establish, leading to issues over reliability, fraud and fake news.51 There is a symbiotic relationship between the health of states and societies and the state of their political and economic institutions.52 Leading philosophers and many economists have identified ongoing social inequality and the political and extractive success of elites as major sources on destabilisation53 and a need to focus on rebuilding crumbling social, community and political institutions.54 41 E Goffman, ‘On Cooling the Mark Out: Some Aspects of Adaptation to Failure’ (1952) 15(4) Psychiatry 451–63; D Gambetta, ‘Mafia: The Price of Distrust’ in D Gambetta (ed), Trust. Making and Breaking Cooperative Relations (Basil Blackwell, 1988); T Frankel, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims (Oxford University Press, 2012); G Hosking, Trust: A History (Oxford University Press, 2014). 42 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019). 43 M Jenkins, The Relationship between Business Integrity and Commercial Success (Chr. Michelsen Institute, 2017); PM Nichols, ‘The Business Case for Complying with Bribery Laws’ (2012) 49(2) American Business Law Journal 325–68; The Case for Purpose-Driven Business (Regenerate, 2020) ch 3. 44 Sustainable Investing: Resilience Amid Uncertainty (BlackRock, 2020). 45 RD Putnam, Making Democracy Work (Princeton University Press, 1993); RD Putnam, ‘Turning In, Turning Out: The Strange Disappearance of Social Capital in America’ (1995) 28(4) PS: Political Science and Politics 644; F Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Penguin Books, 1995). 46 A Fox, Beyond Contract: Work, Power and Trust Relations (Faber, 1974); LG Zucker, ‘Production of Trust. Institutional Sources of Economic Structure 1840–1920’ (1986) 8 Research in Organizational Behavior 53–111. 47 M Stevens, JP MacDuffie and S Helper, ‘Reorienting and Recalibrating Inter-organizational Relationships: Strategies for Achieving Optimal Trust’ (2015) 36(9) Organization Studies 1237–64. 48 G Hofstede, Culture Consequences. Comparing Vales, Behaviors, Institutions, and Organizations Across nations 2nd edn (Sage, 2001); A Arnaud and M Schmimke, ‘The Ethical Climate and Context of Organizations: A Comprehensive Model’ (2012) 23 Organizational Science 1767–80; C Engel, ‘The Behaviour of Corporate Actors: How Much Can We Learn from the Experimental Literature?’ (2010) 6(4) Journal of Institutional Economics 445–75. 49 PJ Zack, Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) xi. 50 Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015). 51 B Bodó, ‘Mediated Trust: A Theoretical Framework to Address the Trustworthiness of Technological Trust Mediators’ (2020) New Media & Society 1–23; B Bodó, ‘The Commodification of Trust’ Amsterdam Law School Legal Studies Research Paper No 2021–22. 52 D Acemoglu and JA Robinson, Economic Origins of Dictatorship and Democracy (Cambridge University Press, 2006); D Acemoglu and JA Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (Crown, 2012). 53 S Gerhardt, The Selfish Society: How We All Forgot to Love One Another and Made Money Instead (Simon & Schuster, 2010); C Eisenstein, Sacred Economics. Money, Gift & Society in the Age of Transition (North Atlantic Books, 2011); M Sandel, What Money Can’t Buy: The Moral Limits of Markets (Allen Lane, 2012); K Raworth, Doughnut Economics.

Summarising the Evidence and Ideas  11 The 2021 World Happiness Report recorded that during the pandemic there was greater economic insecurity, anxiety, disruption of every aspect of life and, for many people, stress and challenges to mental and physical health.55 They concluded that trust and the ability to count on others are major supports to life evaluation, and that variation in trust was a major factor that explained very large international differences in Covid-19 death rates, which were substantially higher in the Americas and Europe than in East Asia, Australasia and Africa. They pointed to the more individualistic culture of the North Atlantic countries compared to countries in the AsiaPacific region and the relative looseness of social norms as having contributed to lower public support for non-pharmaceutical interventions. The simple ideas of ‘let’s all do the right thing’, plus ‘if we’re not sure, ask’ and ‘let’s all prove that we are trying to do the right thing’, have been shown to be an extraordinarily powerful s­ trategy in achieving a group’s objectives. It is the essence of the Ethical Business Practice model.56

Values of Fairness and Justice We all possess the same set of moral values (chapter six). It contains individual values that are inherently conflicted with other values, and we draw on particular values in particular circumstances. Schwartz illustrated this as a continuum of values in a circular model.57 Context affects the primacy of values: self-protection and the need to avoid anxiety trigger particular values, and opposing values are triggered by freedom from anxiety and the freedom to grow. A similar opposition occurs with self focus or social focus. Thus, the values that a group of society values will depend on its context and can change over time. If we feel threatened, the predominant values will trigger protective behaviour, such as strengthening of the tribalism of those who feel the same way, isolationism, anti-immigration and so on. These characteristics have been identified as major causes of the rise of populism in politics in Hungary, Poland, the US rust belt, the gilets jaune in France and Brexit.58 Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017); J Welby, Reimagining Britain. Foundations for Hope (Bloomsbury, 2018); B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019); Under Pressure: The Squeezed Middle Class (OECD, 2019); M Lind, The New Class War. Saving Democracy from the Metropolitan Elite (Atlantic Books, 2020); M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All (Princeton University Press, 2020); Financial Inclusion Commission Strategy 2020 (Financial Inclusion Commission, 2020); T Piketty, Capital and Ideology (The Belknap Press of Harvard University Press, 2020); MJ Sandel, The Tyranny of Merit. What’s Become of the Common Good? (Farrar, Strauss and Giroux, 2020); R Henderson, Reimagining Capitalism. How Business Can Save the World (Penguin Business, 2020); M Shafik, What We Owe Each Other. A New Social Contract (The Bodley Head, 2021). 54 M Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale University Press, 1984); M Mazzucato, The Entrepreneurial State. Debunking Public vs Private Sector Myths (Penguin, 2018 (originally 2013)); N Ferguson, The Great Degeneration: How Institutions Decay and Economies Die (Penguin, 2014); P Collier, The Future of Capitalism (Allen Lane, 2018); A Pabst, The Demons of Liberal Democracy (Polity Press, 2019); J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020); Innovative Citizen Participation and New Democratic Institutions. Catching the Deliberative Wave (OECD, 2020). 55 JF Helliwell, R Layard, JD Sachs, J0E De Neve, LB Aknin and S Wang, World Happiness Report 2021 at http://worldhappiness.report/. 56 C Hodges and R Steinholtz, Ethical Business Practice and Regulation. A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017). 57 SH Schwartz, J Cieciuch, M Vecchione, E Davidov, R Fischer, C Beierlein, A Ramos, M Verkasalo, J-E Lonnqvist, K Demirutku, O Dirilen–Gumus and M Konty, ‘Refining the Theory of Basic Individual Values’ (2012) 103(4) Journal of Personality and Social Psychology 663–88. See earlier SH Schwartz, ‘Universals in the Content and Structure of Values: Theory and Empirical Tests in 20 Countries’ (1992) 25 Advances in Experimental Social Psychology 1; S Schwartz, ‘Are There Universal Aspects in the Structure and Content of Human Values?’ (1994) 50(4) Journal of Social Issues 19–45. 58 C Crouch, Post-Democracy After the Crises (Polity Press, 2020); M Lind, The New Class War. Saving Democracy from the Metropolitan Elite (Atlantic Books, 2020); M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left

12  Introduction Values of fairness and justice are universal (chapter six). Humans all have an internal moral compass: the ability to distinguish between right and wrong based on an internal system of ethical/moral values59 (see Moral Foundations Theory).60 This mechanism of differentiation is typically automatic (values-based, drawing on feelings and emotion) rather than calculative (rational calculation, eg utilitarian, even though we possess the ability to reason). It is impeded in sociopaths and certainly psychopaths. For most of us, values are embedded in individuals’ evaluative mechanisms of self-worth (the need to think of oneself as a just and responsible individual) and that of every society, reflected in the stories we tell about ourselves.61 Wilson, Haidt and others believe that it was the genetic mutation in being able to distinguish right from wrong that occurred at the evolution of homo sapiens as a species that was the critical element in enabling our species to cooperate and hence to dominate all others.62 However, we also have the ability to justify an unethical action after the event (cognitive dissonance), which is explained as a mechanism to maintain our sense of self-worth.63 Thus, what we regard as fair and just varies over time and between individuals and groups, and can be open to challenge and debate – although such challenge may involve heated debate since it challenges our sense of self-worth. The same analysis would apply for individuals as for the social groups and organisations in which they combine, such as clubs, professions, businesses, public bodies and nations. Values of fairness and justice have generated heated debates over centuries about individual, social and distributive justice. Important milestones have been moves beyond divisions such as serfdom, slavery, class, adoption of universal suffrage and gender equality. However, given the continuation of inequality, poverty, abuse and exploitation that persists in the world, Amartya Sen reminded us that a theory of justice that can serve as the basis of practical reasoning must include ways of judging how to reduce injustice and advance justice, rather than aiming only at the characterisation of perfectly just societies.64 The hypothetical ‘social contract’ is no longer adequate. It has to be practical and to deliver equality of respect and fairness. In the twenty-first century, philosopher Michael Sandel concludes that justice is a concept that is larger than either maximising utility or welfare, or respecting freedom of choice, and involves cultivating virtue and reasoning about the common good, involving:65 (a) (b) (c) (d)

a strong sense of community: citizenship, sacrifice and service; recognising the moral limits of markets; confronting inequality, solidarity and civic virtue; and the need for a politics of moral engagement.

Behind and Achieve Prosperity for All (Princeton University Press, 2020); B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019); D Goodhart, The Road to Somewhere. The New Tribes Shaping British Politics (Penguin Books, 2017); R Ford and M Goodwin, Revolt on the Right: Explaining Support for the Radical Right in Britain (Routledge, 2014). 59 EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012). 60 J Haidt and J Graham, ‘When Morality Opposes Justice: Conservatives Have Moral Intuitions That Liberals May Not Recognise’ (2007) 20(1) Social Justice Research 98–116; J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 61 A MacIntrye, After Virtue (Duckworth, 1985). 62 EO Wilson, Sociobiology. The New Synthesis (Harvard University Press, 1975); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 63 L Festinger, A Theory of Cognitive Dissonance (Row, Peterson, 1957); J Cooper, ‘Cognitive Dissonance Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 18. 64 A Sen, The Idea of Justice (Allen Lane, 2009). 65 MJ Sandel, Justice. What’s the Right Thing to Do? (Penguin Books, 2010; first pub Farrar, Strauss and Giroud, 2009).

Summarising the Evidence and Ideas  13 Sandel follows Alastair MacIntyre in saying that with belonging comes responsibility. These ideas raise yet again the issue of whether ideas of equality and stakeholders, as well as respect for individuals and self-determination, require fresh effort to involve people in co-creation of the system and its ethical norms, purposes and outcomes, and in cooperation in their achievement.

The Constant Co-Evolution between Psychology, Norms, Culture and Institutions There is constant coevolutionary interplay between the factors that support humans working socially in groups, such as psychology, institutions and culture.66 Joseph Henrich suggests (chapter three) that changes in brains produced by culture include expansion of verbal memories, shifts to right brain in face processing and thickening of corpus callosa. Henrich suggests that social norms arise directly from cultural learning and social interaction. Where there exist both a social practice and a standard against which it, and violations from it, can be evaluated, cultural evaluation will generate a widely shared rule that, if it is violated, will provoke a reaction from the community.67 The circumstances and changes in psychology can influence the norms, ideas, practices and beliefs that emerge. Thus, norms that are accepted as central to the beliefs of one community are inimical to another population, given the differences in their psychologies. Examples include cannibalism, taboos on marriage affinities such as incest or cousin affinities, formal rituals, the concept of legal ‘rights’ or the maximisation of personal gains.68 There is, in particular, a constant feedback and evolution between culture, institutions, psychology and norms, in which any one may influence the others. Henrich’s extensive study of societies across the world shows the considerable variety of forms and their associated values. He notes the specific institutional organisation and personal psychology that has evolved in Western, Educated, Industrialised, Rich and Democratic (WEIRD) populations, described as individualism. Its key characteristics are highly individualistic, independent, analytic, self-obsessed, control-oriented and nonconformist traits, with limited devotion to tradition, authority, obedience or conformity.69 The psychological, institutional and cultural package of WEIRD populations, which Henrich calls impersonal prosociality, is ‘associated with a set of social norms, expectations, and motivations for impartial fairness, probity and cooperation with strangers, anonymous others, or even abstract institutions like the police or government’.70 Henrich regards this package as lying at an extreme end of the distribution of types. Many social modes exist besides the WEIRD phenomenon, producing different outcomes. Japan demonstrates a different style of social organisation with strong cultural intensity, stability and productivity.71 Brazil’s post-colonial mode of patrimonialism has generated

66 J Henrich, The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (Princeton University Press, 2016); J Henrich, The Weirdest People in the World. How the west Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020). 67 Henrich, The Weirdest People in the World, ibid, 69. 68 ibid, 84–85. 69 ibid, 21, 313. 70 ibid, 48. 71 JR Harrison and GR Carroll, ‘Keeping the Faith: A Model of Cultural Transmission in Formal Organizations’ (2006) 36 Administrative Science Quarterly 552; JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224.

14  Introduction strong family-based ties but lack of trust in public institutions and organisation, leading to corruption.72 Fernand Laloux has argued that human consciousness has evolved in a series of stages, at each of which we have had to reinvent new forms of organisation.73 He considers that we are currently undergoing a further transition from organisations based on empowerment, values-driven culture and inspirational purpose, multiple stakeholder perspectives, and family as the guiding metaphor, to a ‘higher’ level, which he specifies as taming the fears of the ego, soul searching of who we are and what our purpose in life might be, dealing gracefully with adversity, and striving for wholeness. Nicholas Christakis finds that humans ‘have always had both competitive and cooperative impulses, both violent and beneficial tendencies. Like the two strands of DNA, these conflicting impulses are intertwined. We are primed for conflict and hatred but also for love, friendship, and cooperation’.74 However, he argues that our species has evolved to learn how to live with (in fact, to tame) competition in order to prioritise the more important need for cooperation. Importantly, as noted above, Christakis argues that the trajectory of evolution of human social and mental dispositions is to reduce competition and favour cooperation, which necessarily involves increasing emphasis on ethical values ‘bend[ing] towards goodness’.75 A profound consequence of this understanding is that we can change ourselves through the intentional manipulation of values, norms, institutions and culture. The process of natural ‘cumulative cultural evolution’ is occurring, and we have the choice of intervention. Similarly, if we make certain choices, we should not be surprised if they result in some undesirable consequences. Policies of either selfishness or fair cooperation will generate not only short-term responses from others but also deeper changes in institutions and culture, and more permanent consequences, that we may not intend. So, we not only can but should evaluate the consequences of policies such as racism, euthanasia, abortion, profit maximisation, global sustainability and in fact every set of personal, organisational and social goals.

Maintaining Cohesion: Punishment or Ethical Values, Fairness, Legitimacy There are many reasons why good people will make mistakes or do stupid or illegal things. It is now well established that most people do not act on the basis of rational calculation of selfish costs and benefits. For example, the relevance of heuristics and biases (mental shortcuts, especially triggered by perceived familiarity or emotion, Prospect Theory).76 These responses override more objective analyses, so removal of stress (ability to focus and avoiding ‘crowding out by powerful imposed priorities, plus psychological safety77) and having time to think usually delivers better

72 RA Da Matta, Carnivals, Rogues and Heroes: An Interpretation of the Brazilian Dilemma (University of Notre Dame Press, 1991); DJ Hess and RA Da Matta, The Brazilian Puzzle: Culture on the Borderlands of the Western World (Columbia University Press, 1995). 73 F Laloux, Reinventing Organizations: A Guide to Creating Organizations Inspired by the next Stage of Human Consciousness (Nelson Parker, 2014). 74 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019). 75 ibid. 76 D Kahneman, Thinking, Fast and Slow (Allen Lane, 2011). 77 AC Edmondson, The Fearless Organization (John Wiley & Sons, Inc., 2019).

Summarising the Evidence and Ideas  15 judgements and actions. This science is now well known, even if it has yet to percolate far into legal theories and systems.78 Historically, humans have relied on punishment for those who breach values or rules, as the primary mechanism for maintaining adherence to a group (chapter three). This occurs between group members to maintain social cohesion, and by leaders and elites to maintain their hierarchical positions of power and dominance by punishing subjects and inferiors.79 Punishing behaviour has been studied extensively in Prisoner’s Dilemma experiments to identify cooperative and defecting behaviour,80 but leads to some unexpected conclusions. If both reward and punishment were on offer, then the winning groups did not use punishment, which was both costly and ineffective. Rewards went further than punishment in both benefiting the public good and in building cooperation, despite the efforts of free riders. Nowak concluded that the ability of people to gain a reputation was powerful: ‘Cooperators in the public goods game gain a reputation, which makes them more attractive partners for other cooperators in private – one to one – dealings.’81 Or, to put it succinctly: cooperators do not punish, losers punish. Nowak summarises the Prisoner’s Dilemma evidence as finding that although punishment is one mechanism that can counter the selfishness of natural selection that leads to a ‘Tragedy of the Commons’ destruction of common public goods, it is very inefficient and it does not help people cooperate much. A much better mechanism of achieving the maintenance of public goods is to ‘reward fellow cooperators by establishing mutually beneficial private interactions with them’ such that ‘the public cooperators gain a reputation that makes them more attractive prospects to fellow cooperators’ and private cooperation can support public cooperation.82 Hence, transparency and ability to advertise good private cooperation is essential. In other words, if we want to cooperate more, we can adopt a more sophisticated form of supporting social cohesion than punishment. It is based on supporting intrinsic motivation and adopting shared ethical purposes, and supporting the perception – and the fact – that most people are doing the right thing and observing the common values and norms, thus observing shared rules. Extensive research has illuminated the factors that affect whether people will obey social or legal rules. The principal factors are: (a) The rules are made through a fair process; where people feel that they have had involvement, or a possibility for voice and input. (b) The substance of the rule is perceived to be fair by the individual and most of the community, even if individuals do not agree with it. (c) The rule accords with their sense of values; namely the values of the individual, the particular community or social group or organisation. (d) The rule is applied fairly by/to all. (e) Most people are observing the rule.

78 Y Feldman, The Law of Good People. Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018). 79 TR Tyler, ‘Psychology and the Law’ in The Oxford Handbook of Law & Politics (Oxford, 2008). See TR Tyler, Why People Obey the Law (Yale University Press, 2006). 80 E Fehr and S Gächter, ‘Cooperation and Punishment in Public Goods Experiments’ (2000) 90 American Economic Review 980. E Fehr and S Gächter, ‘Altruistic punishment in humans’ (2002) 415 Nature 137. See E Fehr and I Schurtenberger, ‘Normative Foundations of Human Cooperation’ (2018) 2 Nature Human Behavior 458. 81 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 231. 82 ibid, 233–35, 218.

16  Introduction The concept and value of fairness applies to all elements here. Those subject to the regime and its rules need to hold perceptions of fair process,83 fair substance and fair application if they are going to want to observe its rules and regard the regime as legitimate. For example, enforcement has to be perceived to be done fairly if it is to promote respect and observance. Indeed, many scholars regard this set of elements as adding up to the extent to which a regime and its rules are perceived as legitimate.84 Similarly, in the workplace, evaluations of the procedural justice of performance appraisals were found to influence judgements of overall workplace fairness, perceptions of management legitimacy and employee rule‐adherence behaviour more strongly when employees believed fairer workplace procedures were required by law.85 Fairness can clearly dominate the motivation of self-interest.86 If the quality of legitimacy exists, people will be motivated voluntarily to observe the rules, even if they think that some aspects are unfair or they otherwise disagree with them.87

Purposes, Outcomes and Metrics The achievement of common goals requires the different goals of all those involved to be identified and integrated. Different stakeholders will have different purposes, motivations, long- and short-term objectives and values. These elements need to be coordinated. Some of them may conflict. That means having a fair and effective mechanism for identifying, discussing, balancing and agreeing the elements. It is useful to distinguish simple overarching purposes (security, health, safety, equality, fairness) with strategic objectives (particular goals and stages) that may change over time. It is then useful to identify the outcomes that are desired and undesired that go with achievement of the purposes and objectives. Those outcomes can be measured so as to incentivise and evaluate performance in moving toward and attaining the desired purposes, objective and outcomes. Relevant metrics can be set, against which performance and progress can be measured.

83 R Paternoster, R Brame, R Bachman and W Sherman, ‘Do Fair Procedures Matter? The Effect of Procedural Justice on Spouse Assault’ (1997) 31 Law and Society Review 163; DG Pruitt, RS Peirce, NB McGillicuddy, GL Welton and LM Castriano, ‘Long-Term Success in Mediation’ (1993) 17 Law and Human Behavior 313; EA Lind and TR Tyler, The Social Psychology of Procedural Justice (Springer Science & Business Media, 1988); JW Thibaut and L Walker, Procedural Justice: A Psychological Analysis (Erlbaum Associates, 1975). 84 TR Tyler, Why People Obey the Law (Yale University Press, 2006); TR Tyler, ‘Psychological Perspectives on Legitimacy and Legitimation’ (2006) 57 Annual Review of Psychology 375–400; J Sunshine and TR Tyler, ‘The Role of Procedural Justice and Legitimacy in Shaping Public Support for Policing’ (2003) 37 Law and Society Review 513; TR Tyler and YJ Huo, Trust in the Law (Russell Sage Foundation, 2002); JM Darley, TR Tyler and K Bilz, ‘Enacting Justice: The Interplay of Individual and Institutional Perspectives’ in MA Hogg and J Cooper (eds), The Sage Handbook of Social Psychology (Sage, 2003); JT Jost and B Major, ‘Emerging Perspectives on the Psychology of Legitimacy’ in JT Jost and B Major (eds), The Psychology of Legitimacy (Cambridge University Press, 2001); TR Tyler and SL Blader, ‘Can Businesses Effectively Regulate Employee Conduct? The Antecedents of Rule Following in Work Settings’ (2005) 48 Academy of Management Journal 1143; TR Tyler and SL Blader, Cooperation in Groups: Procedural Justice, Social Identity, and Behavioral Engagement (Psychology Press, 2000). 85 Y Feldman and TR Tyler, ‘Mandated Justice: The Potential Promise and Possible Pitfalls of Mandating Procedural Justice in the Workplace’ (2012) 6(1) Regulation & Governance 46. 86 D Kahneman, JL Knetsch and RH Thaler, ‘Fairness and the Assumptions of Economics’ (1986) 59(4) Journal of Business S285–S300; E Fehr and KM Schmidt, ‘A Theory of Fairness, Competition, and Cooperation’ (1999) 114(3) Quarterly Journal of Economics 817–68; Y Feldman and TR Tyler, ‘Mandated Justice: The Potential Promise and Possible Pitfalls of Mandating Procedural Justice in the Workplace’ (2012) 6(1) Regulation & Governance 46–65. 87 HC Kelman, ‘Patterns of Personal Involvement in the National System: A Social-Psychological Analysis of Political Legitimacy’ in J Rosenau (ed), International Politics and Foreign Policy (Free Press, 1969); JT Scholz and N Pinney, ‘Duty, Fear, and Tax Compliance: The Heuristic Basis of Citizenship Behavior’ (1995) American Journal of Political Science 490–512; HC Kelman, ‘The Role of National Identity in Conflict Resolution’ (2001) 3 Intergroup Conflict, and Conflict

Summarising the Evidence and Ideas  17

Stakeholder Involvement and Co-Creation Human endeavour involves multiple individuals and organisations. The identification, discussing, prioritising and balancing of the purposes and outcomes desired by all stakeholders requires their involvement in these processes. Democratic values support involvement, as opposed to authoritarian subjection. Hence, core high-level processes of cooperation need to be based on the principle of co-creation. This model is based on co-creation by all actors who demonstrate that they share the ethical purposes, mode of engagement, and achievement of outcomes that are shared by the other stakeholders. It is well recognised, for example, that many stakeholders are involved in the affairs and success of a commercial organisation – not just owners, managers and staff but also suppliers, customers, communities. A stakeholder is not someone who might be affected by an organisation. Every stakeholder has a role to play, however modest, and a responsibility to perform that role so as to contribute to achieving the common purposes, objectives and outcomes. For example, the function of consumers and users is not just to consume and use but they also have a responsibility as citizens of society to feed back information on the extent to which outcomes are achieved (eg on safety, efficacy and performance of products and services and good or bad service behaviour). The system must equally be designed to make it easy for people to identify and feed back information, for the relevant database to be optimal in size, and for it not to be exploited. A systemic approach involves all actors respecting the role of others, however minor their role or contribution. This is based on adult-adult relationships, not those in which a person or organisation with power (say, a manager or regulator) regards itself as outside or above the system. the requirements of ethical governance, transparency, culture, behaviour, competence, outcomefocus, risk-basis and appropriate interventions apply to all.88 However, the respect should be based on evidence that actors can be trusted to perform their roles in accordance with their responsibilities. The system should support shared common involvement recognising the differing levels of intensity of different stakeholders.89

A Culture of Respect Strong cooperation is not possible without respect between stakeholders. This is an essential element of human rights in a modern democracy. For example, polarisation between managers and workers, or between the regulatory community and the business community, can lead not only to lack of trust but also lack of respect for others’ functions as contributors to an holistic system. It is an essential aspect of recognising that others’ objectives or evaluations are not necessarily identical to one’s own. Those who enforce law all the time can tend to focus to a significant extent on those who break the law, and might not deserve much if any trust, and can fail to see the whole picture. Lack of respect for the functions, contribution, efforts and achievements of others can form a barrier to building trust and can merely perpetuate a distrusting lack of engagement. Treating others with respect has been added as a requirement for holders of public office in the UK.90 Reduction 187; DA Strauss, ‘Reply: Legitimacy and Obedience’ (2005) 118(6) Harvard Law Review 1854; TR Tyler, Why People Obey the Law (Yale University Press, 2006). 88 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 89 CAN/UL2984:2019 National Standard of Canada: Standard for Management of Public Risks–Principles and Guidelines (Standards Council of Canada, 2019), Figure 2, p 18. 90 See ch 6 below. Upholding Standards in Public Life. Final Report of the Standards Matter 2 Review (The Committee of Standards in Public Life, 2021).

18  Introduction

Forms and Institutions The type of interdependence that is structured in a situation determines how individuals interact with each other (Social Interdependence Theory). The interaction patterns, in turn, determine outcomes. So the design and selection of modes of interaction will affect outcomes. Human social interactions have evolved and inter-related with groupings, institutions, modes of behaviour, mental processes and values. They create different forms of evidence and hence affect trust. We have evolved the means by which we cooperate, depending on changing circumstances and needs.91 For example, relations between two individuals involving repetition need direct reciprocity; repeated encounters within a group of players need indirect reciprocity created by reputation; special selection assists multiple overlapping networks; multilevel selection can sometime help groups; kin selection has assisted eusociality in some animal groups92 and historical human groups93 but causes bias, nepotism and corruption in more open societies. Although humans are equipped with the ability to form diverse social groups for a diversity of purposes (social, defence, sustenance, work, recreation), limitations exist on the size of groups that can be sustained in particular levels of intensity (the Dunbar number, limited by the size of our brains). This has implications for the ideal size of social, work, community, sport and national groups. An important Report for the Japanese Government has conclusions that resonate strongly with those of this book.94 It notes that market structures are changing from vertical structures to ones requiring collaborations across different industries; that governance needs to change from legal rule-based laws to goal-based laws and regulations; that the rule of law should be positioned as the foundation of trust; that governance models need to ensure cooperation between government, businesses, communities and individuals and involve multi-stakeholder governance rather than government-centric control; that government needs to perform a facilitative role; that achievement of goals needs to be subject to accountability; that businesses need to be involved in the design of rules; and that communities and individuals need to communicate their values and evaluations to society. The reconfiguring of functions, roles, structures and behaviours here is considerable, but rational.

A Political Choice to Base Policy on Scientific Evidence We have a political choice over how we interrelate in our societies, businesses and communities. The scientific evidence shows that we will be more successful in these endeavours if we design our interactions and institutions around strong ethical values and produce convincing evidence that we can be trusted to demonstrate them in our behaviours and organisational culture. Indeed, evidence of a shift away from individualism and towards more social-centred values and forms of cooperation and organisation can be seen in many contexts: political ideologies, corporate purpose and governance, legal and regulatory systems, employment, communities and dispute

91 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 11, 15. 92 EO Wilson, Sociobiology. The New Synthesis (Harvard University Press, 1975). 93 MAC Nowak, C Tarnita and EO Wilson, ‘The Evolution of Eusociality’ (2010) 466 Nature 1057. 94 Governance Innovation. Redesigning Law and Architecture for Society5.0 (2020), at www.meti.go.jp/press/2020/07/ 20200713001/20200713001-2.pdf.

A Political Choice to Base Policy on Scientific Evidence  19 resolution. Many leading thinkers – from Jonathan Sacks and Roger Scruton to Mark Carney – have called for greater emphasis on social values, which have been highlighted in public discourse as a result of the pandemic.

Major Shifts in Theories, Ideologies and Modes The dominance of the economic and legal theories of self-control and rational calculation has influenced practice throughout the capitalist world in legal and regulatory systems. However, the empirical findings from scientific research into the behavioural motivations of human beings as individuals and in groups have turned previous orthodoxy on its head. As noted here, current understanding involves focusing on building trust between actors through evidence and relationships founded on shared values and supporting intrinsic motivation. Further, the theories and practice on how humans behave have evolved and been influenced by dominant ideological/political thinking. There has been a hugely significant shift in the way humanity thinks and its values – but although the direction of travel is apparent, it is far from universally achieved and needs to be completed. Overall, the trend has shifted from self-centred (self-regarding, selfish) to social centred (other-regarding, altruistic) values. For example: (a) Political ideologies: from individual freedom (self-determination, free markets, no-interference, no regulation, capitalist neoliberalism95) to social solidarity and communitarianism. It is now pointed out that the economic theory of Adam Smith rested on both cost-benefit96 and socio-emotional pillars;97 and that Polanyi argued for the economic to be re-embedded in the social.98 (b) Philosophies: from ‘an eye for an eye’ and religious fundamentalism to the Golden Rule (treat others as you would wish to be treated), social solidarity and sacrificial contribution. (c) Corporations: shift from Maximising Shareholder Value (the sole purpose is to make profit)99 through CSR, ESG, long-term sustainability and SDGs100 to stewardship101 and stakeholder capitalism.102 (d) Legal and regulatory systems: from enforcing compliance with rules (legal positivism) and through sanctions (theory of deterrence) to achieving ethical goals in ethical ways based on ethical principles and supportive interventions, differentiating strong and protective responses for those who flout the common ethical values and purposes, thereby segmenting people you trust from those you cannot. Regulating through (ethical) culture.

95 FA von Hayek, The Constitution of Liberty (Routledge & Kegan Paul, 1960); J Rawls, A Theory of Justice (Harvard University Press, 1971). 96 A Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). 97 A Smith, The Theory of Moral Sentiments (1759). 98 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (2002/1944). 99 M Friedman, Capitalism and Freedom (University of Chicago Press, 1962); M Friedman, ‘Editorial, The Social Responsibility of Business is to Increase its Profits’ New York Times 13 September 1970, at SM17. See also FH Easterbrook and DR Fischel, The Economic Structure of Corporate Law (1991); W Lazonick and M O’Sullivan, ‘Maximising Shareholder Value: A New Ideology for Corporate Governance’ (2000) 29 Economy and Society 1, 15–16; K Williams, ‘From Shareholder Value to Present-Day Capitalism’ (2000) 29 Economy and Society 1. 100 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact) (United Nations, 2015), http://sustainabledevelopment.un.org/. 101 The UK Stewardship Code (Financial Reporting Council, 2012). 102 www.opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-of-aCorporation-with-Signatures-1.pdf.

20  Introduction (e) Work: from polarisation between owners of capital and the means of production (workers) to cooperative organisations based on valuing all contributions and the value of ‘good work’.103 (f) Communities: From religious ideology to nationalism to social solidarity and respectful communitarian autonomy.104 (g) Dispute resolution: from adversarial models to modes that aim at reconciling and rebuilding relationships (techniques like mediation).105 The consistency of the shift in each of the above contexts is strikingly similar. Although liberal democracies may have achieved enormous shifts away from the authoritarian leadership of kings to total enfranchisement (including expanding the corpus of voters from aristocracy and landowners to include all male workers and then all females), power and its fruits remain controlled by the very rich and politically educated elites. The trajectory continues to shift from looking after oneself to thinking about others more widely, the planet and the natural and social environment. There is scientific underpinning for this because concern for others turns out to be good for the prosperity of all of us. Exclusive pursuit of self-advantage has been shown to produce catastrophic systemic harm that threatens our very existence. There is an alternative, which has the support of scientific evidence, even though it may challenge some deeply held political and theoretical beliefs.

Conscious Realignment Towards Cooperation The evidence cited above is that positive choices on context will produce values that are associated with the particular context and drive particular behaviour. Further, the abiding values of fairness and justice can be interpreted in particular ways depending on value beliefs and context. This poses two critical choices for us: do we positively choose to cooperate (rather than fight/ compete) and to design our institutions so as to achieve this (rather than reform our institutions afterwards in the light of changed circumstances)? If we wish to be more cooperative, we should aim to focus less on ourselves as individuals and more on ourselves together. Many thought leaders have been saying this recently.106 This involves consciously moving away from a competitive mode, since it is essentially individualistic and produces multiple undesirable behavioural, social and economic effects,107 to a cooperative mode.

103 Good Work. The Taylor Review of Modern Working Practices, 2017; Good Work. A Response to the Taylor Review of Modern Working Practices. February 2018 (HM Government, 2018); Good Work Plan: Establishing a New Single Enforcement Body for Employment Rights. Consultation (BEIS, July 2019). 104 A Etzioni, The New Golden Rule: Community and Morality in a Democratic Society (Basic Books, 1996). 105 S Roberts, ‘Settlement as Civil Justice’ (2000) 63(5) Modern Law Review 739; P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Publishing PLC, 2016); C Menkel-Meadow, ‘The Origins of Problem Solving Negotiation and Its Use in the Present’ in S Cole, A Hinshaw and AK Schneider (eds), Discussions in Dispute Resolution (Oxford University Press, 2018). 106 See K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017); P Collier, The Future of Capitalism (Allen Lane, 2018); D Ormand and M Phythian, Principled Spying. The Ethics of Secret Intelligence (Oxford University Press, 2018). 107 MJ Sandel, What Money Can’t Buy: The Moral Limits of Markets (Penguin, 2013); M Heffernan, A Bigger Prize. Why Competition Isn’t Everything and How We do Better (Simon & Schuster, 2014).

A Political Choice to Base Policy on Scientific Evidence  21 Margaret Heffernan’s list of disasters caused by uncontrolled competition include schools and examination systems, those addicted to computer games and high-level sports, corporations driven by share price obsession, financial traders driven by daily profit rankings and the constant firing of the lowest ‘performers’, scientific fraud, outsourcing producing workers’ poverty and inadequacies in the definition of Gross National Product.108 Competition law experts Maurice Stuke and Ariel Ezrachi have detailed a depressingly long and consistent series of examples109 where the outcome of pursuit of competition has become toxic – crowding out ethical and social norms,110 increasing unethical behaviour111 and a ‘race to the bottom’,112 promoting self-satisfied and selfish behaviour by commoditising us,113 destroying society through destructive behaviour and eroding the social capital necessary for a market economy.114 Perhaps surprisingly, Stuke and Ezrachi’s prescription is to move beyond the toxic ‘competition as warfare’ to noble ‘competing to create value’ through expanding the total pie by developing new products, designs, and technologies that will satisfy needs unmet by those rivals.115 Noble competition, they say, inherently maintains values and integrity, in which everyone helps their rivals to reach their full potential.116 Michelle Meagher’s analysis is that business and markets are now too powerful to be controlled by law and public institutions. She says that the machine needs to be dispersed, democratised (by giving stakeholders representation at board level and creating balancing structures through cooperative business models and unionisation) and unresponsive power dissolved.117 Important statements of human rights are the UN Universal Declaration of Human Rights,118 the European Convention on Human Rights,119 the Charter of Fundamental Rights of the European Union,120 the UK Human Rights Act 1988 and the Ruggie Principles.121 However admirable this list is in emphasising human values around the dignity of the individual, it is short on cooperative values and goals. The objective is not to revert to Marxian socialism or communism, but to reaffirm the individual with others in a cohesive and productive society. The reasons for this are that what has been called neoliberal capitalism, emphasising individualism and personal success, has produced selfishness at the expense of others. The cost of this and the inherent risks are now too great to be ignored. Many economists have identified poverty and continuing inequality as major factors of destabilisation, not only to individuals and countries but to economies and global stability 108 Heffernan, ibid. 109 ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020). 110 MJ Sandel, What Money Can’t Buy: The Moral Limits of Markets (Penguin, 2013). 111 NW Van Yperen, MRW Hamstra and M van der Klauw, ‘To Win, or Not to Lose, at Any Cost: The Impact of Achievement Goals on Cheating’ (2011) 22 British Journal of Management supp, S5, S6, S9–S10; GJ Kilduff et al, ‘Whatever It Takes to Win: Rivalry Increases Unethical Behaviour’ (2016) 59(5) Academy of Management Journal 1508. 112 NA Den Nieuwenboer and M Kaptein, ‘Spiraling Down into Corruption: A Dynamic Analysis of the Social Identity Processes That Cause Corruption in Organisations to Grow’ (2008) 83(2) Journal of Business Ethics 133. 113 Z Bauman, Does Ethics Have a Chance in a World of Consumers? (Harvard University Press, 2008) 58. 114 RD Putnam, Bowling Alone: The Collapse and Revival of American Community (Simon & Schuster, 2000). 115 ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020) 244. 116 ibid, 256. 117 M Meagher, Competition is Killing Us. How Big Business is Harming Our Society and Planet – and What To Do About It (Penguin, 2020). 118 www.ohchr.org/EN/UDHR/Documents/UDHR_Translations/eng.pdf. See also the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). 119 www.echr.coe.int/Documents/Convention_ENG.pdf. 120 www.europarl.europa.eu/charter/pdf/text_en.pdf. 121 UN Office of High Commissioner for Human Rights, Guiding Principles on Business & Human Rights. Implementing the UN ‘Protect, Respect and Remedy’ Framework. UN 2011.

22  Introduction (chapter nine).122 There is extensive evidence that inequality adversely impacts health,123 happiness,124 prosperity125 and achievement.126 Regional productivity differences were narrowing until the 1980s, then the trend reversed.127 Since the 1980s income growth has been very unevenly distributed across different socioeconomic groups.128 The benefits of global growth were enjoyed by those lifted out of poverty and into the middle class in emerging economies, especially China, and by the very rich. The poorest had limited income growth, but the dramatic point was that those towards the bottom of the industrialised West stagnated.129 In most OECD countries, country wage shares declined while profit shares rose, and personal distribution of income and wealth became ever more unequal.130 Since 1980, average pretax income of the bottom 60% of US workers has remained static or declined in real terms.131 In 1965 ratio of CEO to worker pay in USA was 20 to 1: by 2018 it was 312 to 1.132 In Britain, the ratio of rewards of CEOs to average employees moved from 45 to 1 in 1998, to 120 to 1 in 2010. The UK is one of the most geographically unequal countries in the developed world.133 Many leading political and economic commentators have identified the perceptions by groups of individuals that their expectations of prosperity have been thwarted, and they have been left behind and left without voice, as major ongoing drivers of insecurity. One reason why inequalities between people need to be addressed is that they have major consequences in destabilising social, political and economic stability and prosperity. Examples include the need to ‘level up’ the prosperity of geographical areas within a country,134 as well as feelings that elites are extracting unfair rent (from ‘fat cat’ bosses and investors, to multinationals that pay little tax in most countries where they extract profits, to rich countries’ perceived exploitation of poor countries). This is also why a comprehensive approach to fairness in social, business, environmental and

122 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017); M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018); B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019; T Piketty, Capital and Ideology (The Belknap Press of Harvard University Press, 2020) 19; M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All (Princeton University Press, 2020). 123 M Marmot, P Goldblatt, J Allen et al, Fair Society Healthy Lives (The Marmot Review) (Institute of Health Equity, 2010); M Marmot, J Allen, T Boyce et al, Health equity in England: the Marmot Review 10 Years on (Institute of Health Equity, 2020). 124 A Alesina, R Di Tella and R MacCulloch, ‘Inequality and Happiness: Are Europeans and Americans Different?’ (2004) 88 Journal of Public Economics 2009–42. 125 M Marmot and RG Wilkinson, Social Determinants of Health (Oxford University Press, 1999); RG Wilkinson, The Impact of Inequality: How to Make Sick Societies Healthier (WW Norton, 2005); RG Wilkinson and KE Pickett, The Spirit Level (Penguin, 2009); M Marmot and J Allen, ‘Social Determinants of Health Equity’ (2014) September American Journal of Public Health S517. 126 R Wilkinson and K Pickett, ‘Income Inequality and Social Dysfunction’ (2009) 35 Annual Review of Sociology 493–511: referring to mental illness, violence, imprisonment, lack of trust, teenage births, obesity, drug abuse and poor educational performance of schoolchildren. 127 J Rosés and N Wolf, ‘The Return of Regional Inequality: Europe from 1900 to Today’ VoxEU 14 March 2018. 128 C Lakner and B Milanovic, ‘Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession’ (July 2016) 30(2) World Bank Economic Review. 129 M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All (Princeton University Press, 2020) 19–20. 130 An Economy for the 99% (Oxfam, 2017); M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018), 129 and figures 10 (income inequality) and 11 (household debt). 131 A Giridharadas, Winners Take All: The Elite Charade of Changing the World (Allen Lane, 2019). 132 ‘CEO compensation surged in 2017’ Economic Policy Institute, 16 August 2018. 133 A Davenport and B Zaranko, Levelling Up: Where and How (Institute for Fiscal Studies, 2020). 134 Strong and Prosperous Communities. The Local Government White Paper (Department for Communities and Local Government, 2006); A Etzioni, The New Golden Rule: Community and Morality in a Democratic Society (Basic Books, 1996); Levelling Up (HM Government, 2022).

Structure of the Book  23 governance issues is critical.135 Rebuilding confident and respectful individuals and communities is critical.136 Sir Paul Collier’s analysis of the state of capitalism strongly emphasised the need for ethical values to lie at the foundation of societies, which should be based on reciprocal obligations rather than individual rights.137 He said that ‘Deep rifts are tearing apart the fabric of our societies …. Place has become a dimension of the new grievances.’138 He argued that ‘Economic man is selfish and infinitely greedy’, caring about nobody but himself.139 He argued that John Rawls’ ideas on rights identified through reason, specifically on whether their essential purpose was inclusion of all in society on an equal basis, was antipathetic to the inclusive matching of rights to obligations achieved. Citing Jonathan Haidt’s finding that the same values cherished by people around the world (loyalty, fairness, liberty, hierarchy, care and sanctity), Collier argued that morality derives from values, rather than reason: fairness and loyalty support reciprocity. Given the fact that our style of society and our achievement of our purposes, goals and outcomes are in our own hands, we need to ask ‘What sort of society do we want to live in?’ but also ‘What sort of society, forms or organisation and institutions, and mode business and social interrelation will achieve our purposes, objective and outcomes?’ For example, is American adversarial legalism an admirable model? Jonathan Sacks, the former Chief Rabbi, called for a shift from the self-centred to the social: ‘It is about “Us” not “Me”; about “We” not “I”.’140 Mark Carney argues that the essential values needed for societies at present are dynamism, resilience, sustainability, fairness, responsibility, solidarity and humility.141 Carney noted that failures in fairness and responsibility are at the heart of how institutions decline, citing work by Niall Ferguson142 and Mancur Olson.143 Minouche Shafik has argued that the twentieth century’s social contract between people needs to be rebuilt.144

Structure of the Book This book falls into two parts. Part A sets out the concepts and Part B looks at how we have been evolving in practice, and how we should now take steps to evolve further, in four main areas: communities, business organisations, regulation and dispute resolution. The relevant science is spread across both Parts, depending on the context.

Chapter 2. THE OBC AND PROBLEM SOLVING MODELS. We begin with a concise summary of the Outcome-Based Cooperation Model and Problem-Solving or Continuous Performance Model that we propose, based on the scientific evidence in Part A, that can be applied in the four situations discussed in Part B. some brief indications are given of how

135 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017). 136 K Harrison-Broninski, Supercommunities. A Handbook for the 21st Century (Meghan-Kiffer Press, 2021). 137 P Collier, The Future of Capitalism (Allen Lane, 2018). 138 ibid, 3. 139 ibid, 26. 140 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020). 141 M Carney, Value(s) (William Collins, 2021). 142 N Ferguson, The Great Degeneration: How Institutions Decay and Economies Die (Penguin, 2014). 143 M Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale University Press, 1984). 144 M Shafik, What We Owe Each Other. A New Social Contract (The Bodley Head, 2021).

24  Introduction OBC can be applied in those contexts, namely communities, business organisations, regulation and dispute resolution. In Part A, we examine the following concepts and evidence about them.

Chapter 3. EVOLUTION IN THE MEANS OF COOPERATION. This gives an overview of the evolution of cooperation and its inherent conflict with competition, as explained by evolutionary biologists and anthropologists, including Martin Nowak, Mark Bertness, Edward Wilson, David Johnson, Joseph Henrich, Jonathan Haidt and Nicholas Christakis. It notes the co-evolution between genes, mental tools like values, ethical sense and culture, forms of social groups (family, tribe, group, organisation, nation) and the associated forms of organisation and of elites, and modes that are needed to support cooperation and growth. It also notes the views of leading scientists that humanity has evolved to be more ethical, in view of its expansion of reliance on cooperative relationships, but is currently at a crisis and needs to strengthen its means of cooperation if it is to avoid major disasters, and even survive. Competition does not support effectiveness within a group, but can be helpful between groups if controlled, but will ultimately be destructive. We also note a number of serious problems with a focus on competition as an unchallenged objective, identified by Margaret Heffernan, Maurice Stuke and Ariel Ezrachi. The development in thinking from individual rights to relational law is relevant here, especially summarised by Lorraine Cole and Jonathan Herring. Finally, we note the ideas of Abraham Maslow on individuals, and of Richard Barrett and Fernand Laloux on organisations, that the needs and means of organisation of humans in structures and culture change over time and as an organism engages with its environment, and that a series of essential levels of needs, consciousness, attributes or values are needed for mature functioning and effectiveness.



Chapter 4. HUMAN MOTIVATION. This chapter attempts to summarise a number of theories suggested by schools of researchers into how humans behave and what drives and motivates us. A key focus is on the different effects of internal motivation and external motivation. Some particular theories noted are Icek Ajzen’s theory of planned behaviour, James Reason’s work on why people make mistakes, Albert Bandura’s Social Cognitive Theory, Edward Deci and Richard Ryan’s Self-Determination Theory, Russell Cropanzano’s theory of social exchange, the research of Teresa Amabile, Ernst Fehr, Dan Ariely and others on incentives, Morton Deutsch’s social interdependence theory and the work of David and Richard Johnson on cooperation in groups. A key conclusion is that internal motivation, and its enlistment and support, is far more effective and efficient in producing outcomes than attempts to control or motivate people ‘from outside’.



Chapter 5. TRUST. The foundational mental mechanism by which people cooperate is the concept of trust. This chapter looks at that concept. Here, there is less science and we traverse the thinking of a range of philosophers, including Niklas Luhmann, Anthony Giddens, Robert Hardin, Barbara Misztal and Piotr Sztmopka. Tom Tyler’s research work illuminates the reasons why people obey laws. Onora O’Neill’s summary is particularly clear in suggesting that trust is based on evidence. Studies of criminal groups and authoritarian or unethical societies by Diego Gambetta and Geoffrey Hosking are illuminating. Harrison McKnight and Norman Chervany have produced a useful list of the characteristics of trust, that can inspire ideas on the types of evidence that will be useful. The conclusion is that if we want to cooperate more, we should build the means of trusting more, and this means that we need to produce (more and pertinent) evidence that we can be trusted.

Structure of the Book  25

Chapter 6. MORALITY AND VALUES. Since we evaluate evidence about others and ourselves against the criteria of our internal system of values and sense of right and wrong (ie ethical sense and values), this chapter examines the concepts of morality and ethical values in human psychology and behaviour. The work of John Gibbs and Jonathan Haidt feature strongly, with Piotr Sztompka’s thoughts on a moral community. Shalom Schwartz’s influential circular depiction of 19 values is noted, showing that although we may all rely on the same set of values, individual values are in conflict. We emphasise particular values, but not their opposites, depending on our response to particular environments. Values of fairness and justice, based on ethical principles, are fundamental. Paul Zack argues that modern market exchange is inconceivable without moral values. The importance of values has been much discussed in recent times, especially since the global financial crisis, the Covid pandemic and the activities of authoritarian or populist governments. Luigi Guiso and others have looked at the values of corporations, and found that mere proclamations of values cannot be relied on to affect internal behaviour, or support external reliance. We note the development of international sets of values such as the UN Universal Declaration of Human Rights.



Chapter 7. PURPOSES AND OUTCOMES. Cooperation is a mechanism for achieving things together, so we here examine ideas on purposes and outcomes. We need to know, and agree on, what it is we are trying to do and what we are trying to achieve. There has been an increasing focus on corporate purpose(s), from scholars such as James Collins and Jerry Porras. John Mackey and Ray Sisodia have emphasised the importance of a pluralist approach to business purposes with the idea of ‘conscious capitalism’. The importance of corporate purpose has recently been strongly championed by Colin Mayer, and it is associated with important developments in corporate governance codes on the importance of corporate culture. A profoundly powerful development is the 2019 adoption by the US Business Roundtable of a stakeholder approach, moving away from the sole purpose of maximising the value of shareholders’ interests. We note the broadening of global purposes in the United Nations’ Sustainable Development Goals. We also note the importance of focusing on outcomes is what matters in delivering desired, rather than undesired or harmful, outcomes that crystalise whether the common purposes are being achieved or not.



Chapter 8. COOPERATIVE CULTURE. The way people behave in organisations is summarised as a group or organisation’s culture. Cooperation is essential if organisations are to be successful in achieving their purposes. This chapter looks at Edgar Schein’s influential model of organisational culture and Geert Hofstede’s work on the culture of nations and organisations. Research on the cultures of business organisations by Lee Treviño, Jennifer Chatman, Charles O’Reilly and colleagues has especially highlighted the importance of cultures based on ethical values. Numerous scholars have looked at effective business cultures, and the cultural origins of various corporate disasters. Changing requirements on culture are noted in aviation safety, financial services, corporate sustainability and in regulators, before we look at learning on how to support productive and ethical cultures.

Part B looks at practical developments in cooperation – and its importance – in a number of critical contexts, namely communities (including some political implications), business, regulation and dispute resolution.

26  Introduction

Part B.I.  Cooperation in Society

Chapter 9. COOPERATION IN SOCIETY: CHALLENGES OF ECONOMIC, POLITICAL AND SOCIAL INEQUALITY. The issues of inequality and poverty are highlighted as fundamental problems arising from inadequate cooperation and issues to be addressed in order to achieve greater cooperation and achievement of common purposes and outcomes. We traverse analyses by economic, social and political experts on causes of inequality, and ideas on solutions. This raises issues of why societies become destabilised, inward-looking and hence impeded from cooperating. Critical points are the frustration of the perception of their aspirations and ability to get on in life, multiplied in a community’s setting. In modern societies, perceptions that privileged elites continue to reap rewards whilst others fall backwards have been identified as powerful forces that can be exploited by populist leaders, whilst not addressing the root causes. Several leading economists prescribe reform of the model of capitalism. Political thinkers on right and left, plus religious leaders, diagnose the need to rebuild communities and social solidarity through refreshing values, personal connections, and sense of place. There is widespread agreement on the need to refresh democratic and social institutions, and seriously to address inequalities through a new social covenant. In fact, multiple examples of localism and new democracy can be found to be springing up. We need to push things further, though, if we are to avoid serious risks.

Part B.II.  Cooperation in Business Organisations The next two chapters address major issues in achieving cooperation in business organisations and some profound changes. First, theories on corporate purpose and, second, on the motivation and reward of individuals who work in organisations.

Chapter 10. MOTIVATION IN CAPITALISM AND BUSINESS. The analysis of how to increase cooperation in business organisations starts from the purpose of corporations. Here, we note a dramatic change away from the concept of ‘maximising shareholder value’, for which Milton Friedman’s was the leading voice in the middle of the last century, to the recent spread of ‘stakeholder value’ noted above. Along the way of this broadening conception of the purpose of corporations, we note Corporate Social Responsibility (CSR), Environmental, Social and Governance (ESG), recognition of the need for long-term sustainability and ideas of stewardship, the Sustainable Development Goals (SDGs), Colin Mayer’s crusade around corporate purpose and sustainable investment. There are some surprising and powerful developments in diversification in corporate models and Bruno Roche and Jay Jakub’s concept of the Economics of Mutuality. This all leads to a fresh vision of business in the world. But, again, we need to push still further so as to avoid serious risks, and to achieve powerful outcomes through more cooperation.



Chapter 11. MOTIVATION, REWARD, REMUNERATION. One of the most important issues is how people are incentivised to behave, through targets and remuneration. The earlier discussion on psychology and motivation highlighted the powerful drivers of people in organisations around imposed targets and rewards, and whether people can be, and need to be, incentivised by these means, or whether risk is merely increased and continued

Structure of the Book  27 by them. The scientific work indicates that the approach carries inherent risks that are widely under-appreciated. We note changes in practice, especially since the global financial crisis, in remuneration and bonuses. but these changes still do not appear to be confronting the risks properly. If we really want to reduce serious risk, and promote cooperation in workplaces and between commercial organisations, much more needs to be done in achieving cultures that are fair to all stakeholders.

Part B.III.  Cooperation in Regulation Four chapters look at practices and changes in cooperation in regulatory contexts.

Chapter 12. COOPERATION IN REGULATION. This chapter sets out the OBCR model, in which all stakeholders co-create common purposes and outcomes. Positive moves are noted towards the convergence and alignment of the purposes of public and private organisations. A broad approach is advocated towards involvement of stakeholders, and the allocation and recognition of the functions and roles of different stakeholders. The practical manifestations are discussed of the concepts identified in Part A of ethical culture, respect, trust and engagement are discussed. A continuous model of improving performance and solving problems is explained. New mechanisms and institutions (such as Primary Authority) and policy documents are identified as building blocks that can support OBCR.



Chapter 13. COOPERATIVE REGULATORY MODELS. This chapter notes that component elements of the OBCR model already successfully operate in diverse situations. First, we summarise the development of policy and practice on Better Regulation in the UK over the past 40 years which reveals considerable evolution towards stakeholder involvement based on trust. We then cover examples of co-creation of regulatory systems by multiple experts and stakeholders, a ‘regulatory light’ model for small businesses and the performance and culture model of aviation safety. The Regulatory Delivery Model for regulatory authorities is outlined, followed by some structures for supporting regulatory cooperation, such as the Primary Authority model for coordinating discussions between public authorities and businesses, and regulatory sandboxes.



Chapter 14. TRADITIONAL APPROACHES TO ENFORCEMENT AND COMPLIANCE. This chapter looks at the ineffectiveness of the traditional concepts of deterrence and compliance. It notes, yet again, evolution in approaches to how rules are ‘enforced’, towards focusing on asking more fundamental questions on why people behave in particular ways and how to reduce risk.



Chapter 15. INTERVENTION AND ACCOUNTABILITY. Given the previous chapter, we here set out fresh approaches based on the scientific findings on how people behave, and evolution in the concepts of punishment (horizontally in maintaining the integrity of groups, and vertically in maintaining powerful elites). This leads to the evidence on why people obey rules and are motivated to observe ethical values. We again look at the concepts of open and just culture that are used in aviation safety, and at what the concepts of intervention, responsibility and accountability ought to mean in contemporary democratic society, before examining fresh principles for regulatory intervention, based on protection of an ethical society. We then set out a policy for responsive intervention and a regulatory model that provides different ‘trust tracks’.

28  Introduction

Part B.IV.  Cooperation in Dispute Resolution

Chapter 16. COOPERATIVE DISPUTE RESOLUTION. Finally, we examine the implications of the need to foster cooperation through systems and techniques in dispute resolution. This clearly indicates problems with a traditional adversarial approach and the preferability of engagement based on communication and mediation. Given the spread of digital and online forms of dispute resolution, we examine developments in Online Dispute Resolution (ODR) and integrated pathways used by Ombudsmen. We also note psychological needs for truth, reconciliation, explanation, accountability, voice, closure and delivering changes that reduce risk. In supporting cooperative relationships, we note the need for systems to have features of modern systems if they are to deliver the functions of capture of data, feedback and effecting change.

Chapter 17. CONCLUDING THOUGHTS: COOPERATIVE CO-CREATION BY STAKEHOLDERS. Summarising the actions on co-creation.

Conclusions It is not enough for there to be some cooperation. The continuation in relationships and exchanges of elements of distrust or poor behaviour will undermine achievement of the goals and outcomes that we want. So, we need to support strong trust and holistic ethical practice if we are to be successful in crafting cohesive, vibrant and productive communities, productive and innovative commerce, and effective institutions, regulation and dispute resolution, and a happy planet. We need to aim to be able to generate strong social capital through opportunities for common engagement and discussion on objectives, values, performance and achievement. Relationships need to be trustworthy and respectful all the time, and in relation to all aspects. Having some degree of trust in politicians, administrators, managers, companies and neighbours is not enough – we will only maximise our achievements if we are holistic and fully engaged. A considerable amount of change is needed. We need to press on further in various contexts if we are really going to be able to defeat major threats to ourselves and our civilisation. Here are some major issues: 1.

Adopt Outcome-Based Cooperation as the consistent approach across society and business. This should be a fresh national approach based on shared ethical values, supported and liberated intrinsic motivation, and achieving agreed outcomes. 2. Reenergise local regions and communities, so as to support frameworks of social­ engagement – the levelling up agenda provides a real opportunity. 3. Reenergise businesses through engaged workforces and stakeholders, aiming at strengthening trust and delivering great outcomes through intrinsically motivated commitment and constantly improved performance. Various changes are needed to how people are energised (refocusing use of targets, excessive remuneration, managerial style). 4. Reenergised engagement between regulators, regulatees and stakeholders to support each other and achieve agreed purposes and outcomes in an OBCR model. Develop trust tracks for large and small organisations. Revise ideas on sanctions so as to support improved performance, whilst providing adequate protection. 5. Supporting people to solve their problems based on mutual understanding and rebuilding ethical trusting relationships, rather than driving them apart. This needs an integrated system for courts and ombudsmen, supporting good behaviour in a non-adversarial system.

2 The Outcome-Based Cooperation Model The issue is: how can we support cooperative behaviour and engagement? The science set out in this book identifies that essential elements of how we should cooperate effectively are: the ethical values that are observed, especially values of fairness and justice; the purposes and outcomes that are set and delivered; the ability to produce a convincing body of consistent evidence that demonstrates that an actor can be trusted; the existence of institutions that support ethical cooperation and differentiate those who can be trusted from others and that permit respectful involvement of all stakeholders in co-creation and cooperation; and the way in which dissent, conflict, errors, harm and failure are responded to. This chapter first summarises the generic OBC model, based on the science and learning accumulated in the book. It then indicates in general how the model might be implemented to increase cooperation in communities, dispute resolution, business organisations and regulation. Adopting a mode of human society and business on a cooperative basis saves cost and increases performance. Switching to cooperation has almost no immediate implementation cost: redesign of institutions can be done later. Doing the right thing turns out to avoid cost and build value through enhanced performance and easier achievement of ethical goals. Some businesses or individuals may instinctively wish to pursue their own interests in free markets without red tape. However, the ideology of exclusive pursuit of self-regarding goals (eg maximising shareholder value) is being replaced as involving unacceptable risk and systemic harm, as well as being ethically inadequate. The switch is towards pursuing sustainable stakeholder interests and value. This model builds on a huge evidence base and shows how that can be done. It will reduce the perception that freedom is constrained, and open opportunities for ‘better achievement’ (and ‘better regulation’) by enlisting humans’ innate psychological motivations and capabilities.

The Outcome-Based Cooperation Model The proposal here is that the key elements that should comprise a model that would incentivise and deliver effective ethical outcomes, and improvements in performance, through full cooperation are: Principles: a. A trust-based system that supports cooperation whilst differentiates those who can be trusted to behave according to ethical values in the achievement of agreed purposes and outcomes from those who do not, with appropriate accountability and consequences. b. A system in which all trusted stakeholders work together to achieve the common purposes and outcomes and avoid undesired outcomes. c. Co-creation involving all stakeholders, such as government, industry and civil society.

30  The Outcome-Based Cooperation Model d. A performance-enhancing and problem-solving approach, respecting the functions and roles of all participants, irrespective of whether their contribution is major or modest. Agreements: a.

b.

c. d. e.

Agreement on the mode of engagement, ie statements of ethical values and modes of cooperation, such as in a code of ethical practice governing the whole system, to which all trusted actors should sign up, supplemented by all necessary subsidiary agreed rules on specific activities and behaviours, whether in law, standards or guidance. Agreement on the common core purposes, strategic objectives and outcomes (desired and undesired), and hence associated metrics that indicate performance and progress in achieving them, and will drive accountability and appropriate consequences to reduce risk and deliver protection as well as prosperity. Agreement on the institutions (consensus-forming, strategic, operating, data generating and collecting, evaluating etc) that are necessary for the system of trust and achievement to perform well. Agreement on the functions, roles, responsibilities, objectives, outcomes, metrics and accountability mechanisms of each stakeholder in order to achieve the purposes and outcomes. Agreement on the type of evidence that will support trust, given the role, competences, resources, degree of risk, and state of maturity of particular actors.

Actions: a. Stakeholders who wish to be part of the cooperative community should produce evidence they are trustworthy. The body of evidence could form a single corpus, relevant for staff, investors, suppliers, customers, communities and so on. b. A constant monitoring system should be operated in which stakeholders account for their behaviour and contribution in achieving the desired purposes and outcomes, produce relevant data that they can be trusted and data on their performance in achieving desired outcomes and cooperate in identifying problems, analysing root causes and implementing agreed responses prospectively to improve performance, reduce risk and retrospectively to repair harm. c. All stakeholders are treated with respect as responsible actors and encouraged to act through self-motivation with competence, autonomy and relatedness, unless their behaviour and outcomes prove that they cannot be trusted. d. All contribute to an achievement and problem-solving mode in which all cooperate to achieve the purposes and outcomes whilst identifying and resolving problems and reducing risk. e. Appropriate responses are made to failures. Actors who produce harm or make mistakes are supported to improve their performance, competence, behaviour and outcomes. Actors who behave unethically and anti-socially are subject to interventions of appropriate severity aimed at protecting society. All behaviour, data and events forms the basis of learning so as to improve performance and reduce risk. The key elements of this model are: a. to support people to achieve valid purposes and constantly to improve; b. building trust – through producing a convincing and adequate body of evidence that people have good intentions, competences, understanding, resources, and will do the right thing (based on ethical values), such as asking for help, reporting problems, and cooperating to implement fixes;

The Outcome-Based Cooperation Model  31 reliance on intrinsic motivation with supportive interventions rather than externally imposed authoritarian control (save where needed for protection); and d. involving everyone (all stakeholders) in a collaborative co-creative exercise. c.

Some of the key elements and their application in particular contexts are discussed in greater detail below.

Agreeing Ethical Values: A Code of Practice The substance and modes of behaviour underpinning our relationships should be clearly stated as being based on society’s ethical values. This makes clear how we will value and judge our common behaviours and relationships, based on our inherent feelings that differentiate fairness and justice from their opposites. It drives how we select who we will cooperate with and at what level of intensity. Ethical values and evidence of the associated behaviours differentiate ethical democratic societies from authoritarian repressive regimes, and honest, well-intentioned citizens from criminals. The fundamental issue is how we give effect to the basic human values of fairness and justice. What does this mean in practice? This includes whether we seek to sanction breaches (fines, amputation, removal of liberty or execution) or whether we seek to identify root causes of problems and support changes in behaviour and culture, thereby reducing risk. Having an ethical purpose and culture is essential for a successful business.1 Many businesses have produced statements of corporate purpose and values, which have long been regarded as essential.2 This movement towards not just including social purpose with economic purpose for business but also ethical values as means of behaviour, underpins moves to adopt Stewardship Codes for asset owners and managers3 and business leaders’ adoption of a stakeholder model of corporations in 2019.4 The common agreed principles on how humans agree to cooperate in an organisation (eg business, institution, club, community) or in a system (eg nation, regulatory system, community, club) should be produced, such as in a Code of Ethical Practice. In regulation by states to protect citizens, the mode is to transcend regulating through rules and enforcement, or r­egulating the culture of other organisations, but to achieve intended outcomes through ethical values: ‘Regulating through ethical culture’. This approach has extensive support in the science of behaviour and the findings of studies into effective organisations and supportive regulation. Of course, it is not enough just to claim adherence to values, they need to be lived and demonstrated in practice. The operation of a complete system can go further and be subject to a systemic Operating Code of Practice that records the agreed elements of the purposes and outcomes, functions, roles and responsibilities of different actors, how they will interrelate and achieve the common purposes and outcomes, relevant evidence and metrics that will be produced to demonstrate performance, and accountability mechanisms.

1 The UK Corporate Governance Code (Financial Reporting Council, 2018). 2 T Deal and A Kennedy, Corporate Cultures: The Rites and Rituals of Corporate Life (Addison-Wesley, 1982); J Mackey and R Sisodia, Conscious Capitalism. Liberating the Heroic Spirit of Business (Boston, Harvard Business Review Press, 2014) 47. 3 The UK Stewardship Code (Financial Reporting Council, 2020); the first Stewardship Code was 2012. 4 Statement on the Purpose of a Corporation (US Business Roundtable, 2019) at www.opportunity.businessroundtable. org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-of-a-Corporation-with-Signatures-1.pdf.

32  The Outcome-Based Cooperation Model

An Evidence-Based Model of Purposes and Outcomes: Intentions, Behaviours, Culture The system, and the information it generates from all relevant sources, should be designed to identify those who intend to and do perform their roles and responsibilities in contributing to the common purposes and outcomes, and avoidance of, or reduction of risk of, undesired outcomes – and those who do not. What intentions do people, individually and collectively in groups, have? What outcomes do they produce? This is demonstrated by evidence, ideally a body of evidence built up over time from different relevant sources, that forms a consistent and convincing body of evidence on which to found trust in future actions. The sources and types of evidence are expanding from mere statements of motivation, evidence of quality management systems and of compliance with rules, to encompass evidence of commitment to purposes and ethical values, ethical organisational culture and achievement of the purposes and goals. The nature of evidence and metrics needs to be discussed and agreed as relevant to particular circumstances as they evolve. It can, thus, be made relevant and proportionate to the benefits and risks of the endeavour, such as covering particular competence and capability that differentiates between large complex organisations and SMEs. This recognises differences in roles and responsibilities.

Applications of the OBC Model The following are summaries of the application of the OBC model in international cooperation, communities, resolving disputes, organisations, markets and regulation.

International Cooperation: Shared Goals In the current state of the world, systemic threats such as threats to human existence from climate change, pandemics and war have clearly been shown to need increased and serious cooperation on an international scale not previously realised. Multiple institutions for international cooperation exist at global and regional levels but vary in their support and effectiveness. The importance of bodies such as the World Health Organization and World Trade Organization should be clear. Less well known but useful international oversight mechanisms exist, such as the Financial Action Task Force.5 The OECD is one body that has recognised the need to enhance international cooperation, and to do so based on holistic ‘whole of government’ and ‘throughout domestic rulemaking’ mechanisms as well as cooperating international ‘bilaterally, plurilaterally and multilaterally’.6 Statements of values and purposes need to be refreshed and implemented. Statements of adherence to ethical values, together with collation of a body of evidence, should drive the extent of trust and cooperation between nations. The United Nations’ Sustainable Development Goals (SDGs)7 are the current benchmark that encompasses the range of social, humanitarian, environmental and economic goals, and these should be included in all public and private statements of purposes. 5 www.fatf-gafi.org/. 6 OECD Draft Recommendation on International Regulatory Cooperation to Tackle Global Challenges, February 2022. 7 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact) (United Nations, 2015), http://sustainabledevelopment.un.org/.

Applications of the OBC Model  33 UN Sustainable Development Goals Goal 1. End poverty in all its forms everywhere Goal 2. End hunger, achieve food security and improved nutrition and promote sustainable agriculture Goal 3. Ensure healthy lives and promote well-being for all at all ages Goal 4. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Goal 5. Achieve gender equality and empower all women and girls Goal 6. Ensure availability and sustainable management of water and sanitation for all Goal 7. Ensure access to affordable, reliable, sustainable and modern energy for all Goal 8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Goal 9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation Goal 10. Reduce inequality within and among countries Goal 11. Make cities and human settlements inclusive, safe, resilient and sustainable Goal 12. Ensure sustainable consumption and production patterns Goal 13. Take urgent action to combat climate change and its impacts Goal 14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development Goal 15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Goal 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development However, nations and commercial, governmental and social organisations vary in the extent to which they have adopted the SDGs. A sense of shared purpose is necessary through formal adoption of these goals and of the mode of cooperating to achieve them, namely on the basis of shared ethical values. An interesting example is the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business published by the Government of India in 2011 that starts with ethics, transparency and accountability.8

8 Report of the Committee on Business Responsibility Reporting (Ministry of Corporate Affairs, Government of India, 2011).

34  The Outcome-Based Cooperation Model

Cooperation in Communities Daron Acemoglu and James Robinson’s historical work has shown the need for mutual support between inclusive political institutions and inclusive economic institutions.9 It is striking that both right and left leaning political thinkers have emphasised the importance of strong local communities. For example, the foundation of Roger Scruton’s conception of conservatism rests on personal social groups (such as the family and local civil associations), and a sense of a shared place (the love of and a feeling for home, which he called oikophilia), generating a sense of tradition, local loyalties and customs, and effective institutions of a self-governing society with inherent accountability.10 Marianna Mazzucato,11 Paul Collier12 and Jonathan Sacks13 have all called for firm steps to be taken to renew the institutions and means of social engagement in families, organisations, society, communities, markets and nations – plus the inclusion of the extra element of moral standards. Adrian Pabst calls for renewal of individuals through feeling dignity in belonging to communities and civic institutions with wider community ownership and self-governance of intermediary institutions such as professional associations, trade unions, universities and free hospitals.14 This line of thinking, coupled with the Dunbar number’s limitation on the size of groups that support cooperation, has clear implications for the size of communities that are subject to local government (or any operational groups). Ensuring that regional governments are not too small or large, and can exercise multiple inter-related powers, is important for generating shared senses of belonging and effective outcomes. This rationale supports calls that England should be organised, say, on four ‘mega regions’ (North, Midlands, South East, South West), based on spatial plan models that coordinate industrial strategy, infrastructure planning and local economic development.15 That would resolve the issue of devolution in relation to Scotland, Wales and Northern Ireland. The wide development of new forms of democracy across nations was notably highlighted by the OECD in a 2017 Recommendation on open government,16 defining the policy as ‘a culture of governance that promotes the principles of transparency, integrity, accountability and stakeholder participation in support of democracy and growth’. The OECD’s 2020 report,17 based on 289 case studies from 282 countries, notes that politicians, policy makers, civil society organisations and citizens have begun to reflect on how collective public decisions should be taken in the twenty-first century and are producing new mechanisms. It is interesting to note the durability of the Women’s Institute movement from 1897 in Canada and rooted in Britain since 1913.18 More recently, Vivek Murthy, whose book is ostensibly about 9 D Acemoglu and JA Robinson, Why Nations Fail. The Origins of Power, Prosperity and Poverty (Profile Books, 2012) 333, 430. 10 R Scruton, Green Philosophy. How to Think Seriously about the Planet (Atlantic Books, 2009). His concept is based on the Greek oikos, the household, and he praises the German concept of Heimat. Stirred up by witnessing French student riots in 1968, Scruton developed three ideas from Edmund Burke’s thoughts in response to the ‘geometrical’ politics of French revolutionaries: respect for the dead, the ‘little platoon’ and the voice of tradition. His thoughts on the effectiveness of the law of tort in delivering accountability have since been undermined by empirical evidence: see C Hodges, Law and Corporate Behaviour (Hart, 2015). 11 M Mazzucato, The Entrepreneurial State. Debunking Public vs Private Sector Myths (Penguin, 2018 (originally 2013)). 12 P Collier, The Future of Capitalism (Allen Lane, 2018). 13 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020). 14 A Pabst, The Demons of Liberal Democracy (Polity Press, 2019); citing J Milbank and A Pabst, The Politics of Virtue: Post-Liberalism and the Human Future (Rowman & Littlefield International, 2016) 179–204. 15 A One Powerhouse Framework for National Convergence and Prosperity. A Vision for Britain. Planned (The One Powerhouse Consortium and the Royal Society for the encouragement of Arts Manufactures and Commerce, 2020). 16 OECD Recommendation on Open Government (OECD, 2017). See earlier Open Government. The Global Context and the Way Forward (OECD, 2016). 17 Innovative Citizen Participation and New Democratic Institutions. Catching the Deliberative Wave (OECD, 2020). 18 S Cohen, The Women’s Institute (Shire Publications, 2011).

Applications of the OBC Model  35 the damage to health and society by loneliness,19 cites the strength that results from the moai social system in Japan (involving the creation of links between people of all ages involving mutual social and even financial support),20 a community of the elderly in Goolwa, South Australia, the Village Movement in Boston and the spread of Men’s Sheds.21 The Compassion Project in Frome, Somerset, is a similar example, improving community health and spreading elsewhere.

Cooperation in Solving Disputes A cooperative approach can be taken towards resolving arguments and disputes (chapter 16). Such a mode will itself support greater cooperation in ongoing relationships after the dispute has (hopefully) been resolved.22 Part of the approach is to address underlying root causes and people’s needs, and ensure that they are addressed, which does not necessarily happen in traditional dispute resolution systems that focus just on resolving legal rights in a particular issue.23 Another aspect is to engage in modes of dispute resolution that encourage people to resolve issues themselves, by talking, rather than by encouraging them to fight in an adversarial contest. A third aspect is to address issues of behaviour and culture, which arguments about law and legal rights rarely do, but which are better addressed by codes of ethical behaviour, decided by Ombudsmen rather than judges. More debates are, possibly counter-intuitively, to be expected in an open cooperative environment than in a more secretive competitive environment. The aims should be to ensure that differences and problems are raised, and then resolved well, both in terms of substance and mode, if a controversy is to be fruitful, constructive, cooperative and provoke learning and innovation – all of which are desirable and possible.24 These considerations point towards the need for codes based on ethical values to work alongside legal rules (which are needed as a longstop to trigger formal remedies), and for techniques like providing information, communication, mediation, support and ultimate decision by an independent third-party. Several current evolutions are occurring on these lines.25 Online processes are well advanced in various contexts.26 Digital online platforms can provide useful information, a portal that opens relevant dispute resolution pathways, aggregation of data on the occurrence of problems and feedback of data to support changes needed in behaviour, systems or rules. This provides integrated, simple and cheap pathways for dispute resolution, involving relevant techniques (investigation, communication, mediation, debate, decision) where needed, with the data feedback necessary under supportive behavioural and regulatory systems. Pathways that integrate judges and ombudsmen are also being contemplated. 19 VH Murthy, Together. Loneliness, Health and What Happens When We Find Connection (Profile Books & Wellcome Collection, 2021) 71–150. 20 D Buettner, The Blue Zones: Lessons for Living Longer from the People who Lived the Longest (National Geographic Society, 2010). 21 B Golding, The Men’s Shed Movement: The Company of Men (Common Ground Publishing, 2015). 22 S Roberts and M Palmer, Dispute Processes: ADR and the Primary Forms of Decision-Making (Cambridge University Press, 2005). 23 C Menkel-Meadow, ‘The Origins of Problem Solving Negotiation and Its Use in the Present’ in S Cole, A Hinshaw and AK Schneider (eds), Discussions in Dispute Resolution (Oxford University Press, 2018). 24 M Deutsch, ‘A Theory of Cooperation – Competition and Beyond’ in PAM Van Lange, AW Kruglanski and ET Higgins, Handbook of Theories of Social Psychology (SAGE, 2012) 282; DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015); P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Publishing PLC, 2016). 25 C Hodges, Delivering Dispute Resolution (Hart, 2019). 26 Lord Justice Briggs, Civil Courts Structure Review: Final Report (Judiciary of England and Wales, 2016); The Lord Chancellor, the Lord Chief Justice and the Senior President of Tribunals, Transforming Our Justice System (Ministry of

36  The Outcome-Based Cooperation Model

Cooperation within Organisations Cooperation within organisations is supported where all the individuals involved share the same purposes, mode of ethical, respectful working and the same passion for achieving the ethical outcomes. It has long been recognised in business that cooperation between all those involved in an enterprise is a requirement to achieve a shared, or certain, end.27 It is striking that ethical businesses find that internal organisational structures tend to be flat rather than hierarchical, and decisions are made by empowered staff, rather than by a limited number of managers.28 Output and sharing of information that might be embarrassing is supported by an open, trusting and ethical environment of psychological safety.29 Authoritarian or repressive environments depress cooperation, productivity, output, compliance and sharing of important information and ideas. Businesses have applied these lessons to managerial styles over several decades, with notable successes where they have been taken seriously, and the mode should now be extended more widely. The system should primarily provide support to competence, autonomy and relatedness in psychological and material ways, including training, information, discussion and analysis. Cooperation is supported by productive engagement. This type of relationship is built on supporting trust and intrinsic motivation of individuals (as opposed to attempts at authoritarian control or ‘enforcement’). Again, businesses have relied on trust evidence in commerce for centuries, supported by trading history, contracts, enforcement through courts, regulatory requirements, accreditation of compliance with standards and requirements and so on. However, production of reliable evidence to support trust is seriously undermined by innovations such as international platforms. Some historical mechanisms (eg adversarial courts, Parliamentary oversight committees, some enforcement authorities) are outdated. So the system should aim to provide evidence that people and organisations can be trusted. New ways of doing this can be added to traditional means. An ethical organisation has to be based on ethical values in its internal and external relationships. This has implications for a respectful, fair, open and just culture of behaviour between colleagues, psychological safety, an absence of any kind of abuse, fairness in recognition and sharing reward, adoption of energising goals covering the objectives of all stakeholders, avoidance of distorting objectives and a responsive approach to problems. The Ethical Business Practice (EBP) model prescribes two essential organisational frameworks:30 (a) A Cultural and Leadership Framework, which covers the foundation, people and careers, people and ethos, and aligned systems and processes, in which ‘ethics is everyone’s responsibility’ and managing the organisational culture is an essential task of management and a concern of all staff and investors, and Justice, 2016); R Susskind, Online Courts and the Future of Justice (Oxford University Press, 2019); C Rule, ‘Online Dispute Resolution and the Future of Justice’ (2020) 16 Annual Review of Law and Social Science 277. 27 CI Barnard, The Functions of the Executive (The President and Fellows of Harvard, 1938), 4; T Peters and RH Waterman Jr, In Search of Excellence: Lessons from America’s Best-Run Companies (Harper & Row, 1982); J Collins and JI Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins, 1994, 12th edn 2005); LS Paine, Vale Shift. Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance (McGraw-Hill, 2003). 28 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017) ch 9. 29 AC Edmondson, The Fearless Organization (John Wiley & Sons, Inc., 2019). 30 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017).

Applications of the OBC Model  37 (b) an Ethics and Compliance Framework, which establishes the shared ethical values of those working in the organisation, and produces compliance is an outcome rather than an approach. A number of practices carry significant risk, and should be avoided, such as (a) confusing staff with conflicting or overriding targets (crowding out), (b) focusing staff attention significantly on financial targets for themselves and their remuneration, (c) not allowing enough time for reflection and co-creative consideration before acting, (d) arbitrary termination of employment for those who fail to reach financial targets, (e) authoritarian, unfair and abusive cultures. Refreshing cooperation is also relevant in the governance of corporations. The relationships between investors, managers and other stakeholders should all be scrutinised. An example of this is renewal of interest in cooperative models of ownership and in public, or non-private, ownership of common goods such as community interest companies.

Building Common Purposes, Values and Outcomes in Markets and Businesses The basic two purposes of endeavours in capitalist markets are prosperity and protection (rather than growth). There has historically been an unresolved tension between those two overarching purposes/goals. An integrated cooperative model would seek to recognise and align them, raising and reconciling conflicts in advance rather than to be navigated in medias res. We are transitioning to a new stakeholder capitalism model. Major effort is underway to broaden corporate purpose to include social purposes,31 involving an obligation on directors to establish a ‘company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’32 and a basis in legislation.33 Ethical values and the simple value of fairness are, however, fundamental. They differentiate between states, societies, businesses and groups – such as an authoritarian repressive regime from an open, inclusive one. For this reason, one ‘better business’ model specifies Five Principles for a Purpose Driven Business:34 • Honest and fair with customers and suppliers • A good citizen • A responsible and responsive employer

31 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); C Mayer, Prosperity (Oxford University Press, 2019); Principles for Purposeful Business. How to deliver the framework for the Future of the Corporation (The British Academy, 2019); The Enacting Purpose Initiative. Report #2 (European Purpose Initiative, 2021). 32 The UK Corporate Governance Code (Financial Reporting Council, 2018). For similar provisions in relation to asset owners and asset managers, see The UK Stewardship Code 2020 (Financial Reporting Council, 2019). 33 Draft Better Business Bill 2021. 34 How Can Businesses Contribute To People’s Health? A Guide for Leaders (A Blueprint for Better Business and The Health Foundation, 2018).

38  The Outcome-Based Cooperation Model • A guardian for future generations • Has a purpose which delivers long-term sustainable performance. This thinking has led to a diversification in corporate models, including social enterprise firms,35 ‘community interest companies’,36 multi-national ‘B Corps’37 and a FairShares model.38 An holistic approach has been identified to valuing and accounting for and rewarding all aspects of a business’ activities that have internal or external affect – human capital, social capital, natural capital as well as shared financial capital – called the Economics of Mutuality.39 Major businesses and high-risk regulatory systems have for some time focused on open, cooperative, fair, just and effective cultures. Public sector organisations are adopting similar models.40 There is mounting evidence that these shared ethical cooperative cultures deliver desired outcomes and identify and respond quickly to crises. This is what is needed. The OBCR model combines the scientific and research evidence on how to do this. It aims to: –– Achieve our common goals of prosperity, growth, innovation, sustainability and protection. –– Support good businesses to achieve success. –– Ensure a fair market, by taking action against crooks, rogues, scammers, etc. Its key elements are to co-create and agree common purposes, desired outcomes, applicable ethical values that govern the mode of behaviours; to cooperate on the basis of evidence produced by actors that they can be trusted; to work together in identifying and solving problems, thereby reducing risk and improving performance; to adopt a supportive approach to those who show they can be trusted and a take appropriate steps to provide protection against the actions of those who do not.

A Market and Regulatory Performance-Improving and Problem-Solving Model In a cooperative regulatory model, every actor/stakeholder has a role, assumes responsibility for performance of that role and is accountable for such performance and contribution to the core functions that are necessary for maintaining performance in achievement of the basic purposes and outcomes. The basic functions include identification and solving of problems, under-achievement in performance in delivering outcomes and unacceptable levels of risk (Figure 2.1).41

35 State of Social Enterprise Survey 2015 (Social Enterprise UK, 2015). 36 See www.gov.uk/government/organisations/office-of-the-regulator-of-community-interest-companies. Companies (Audit, Investigations and Community Enterprise) Act 2004 and Community Interest Company Regulations 2005 (S.I. 2005/1788), as amended by the Community Interest Company (Amendment) Regulations 2009 (S.I. 2009/1942) and Community Interest Companies (Amendment) Regulations 2014 (S.I. 2014/2483). See S Lloyd, ‘Transcript: Creating the CIC’ (2010) 35 Vermont Law Review 31. 37 See http://bcorporation.net/. 38 R Ridley-Duff, The Case for FairShares (FairShares Association, 2015). 39 B Roche and J Jakub, Completing Capitalism. Heal Business to Heal the World (Berrett-Koehler Publishers, 2017). 40 R&D People and Culture Strategy People at the Heart of R&D (BEIS, 2021). 41 C Hodges, ‘Mass Collective Redress: Consumer ADR and Regulatory Techniques’ (2015) 23 European Review of Private Law 829–74; C Hodges, ‘Consumer Ombudsmen: Better Regulation and Dispute Resolution’ (2015) 15(4) ERA Forum 593.

Applications of the OBC Model  39 Figure 2.1  The Problem-Solving Cycle

Establish clear rules Monitor to decide if further change is needed

Support systems and culture to work well

Take action to prevent recurrence and repair damage

Identify problems Identify the root cause of each problem

This system is operated constantly, responding to fresh information. It is operated by institutions and mechanisms that deliver effectively all of the functions. For example, the identification of problems will be achieved partly by open cultures that support information flow in an environment of psychological safety (and no blame) and by data collection and feedback mechanisms from operators (businesses) third party certification and accreditation, and user feedback (eg for consumers through Ombudsmen platforms). The operation of the system is, of course, predicated on the expectation that all actors will cooperate in achieving the purposes and outcomes based on commitment to the shared ethical values, and that evidence will differentiate those who do so from those who do not.

A Co-Creation Model in Regulation and Markets: Allocating the Functions to Institutions In the traditional mode, the basic functions are: create a regulator, make rules, inspect and identify breaches of rules, impose sanctions, interrogate regulators (but not usually others). The background assumptions include: people behave rationally; people’s behaviour should be controlled by getting them to comply with rules; imposing sanctions deters future breaches. Those assumptions, and hence that model, have crumbled under the findings of scientific and empirical social research. In traditional legal and regulatory systems, laws are made by national authorities (eg proposed by Ministers and approved by Parliaments) and imposed and enforced on subjects. Thus, oversight

40  The Outcome-Based Cooperation Model of the design and operation of the system has traditionally been the function of Ministers, civil servants and Parliaments. Given the refocusing of the overall model, these institutions would evolve. The basic orientation of shared stakeholder involvement would shift to being horizontal, and away from being vertical and authoritarian. This shift need not occur suddenly, as constitutional mechanisms and institutions could evolve, as they are already doing. A first step might be to ensure that purposes and outcomes have been adequately identified, discussed, prioritised and agreed. In a fully cooperative system, the purposes and outcomes, the ethical values and principles by which they will be achieved, the roles and responsibilities of all actors, and their objectives and metrics that will demonstrate commitment and accountability, are all co-created and jointly scrutinised. The model involves a number of functions: A. B. C. D. E. F. G. H.

Agreeing the shared purposes and outcomes. Agreeing the system design and allocation of functions, roles and responsibilities. Agreeing the mode of engagement in an overarching Code of Ethical Conduct. Agreeing the strategic objectives and outcomes (desired and undesired) for succeeding time periods. Agreeing the means of demonstrating ethical contribution to the purposes and outcomes, and periodic strategic objectives, and the metrics for measuring success. Performing allocated roles, sharing relevant information on contribution, achievement, trust and performance and agreeing and implementing changes. Data capture and circulation, oversight and evaluation of data, and on relevant change, intervention and improvement. Reviewing and scrutinising the operation of the system as a whole in achieving the desired outcomes.

The institutions needed to support the functions and roles in this model are: (a) An inclusive System Governance Body, agreeing the purposes and outcomes and overseeing whether the system delivers them and whether changes need to be made. (b) An inclusive body for agreeing the Code of Ethical Practice for the actors in the system, and relevant rules, co-created by all actor stakeholders. (c) A regulatory authority to oversee the performance by actors of their behaviours in achievement of the purposes and outcomes, and to support change or intervene to protect where necessary. (d) An Ombudsman to support resolution of complaints about behaviour and culture (under the Code), to hold aggregated data on system performance, and to be able to assist in achieving changes in behaviour and culture. (e) Judges to interpret the legal rules. All of these institutions need to function together as elements of a single integrated system. In practice, sectoral divisions also need to be coordinated, such as between different regulatory authorities and oversight or Code bodies. Any differences in approach between different areas should be justified and clear.

Comments on the Functions Agreement on the fundamental purposes, outcomes, and applicable ethical values of the system as a whole, its ethical mode of engagement, and scrutiny (Functions A–C and H). This might

Applications of the OBC Model  41 traditionally be a role for Parliament, but in a co-creation model, new elements arise beyond the traditional and more generalised functions of making ‘policy and rules’. The fundamental tenet is that the function involves all stakeholders, such as citizens, civil organisations, those subject to regulation. Accordingly, new mechanisms for democratic involvement, voice, representation debate, negotiation and agreement can be envisaged. However, a mechanism is needed for achieving a binding outcome in the event of lack of complete consensus, so a voting system of delegates (traditionally MPs) or other representatives would be necessary. Hence, there should be a System Governance Body (SBG) or assembly comprising full stakeholder representation. It should be a cooperative, co-creative body, not a representative Parliament or regulator imposed over private or public actors. Ministers should be involved in this body, and its function would be to set the parameters for the system and make sure that the system works as a whole. A linked system Commissioner could also be useful as an independent voice representing all but especially civil society (like an expanded Small Business Commissioner and the new Patient Commissioner for the NHS) and be able to take an objective overview. The histories of many major disasters reveal that people almost always knew that risk was increasing, but no-one listened or was prepared to listen (wilful blindness) or those who knew did not think they would be listened to, or were afraid to speak up. This needs changes in cultures. It also needs channels for insiders and outsiders to raise issues that will be taken seriously. Hilary Sutcliffe calls for taking seriously the people you don’t take seriously, and deliberately seeking out challenge. The SGB undertakes early scrutiny of regulatory proposals as well as of the effectiveness of the system. Both the initial scrutiny and the operational scrutiny need to encompass not just the anticipated economic benefits and costs but also the shared purposes, objectives and outcomes of the regulation and its delivery aspects, ie the extent to which it can be delivered in practice. That final aspect includes analysis, by experts and those subject to the regulation, on how its purposes and outcomes can be delivered, including whether and the extent to which they can be delivered. That will include operational, behavioural, cultural aspects. The starting point should be to agree the balance between prosperity and protection: the purposes, objectives and desired outcomes and unacceptable outcomes. The next phase is mechanistic: how are these aims to be achieved, and what will success look like? There should also be extensive examination of any existing instruments that can already serve the intent of policy proposals. Within that debate, aspects such as deliverability, proportionality and cost-benefit balance will become clear. Achieving initial agreement on the policy and mechanisms will assist in defining the level of detail that is necessary and at what level – in legal rules, in standards, guidance, codes and so on – and what evidence actors can and should produce to demonstrate that they can be trusted and the extent to which the objectives are being achieved, thereby providing accountability and identifying further actions. Early agreement will also generate ownership of the regulation by regulatees, assisting implementation and performance. The operational regulatory functions would be undertaken by a regulatory authority (RA). This should have operational independence from the SGB but governance and accountability involving all stakeholders. It should be responsible for making and updating the rules. There are two types of rules: first, legal rules containing rights and responsibilities that can be enforced by the state (by the action taken by the regulator or through the courts) and, second, the behavioural norms, contained in a Code of Ethical Practice, co-created by all stakeholders with secretariat perhaps provided by the RA. This model will involve and empower all the private actors but also bind them into owning the achievement of the public purposes and generate intrinsic motivation and self-governance, keeping formal interventions available for where needed. The RA could benefit from having the considerable flexibility of being a not-for-profit body, such as a Delegated Administrative Authority, which has been used successfully in Canada. The regulator

42  The Outcome-Based Cooperation Model has responsibility for appropriate operational intervention, ranging from inspections, supportive actions to harder enforcement action. The Ombudsman has several roles: (a) A focus for impartial but reliable information, advice and support to businesses, consumers and others. A single reliable website would be coordinated with provision of local support through networks of Business Hubs and local authorities operating on a Primary Authority framework. Some sectors and localities are already close to this. (b) A portal and human support providing advice, assistance and IT- and AI-supported ‘early facilitated dispute resolution’ impartially to any party based on issues of behaviour under the Code of Ethical Practice. Pathways are increasingly being shortened by Ombudsmen acting as companies’ outsourced complaints-handling functions, thereby telescoping the, timing and cost. (c) Collection of aggregated data on market behaviour and issues, collating all information from whatever source that identifies practices, issues and problems, and feeding it back to regulators, providers and customers so as to drive evidence-based interventions, changes and formal action. (d) Impartial support services based on the data evidence to assist in effecting changes in performance, behaviour and culture that prevent and reduce future problems. The support would be reliable but informal. The Ombudsman provides micro redress and rectification and also macro regulatory data. It needs to be independent from industry, to maintain trust, although with governance involving all stakeholders. There should be a single sectoral Ombudsman, to provide simplicity and clarity of where people should go for help, and to maximise the data set. The data must be controlled by a non-commercial body, so the Ombudsman has to be not-for-profit. Judges, whether in courts or tribunals, decide issues of interpretation of law, legal rights and obligations. The system would involve reference of files and issues between ombudsmen, regulators and courts so that a relevant instant issue is decided by the relevant authority and then applied systemically by the relevant (other) state authority in a consistent and coordinated fashion. All of the functions and bodies outlined above should be linked, so as to operate in a more coordinated manner as an integral system. Each of them is essential, but the system cannot operate effectively without any of them, and they need to work together to deliver effective operational outcomes. One objective of this model is to target appropriate knowledge and professional expertise to relevant functions – such as generating effective behaviour, controls and responses to problems and crises, as including policy making as well as operational performance. Thus, for example, the model involves significant delegation of operational power from Ministers to regulators. This would be accompanied by clear governance, transparency and accountability. There would be a consequential shift in the role and operation of civil servants involved in policymaking and oversight, since Ministerial roles and responsibilities would evolve. However, a major benefit for business would be the reduction in ‘regulatory burden’ that would come from the integral involvement in agreeing purposes, objectives, outcomes and ethical values. That should deliver greater flexibility in achieving the outcomes, and hence proportionality.

Trust Options A trust-based regulatory system need not be the only option for all regulatees. The ideal is a ‘trustworthy track’: regulatees and regulators produce evidence that each can be trusted. Various

Applications of the OBC Model  43 advantages would flow, such as an opportunity to build a reputation for trust; simplification of qualification for contacts and procurement; and speedy identification of problems and cooperative response to fixing them (changes to improve performance and reduce risk, and making redress – largely avoiding traditional ‘enforcement’). Regulators, business and other stakeholders would be encouraged to co-create the relevant purposes, desired outcomes, systems and requirements. These would be agreed and kept updated. Significant opportunities would typically arise for simplification in requirements and systems, and integration of private management/assurance systems and public regulatory systems, such as in any manufacturing chain and food chain. Significant economies and increased productivity (through simplification of objectives and strengthening internal motivation) should also follow under a trust-based system rather than a rules/enforcement-based one. All of this should cut a lot of ‘red tape’ and cost. It also frees minds to think about improvements and innovation. It costs little to implement – it’s just about doing things differently! There would be a ‘traditional track’ of rules, inspection and enforcement open to (eg foreign) businesses to adopt the traditional compliance, surveillance, enforcement route, but without access to the advantages. Further options would arise to devise ‘regulatory light’ requirements for SMEs and new entrants, based on modules of competence, resource and trust. As chapter 12 shows, some regulators have proved that the ‘trust approach’ works, especially in aviation safety. Considerable opportunities would arise if this were expanded generally in business, and in the NHS and social care, property, teaching and other areas. In the past 40 years, especially since Hampton, the general direction of regulation and enforcement has been to be more engaged and supportive, and less authoritarian and enforcement-led. The Primary Authority scheme is a good example. Some regulators have shifted their approaches significantly, but could go further (with great success) if they were encouraged to. There is increasing recognition that (ethical) organisational culture is critical to success and compliance. This can be seen in the introduction of culture into good business practice, financial services, Corporate Governance Codes, compliance systems and enforcement considerations. As with much performance/compliance evidence, that on culture is internal to an organisation and there should be no need to duplicate with external/regulatory requirements. There are various successful examples of co-creation involving all stakeholders: Ontario’s heating and operating engineers (with a facilitator); Ofcom’s revision of the Broadcasting Code; Independent Spectrum Broker for revising bandwidth allocations; WICS Scottish water pricesetting procedure. The South Australia energy/water regulator has created an OBCR-inspired ‘regulatory light’ track for SMEs, based on limited requirements, evidence of trust and cooperative support. Many people are thinking about digitisation and more data: this focuses minds on the type of data that is relevant. Drinking Water Inspector uses data as an integral part of its work on quality and risk: The HSE and others are investigating new ways of sharing data between regulators. A new data approach opens major doors for reducing ‘red tape’ bureaucracy. The shift is from a rule-breach-enforcement mode to one based on values, objectives, outcomes, data and feedback, fixing problems and improving performance.

Redefining Interventions for Delivering Protection A cooperative model aims to transcend rules and compliance, and to constantly improve performance and extend boundaries. As noted above, people will obey a social rule if they perceive that the substance of the rule is fair, it has been made through a fair process and is applied fairly to

44  The Outcome-Based Cooperation Model and by all. This has been demonstrated in relation to public law42 and in private organisations.43 The key elements here are fairness, perception of observance and legitimacy. Historical terminology for these effects has used language of punishment, enforcement, deterrence. However, fresh understanding, language and methodology are now available and appropriate. Thus, we should be talking about interventions and consequences aimed at achieving the purposes of prosperity and protection. The purposes and outcomes of intervention in a cooperative system are to optimise achievement of the common purposes and outcomes – particularly adequate protection from harm, as well as observance of fair behaviour, compliance with the rules, improving performance (over and above the standard set by rules) and reducing risk. They also encompass purposes of identifying issues, sharing the information about problems, cooperating in identifying root causes and implementing effective changes, ongoing monitoring, rectifying errors, repairing and making redress – all as swiftly and cooperatively as possible. Tools to measure the performance of quality systems are well familiar. Various new tools are emerging to assist with evaluating culture. The cooperative model does not lessen the need for strong interventions to protect society when harms occur – quite the contrary. The regulator should have a toolbox continuing as wide a set of intervention powers as possible aimed at achieving the desired purposes and outcomes – and preventing the undesired outcomes. Traditional ‘enforcement’ tools remain relevant where deliberate harm or risk are intended but are only one type of tool, and another critically important set of tools will involve using cooperative relationships to achieve effective changes in behaviour and culture and reduction of risk (there is extensive evidence on the effectiveness of such tools, but it is often overlooked). The regulator should have a sophisticated differentiated and ethically based approach to selecting which intervention (formal or informal) to use in which circumstances. The key to achieving changes in behaviour and performance lies in how interventions are done, rather than in traditional ‘enforcement’ through sanctions and deterrence. The Ethical Code is a critical tool here. However, for most regulatees, the important tools to improve performance are information, training, reference, support and intervention – not enforcement. In many sectors, these functions and tools can – and should – be provided by actors other than a regulatory authority. What is needed is oversight that the relevant functions are available and being deployed. There can be an ecosystem of supportive performance in which a regulator might only play a coordinating and oversight role.

Further Examples This model can transform a number of traditional areas, briefly illustrated here. Adopting agreed purposes and outcomes, an ethical (open, just) culture, agreed roles and responsibilities, evidence 42 TR Tyler, JD Casper and B Fisher, ‘Maintaining Allegiance towards Political Authorities: The Role of Prior Attitudes and the Use of Fair Procedures’ (1989) 33(3) American Journal of Political Science 629; TR Tyler, ‘Citizen Discontent with Legal Procedures: A Social Science Perspective on Civil Procedure Reform’ (1997) 45(4) The American Journal of Comparative Law 871; TR Tyler, ‘Social Justice: Outcome and Procedure’ (2000) 35(2) International Journal of Psychology 117–25. 43 R Cropanzano, DE Rupp, CJ Mohler and M Schminke, ‘Three Roads to Organizational Justice’ (2001) 20 Research in Personnel and Human Resources Management 1–113; R Cropanzano, B Goldman and R Folger, ‘Deontic Justice: The Role of Moral Principles in Workplace Fairness’ (2003) 24 Journal of Organizational Behaviour 1019–24; CT Kulik and Y Li, ‘The Fork in the Road: Diversity Management and Organizational Justice’ in RS Cropanzano and ML Ambrose (eds), The Oxford Handbook of Justice in the Workplace (Oxford University Press, 2015); R Miles, Culture Audit in Financial Services (KoganPage, 2121).

Applications of the OBC Model  45 of trust and performance, a problem-solving model, supported by relevant institutions, should generate: (a) More cohesive and fairer communities. This should generate stronger community solidarity and social trust, which will drive achievement of local plans for engagement with local integrated social, commercial and environmental goals. (b) Fair behaviour in workplaces, especially through a Code of Ethical Practice and independent feedback system. This should transform centuries of owner-worker conflict, involving common purposes, and fair working culture and reward. (c) Innovative ideas within an enterprise (as well as ‘compliance’ or achieving high performance) and also an enlightened approach within a regulator, but also (d) Swift and effective regulatory approval, market access and supervision (ie achievement of productivity and protection) in the relationships between regulator and enterprise (or more of both of them on each side). Thus, the success of sandboxes or ‘regulatory light’ regimes (eg for SMEs) would be based on trust (evidence of capability, competence, resource, intention and outcomes), ethics, evidence, relationships, close working and monitoring of outcomes and ‘side effects’. (e) A cooperative mode of dispute resolution, bringing people together rather than dividing them through adversarialism, and producing learning through captured data and analysis that can drive learning and improved performance. In relation to the major systemic risks identified above, we should strengthen cooperation as an essential means of resistance to threats to destabilisation: (a) (b) (c) (d)

International perceptions of threat – driving cybersecurity, terrorism. Threats to life and health – disease, migration. Socio-economic perceptions of threat – inequality, lack of economic security. Build communities – start with the right size of populations to generate social community; governance of some issues in some countries are too large or too small. (e) Avoid perceptions of closed elites: moderate between expertise, competence, knowledge, involvement, values, feelings.

Potential Dividends A cooperative ethical model should increase performance, production, productivity, innovation, early identification of problems and protection. It should lead to proportionate regulation, ‘regulation light’ and sandbox approaches, and it should solve the ‘too much red tape’ problem.44 It should lead to significant support for SMEs. It should achieve effective ‘levelling up’ and ‘building back better’.45 The co-creation approach is a means of strengthening both the social licence of business operations aimed at prosperity and the social mandate for delivering protection. But it does so by re-inventing traditional regulation (rules-inspect-breaches-sanctions-assume deterrence) by supporting those who are well-intentioned (enlisting society’s ethical values and principles with the state’s common goals of prosperity, growth and protection).



44 I

Duncan Smith, T Villers and G Freeman, Taskforce on Innovation, Growth and Regulatory Reform (June 2021). Back Better: Our Plan for Growth (HM Treasury, 2021); Levelling Up (HM Government, 2022).

45 Build

46  The Outcome-Based Cooperation Model This approach can be applied widely: –– regulation as a concept, supporting closer working in low-intensity-rules (ie inherent proportionality matching the risk of the activity with relevant competences), enabling sandboxes and development of innovative ideas through new approval processes that establish adequate protection (see chapter 11). –– a principles-plus-outcomes approach encourages excellence and constant improvement in performance (rather than just compliance with the standard set by a rules-based system). –– transforming productivity of SMEs, with a refocused Small Business system, including Local Authorities, Trading Standards, sectoral regulators, technical support, a single data platform and Ombudsman. –– delivering fair employment (avoiding workplace disputes through a Code, supported by a fused ACAS-ET pathway and Labour Regulator, rather than partisan workers-employers confrontation). –– people working in large organisations (where many companies best already do it). –– dispute resolution (Ombudsmen applying Codes of ethical practice, rather than adversarial and costly litigation; the former can be largely funded by private sector, saving public expenditure) (see chapter 16).

part a Theories and Science

48

3 Evolution of the Means of Cooperation How do we cooperate? This chapter starts our looking at the evidence on this by looking at the natural mechanisms that generate evolution of life on earth. Geneticists and anthropologists identify enormously similar basic forces and processes that drive inter-relations between basic cells and more complex cellular structures up to human beings, both individually and in groups. Without going into too much scientific detail, two key concepts in evolutionary development are competition and cooperation. These two mechanisms are thought to exist constantly, and to have driven the development of cells, brains, language, concepts, values and institutions. A basic problem is that scientists have identified that ‘natural’ evolution appears to be random, but is in fact driven by natural evolutionary needs, and leads to a constant cycle of building up groups and civilisations that are then vulnerable and collapse or are overwhelmed. We are facing scenarios like this now, with the sustainability of life on earth, as a result of vulnerabilities to global warming, armed conflict, pandemics and economic collapse. However, science also points to a solution if humans are able to direct the randomness of forces so as consciously to encourage more cooperation rather than competition. We need to take control of our destiny and harness the forces that will enable us to thrive. This is a critical moment for humanity. We also examine major lessons for the design of systems to support cooperation, involving reliance on ethical values, a rich number of networks of groups of limited sizes, building information on cooperative behaviour and successful outcomes, moving to modes of democratic involvement and away from controlling elites, and finding new forms of ‘enforcement’ (which is discussed further in chapter 14). We note shifts in the conceptions of law and legal rules, and recent evidence of undesirable outcomes of excessive competition.

Untangling Competition and Cooperation The basic forces that evolutionary biologists and anthropologists identify as driving life on earth are competition and cooperation. They are typically in conflict with each other. Competition arises because of the need to survive that applies to cells, multicellular organisms such as individual people, and groups. The need and drive to survive necessarily involves, at a basic level, dominance over others and their subjection or extinction. Cooperation, on the other hand, involves individuals and groups working together. The reason for doing this is that the outcome is to enable individuals and groups to evolve, learn and improve their performance and outputs through higher levels of organisation and innovation.1 The contrast, therefore, is that competition 1 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 280; M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 11.

50  Evolution of the Means of Cooperation may cause survival of the ‘winner’ of a contest but not of the ‘losers’, whereas with cooperation, not only do all participants survive but they also evolve and achieve more. As Martin Nowak said, there is abundant evidence that it pays to cooperate: ‘Cooperation is the architect of living complexity.’2 He shows that, perhaps curiously, competition can sometimes lead to cooperation. Although competition may have been a strong initial driving force in evolution, and attracted the attention of scientists after Darwin’s breakthrough ideas on natural selection, the power of cooperation has since been recognised to be even more important – and vital for overcoming serious systemic challenges. David Johnson, who has studied cooperation deeply, says bluntly that there is ‘no doubt that competition breeds competition, which tends to result eventually in mutual destruction’.3, 4 The same physical and biological processes govern all human life on earth. Mark Bertness has recently charted the analogous evolutionary processes that created human civilisation and the symbiogenetic evolution of eukaryotic cells:5 the mutualistic, cooperative partnership among primordial prokaryotic cell components eventually gave way to eukaryotic cells that could organise and control what had been individual independent parts. An increase in order, efficiency, and reproductive success – an increase driven by cooperative, rather than competitive, processes – simultaneously meant the loss of individual control.6 Cooperating eukaryoptic cells then joined forces with mutualist microbes to form multicellular organisms. These multicellular plant and animal cooperative superorganisms were better suited to dominate their competitors and environments than simple nucleated cells, so they were, in turn, the answer to the problem that natural selection posed to organisms.

Bertness concludes that coevolution through cooperation ‘occurs at multiple levels and with multiple degrees of activity and passivity, intention and awareness’.7 Examples are humans’ harnessing of fire for more efficient food processing, reliance on agriculture in multiple mutually beneficial partnerships with local flora and fauna, formation of cultural groups and industrial and information revolutions.8 Thus, Bertness says, evolutionary history has shown time and time again that cooperating groups are stronger than individuals and that cooperation makes groups stronger than competitors. Whether this occurs within or between species, as long as it ultimately increases individual reproduction and fitness, groups will dominate.9

‘In the course of our evolutionary history, selfish and competitive behaviours have repeatedly been overcome by the group benefits of cooperation; whether facing disease, violence, or limited resources, working together has been the answer.’10 Bertness identifies two key physical and biological processes that have driven life: symbiogenesis and hierarchical self-organization. He defines symbiogenesis as referring to ‘the foundational,

2 Nowak with Highfield, ibid, 11, 15. 3 DW Johnson and RT Johnson, Cooperation and Competition: Theory and Research (Interaction Book Company, 1989), 9. 4 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015). 5 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 80. 6 L Margulis and D Sahan, Microcosmos: Four Billion Years of Microbial Evolution (Summit, 1986). 7 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 63, 64. 8 ibid, 11. 9 ibid, 80. 10 ibid, 92.

Untangling Competition and Cooperation  51 constructional role that symbiotic, cooperative interactions have played in overcoming obstacles during the history of life on earth’.11 An important element is the creation of positive feedback loops that drive self-creation and stability.12 Random self-organisation is, he notes, superseded by hierarchical self-organization,13 in which an elite autocratic class dominates a hierarchically organised society, maintained by vertically-imposed violence with inequality. Nowak identified five mechanisms that have been thought to underpin cooperation, countering what he perceived to be a natural tendency for natural selection to destroy the fitness of a population.14 Like many researchers in the latter twentieth century, his depressing view of natural competition was based on the theoretical game called the Prisoner’s Dilemma, which inherently favours individuals who defect rather than cooperate, and hence fails to achieve highest fitness. The five strategies that have supported solitary and selfish life to more social connected and cooperative civilisations are: 1.

2.

3.

4.

Repetition (direct reciprocity) in relations between two individuals, identified in species like baboons15 and humans.16 A Tit-for-Tat strategy is theoretically effective (but does trigger vendettas) but in more messy reality more generous strategies (never forget a good turn, but occasionally forgive a bad one) and especially ‘Win Stay, Lose Shift’ prove effective. But ‘direct reciprocity can lead to the evolution of cooperation only if the probability of another encounter between the same two individuals exceeds the cost-to-benefit ratio of the altruistic act’. Reputation (indirect reciprocity) thrives when there are repeated encounters within a group of players. My behaviour towards you also depends on what you have done to others. This leads to development of and reliance on mechanisms of communication, language, evidence, reputation and standing.17 Mythology and religions typically support doing good to others and altruism by acting as ‘recipes for cooperation’.18 Nowak found that indirect reciprocity can only promote cooperation if the probability of knowing someone’s reputation exceeds the cost-to-benefit ratio of the altruistic act. Spatial selection occurs in the reality of multiple overlapping social networks. Research shows that some individuals interact with each other more often than with others. Here, cooperators can prevail by forming networks and clusters in which they help each other. The benefit-to-cost ratio must exceed the average number of neighbours per individual. Multilevel selection acts in some circumstances involving groups.19 Multilevel (group) selection allows the evolution of cooperation, provided that the ratio of the benefits to the costs is greater than one plus the ratio of group size to number of groups. Thus this cooperative mechanism works well if there are many small groups and not so well if there are a few large groups.

11 ibid, 5. 12 H Maturana and F Varela, Autopoiesis and Cognition: The Realization of the Living (Springer Netherlands, 1971). 13 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 9. 14 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011), summarised at 270–71. 15 RL Trivers, ‘The Evolution of Reciprocal Altruism’ (1971) 46 Quarterly Review of Biology 35. 16 R Axelrod, The Evolution of Cooperation (Penguin, 1984). 17 R Sugden, The Economics of Rights, Co-Operation, and Welfare (Blackwell, 1986). 18 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 273. 19 The idea has received support from Darwin in The Descent of Man, and Vero Wynne-Edwards, but was denied by GC Williams, Adaptation and Natural Selection (Princeton University Press, 1966) and recently supported by EO Wilson, and Nowak. War has been shown to be a factor: S Bowles, ‘Group Competition, Reproductive Levelling, and the Evolution of Human Altruism’ (2006) 314 Science 1569.

52  Evolution of the Means of Cooperation 5.

Kin selection rests on cooperating with family members. This has been highlighted in tribes and some hierarchical societies. Hamilton’s rule proposed that the coefficient of relatedness must exceed the cost-to-benefit ratio of the altruistic act.20 Wilson promoted kin selection to explain ‘eusociality’, cooperative care of young by social insects, meercats and other animals,21 although other explanations are based on population structures.22 This mechanism carries challenges for open societies.

Ideas about the comparative relevance of these theories may change, but Bertness’ basic point is that cooperation will exist if an effective mechanism applies. He is concerned, however, that we are not currently enabling and deploying cooperation properly, and that means consciously seeking to deploy effective mechanisms.

Basic Processes of Social Interdependence David Johnson has argued that human beings exist in three basic modes:23 (a) Individualism – (no interdependence): a situation in which individuals perceive that they can reach their goal regardless of whether other individuals in the situation attain or do not attain their goals. (b) Competition – (negative interdependence) exists when individuals perceive that they can reach their goals if and only if the other individuals with whom they are competitively linked fail to reach their goals. Participants, therefore, obstruct each other’s efforts to achieve their goals. (c) Cooperation – (positive interdependence) exists when individuals perceive that they can reach their goals if and only if the other individuals with whom they are cooperatively linked also reach their goals. Participants, therefore, promote each other’s efforts to achieve the goals. Johnson’s Social Interdependence Theory holds that the type of interdependence that is structured in a situation determines how individuals interact with each other. The interaction patterns, in turn, determine outcomes. So the design and selection of modes of interaction will affect outcomes. Johnson said that conflict arises in both competitive and cooperative modes – possibly even more in the cooperative mode, since differences of perspectives, goals and means should arise more freely. ‘The issue, therefore, is not how to eliminate or prevent conflict, but rather how to make it productive or, at the very least, how to prevent it from being destructive.’24 A baby is completely dependent on other humans for its continued existence and development. Developmental psychologists have shown how humans develop through social processes of learning that draw on the experience and hard work of others, as Michael Tomasello expressed it.25 He noted that cooperation is the mechanism by which groups of humans achieve the goals 20 WD Hamilton, ‘The Genetical Evolution of Social Behaviour I and II’ (1964) 7 Journal of Theoretical Biology 1–16 and 17–52. 21 EO Wilson, Sociobiology. The New Synthesis (Harvard University Press, 1975). Although bacteria in the lung become less cooperative with one another – failing to meet Hamilton’s Rule – this is explained because bacterial cells enjoy an evolutionary advantage by not contributing to a common supply of useful substances (enzymes and toxins that keep them well fed and safe): Ashleigh Griffin, ‘Evolution Rules at New College’ (2019) New College Record 82–86. 22 MAC Nowak, C Tarnita and EO Wilson, ‘The Evolution of Eusociality’ (2010) 466 Nature 1057. 23 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015). 24 ibid, 13. 25 M Tomasello, Why We Cooperate (The MIT Press, 2009).

Untangling Competition and Cooperation  53 that they have in common, acting on some division of labour and understanding of others’ roles.26 He suggested that two basic phenomena involved in cooperation are: altruism (one individual sacrificing in some way for another) and collaboration (multiple individuals working together for mutual benefit).27 His research found that altruistic tendencies in young children are clearly shaped by socialisation, involving three sets of processes: coordination and communication; tolerance and trust; and norms and institutions.28

The Constant Co-Evolution between Psychology, Norms, Culture and Institutions Humans exist predominantly in groups, rather than as isolated individuals. We are inter-dependent and hence social beings, relying on learning from others ‘to acquire an immense amount of behavioural information, including motivations, heuristics, and beliefs that are central to our survival and reproduction’.29 The inter-relationships between us are formed by a constant and complex interplay and development between our brains, hormones, perceptions, anatomy, skills, groupings, institutions and cultures.30 Joseph Henrich, Professor of Human Evolutionary Biology at Harvard, has set out the evidence that charts the constant coevolutionary interplay between these factors, especially between psychology, institutions and culture.31 He suggests that changes in brains produced by culture include expansion of verbal memories, shifts to right brain in face processing and thickening of corpus callosa. He comments: Beliefs, practices, technologies, and social norms – culture – can shape our brains, biology, and psychology, including our motivations, mental abilities, and decision-making biases. You can’t separate ‘culture’ from ‘psychology’ or ‘psychology’ from ‘biology’, because culture physically rewires our brains and thereby shapes how we think. … Psychological changes induced by culture can shape all manner of subsequent events by influencing what people pay attention to, how they make decisions, which institutions they prefer, and how much they innovate. In this case, by driving up literacy, culture induced more analytic thinking and longer memories while spurring formal schooling, book production, and knowledge dissemination. Thus, sola scriptura likely energized innovation and laid the groundwork for standardizing laws, broadening the voting franchise, and establishing constitutional governments.32

Henrich suggests that social norms arise directly from cultural learning and social interaction.33 Where there exists both a social practice and a standard against which it, and violations from it, can be evaluated, cultural evaluation will generate a widely shared rule that, if it is violated, will provoke a reaction from the community.34 The circumstances and changes in psychology can influence the norms, ideas, practices and beliefs that emerge. Thus, norms that are accepted as 26 ibid, 67. 27 ibid, xvii. 28 ibid, 43, 59. 29 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 62. 30 J Henrich, The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (Princeton University Press, 2016). 31 ibid, further explained in J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020). 32 ibid, 16–17. 33 ibid, 69. 34 ibid, 69.

54  Evolution of the Means of Cooperation central to the beliefs of one community are inimical to another population, given the differences in their psychologies. Examples include cannibalism, taboos on marriage affinities such as incest or cousin affinities, formal rituals, the concept of legal ‘rights’ or the maximisation of personal gains.35 There is, in particular, a constant feedback and evolution between culture, institutions, psychology and norms, in which any one element may influence the others.

Social Control: Feelings, Norms, Enforcement Tightly knit kin-based populations are governed by numerous and contextually sensitive norms that are strictly enforced,36 and display shame – when they or their relatives suffer social devaluation in the eyes of others for failing to live up to the standards imposed on them by their communities – and revenge-driven actions. Henrich identified two key processes that drove up the scale and intensity of cooperation: (1) intergroup competition and (2) the ‘fit’ between different social norms and institutions.37 In contrast, Western, Educated, Industrialised, Rich and Democratic (WEIRD) people’s impersonal prosociality produces reliance on intellectual, impartial principles and rules and is supported by feelings of guilt – failure to live up to their culturally inspired, but largely selfimposed, standards and aspirations – and by third-party norm enforcement.38 Guilt acts as an ‘internal guidance system’.39 They place great importance on intentions, and rely heavily on inferences about other people’s invisible states on mind over their intentions, often type-casting unreliably (fundamental attribution error), rather than thinking holistically about causes and outcomes.40 WEIRD people are uncomfortable with their own inconsistencies, suffering from cognitive dissonance, and do a range of mental gymnastics to relieve their discomfort.41 WEIRD populations have among the highest levels of impersonal trust, although there are interesting variations within USA and Europe.42 In places where people trust strangers and cooperate with those they’ve just met, they are also more inclined to punish anyone who violates their impartial norms of fairness and honesty even if the violation isn’t directly against themselves. At the same time, they are less inclined to seek revenge against those who’ve personally crossed them.43

The transformation from kin-based to WEIRD populations increased within-group cooperation, trust, teamwork, productivity, and also maintained between-group competition.44 There is evidence that when people move into a more competitive industry, their impersonal trust tends to go up.45 Henrich has three particular conclusions. First, moderate levels of controlled nonviolent intergroup competition can strengthen impersonal trust and cooperation. Second, extreme forms of within-group competition encourage selfish behaviour, envy and zero-sum thinking.



35 ibid,

84–85. 198. 97. 38 ibid, 217. 39 ibid, 34–35. 40 ibid, 50–55. 41 ibid, 33. 42 ibid, 46. 43 ibid, 48. 44 ibid, 322. 45 ibid, 344. 36 ibid, 37 ibid,

Untangling Competition and Cooperation  55 Third, however, when disciplined by intergroup competition, moderate levels of within-group competition can inspire perseverance and creativity.46 WEIRD populations trade widely but with strangers through impersonal markets, supported by rules that are theoretical general concepts. Institutions are created to regulate relations, creating and enforcing rules.47 Impersonal markets can affect our social psychology by simultaneously reducing our interpersonal prosociality within our in-groups and increasing our impersonal prosociality with acquaintances and strangers. The replacement of dense networks of interpersonal institutions has sometimes led to alienation, exploitation, and commodification.48 However, in order for impersonal markets to function well, Henrich argues that it is necessary for there to be, first, few interpersonal connections between buyers and sellers and, second, a system of market norms and their observance.

Transformations and Forms of Groups Henrich applies his detailed account of the co-evolution of brains, psychology, social interrelation, institutions, norms and culture to explain different forms of groups (families, tribes, nations), and their modes of both intra-group cooperation and social norms (values, cultures and institutions) and of inter-group competition, including existential conflicts such as warfare and aggression in response to perceived threats. He argues that the psychological mechanisms have evolved around drives for self-protection and self-thriving of the individual and the individual’s social group. A critical early form was when people were formed in groups in response to the opportunities arising from agriculture and herding after the last ice age, some 20,000 years ago. The grouping was based on kin-based clans, with particular affinities, norms and institutions formed around family, marriage, ritual and interpersonal relationships. Henrich explained the behavioural culture like this: This social interdependence breeds emotional interdependence, leading to people strongly identifying with their in-groups and to make sharp in-group vs out-group distinctions based on social interconnections. … Success and respect in this world hinges on adroitly navigating these kin-based institutions. This often means: (1) conforming to fellow in-group members, (2) deferring to authorities like elders or sages, (3) policing the behaviour of those close to you (but not strangers), (4) sharply distinguishing your in-group from everyone else, and (5) promoting your network’s collective success whenever possible.49

There would be distrust of anyone outside one’s kin-based group and inter-tribe competition, usually expressed in warfare and revenge. Norms and institutions for judging others would be rooted in in-group loyalty rather than impartial principles, and what we might describe as nepotism would be viewed as essential. Various scholars have charted this change towards cooperation

46 ibid, 349. 47 ibid, 297. 48 S Bowles, ‘Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions’ (1998) 36(1) Journal of Economic Literature 75–111; M Fourcade and K Healy, ‘Moral Views of Market Society’ (2007) 33 Annual Review of Sociology 285–311; AO Hirschman, ‘Rival Interpretations of Market Society: Civilizing, Destructive or Feeble?’ (1982) 20(4) Journal of Economic Literature 1463–84. 49 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 28.

56  Evolution of the Means of Cooperation within groups in a hunter-gatherer pre-agricultural environment, whilst conflict, violence and dominance remained the rule between groups.50 Over time, some groupings of humans evolved to another extreme of institutional organisation and personal psychology – one of individualism. The key characteristics of this psychological package are highly individualistic, independent, analytic, self-obsessed, control-oriented and nonconformist traits, with limited devotion to tradition, authority, obedience or conformity.51 Henrich considers that people with this psychological package of individualism lie at the extreme end of the distribution, and have evolved in WEIRD populations. He says that WEIRD people focus ‘intensely on their personal attributes, achievements, aspirations, and personalities over their roles, responsibilities and relationships’.52 The psychological characteristics needed to navigate a world with few inherited ties but extensive individualism are: (1) honing one’s own special attributes; (2) attracting friends, mates, and business partners with these attributes; and then (3) sustaining relationships with them that will endure for as long as the relationship remains mutually beneficial.53 We focus on ourselves – our attributes, accomplishments and aspirations – over our relationships and social roles. … Like everyone else, we are inclined to go along with our peers and authority figures; but, we are less willing to conform to others when this conflicts with our own beliefs, observations and preferences. We see ourselves as unique beings, not as nodes in a social network that stretches out through space and back in time.54

The psychological, institutional and cultural package of WEIRD populations, which Henrich calls impersonal prosociality, is ‘associated with a set of social norms, expectations, and motivations for impartial fairness, probity and cooperation with strangers, anonymous others, or even abstract institutions like the police or government’.55 Impersonal prosociality is about fairness principles, impartiality, honesty, and conditional cooperation in situations and contexts where interpersonal connections and in-group membership are deemed unnecessary or even irrelevant. In worlds dominated by impersonal contexts, people depend on anonymous markets, insurance, courts, and other impersonal institutions instead of large relational networks and personal ties.56

Many social modes exist besides the WEIRD phenomenon, producing different outcomes. Japan demonstrates a different style of social organisation with strong cultural intensity, stability and productivity.57 Brazil’s post-colonial mode of patrimonialism has generated strong family-based ties but lack of trust in public institutions and organisation, leading to corruption.58

50 YN Harari, Sapiens: A Brief History of Humankind (Vintage, 2019); M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020). 51 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 21, 313. 52 ibid, 26. 53 ibid, 28. 54 ibid, 21. 55 ibid, 48. 56 ibid, 300. 57 JR Harrison and GR Carroll, ‘Keeping the Faith: A Model of Cultural Transmission in Formal Organizations’ (2006) 36 Administrative Science Quarterly 552; JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224. 58 RA Da Matta, Carnivals, Rogues and Heroes: An Interpretation of the Brazilian Dilemma (University of Notre Dame Press, 1991); DJ Hess and RA Da Matta, The Brazilian Puzzle: Culture on the Borderlands of the Western World (Columbia University Press, 1995).

Untangling Competition and Cooperation  57 The forces of change unleashed by wars and the Christian Church proved to be major pivotal points in the West. First, from around 1000 AD, the Western Church dismantled kinship and fertilised a pan-tribal society. Sharing ideas amongst new large networks (eg Cistercians, journeymen) produced not just bigger cities but also bigger brains, and ultimately supported innovation.59 Moving from little or no belief in supernatural punishment to the strongest beliefs in punishment reduced the bias against strangers by a factor of four to five times.60 A similar massive change occurred in the 1950s in China. Second, the Reformation crystalised a strong development away from authoritarianism and towards individualism and literacy.61 New institutions were created (monastic orders, guilds, free towns and universities) that ‘increasingly built their laws, principles, norms and rules in ways that focused on the individual, often endowing each member with abstract rights, privileges, obligations and duties to the organisation’.62 Individuals increasingly became self-regulatory – able to drive themselves work hard and even to defer immediate gratification and gains in exchange for benefits in future or to others. These ideas ‘evolved not because they are accurate representations of reality but because they help communities, organisations and societies beat their competitors’.63 Mark Bertness argues that the hierarchical organisation of a society, inherited from animal and some human groups, leads to a continued rise and fall in ruling elites but also to systemic problems in developing cooperation.64 The shared cultural values, institutions and means of control (violence, repression, enforcement, deterrence) that support vertical dominance (essentially, competition), can be too strong to allow cooperation vertically between groups (slaves, castes, classes) absent revolution. But even then, different elites can form. A consistent theme in Henrich’s account of the evolution from kin-based to WEIRD populations is how elites have eventually found it necessary to involve the majority of the population in the contemporary political structure, often through evolution in institutions (monasteries, guilds, universities, charter towns, churches, trade unions, modern firms) as well as ideas (equality, abhorrence of slavery and abuse, enfranchisement). He notes that the dissolution of kinship, and later that need for kings and elites to share power with barons (Magna Carta and the 1688 Glorious Revolution) and ultimately workers, produced a slow expansion of political pluralism and modern democracy.65 Sooner or later, hierarchies either collapse or convert to cooperation to survive and transcend.

59 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 452. 60 ibid, 137. 61 SO Becker and L Woessmann, ‘Was Weber Wrong? A Human Capital Theory of Protestant Economic History’ (2009) 124 (2) Quarterly Journal of Economics 531–96; SO Becker and L Woessmann, ‘The Effect of Protestantism on Education before the Industrialization: Evidence from 1816 Prussia’ (2010) 107(2) Economics Letters 224–28; AE McGrath, Christianity’s Dangerous Ideas: The Protestant Revolution – A History from the Sixteenth Century to the Twenty-First (HarperOne, 2007). 62 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 230–31. 63 ibid, 139. 64 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) ch 7. See J Sidanius and F Pratto, Social Dominance: An Intergroup Theory of Social Hierarchy and Oppression (Cambridge University Press, 1999); S Houston and D Stuart, ‘Of Gods, Glyphs and Kings: Divinity and Rulership among the Classic Maya’ (1996) 268 Antiquity 289–312; EO Wilson, The Insect Societies (Liveright, 2019); DM Gordon, ‘The Organization of Work in Social Insect Colonies’ (1996) 380 Nature 121–24; TL Friedman, The World Is Flat: The Globalized World in the Twenty-First Century (Farrar, Strauss and Giroux, 2006). 65 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 412.

58  Evolution of the Means of Cooperation

Genes and Culture Like Henrich, Nicholas Christakis’ review of research evidence on genetics and human behaviour concludes that the overriding driver of the need to cooperate in humans and groups explains how genes lead to culture:66 Evolution provides the underlying foundation for human culture by equipping us with the ability to cooperate, make friends, and learn socially. We manifest cultural variation precisely because we evolved to have this capacity in the first place.67

Christakis says that humans are cultural animals.68 Humans have a constellation of psychological traits built for culture, including the tendency to conform to what others are doing, to develop and obey local norms, to privilege high-status or older people who could be potential teachers, and to pay attention to the people whom others are paying attention to. We also evolved to preferentially attend to those who show confidence in their behaviour (whether that confidence is warranted or not). We have a predilection for over-imitation. …69

Christakis defines culture as ‘a property of groups, not individuals’ and it evolves.70 It is defined by ecologist Peter Richerson and anthropologist Robert Boyd as ‘information capable of affecting individuals’ behaviour that they acquire from other members of their species through teaching, imitation, and other forms of social transmission’.71 Christakis concludes that the development of human evolution is based on the need to cooperate, and that the inter-relationship of genes and cooperative culture has produced, and is continuing to produce, a movement towards humans inherently becoming more ethical. He explains the process like this:72 Biology and culture in conversation. … Once cultural transmission became possible, our species faced circumstances favouring brains that were capable of learning and teaching, including brains that could respect norms, copy models, or transmit information. In turn, as humans came increasingly to rely on the knowledge of others, they became even friendlier and kinder so that they could interact reasonably peacefully within groups and so that they could take full advantage of culture in order to survive. Culture builds on, and reinforces, our evolved capacity for making a good society. Culture is an emergent property of human groups, a new property of the whole not manifested in the parts themselves. And it arises from humans having the brains and social systems that allow for retaining and exchanging ideas.73

Inherent Ethical Sense The scientific evidence shows that two drivers of behaviour are particularly important. First, human beings possess an inherent sense of right and wrong (unless they are psychopaths or

66 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019). 67 ibid, 19. 68 ibid, 414. 69 ibid, 414. 70 ibid, 412. 71 PJ Richerson and R Boyd, Not by Genes Alone: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (Princeton University Press, 2016). 72 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 437, 438. 73 J Tooby and L Cosmides, ‘Evolutionary Psychology and the Generation of Culture. I: Theoretical Considerations’ (1989) 10 Ethology and Sociobiology 29; JH Barlow, L Cosmides and J Tooby (eds), The Adapted Mind: Evolutionary Psychology and the Generation of Culture (Oxford University Press, 1992).

Untangling Competition and Cooperation  59 sociopaths). The anthropologist Edward Wilson concluded that humans evaluate evidence against our internal value systems, which are based on our inherent ability to distinguish between right and wrong, and arose from a critical genetic mutation that gave the species homo sapiens this unique powerful advantage over other species.74 Similarly, Jonathan Haidt describes morality as ‘the extraordinary human capacity that made civilization possible’.75 Christakis cites studies showing humans’ inherent moral sense, even from birth.76 The second aspect is that some factors can distract or divert the internal ethical compass, especially the impact of social forces (driven by our need to conform to the perceived social norms and ways of behaving in the social groups to which we belong, especially work groups)77 and factors or incentives that distract or crowd out our ability to apply our ethical compass, such as our concentration on achieving certain objectives (such as targets) without taking the time to reflect or be challenged. The general description of consistent behavioural effects in a group can be referred to as its culture. ‘The way we do things round here.’ The culture may be influenced to a greater or lesser extent by perceived ethical values (such as inherent senses of what is right and wrong, or of what is in an organisation’s code of ethical conduct or statement of values), and by purposes, objectives, targets, rules and other incentives and fears. The culture is a generally consistent way of behaving, influenced by these multiple factors.

The Trajectory Towards Genetic Goodness Christakis’ conclusion is that the arc of our evolutionary history ‘bends towards goodness’, ie that humans tend overall to behave more ethically, because we learn (and accordingly our genes adapt) that moral behaviour is better for cooperation. He says: All this work regarding the conditions for the evolutionary emergence of cooperation, its rational basis, and its cultural universality speaks to the role of cooperation in the blueprint for social life. Growing evidence also suggests that cooperative behaviour in humans is stable and heritable, partly explained by our genes.78

The same conclusion – that humans are basically good, and the more we act on this basis the more it becomes true – was the premise of the popular book by Rutger Bregman.79 This point chimes with Sztompka’s suggestion, noted in chapter six, that six moral bonds – that people value simply because they feel happier to live in a society pervaded with good inter-relations – are crucial: trust, loyalty, reciprocity, solidarity, respect and justice.80 We also find that the idea of fairness is universal.

74 EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 75 Haidt, ibid. See previously J Haidt and J Graham, ‘When Morality Opposes Justice: Conservatives Have Moral Intuitions That Liberals May Not Recognise’ (2007) 20(1) Social Justice Research 98–116. 76 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019). 77 In-group favouritism is strong in humans: ibid, 4. 78 E Schagatay, A Lodin-Sundstrom and E Abrahamson, ‘Underwater Working Times in Two Groups of Traditional Apnea Divers in Asia: The Ama and the Bajau’ (2011) 41 Diving and Hyperbaric Medicine 27. 79 R Bregman, Humankind, A Hopeful History (Bloomsbury, 2020). 80 P Sztompka, ‘Trust in the Moral Space’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021).

60  Evolution of the Means of Cooperation

Current Crises and the Need for Conscious Actions to Direct How We Evolve Next Christakis asserts that we can affect our moral behaviour and our culture, not only through our actions and choices but also through those elements affecting our genes. This occurs both through random drift and also the spread of superior ideas. The implication is that we can affect the strength of our genetic disposition to favour cooperation – or its opposite. A profound consequence of this understanding is that we can change ourselves through the intentional manipulation of values, norms, institutions and culture. The process of natural ‘cumulative cultural evolution’ is occurring, and we have the choice of intervention. Similarly, if we make certain choices, we should not be surprised if they result in some undesirable consequences. Policies of either selfishness or fair cooperation will generate not only short-term responses from others but also deeper changes in institutions and culture, and more permanent consequences, that we may not intend. So, we not only should but can evaluate the consequences of policies such as racism, euthanasia, abortion, profit maximisation, global sustainability, and in fact every set of personal, organisational and social goals. There is a striking consensus amongst scientists that natural selfish and competitive evolutionary forces ultimately produce destruction of groups, that these forces have led humanity close to destruction of the planet and of itself, but that disaster could be averted by conscious shifts to enhance cooperation. Natural selection produces random and short-sighted changes operating generation by generation without long-term planning or future goals.81 Random changes are superseded by hierarchical self-organisation, a process that in turn creates the illusion of intent and design.82 These changes have led to, for example, destroying forests, using fossil fuels, over-production of carbon in the atmosphere, destruction of ecosystems, global warming and extinction of species.83 History should teach us, Bertness comments, that empires such as Mesopotamia,84 Rome and the Maya, and much smaller natural ecosystems, decline and fall under natural forces.85 We must, he says, ‘tame, control, and harness the selfish genes that have been responsible for our success as a species, but that now drive our greed. At a fundamental level, humanity’s hopes lie in the ability to adjust our genetic wiring for dominance’.86 The myopic selective pressure that has produced ‘competitive gridlock’ must be alleviated by a conscious resurgence of cooperation through evolving with others. These stark points were also made by Nowak (‘man has no alternative but to evolve further’)87 and Christakis.

81 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 88. 82 M Kimura, The Neutral Theory of Molecular Genetics (Cambridge University Press, 1983); SP Hubbell, The Unified Neutral Theory of Biodiversity and Biogeography (Princeton University Press, 2001); W Heisenberg, ‘Über den anschaulichen Inhalt der quantentheoretischen Kinematik und Mechanik’ (1927) 43 Zeitschrift für Physik 172–98. 83 D Tilman, J Fargione, B Wolff, C D’Antonio, A Dobson, R Howarth, D Schindler et al, ‘Forecasting Agriculturally Driven Global Environmental Change’ (2001) 5515 Science 281–84. 84 S Pollock, Ancient Mesopotamia: The Eden That Never Was (Cambridge University Press, 1999). 85 M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020) 214. 86 ibid, 230. 87 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) xvii: ‘no matter what we do, empires will always decline and fall; and to succeed in life, you need to work together … just as much as you strive to win the struggle for existence’.

Designing for Cooperation  61

Designing for Cooperation If it is important for us to cooperate more, how should we do that? The evidence points to decisions to build trust through the use of ethical values and evidence of purposes and outcomes, and the design of relationships and institutions. David Johnson’s study of cooperation and conflict with his brother Roger has led him to identify the following characteristics of effective cooperative situations:88 1. Individuals focus on mutual goals and shared interests. 2. Individuals are concerned with both self and others’ well-being. 3. Individuals adopt a long-term time orientation where energies are focused on both achieving goals and building good working relationships with others. 4. Effective and continued communication is of vital importance in resolving a conflict. Within a cooperative situation, the communication of relevant information tends to be open and honest, with each person interested in informing the other as well as being informed. Communication tends to be more frequent, complete and accurate. 5. Perceptions of the other person and the other person’s actions are far more accurate and constructive. Misperceptions and distortions such as self-fulfilling prophecies and double standards occur less frequently and are far easier to correct and clarify. 6. Individuals trust and like each other and, therefore, are willing to respond helpfully to each other’s wants, needs and requests. 7. Individuals recognise the legitimacy of each other’s interests and search for a solution that accommodates the needs of both sides. Conflicts tend to be defined as mutual problems to be solved in ways that benefit everyone involved. The Johnsons’ identification of the effectiveness of people solving problems by focusing on goals that are common and encompass the interests of other stakeholders is a powerful pointer to how we should approach the design and operation of achieving purposes and outcomes through cooperative systems. Strong echoes here chime with the evidence and conclusions in chapters four and seven on purpose, motivation and culture. Their central prescription for achieving cooperation is to build moral bonds among citizens:89 the Johnsons note that cooperative relations in fact give rise to considerable controversies, but this is a sign of healthy engagement, and what matters is how debates are undertaken and resolved, in order to prevent them becoming destructive.90 They certainly believe that constructive controversy leads to individual and team innovativeness.91 Christakis describes the core of all societies as a ‘social suite’ of eight elements: 1. 2.

The capacity to have and recognise individual identity Love for partners and offspring

88 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015) 11–12, citing M Deutsch, The Resolution of Conflict, Constructive and Destructive Processes (Yale University Press, 1973); DW Johnson and RT Johnson, Cooperation and Competition: Theory and Research (Interaction Book Company, 1989); DW Johnson and RT Johnson, ‘New Developments in Social Interdependence Theory’ (2005) 131(4) Genetic, Social, and General Psychology Monographs 285; G Watson and DW Johnson, Social Psychology: Issues and Insights 2nd edn (Lippincott, 1972). 89 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015) 159. 90 ibid, 13, 92. 91 ibid, 101, citing G Chen and D Tjosvold, ‘Conflict Management and Team Effectiveness in China: The Mediating Role of Justice’ (2002) 19 Asia Pacific Journal of Management 557; G Chen, CH Liu and D Tjosvold, ‘Conflict Management for Effective Top Management Teams and Innovation in China’ (2005) 42 Journal of Management Studies 277; D Tjosvold and ZY Yu, ‘Group Risk-Taking: The Constructive Role of Controversy in China’ (2007) 32 Group and Organization Management 653.

62  Evolution of the Means of Cooperation 3. Friendship 4. Social networks 5. Cooperation 6. Preference for one’s own group (in-group bias) 7. Mild hierarchy (relative egalitarianism) 8. Social learning and teaching. He says that this social suite is supported by accentuating practices related to evolved behaviours, especially identity, friendship, in-group bias, cooperation and learning.92 Some lessons identified from the genetics and anthropology experts are summarised here.

Hierarchies and Elites One lesson relates to how we use knowledge without elitism. We have seen that competition leads to dominance and extinction of perceived threats, and the historical move away from top-down sources of power towards more cooperative, egalitarian and bottom up structures. This is related to Robert Wuthnow’s observation that altruism has changed in its cultural expression at different stages of history: a person’s altruistic disposition at a particular juncture in history was determined by their membership of a particular social class.93 Nowak says bluntly that ‘Cooperation has to come from the bottom up and not be imposed from the top down’ and that democracy is a key concept, involving placing ‘more faith in citizens than leaders’.94 Similarly, Frans de Waal has said that ‘When we became cooperative animals, we abandoned the right-of-the-strongest principle and moved on to a right-of-the-contributor principle.’95 One of the popular complaints over Brexit, referred to in chapter nine, was that the discourse was dominated by ‘elites’. The shift from hierarchical control systems to more horizontal, stakeholder forms is noted in this book in relation to corporations (from control by investors or managers to forms like community-ownership or stakeholder involvement), government (local empowerment, citizen assemblies, rich social networks) and regulation (from ‘command-andcontrol forms to cooperative trust-based ‘open and just culture/performance-based’ models). These flatter, open networks need access to adequate, reliable information on which to base judgements of trustworthiness96 and to base imitation of successful strategies and behaviour.97 It can be a challenge for some cultures to evolve but it is critical, for example, to shed protective reliance on kin-based affinities, so as to encourage cooperation across wider networks in societies.98 We also need to re-examine the ideas and behaviours around control of others, such as punishment, enforcement and deterrence, shifting more to cooperative techniques of participation, friendship and reward – these are discussed in chapters 10–15.99 92 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 433. 93 R Wuthnow, ‘Altruism and Sociological Theory’ (1993) 67(3) Social Service Review 344–57. 94 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 282. 95 FBM de Waal, ‘How Selfish an Animal?’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 66. 96 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 281: ‘Reputation is a potent force that can be harnessed to avoid the Tragedy of the Commons. Success depends on freedom of information without censorship and spin. We need detailed information on the degree to which people, companies, or countries squander precious resources.’ 97 ibid, 264 98 ibid, 283. 99 ibid, 283. See also NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 137.

Designing for Cooperation  63

Sizes of Groups and Networks Although humans are equipped with the ability to form diverse social groups for a diversity of purposes (social, defence, sustenance, work, recreation), limitations exist on the size of groups that can be sustained in particular levels of intensity (known as the Dunbar number, limited by the size of our brains). This has implications for the size of social, work, community, sport and national groups. It is difficult to maintain cooperation as group size increases.100 But techniques relying on unified common values, purposes and cultures can support coordination in large groups. Christakis finds that the challenge of cooperation is solved by elements such as friendship networks, cultural norms of punishment, altruism, reciprocity.101 He cites cases and studies on unintentional communities (eg shipwrecked people), intentional communities (eg religious sects) and artificial communities that all demonstrate the tendency to cooperate. In laboratory experiments where people had no control over whom they interacted with, they stopped cooperating.102 Other experiments indicate that the more connections people have, the more they must be incentivised to cooperate.103 Cooperation depends on the rules governing the formation of friendship ties. Good people can do bad things (and vice versa) simply as a result of the structure of the network in which they are embedded, regardless of the convictions they hold or that the group espouses. It is not just a matter of being connected to ‘bad’ people; the number and pattern of social connections is also crucial.104 Aspects of the social suite, such as cooperation and social networks work together.105

However, research by Nowak and Corina suggests that even if groups need to be comprised of a limited number of members, the availability of multiple networks of groups is beneficial for cooperation.106 Christakis’ review of the evidence leads him to identify a paradox:107 [S]ocieties that stress uniqueness and individuality and that provide a fertile terrain for friendship based on the personal and specific can actually be those where our common humanity is more easily recognized. … In fact, findings from cross-cultural studies suggested that in-group bias and an emphasis on the distinction between us and them is higher in collectivism societies (inc Communist societies), which stress the importance of group membership and subsume the individual within the group, than it is in individualist societies (where social interdependence is less salient), which stress autonomy.108

In considering how people and societies operate, Christakis concludes that the interaction between genetic and environmental forces means that the more social a species is, the more social it will become.109 Similarly, Nowak cites evidence that cooperativeness tends to spread. These

100 V Capraro and H Barcelo, ‘Group Size Effect on Cooperation in One-Shot Dilemmas. II: Curvilinear Effect’ (2015) PLOS ONE 10. 101 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 433, 137. 102 D Rand, S Arbesman and NA Christakis, ‘Dynamic Social Networks Promote Cooperation in Experiments with Humans’ (2011) 108 PNAS: Proceedings of the National Academy of Sciences 19193–98. 103 DG Rand, M Nowak, JH Fowler and NA Christakis, ‘Static Network Structure Can Stabilize Human Cooperation’ (2014) 111 PNAS: Proceedings of the National Academy of Sciences 17093–98. 104 DG Rand, M Nowak, JH Fowler and NA Christakis, ‘Static Network Structure Can Stabilize Human Cooperation’ PNAS: Proceedings of the National Academy of Sciences 111 (2014): 17093-17098. 105 Christakis, 120-121. 106 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 262–63. One explanation from this is that cooperators may easily escape defectors and find other cooperators. However, mobility needs to be neither too low nor too high. 107 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 313–14. 108 HC Triandis, Individualism and Collectivism (Westview Press, 1995). 109 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown, Spark, 2019) 325.

64  Evolution of the Means of Cooperation findings chime with the observations of Francis Fukuyama and others that states that have greater social cooperation have economies that perform better.

Changes in the Conception of Law Various conclusions can be drawn from the anthropological work of Henrich and others. There is the obvious point that WEIRD people have developed to be an extreme, and not necessarily an ideal or most advanced, form of human organisation. It is also incorrect to generalise about people across the globe and how they act, and we should be careful to avoid applying the research findings based on WEIRD people to people in other parts of the world. Henrich comments that: [T]he particular idea of endowing individuals with ‘rights’ and then designing laws based on those rights only makes sense in a world of analytical thinkers who conceive of people as primarily independent agents and look to solve problems by assigning properties, dispositions and essences to objects and persons.110

In contrast, where we conceive of people as cooperative and inter-dependent, working together in coordinated relationships, concepts of legal rights may be seen as less important tools than fundamental ethical values and principles. Also, formal institutions need to fit the cultural psychology of the population in question.111 Do we act the way we deserve? Or can we act differently – and better? Henrich clearly thinks that we can evolve – and consciously change – where there are ongoing changes in the matrix of our norms, institutions, cultures and psychology. I argue below that a number of ways in which we organise ourselves, and concepts that we use, can and should be changed if we wish to increase cooperation and behave in accordance with our prevailing ethical values and principles. Examples include the form of corporations, their purposes, governance and remuneration practices. Other examples include the concepts of punishment, enforcement and deterrence. It should be no surprise, therefore, that new ideas are emerging about the nature of law and the relevance of competition.

From Individual Rights to Relational Law The ideas above about evolutions in personal, social and organisational needs and structures can be seen in contemporary academic discussions about viewing law differently based on a shift in emphasis from the individual self (and individual law) to the relational self (and relational law). The idea of an independent individual possessing unfettered personal rights to freedom, self-determination and self-reliance has been widely prized. However, this idea of an individual self has been significantly criticised. An alternative conception of a relational self has emerged, partly through feminist writings but also in sociology,112 theology,113 ethics,114 anthropology,115 110 J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020) 84–85. 111 ibid, 219. 112 P Donate and M Archer, The Relational Self (Cambridge University Press, 2015); N Crossley, Towards Relational Sociology (Routledge, 2011). 113 M Pagis, ‘Religious Self-Constitution: A Relational Perspective’ in C Bender, W Cadge, P Levitt and D Smilde (eds), Religion on the Edge: De-centering the Sociology of Religion (Oxford University Press, 2012) 92; J Herring, ‘The Vulnerability of God and Humanity’ (2018) 180 Law and Justice 5. 114 H Lindemann, Holding and Letting Go: The Social Practice of Personal Identities (Oxford University Press, 2014). 115 L Shults, Reforming Theological Anthropology: After the Philosophical Turn to Relationality (Erdman, 2003).

Changes in the Conception of Law  65 philosophy,116 disability studies117 and legal theory.118 The paradigm – perhaps caricature – of the individual self is said119 to promote overwhelming selfishness, the maximisation of personal gain, and a ‘culture of narcissism’.120 Lorraine Cole summarised the (male) protagonist thus: His independence is under constant threat from other (equally self-serving) individuals: hence he devises rules to protect himself from intrusion. Talk of rights, rational self-interest, expediency, and efficiency permeates his moral, social, and political discourse.121

By contrast, the concept of the relational self emerges out of the recognition that humans cannot exist without relationships with each other: the concept of any person having complete self-sufficiency and self-containment is simply inaccurate. Further, the claim is that: the self is constituted by and through our relationships. … these relationships are also found in the form of communal forces and constructions which provide the background for relationships with others. Hence social identity is connected with gender, disability, race, sexual orientation, class, age, ethnicity etc and intersections between these identities, interface with our personal relationships and generate the self.122

This conception recognises that the relationship between the self and society is a two-way process: The self influences society through the actions of individuals thereby creating groups, organisations, networks, and institutions. And, reciprocally, society influences the self through its shared language and meanings that enable a person to take the role of the other, engage in social interaction, and reflect upon oneself as an object. The latter process of reflexivity constitutes the core of selfhood.123

This understanding has profound implications for society’s institutions, including the legal system and the substance of law. As Jonathan Herring notes:124 The law tends to reflect the values that are suitable for an individualised understanding of the self; autonomy, privacy and bodily integrity. The law undervalues or ignores relational values: trust, mutuality and interdependence. The law tends to pitch the rights of one individual against the rights of another rather than seeing the relationship between two people as being the core object of legal concern.

Accordingly, this development in thinking about the conception of the fundamental importance of human relationships concludes that trust, and institutions that support trust and caring relationships, has to be at the centre of human social and legal systems. Citing Fineman, Herring develops how the law should support the inherent ‘universal beneficial vulnerability’ of humans125 and ‘the caring self ’. One of his examples challenges the idea of liberty in contracts: Contract law provides a mechanism for people to enter contractual relationships and to give weight to the obligations created as a result. A legal, political and social system structured around an ethic of care 116 C Sedikides, L Gaertner and E O’Mara, ‘Individual Self, Relational Self, Collective Self: Hierarchical Ordering of the Tripartite Self ’ (2011) 56 Psychological Studies 98. 117 S Reindal, ‘A Social Relational Model of Disability: A Theoretical Framework for Special Needs Education?’ (2008) 23 European Journal od Special Needs Education 135. 118 J Herring, Law and the Relational Self (Cambridge University Press, 2020); the following account draws heavily on this work. 119 See especially N Naffine, ‘The Liberal Legal Individual Accused: The Relational Case’ (2014) 29 Canadian Journal of Law and Society 123; general summary in J Herring, Law and the Relational Self (Cambridge University Press, 2020). 120 C Lasch, The Culture of Narcissism (WN Norton & Co, 1991). 121 L Code, What Can She Know? Feminist Theory and the Construction of Knowledge (Cornell University Press, 1991) 77–78. 122 J Herring, Law and the Relational Self (Cambridge University Press, 2020) 11. 123 J States and P Burke, ‘A Sociological Approach to Self and Identity’ in M Leary and J Tangney (eds), Handbook of Self and Identity (The Guildford Press, 2003) 128. 124 J Herring, Law and the Relational Self (Cambridge University Press, 2020) 23. 125 M Fineman, ‘The Vulnerable Subject: Anchoring Equality in the Human Condition’ (2008) 20 Yale Journal of Law & Feminism 1.

66  Evolution of the Means of Cooperation would hope to see few cases reaching court. However, it would still have a powerful influence on how people behave.126

Herring had earlier questioned whether the spread of relational ethics in medical law was likely to find a right-based or a best-interests based approach amenable to supporting or accommodating the responses that it was desired to promote.127 He noted that standard legal approaches were being rejected in favour of promoting alternatives based on an ethic of care. He subsequently expanded the analysis of the difficulties facing law in promoting compassion and responding to caring relationships.128 In particular, he criticised the legal tools of human rights and the concept of best interests, which had been designed to promote individualistic concepts of the self, to assist in the development of intimate relationships. His conclusion was that those legal concepts had utility in setting the boundaries of a space within which care and compassion were the prime and desirable concepts. Herring’s latest analysis also notes that criminal law focuses strongly on individual responsibility ‘and a suspicion of those who work together with others in enterprises’, and ‘too readily identifies a vulnerable person to blame, rather than identifying the broader social failures’.129 Herring’s conclusion involves a strong call for reforming law: Re-imagining what the law could be like if it took the concept of the relational self seriously. It would be a law which saw the sustenance, support and reward for caring relationships as a central goal. It would be law which recognised that we cannot consider the rights and interests of individuals separately from each other, but needs to focus on enabling caring relationships to develop. A law which would recognise our deep universal vulnerability, requiring legal protections and state provisions and which recognised that powerful social forces mean that some people are very well provided for by the state and others are not. A law that appreciated that the abuse of a relationship to undermine and destroy another person was the most profound of wrongs, the prevention of which should be a key role for the law. A law that recognises that on our own we humans are of little moral or scientific interest, but that in a relationship of care and love we can produce wonders.130

Adverse Outcomes of Competition Nicholas Christakis finds that humans ‘have always had both competitive and cooperative impulses, both violent and beneficial tendencies. Like the two strands of DNA, these conflicting impulses are intertwined. We are primed for conflict and hatred but also for love, friendship, and cooperation’.131 He argues that our species has evolved to learn how to live with (tame) competition in order to prioritise the more important need for cooperation. That understanding, assuming it to be correct, has profound implications for ongoing human organisation. Competition is still held to be fundamentally important in some disciplines, such as economics, and hence in policy and practice in regulating markets. Yet is a fresh understanding needed? Indeed, is competition bad for humans, because it undermines cooperation? Christakis



126 J

Herring, Law and the Relational Self (Cambridge University Press, 2020) 36.

127 J Herring, ‘Forging a Relational Approach: Best Interests or Human Rights?’ (2013) 13(1) Medical Law International 32.

128 J

Herring, ‘Compassion, Ethics of Care and Legal Rights’ (2017) 13(2) International Journal of Law in Context 158. Herring, Law and the Relational Self (Cambridge University Press, 2020) 185, 187–88. 130 ibid, 197. 131 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019). 129 J

Adverse Outcomes of Competition  67 would say that cooperation and competition have evolved alongside each other, and may be mutually required in evolutionary terms. But is not competition antithetical to cooperation? A more nuanced idea is that of Jonathan Sacks, who points out that both Darwin and de Tocqueville concluded that in any form of collective life, we need both competition and cooperation, but they call for sets of completely different instincts, the one for aggression and the other for altruism.132 We may pass on our genes as individuals, and they may compete to survive, but we only survive as members of a group, for which we need to cooperate (in selfless, ethical communities). Competition in markets is endlessly promoted as essential and non-negotiable.133 However, Margaret Heffernan has highlighted a worryingly large number and range of bad outcomes from excessive competition in her 2014 study on competition amongst humans.134 She notes that siblings and children, who demonstrate a natural tendency to compete, have to learn to modify that urge and to cooperate. Her list of disasters caused by uncontrolled competition include schools and examination systems, those addicted to computer games and high-level sports, corporations driven by share price obsession, financial traders driven by daily profit rankings and the constant firing of the lowest ‘performers’, scientific fraud, outsourcing producing workers’ poverty and inadequacies in the definition of Gross National Product. Heffernan concludes:135 It is a great way to focus on short-term problems and to enliven monotonous repetitive work. In small doses, competition adds spice to what might be mundane and dreary. And when the stakes are low, it can be an inspiring way to get things started, to galvanize participation and spark the imagination. But when stakes are high, and competition becomes the dominant driver, it backfires spectacularly, undermining exactly what it hopes to build. Competitive thinking, constrained by benchmarks, scorecards and comparisons, cannot wander and explore new territory but stays fettered to old ideas and models. cheating, corruption, subversion, silence, disenchantment and the unwinding of the social fabric are not perverse but inevitable outcomes of societies captive to the competitive mindset and the ephemeral pleasures of winning.

Is it time to redefine competition? This thought might have seemed heretical until recently, so entrenched is the ideology that full competition is ‘always necessary and always good’ and its primacy cannot be challenged.136 However, a powerful attack on the hegemony of competition was made by competition law professors Maurice Stuke and Ariel Ezrachi in 2020. They detailed a series of examples where the outcome of pursuit of competition has become toxic – crowding out ethical and social norms,137 increasing unethical behaviour138 and a ‘race to the bottom’,139 promoting self-satisfied and selfish behaviour by commoditising us,140 destroying society through destructive behaviour and eroding the social capital necessary for a market economy.141 132 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020) 262. 133 eg J Penrose, Power To The People. Stronger Consumer Choice and Competition So Markets Work For People, Not The Other Way Around (2021), at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/ attachment_data/file/961665/penrose-report-final.pdf. 134 M Heffernan, A Bigger Prize. Why Competition isn’t Everything and How We do Better (Simon & Schuster, 2014). 135 ibid, 372–73. 136 ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020) 123. 137 MJ Sandel, What Money Can’t Buy: The Moral Limits of Markets (London, Penguin, 2013). 138 NW Van Yperen, MRW Hamstra and M van der Klauw, ‘To Win, or Not to Lose, at Any Cost: The Impact of Achievement Goals on Cheating’ (2011) 22 British Journal of Management supp, S5, S6, S9–S10; GJ Kilduff et al, ‘Whatever It Takes to Win: Rivalry Increases Unethical Behaviour’ (2016) 59(5) Academy of Management Journal 1508. 139 NA Den Nieuwenboer and M Kaptein, ‘Spiraling Down into Corruption: A Dynamic Analysis of the Social Identity Processes That Cause Corruption in Organisations to Grow’ (2008) 83(2) Journal of Business Ethics 133. 140 Z Bauman, Does Ethics Have a Chance in a World of Consumers? (Harvard University Press, 2008) 58. 141 RD Putnam, Bowling Alone: The Collapse and Revival of American Community (Simon & Schuster, 2000).

68  Evolution of the Means of Cooperation They cite evidence that many markets have become more concentrated and less competitive.142 The underlying behaviour is linked with ‘rugged individualism’ (per Martin Luther King), leaving the poor to struggle for themselves whilst permitting a ‘bounty of gifts for the wealthy’.143 Stuke and Ezrachi’s examples ranged from the inability of American universities to escape from the competitive spiral to capture students so as to maintain rankings, to competitive pressure on prices that causes companies to quietly degrade quality and safety (a high-profile example being the pressure on Boeing of competing with Airbus that led to corners being cut in redesigning the 737MAX aircraft and 346 deaths), to exploitation of consumers’ personal data by platforms, in all cases driving hugely expensive lobbying to avoid the intrusion of state regulation and to promote the ideology of the supreme effectiveness of free markets. Perhaps surprisingly, Stuke and Ezrachi’s prescription is to move beyond the toxic ‘competition as warfare’ to noble ‘competing to create value’ through expanding the total pie by developing new products, designs and technologies that will satisfy needs unmet by those rivals.144 Noble competition, they say, inherently maintains values and integrity, in which everyone helps their rivals to reach their full potential.145 This seems to be a prescription for cooperation rather than competition, within a state that operates balanced regulatory intervention. Stuke and Ezrachi cite the example of cooperation by multiple companies across 75 countries in creating valuesdriven ethical corporate purpose under the Food Industry Intelligence Network.146 They make two broad suggestions. First, legislation should ‘promote a competition ideal embedded within a vision of a just society’.147 In other words, ethical values are paramount, and theories and rules of the market are secondary. Second, the state should step in to provide what competition (and markets) cannot deliver, such as a fair safety net to support workers and businesses that fail. This might include strengthened social insurance programmes, offering subsidised childcare to boost the number of women entrepreneurs, and reforming unemployment insurance to help nascent entrepreneurs mitigate the downside risks of entrepreneurship.148 Further attacks have been made on how competition has been practised. It is important to distinguish between healthy market exchange (a very high form of human cooperation) and unhealthy economic rent-seeking (too contested, and one of the lower forms of human interaction). Humans are economic animals as well as social and ethical animals.149 Realignment of competition has recently been advocated by gurus Richard Posner and Cass Sunstein so as to advance consumer welfare (in the sense of utility) rather than consumer surplus, in order to redistribute resources from shareholders to workers and consumers. reduce economic inequality.150 The regulatory approach of protecting consumers in a regulatory market through promoting competition has recently been criticised.151 It ‘created the opportunity for suppliers to enter the market and grow to a considerable scale while committing minimal levels of their own equity capital’, which left suppliers with insufficient capital when the unexpected shock of a major

142 J De Loecker and J Eeckhout, ‘Global Market Power’ NBER Working Paper No 24768, June 2018. 143 JE Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future (WW Norton, 2012). 144 ME Stuke and A Ezrachi, Competition Overdose (Harper Business, 2020) 244. 145 ibid, 256. 146 ibid, 274. See also the Global Food Standards Network of the Consumer Goods Forum, at http://mygfsi.com/. 147 ibid, 261. 148 M Munro and C Henderson, ‘Gouging the Safety Net Is Especially Untimely Now’, Brookings Institution, 20 December 2017. 149 Thanks to Ed Humpherson for this emphasis. 150 EA Posner and CR Sunstein, ‘Antitrust and Inequality’ at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4023365&dgcid=ejournal_htmlemail_consumer:law:ejournal_abstractlink. 151 Review of Ofgem’s Regulation of the Energy Supply Market (Oxera, 2022).

Levels of Development of Human Psychological Consciousness and Organisations  69 increase in supply costs was triggered by the Russian invasion of Ukraine. Multiple retail suppliers became insolvent, consumers were switched to other suppliers but left vulnerable to high costs, the resilience of the sector was reduced, and confidence in suppliers, regulator, government and the system fell. This story echoed the prudential risk and capital adequacy issue experienced by the banks in 2008–10. Michelle Meagher’s analysis is that business and markets are now too powerful to be controlled by law and public institutions. The machine needs to be dispersed, democratised (by giving stakeholders representation at board level and creating balancing structures through cooperative business models and unionisation) and unresponsive power dissolved.152 A highly illuminating insight was found by Collins and Porras in their classic study, that high achieving visionary companies focus primarily not on beating their competitors but on beating themselves.153 In other words, improving your own performance is what really matters.

Levels of Development of Human Psychological Consciousness and Organisations Some researchers have proposed that human beings, organisations and societies undergo stages of development and maturity. This process means that values that may be thought relevant at ‘earlier’ stages of development may actually impede development at more advanced stages. Further, it is said that human civilisation is currently undergoing a transformation to another level, and that this necessitates us examining our values and the structures by which we collaborate. If these points are true, we should think imaginatively in reimagining our structures and connectedness for the rest of the twenty-first century. The ideas of Abraham Maslow on individuals, Richard Barrett and Fernand Laloux on organisations, are remarkably consistent. They illustrate that not only do needs and behaviours change as an organism develops but also how structures and culture change over how the organism engages with its environment. The various stages are summarised below: scientific findings may have modified some elements, but the main point is to show the points about evolution in needs and maturity, and how basic elements need to be complemented by more advanced elements if an organism is to fully achieve its potential. Abraham Maslow proposed a hierarchy of human needs was divided into two types: in the first four stages were basic or deficiency needs and in the fifth stage (self-actualisation) relates to growth needs.154 Self-actualisation

Desire to become the most that one can be

Esteem

Respect, self-esteem, status, recognition, strength, freedom

Love and belonging

Friendship, intimacy, family, sense of connection

Safety needs

Personal security, employment, resources, health, property

Physiological needs

Air, water, food, shelter, sleep, clothing, reproduction

152 M Meagher, Competition is Killing Us. How Big Business is Harming Our Society and Planet – and What To Do About It (Penguin, 2020). 153 J Collins and JI Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins, 1994, 12th edn 2005). 154 AH Maslow, Motivation and Personality (Harper Collins, 1987); Toward a Psychology of Being 2nd edn (Van Nostrand Reinhold, 1968); AH Maslow, The Farther Reaches of Human Nature (Penguin/Arkana, 1993).

70  Evolution of the Means of Cooperation The idea of stages of human development are echoed in Kegan and Lahey’s identification of three plateaus of adult psychological development: the socialised mind, the self-authoring mind and the self-transforming mind.155 Jacques and Clement suggested that we should match a person’s level of cognitive complexity (psychological development) to the level of task complexity he or she has to perform.156 Richard Barrett drew on the work of Maslow, shifting the focus from needs to consciousness as a way of mapping the consciousness of leaders, organisations and communities. He proposed a model of seven levels of organisational consciousness in 1995,157 discussed in chapter 8. Fernand Laloux, also drawing on Maslow, proposed a series of stages in the development of how humans group themselves into different organisations depending on the state of evolution of their ideas and social, economic and political needs.158 His sequence is: small bands of family kinships, tribes, chiefdoms, small conquering armies, agriculture-based societies, extensive crossborder hierarchical organisations, outcome-based movements such as the Enlightenment and the Industrial Revolution, meritocratic process and project driven organisations, relationship-based cultures sensitive to individuals’ feelings and structures aimed at reaching consensus among large groups of people.159 He argues that at each stage, we made a leap in our abilities – cognitively, morally and psychologically – to deal with the world. Each stage therefore invented a new way to collaborate, a new organizational model. He argues that the most recent stage has developed features of meritocratic empowerment, values-driven culture and inspirational purpose, a multiple stakeholder perspective with no hierarchy among stakeholders and the family as the guiding metaphor. Laloux noted the similarity between his highest level of organisational development (called ‘teal’) and Maslow’s ultimate stage of human development, ‘self-actualizing’. He described it as operating on the basis of trust, which replaces attempts at control, and unleashes energy to perform and improve.160 The values of a teal organisation can be seen from the following description of its characteristics:161 1. 2.

3.

Taming the fears of the ego. A capacity to trust the abundance of life. Believe that even if something unexpected happens or if we make mistakes, things will turn out all right, and when they don’t, life will have given us an opportunity to learn and grow. Soul searching of who we are and what our purpose in life might be. Become the truest expression of ourselves. Let go and listen to the life that wants to be lived through us. Don’t fear failure as much as not trying. A person who has ambition, but is not ambitious. Life as a journey. Dealing gracefully with adversity. Life’s way of teaching us about ourselves and about the world. Make frequent small adjustments.

155 R Kegan and L Lahey, Immunity to Chance (Harvard Business School Publishing, 2009). 156 E Jacques and SD Clement, Executive Leadership: A Practical Guide to Managing Complexity (Blackwell Business, 1991). 157 See now R Barrett, The Values-Driven Organization: Cultural Health and Employee Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017). 158 F Laloux, Reinventing Organizations: A Guide to Creating Organizations Inspired by the Next Stage of Human Consciousness (Nelson Parker, 2014). 159 ibid. 160 ibid, ch 2.2. 161 These points are summarised from Laloux ch 1.3.

Collaborative Working  71 4. 5.

Wisdom beyond rationality. Rational thinking can be more accurately informed by data. A fearless rationality and the wisdom that can be found in emotions, intuition, events and paradoxes. Striving for wholeness. Transcend the opposites of judgement and tolerance. Integrate with the higher truth of non-judgement. This creates a shared space.

Laloux suggests that we are currently engaged in a shift to a new consciousness of collaboration between people and peoples – even if that transformation is not without its upheavals. He concludes that we are transforming into a new stage and need to replace fear with collaboration – and need to develop new structures for collaboration. The impact of the Fourth Industrial Revolution and further globalisation make it even more important for us to consider the implications of what the next stage of our development should look like.

Collaborative Working The need for collaborative working between businesses engaged on combined projects led the UK Government and the Confederation of British Industry to establish the Institute for Collaborative Working (ICW) in 1990 with the aim of creating value through knowledge and relationships.162 The ICW has members across multiple sectors, most significantly transportation, construction, public, defence utilities and energy. Surveys and interviews involving 107 companies confirmed the need for formal and systematic processes for managers to understand the benefits of collaboration in terms of cost and business growth.163 Attributes of individuals were found to be, listed in terms of relevance: strategically minded, team oriented, good communicator, open to sharing, creative/innovative, empathetic, believe in collaboration, good listener, behaving ethically and leadership. A national standard BS 11000, created in 2010, became the model in 2017 for the international standard ISO 44001.164 The standard specifies a lifecycle model for a collaborative relationship framework, comprising the following stages: operational awareness, knowledge, internal assessment, partner selection, working together, value creation, staying together and exit strategy activation. A key principle is that a collaborative relationship is ‘underpinned by aligned visions and values, business objectives and commitment to mutual benefits’. Carol Gilligan found that men and women use different styles of moral reasoning.165 Men found their identity by separation, women by attachment. Men played competitive games in groups, regulated by rules. Women were less rule-oriented, formed smaller and closer groups, but had fewer resources for conflict resolution. The analysis has, however, remained controversial.166

162 MT Hansen, Collaboration: How Leaders Avoid the Traps, Build Common Ground, and Reap Big Results (Harvard Business Review Press, 2009). 163 M Chakkol, M Finne and M Johnson, Understanding the Psychology of Collaboration: What Makes and Effective Collaborator? (Institute for Collaborative Working, 2017). 164 International Standard ISO 44001 (2017). Collaborative Business Relationship Management Systems – Requirements and Framework. See also Technical Report ISO/TR 44000. Principles for Successful Collaborative Business Relationship Management; ISO 44002. Collaborative Business Relationship Management Systems – Guidelines on the Implementation of ISO 4401; ISO 4403. Collaborative Business Relationship Management Systems – Guidelines for Micro, Small and MediumSized Enterprises on the Implementation of the Fundamental Principles. 165 C Gilligan, In a Different Voice: Psychological Theory and Women’s Development (Harvard University Press, 1982). 166 See references at J Sacks, Morality. Restoring the Common Good in Divided Times (Hodder & Stoughton, 2020) fn 3 p 353.

72  Evolution of the Means of Cooperation

Conclusions The evolution of homo sapiens in inter-relating in ever larger groups was made possible by evolution in the inter-relation and mutual development between our genes, mental mechanisms such as values, concepts like ethical principles, and institutions. At levels ranging from individual cells to advanced societies of people, we are driven by conflicting forces of competition and cooperation. In simple terms, competition turns out to support short-term dominance over others but cooperation is essential for long-term sustainability and for innovation. An individual may be driven to benefit themselves through selfishness and competition, but this behaviour will not support effective thriving with others. Cooperation is essential for performance and achieving objectives. Cooperation is facilitated where people place or share confidence and trust, and those beliefs are based on evidence of trustworthiness. Accordingly, a society that wishes to do well should concentrate on enhancing the positive values of its members, and on mechanisms that build reliable evidence that people and organisations can be trusted. Structures and mechanisms that can deliver these functions will be needed. Repeated engagement and interdependence with others in particular numbers and social environments requires different forms of reciprocity, behaviour and institutions. In contemporary modern societies, the effective model is the formation of multiple overlapping networks, each of limited size and varying character. The key to how (and how well) people behave is the set of core values that they hold. These values drive thought and actions both subconsciously and in rational discourse. Similarly, the actions of a group of people (interacting as an organisation, a society or even nation) will be driven, and can be judged, by their shared values. Equally, highlighting particular values can assist in prompting particular behaviours and in supporting or inhibiting cooperative performance. To address the problem that groups of people can adopt common values that are selfish, ultra-competitive, destructive and ‘unethical’, we also need to take steps to ensure that we have mechanisms for critical challenge and evaluation of our values, actions and outcomes. Most humans rely on sensing values against an inherent ethical compass. The concept of ‘ethical’ values is a critical means of differentiation between groups, for example, between benevolent democratic regimes and autocratic repressive and aggressive regimes, and between criminal organisations and socially productive organisations. We have evolved to value equality and mutual respect for others, and this has implications for our social and political organisations, necessarily supporting and requiring transition from hierarchical to horizontal forms. These trends are inextricably linked with our emphasising values of goodness, reciprocity, altruism, fairness and justice – and, perhaps surprisingly, less emphasis on individual legal rights. We are able consciously to set our course in relation to encouraging cooperation or destruction. Encouraging fresh thinking should, of course, stimulate evolution in ways of doing things, in what we value, and in innovation. The combination of competitive forces of natural selection coupled with cooperative developments in technology and human activities has produced such power that our very existence is currently threatened. This rise and fall of systems and empires is a natural phenomenon of the uncontrolled operation of natural forces. But if we wish to avoid widespread extinction, we now need to consciously deploy strategies that spread cooperative networks. This is a critical moment for humanity and so many of the ways that we interrelate – in businesses, markets, communities, regulation, government and internationally.

4 Human Motivation Behaviour and Theories If we are to cooperate more, we should understand the reasons why we might either cooperate or compete, or fail to do either. If we succeed in understanding those things, we may be able consciously to support a cooperative mode and to avoid frustrating or undermining it. This takes us into an analysis of human behaviour, individually and in groups. We are now able to transcend generations of thinkers (especially philosophers and elites) who put forward their ideas on how and why people behaved, and to rely instead on a great deal of relatively recent scientific research that has emerged in the past century or so on how and why people actually behave. There is a great deal of scientific evidence, but there are also some challenges in interpreting and understanding it. Many of the research studies exist in unconnected silos, and interpretation of the data still depends on what groups of scientific researchers think, expressed in the theories that they propose so as to organise, interpret and make sense of their results into findings that are generalised. There can be considerable debate about the veracity, strength and relevance of different theories. Researchers can also fail to refer to the data, findings or theories of other researchers.1 Further, studies often involve laboratory experiments, since real life experiments are difficult to do, and involve students, especially WEIRD students (discussed in chapter three) – so the findings might only apply to particular and perhaps artificial circumstances, and would not apply to other populations at different times or places. Overall, it is a considerable challenge to give a clear answer to the question: How do humans behave? But we need to try! The following is, therefore, a personal summary of extensive materials and theories, which must be read with the clear caveats that I am not a scientist, may not have read enough and may have misunderstood what I have read! My aim here is to avoid writing a summary of everything that I have read, but to provide a short overview of the major evidence and what seems to be either a consensus or a rational summary of diverse findings, so as to be able to form hopefully reliable conclusions for action on how to support cooperation in social relations, communities, organisations, regulation and dispute resolution.

Basic Ideas: Intrinsic and Extrinsic Motivation The analysis proceeds basically at two levels: understanding the behaviour of individuals singly and then (socially) in groups. The group context includes different forms of social organisation of 1 In reviewing many individual studies, one finds that theories are often claimed to have broad applicability but the experimental focus tends to be tested or illustrated in narrow contexts. Few proponents of theories refer to other theories, which was described to the author by a leading medical researcher as tending towards a multiple ‘Ponzi scheme’ situation!

74  Human Motivation humans, into communities, organisations, nations and so on, including commercial businesses and public institutions. A further critical cleavage is between the extent to which individuals or groups control their own behaviour, compared with the extent to which they are influenced by external forces. In the context of individuals, the differential analysis is between intrinsic ­motivation and extrinsic motivation. There is a parallel differential in the context of organisations, between internal controls (such as those deriving from the self-motivation of workers, the behaviour of managers and the requirements of systems and procedures) and controls that are external to the organisation (such as imposed by investors, regulation and enforcement). A confusing factor is that we can anthropomorphise an institution and treat it as if it were a single human being – attributing to it a mind, intentions and personality – which is fundamentally misleading, since the actions of any organisation are in reality consequences of the actions of the humans who work in it, typically through set procedures and systems. However, there is considerable truth in characterising an organisation (or a sub-group) as having a particular culture, which gives a general impression of the typical behaviour of its individuals, especially the extent to which it is ethical or not. It is helpful to start by drawing on professional overviews of different theories, and analyses of the theories that have statistically received most attention. For example, one extensive overview found that just four theories accounted for 174 (63%) of references in articles:2 Theoretical Change Model (TTM), Prochaska 1983 Theory of Planned Behaviour (TPB), Ajzen 1985 Social Cognitive Theory (SCT), Bandura 1986 The Information-Motivation-Behavioural-Skills Model (IMB), Fisher 1992 A further four theories accounted for an additional 32 (12%) of the surveyed articles: Health Belief Model (HBM), Rosenstock 1996 Self-Determination Theory (SDT), Deci 2000 Health Action Process Approach (HAPA), Schwarzer 1992 Social Learning Theory (SLT), a precursor of SCT, Miller 1941 One insight in looking at scientific theories is that individual researchers may themselves have been influenced by ideas that were prevalent at a particular time. An example is that many theories in economics, law and psychology in the past century were influenced by ideas about the importance of the individual, and how individuals sought personal freedom and made decisions rationally or on the basis of what was in their best interests. That idea (the basis of neoliberal capitalism) appears even in theories of behavioural researchers in the twentieth century but has since been challenged by ideas of social interconnectedness, solidarity and altruism as forces that also have relevance. An argument can be made, in reviewing chronologically the eight theories listed above, of identifying a general shift from self-centred (and hence selfish-centred) thinking towards more social, inter-connected thinking. Taking a transtheoretical, integrated perspective,3 some researchers have focused on three particularly influential theories, that describe the following criteria (Table 4.1) as core characteristics driving behaviour.4 2 R Davis, R Campbell, Z Hilton, L Hobbs and S Michie, ‘Theories of Behaviour Change across the Social and Behavioural Sciences: A Scoping View’ (2015) 9(3) Health Psychology Review 323–44. 3 The author is grateful to Victoria McCloud for discussion on this topic. 4 This chart is based on the original sources and JM Garrin, ‘Self-Efficacy, Self-Determination, and Self-Regulation: The Role of the Fitness Professional in Social Change Agency’ (2014) 6(1) Journal of Social Change 41–54.

Psychology Dethrones Rational Acting Theory  75 Table 4.1  Summary of Major Theories of Behaviour Theory

Description

Core characteristics

Self-efficacy5

Reflects the capacity for individuals to take measures to achieve targeted goals.

Mastery, competence, confidence

Self-determination6

An intrinsic, self-sustaining form of motivation that is influenced by internal stimuli; fundamentally associated with social cognition7 and personal empowerment.

Competence, autonomy, relatedness

Self-regulation8

The capacity to moderate the thoughts and emotions that govern human behaviour, in which individuals consciously attempt to control behaviour in an effort to mediate outcomes, linking to standards (eg value-driven expectancies), motivation (eg adherence to standards), and willpower (eg impulse control).9

Standards, motivation, willpower

Psychology Dethrones Rational Acting Theory It will be seen that these theories focus on the individual actor and his or her attributes (mastery, competence, confidence, motivation, willpower) with limited reference to external standards and controls. However, although self-determination and self-regulation theories focus on intrinsic motivation (competence, autonomy) they are also influenced by external factors (standards, social practice) and how external factors support an individual’s senses of competence and autonomy through emphasis on the individual’s intrinsic ethical values and sense of relatedness to others. These psychological and behavioural theories clearly contrast with the theories of pure economics and law, in which individuals are entirely rational and make all decisions based on an objective cost-benefit calculation of which choice benefits a person most.10 That mechanistic approach assumes that actors are susceptible to being – and perhaps need to be – incentivised and controlled through rational cost-benefit levers, such as financial targets and remuneration rewards (agency theory),11 and are controlled by the threat of sanctions involving adverse costs (deterrence theory). Thus, an unemotional utilitarian and a classical economist would consider that individuals, and certainly companies, only ever made decisions or base actions on an objective calculation of their self-interest, namely if likely benefits were thought to exceed costs.12 However, it was also recognised that constant surveillance and intervention is so intrusive, costly 5 A Bandura, ‘Self-efficacy: Toward a Unifying Theory of Behavioral Change’ (1977) 84(2) Psychological Review 191–215. 6 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017). 7 A Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory (Prentice-Hall, Inc, 1986). 8 H Leventhal, D Nerenz and D Steele, ‘Illness Representations and Coping with Health Threats’ in A Baum and J Singer (eds), A Handbook of Psychology and Health Vol 4 (Erlbaum, 1984). 9 RF Baumeister and KD Vohs, ‘Self-regulation, Ego Depletion, and Motivation’ (2007) 1 Social and Personality Psychology Compass 1–14. 10 eg J Bentham, An Introduction to the Principles of Morals and Legislation (JH Burns and HLA Hart, eds) (Methuen, 1789/1982). 11 MJ Jensen and WH Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’ (1976) 3(4) Journal of Financial Economics 305; see also LA Stout, ‘On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)’ (2013) 36 Seattle University Law Review 1169. 12 AC Pigou, The Economics of Welfare (Macmillan, 1920) 169–71; GS Becker, The Economic Approach to Human Behavior (University of Chicago Press, 1976); M Allingham, Rational Choice (St. Martin’s Press Inc., 1999).

76  Human Motivation and contrary to principles of individual freedom as to raise numerous problems. Continuous surveillance of behaviour and enforcement by authoritarian regulatory regimes tends to be experienced as accusatory, confrontational, punitive and coercive, and produces a culture of mistrust and resentment.13 This is even more obvious from Communist states of entire populations living in constant fear of spies, surveillance and informers.14 Around the 1950s, it was also believed that, although intrinsic motivation was central to the performance of all human and economic activities,15 many people behaved selfishly or lazily (especially at work) and needed to be externally incentivised to ensure that they worked in a hard and focused way to achieve the goals of a business – which was asserted to be just to make profit – particularly through setting people targets that triggered remuneration or bonuses. However, the growth of now extensive evidence from psychological and empirical behavioural studies has largely ousted the rationality theories, which have now been widely rejected.16 People can behave altruistically and ethically, at cost to themselves. Psychologists have shown that people individually, and in an organisational context, act in many unpredictable and irrational ways. Humans are subject to various mental short-cuts (heuristics) and biases that lead to perhaps unintended or undesirable outcomes.17 They can focus on certain goals such that other goals or ethical considerations can be forgotten (crowded out). They can persuade themselves that an action is ethical and justified when it isn’t, and they would not think that way if they had had time to think objectively about the situation or if they were not tired (cognitive dissonance). If they feel undervalued or feel that their sense of self-worth or competence is undermined (say by being subject to excessive external control, such as through targets, orders, unfair rewards or punishments), they can lose motivation and perform poorly or even become resentful, uncooperative and ineffective. As Ernst Fehr recently said, ‘there is a large body of both circumstantial and experimental evidence suggesting that a sizeable share of individuals is not entirely selfishly motivated’.18 Just this quick summary demonstrates that common ideas about the effectiveness of ‘telling people what to do’ or ‘punishing them to behave better’ are now proved to be highly contentious, sometimes plainly incorrect, and even counter-productive. If we really wish to be successful, by ourselves and working together, some deep-seated ideas have to be rethought and fresh practices introduced. The consequences for organisational managers, regulators and political leaders are profoundly important. Let us look at some of the science in greater depth.

13 B Hutter, ‘Regulating Employers and Employees: Health and Safety in the Workplace’ (1983) 20 Journal of Law and Society 452; B Hutter, Regulation and Risk: Occupational Health and Safety on the Railways (Oxford University Press, 2001). 14 M Glennie, The Balkans: Nationalism, War and the Great Powers, 1804–1999 (Penguin Books, 1999); M Glennie, The Rebirth Of History: Eastern Europe in the Age of Democracy (Penguin Books, 1990); D Galligan and M Kurkchiyan, Law and Informal Practices: The Post-Communist Experience (Oxford University Press, 2003), T Judt, Postwar: A History of Europe Since 1945 (London, William Heinemann, 2005). 15 BS Frey, Not Just for the Money: Theory of Personal Motivation (Edward Elgar, 1997), 118–19, ix. See also BS Frey and A Stutzer, Happiness and Economics: How the Economy and Institutions Affect Well-being (Princeton University Press, 2002). 16 G Loewenstein, S Rick and JD Cohen, ‘Neuroeconomics’ (2008) 59 Annual Review of Psychology 647, 661; RA Posner, ‘Rational Choice, Behavioral Economics, and the Law’ (1998) 50 Stanford Law Review 1551; AM Coleman, ‘Cooperation, Psychological Game Theory, and Limitations of Rationality in Social Interaction’ (2003) 26 Behavioral & Brain Sciences 139–43; RB Korobkin and TS Ulen, ‘Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics’ (2000) 88 California Law Review 1051, 1060–66. 17 T Gilovich, D Griffin and D Kahneman (eds), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge University Press, 2002); D Kahneman and A Tversky (eds), Choices, Values, and Frames (Cambridge University Press, 2000); D Kahneman, Thinking, Fast and Slow (Allen Lane, 2011). 18 E Fehr, Behavioral Foundations of Corporate Culture (UBS International Center of Economics in Society, November 2018), UNS Center Public Paper 7.

Theory of Planned Behaviour, Causation and Mistakes  77

Theory of Planned Behaviour, Causation and Mistakes Icek Ajzen’s theory of planned behaviour is that intention is the immediate antecedent of behaviour, and that intention is a function of three factors: attitudes toward the behaviour, subjective norms and perceived behavioural control; and that these determinants follow, respectively, from beliefs about the behaviour’s likely consequences, about normative expectations of important others (perceived social pressure to perform or not to perform the behaviour) and about the presence of factors that control behavioural performance (ability).19 However, intrinsic motivation may not be the only causal factor of actions or outcomes. Sometimes things just happen. One or more individuals may not be prime root causes of events or the causation of occurrences is multi-factorial. This wider realisation runs counter to a widelyheld tendency to respond to the occurrence of harm by identifying an individual to blame on the basis that that person was the sole proximate cause of harm. This model is the basis of legal systems directed at individuals or companies (as if they had human personality), whether under criminal law, regulatory law or civil law. But the approach overlooks other and wider causes of unintended harm or breaches of rules, especially the effect of systems, within which people may behave rationally (or predictably irrationally) and an undesirable outcome may be the inevitable result, whosever is involved. In other words, it might not be appropriate to regard an individual as causative or blameworthy. James Reason has analysed the causes of a wide range of errors, including absent-minded slips and lapses, cognitive failures and psychiatric symptoms experienced during or immediately following a period of real-life stress,20 lack of task competence, failures in planning or execution, especially involving groups, cutting corners, system failures involving multiple causes (the Swiss cheese model),21 as well as intentional acts aimed at causing harm, whether for personal gain or not.22 Reason firmly emphasises the importance of organisational culture as both ­facilitating and/ or preventing risk. At best, he describes the power of a safe culture lies in instilling a dynamic ‘collective mindfulness’ of the many entities that can penetrate, disable or bypass a system’s safeguards.23 In fact, most people make mistakes and break rules, quite frequently. Yuval Feldman concludes that legal systems have wrongly focused on assuming that people break the law because they are bad people, whereas he lists extensive evidence that many (good) people make mistakes.24 This can be for many reasons, including not realising that what they are doing is unethical,25 or where actions are driven by emotion,26 or acting in circumstances where the focus on achieving

19 I Ajzen, ‘The Theory of Planned Behavior’ (1991) 50(2) Organizational Behavior and Human Decision Processes 179–211; I Ajzen, ‘The Theory of Planned Behavior’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012). 20 J Reason, ‘Stress and Cognitive Failure’ in S Fisher and J Reason (eds), Handbook of Life Stress, Cognition and Health (Wiley, 1989) 405–21. 21 J Reason, The Human Contribution: Unsafe Acts, Accidents and Heroic Recoveries (Ashgate Publishing, 2008). 22 J Reason, A Life in Error. From Little Slips to Big Disasters (Ashgate Publishing, 2013). 23 KE Weick, KM Sutcliffe and D Obstfeld, ‘Organising for High Reliability Processes of Collective Mindfulness’ (1999) 21 Research into Organizational Behavior 23–81. 24 Y Feldman, The Law of Good People. Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018). 25 MH Bazerman and AE Tenbrunsel, Blind Spots: Why We Fail to Do What’s Right and What to Do About It (Princeton University Press, 2011). 26 J Haidt, ‘The Emotional dog and its Rational Tail: A Social Intuitionist Approach to Moral Judgement’ (2001) 108(4) Psychological Review 814.

78  Human Motivation certain goals, or the lack of focus on risks and adverse consequences, causes temporary ethical blindness.27 Feldman suggests that an incentive-based approach fails to engage with many behaviours, and that the whole focus of the criminal and regulatory enforcement systems is incorrect and ineffective, because it uses the wrong tools on the wrong people.28 He suggests that too little attention has been paid to the role of internal motivation. He cites numerous studies. Moore’s study showed how much people fail to recognise conflicts of interest, believe their own biased judgements and are easily influenced by affiliation with interested partisans.29 However, Inzlicht showed that people can be motivated to overcome their unethical biases.30 Studies by Ann Tenbrunsel and colleagues support the conclusion that an organisation’s ethical infrastructure, culture and climate are far more important than individual factors in supporting the moral awareness of staff31 and conversely can generate significant unethical behaviour if they are inadequate in this respect.32 Maintaining a sense of oneself as ethical was suggested by Nina Mazar, On Amir and Dan Ariely to explain consistent experimental findings that many good people often cheat – but only to a limited extent.33 They found that, in general, people were insensitive to the expected external costs and benefits associated with dishonest acts, but they were sensitive to contextual manipulations related to the self-concept. Further, the level of dishonesty dropped when people paid more attention to honesty standards and climbed with increased categorisation malleability.34 Others also found that most people would prefer to stay ignorant about the consequences of their actions on others’ benefits.35 Mazar and colleagues thought that dishonesty may actually decrease with external rewards. Ariely later summarised further research evidence on the extent of selfdeception and dishonesty, noting illustrations such as blindness to conflicts of interest, believing our own exaggerated stories, and collaborative cheating.36

27 N Mazar, O Amir and D Ariely, ‘The Dishonesty of Honest People: A Theory of Self-concept Maintenance’ (2008) 45(6) Journal of Marketing Research 633–44; DM Bersoff, ‘Why Good People Sometimes Do Bad Things: Motivated Reasoning and Unethical Behaviour’ (1999) 25(1) Personality and Social Psychology Bulletin 28–39; RM Kidder, How Good People Make Tough Choices: Resolving the Dilemmas of Ethical Living (Harper, 2009); DD Cremer, RV Dick and J Murnighan, ‘When Good People Do Wrong: Morality, Social Identity, and Ethical Behavior’ in Social Psychology and Organizations (Routledge, 2012); J Hollis, Why Good People Do Bad Things: Understanding Our Darker Selves (Gotham Books, 2008); MR Banaji and AG Greenwald, Blindspot: Hidden Biases of Good People (Penguin, 2008). 28 U Gneezy, S Meier and P Rey-Biel, ‘When and Why Incentives (Don’t) Work to Modify Behavior’ (2011) 25(4) The Journal of Economic Perspectives 191–209. 29 DA Moore, L Tanlu and MH Bazerman, ‘Conflict of Interest and the Intrusion of Bias’ (2010) 5(1) Judgment and Decision Making 37. 30 R Teper, ZV Segal and M Inzlicht, ‘Inside the Mindful: How Mindfulness Enhances Regulation through Improvements in Executive Control’ (2013) 22(6) Current Directions in Psychological Science 449–54. M Milyavskaya, M Inzlicht, N Hope and R Koestner, ‘Saying “No” to Temptation: Want-to Motivation Improves Self-regulation by Reducing Temptation Rather Than by Increasing Self-control’ (2015) 109(4) Journal of Personality and Social Psychology 677. M Inzlicht, BJ Schmeichel and CN Macrae, ‘Why Self-control Seems (But May Not Be) Limited’ (2014) 18(3) Trends in Cognitive Sciences 127–33. 31 A Tenbrunsel and K Smith-Crowe, ‘Ethical Decision Making: Where We’ve Been and Where We’re Going’ (2008) 2(1) Academy of Management Annals 545–607. 32 A Tenbrunsel and D Messick, ‘Ethical Fading: The Role of Self-deception in Unethical Behavior’ (2004) 17 Social Justice Research 223–36. 33 N Mazar, O Amir and D Ariely, ‘The Dishonesty of Honest People: A Theory of Self-Concept Maintenance’ (2008) 45(6) Journal of Marketing Research 633–44. 34 J Dana, RA Weber and JX Kuang, ‘Exploiting Moral Wiggle Room: Experiments Demonstrating an Illusory Preference for Fairness’ (2007) 33 Economic Theory 67–80. 35 T Larson and CM Capra, ‘Exploiting Moral Wiggle Room: Illusory Preference for Fairness? A Comment’ (2009) 4(6) Judgment and Decision Making 467–74. 36 D Ariely, The (Honest) Truth about Dishonesty. How We Lie to Everyone – Especially Ourselves (HarperCollins, 2012).

Theory of Planned Behaviour, Causation and Mistakes  79 Our ability to persuade ourselves that breaking a rule is consistent with our ethical values and sense of self-worth is widely recognised. This is a manifestation of Festinger’s theory of cognitive dissonance, which is the discomfort that we feel in the face of conflict between different values and hence actions.37 When we are confronted with evidence that challenges our deeply held beliefs, which therefore threatens our self-worth, we are more likely to reframe the evidence,38 and deny that we have acted unethically, than we are to accept self-censure. For a behaviour to lead to a cognitive or attitude change, we must first experience taking responsibility for bringing about an adverse event (dissonance arousal) and then accept personal responsibility for the consequences of the behaviour (dissonance motivation).39 A possible mechanism for change towards more healthy future behaviours involves Ajzen’s mechanism of planned behaviour. We must not, of course, generalise about how people think and act at the expense of ignoring the effects of different personalities,40 mental abilities and injuries, exposure to experiences, depth of knowledge41 and conditions (such as emotional states42 and tiredness). Feldman refers to differences in personalities, relating to moral identity,43 level of moral disengagement,44 and moral firmness,45 and context-specific measures. He suggests that the situational factor is much more influential than the personal factor in causing wrongdoing.46 Aquino’s studies show that people who have strong moral identity are readily influenced by situational factors that increase the accessibility of their moral identify (moral priming), whereas the converse occurred in those who have low moral identity.47 There is certainly evidence that different communities across the world can vary in their levels of intrinsic honesty, which is linked with the prevalence of rule violations.48

37 L Festinger, A Theory of Cognitive Dissonance (Row, Peterson, 1957). 38 M Syed, Black Box Thinking. Marginal Gains and the Secrets of High Performance (John Murray, 2015) 80. 39 J Cooper, ‘Cognitive Dissonance Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins, Handbook of Theories of Social Psychology (SAGE, 2012) ch 18. 40 PT Costa and RR McCrae, ‘The Five-factor Model of Personality and Its Relevance to Personality Disorders’ (1992) 6(4) Journal of Personality Disorders 343–59. See also D Nettle, Personality: What Makes You the Way You Are (Oxford University Press, 2007), noting RR McCrae and PT Costa Jr, ‘A Five-Factor Theory of Personality’ in LA Pervin and OP John (eds), Handbook of Personality: Theory and Research (Guilford Press, 1999): Neuroticism, Extraversion, Openness to experience, Agreeableness, and Conscientiousness. See also EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012) categorised the very large array of personality traits into five broad domains: extroversion versus introversion, antagonism versus agreeableness, conscientiousness, neuroticism, and openness to experience. But see A Bandura, ‘A Social Cognitive Theory of Personality’ in L Pervin and O John (eds), Handbook of Personality 2nd edn (Guilford Publications, 1999). 41 MFH Schmidt, H Rakoczy and M Tomasello, ‘Young Children Enforce Social Norms Selectively Depending on the Violator’s Group Affiliation’ (2012) 124(3) Cognition 325; MFH Schmidt and M Tomasello, ‘Young Children Enforce Social Norms’ (2012) 21(4) Current Directions in Psychological Science 232–36. 42 KJ Eskine, NA Kacinik and J Prinz, ‘A Bad Taste in the Mouth: Gustatory Disgust Influences Moral Judgment’ (2011) 22(3) Psychological Science 295–99; E Ghelfi et al, ‘Reexamining the Effect of Gustatory Disgust on Moral Judgment: A Multilab Direct Replication of Eskine, Kacinik, and Prinz’ (2020) 3(1) Advances in Methods and Practices in Psychological Science 3. 43 A Reed II and KF Aquino, ‘Moral Identity and the Expanding Circle of Moral Regard Toward Out-groups’ (2003) 84(6) Journal of Personality and Social Psychology 1270. 44 A Bandura, ‘Moral Disengagement in the Perpetration of Inhumanities’ (1999) 3(3) Personality and Social Psychology Review 193–209. 45 S Shalvi and D Leiser, ‘Moral Firmness’ (2013) 93 Journal of Economic Behaviour 400–07. 46 Y Feldman, The Law of Good People. Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018) 127. 47 K Aquino, D Freeman, A Reed, W Felps and VKG Lim, ‘Testing a Social-Cognitive Model of Moral Behavior: The Interactive Influence of Situations and Moral Identity Centrality’ (2009) 97(1) Journal of Personality and Social Psychology 123–41. 48 S Gächter and JF Schulz, ‘Intrinsic Honesty and the Prevalence of Rule Violations Across Societies’ (2016) 531 (7595) Nature 496.

80  Human Motivation

Human Agency Theory: Deliberate Actions Albert Bandura’s influential Social Cognitive Theory (SCT) aims to explain how humans act consciously and purposively as agents in achieving goals (belief in self-efficacy, as opposed to how people react to external stimuli). Like many others, his work grew out of clinical psychology and psychotherapy, such as treating people with phobias. He was alarmed at a growing tendency in the 1960s at the deleterious effects on behaviour and society of media and entertainment stories about violence.49 He suggests that there are two key elements to human agency: a cognitive element and a social element. The social element is founded on the recognition that human functioning is rooted in social systems. Bandura’s starting point is with the idea of personal agency, for which he identifies four core cognitive features:50 intentionality (intentionally acting purposively from choice), forethought (acting through motivation to achieve a goal in the expectation of achieving an envisaged outcome),51 self-reactiveness (motivating and shaping functions through self-monitoring, performance self-guidance via personal standards, and corrective self-reactions) and self-reflectiveness (self-examination and evaluation of motivation, values, objectives and actions).52 Bandura said that the self-regulatory processes were governed by comparing performance against personal goals and standards rooted in a value system and sense of personal identity, investing activities with meaning and purpose. Acting in accordance with such values gives satisfaction and a sense of self-worth, or the converse of self-censure. Goals have to be regarded as achievable (adequately specific and practically possible) and worth achieving in order to generate motivation. An important consequence is that these goals can be differentiated by distance in future time and by generality, and that this can generate ‘achievement by hierarchically structured goal systems combining distal aspirations with proximal self-guidance’.53 Bandura notes that self-regulation operates both across aspirational and moral spheres of functioning. A person will make a moral judgement of the rightness or wrongness of conduct evaluated against personal standards and situational circumstances, and self-sanctions.54 However, Bandura accepts that there are many psychological manoeuvres by which people selectively morally disengage their moral values in evaluating particular actions. Importantly, Bandura agrees that major advances can only be achieved by setting ambitious goals ‘through collaboration fuelled by common interest and purpose’.55

49 A Bandura, ‘Social Cognitive Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 17. 50 A Bandura, ‘Toward a Psychology of Human Agency’ (2006) 1 Perspectives on Psychological Science 164–80; A Bandura, ‘The Reconstrual of “Free Will” from the Agentic Perspective of Social Cognitive Theory’ in J Baer, JC Kaufman and RF Baumeister (eds), Are We Free? Psychology and Free Will (Oxford University Press, 2008) 86–127. 51 A Bandura, Social Foundations of Thought and Action: A Social Cognitive Theory (Prentice-Hall, Inc, 1986). 52 A Bandura, ‘Social Cognitive Theory: An Agentic Perspective’ (2001) 52 Annual Review of Psychology 1–26. 53 ibid; A Bandura, ‘Self-regulation of Motivation through Anticipatory and Self-reactive Mechanisms’ in RA Dienstbier (ed), Perspectives on Motivation: Nebraska Symposium on Motivation (University of Nebraska Press, 1991) 38: 69–164. 54 A Bandura, ‘Social Cognitive Theory of Moral Thought and Action’ in WM Kurtines and JL Gewirtz (eds), Handbook of Moral Behavior and Development Vol 1 (Erlbaum, 1991); A Bandura, ‘Selective Exercise of Moral Agency’ in TA Thorkildsen and HJ Walberg (eds), Nurturing Morality (Kluwer Academic, 2004). 55 A Bandura, ‘Social Cognitive Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) 369.

Self-Determination Theory: Competence, Autonomy and Relatedness  81

Self-Determination Theory: Competence, Autonomy and Relatedness Edward Deci and Richard Ryan’s Self-Determination Theory (SDT)56 holds that the means by which internal or external motivations become dominant for action in any particular situation is dependent on the extent to which our basic psychological needs (defined functionally as satisfactions required for healthy development and wellness) are functionally satisfied. The three basic psychological needs they identify are our need for competence, relatedness and autonomy. They define these like this. Competence is the feeling of satisfaction that accompanies the achievement of effects on one’s environment.57 This encompasses ownership of causational efficacy and the acquisition and application of skills. Autonomy means behaving freely in accordance with the self ’s own overarching values, needs and interests.58 This does not mean individualism as complete freedom, nor being free from external influences, or proximal stimuli. It means that actions are accepted, valued and endorsed by the self as a matter of self-determination and ‘self-compatibility’.59 Since experience is always of something other than the self, the self is conceived to be ‘self-as-process’, a set of spontaneous, integrative processes that are fluid and emergent, ‘aids in regulating action and adapting to circumstances’.60 Relatedness is ‘the feeling of belonging, a basic need to feel responded to, respected, and important to others, and conversely, to avoid rejection, insignificance, and disconnectedness’.61 The most powerful forces derive from the quality of experiences of partners within close relationships. The need to satisfy the three psychological needs is a functional requirement, so its satisfaction or frustration will affect functioning and wellness respectively for better or worse. Positive or negative outcomes are, therefore, produced spontaneously by effects on autonomy, competence or relatedness.62 The balance of the three elements is important to wellness and adjustment. Other needs can also be relevant in some circumstances, such as deficit needs (for security and selfesteem) or thwarting of growth needs, which emerge as most salient under adverse conditions.63 Ryan and Deci suggest that an individual ‘has multiple identities, all being managed by values and regulations that have been more or less fully integrated into a single, coherent self ’.64 ‘The more integrated an identity is, the greater its benefit is for individual flourishing’.65 56 The main books are: EL Deci, Intrinsic Motivation (Plenum Press, 1975); EL Deci and RM Ryan, Intrinsic Motivation and Self-Determination in Human Behaviour (Plenum Press, 1985); EL Deci with R Flaste, Why We Do What We Do. Understanding Self-Motivation (Penguin, 1995); EL Deci and RM Ryan (eds), Handbook of Self-determination Research (University of Rochester Press, 2002); RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017). 57 This draws on RW White, Ego and Reality in Psychoanalytic Theory: A Proposal Regarding Independent Energies (International Universities Press, 1963) 185. 58 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 55–75. 59 ibid, 56. RM Ryan and EL Deci, ‘Autonomy is No Illusion: Self-determination Theory and the Empirical Study of Authenticity, Awareness, and Will’ in J Greenberg, SL Koole and T Pyszczynski (eds), Handbook of Experimental Existential Psychology (Guilford Press, 2004). 60 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 79. 61 ibid, 96. 62 ibid, 248. 63 ibid, 255. 64 ibid, 400. 65 ibid, 392.

82  Human Motivation In constant interactions with others in a social world, individuals constantly process external influences, internalising values, beliefs, practices or behavioural regulations from external sources and transforming them into one’s own.66 The extent to which this internalisation process occurs determines the extent to which individuals are able to carry out behaviours on their own, in the absence of immediate contingencies or surveillance. The outputs fall along a spectrum of autonomous or controlled behaviour. ‘The more fully integrated a value or goal is, the more the person is effective in self-regulation’.67 A person can also not be motivated to behave, or behaves in a way that is not mediated by intentionality (amotivation).68 Ryan and Deci hold that behaviour that is regulated through more autonomous or integrated forms of internalisation will tend to display higher performance, persistence and quality. The social situation should support a person’s need for relatedness, competence and autonomy. The opposite will apply to the extent that the context is more controlling, and that needs are thwarted.69 More integrated functioning (mindfulness) is promoted by greater focus on intrinsic goals relative to extrinsic goals.70 Thus, workers should be empowered not overpowered.71 The SDT framework explains why some incentives, rewards, evaluations, directives and feedback systems work and others backfire.72 Culture is ‘perhaps the most pervasive influence on human behaviour, as well as the most complex to conceptualize and measure’.73 This means respecting the perspectives, values and concerns of all participants,74 and avoiding authoritarian and controlling behaviours and culture.75 The analysis also applies in distinguishing between a totalitarian or fascist regime and a democratic society.76 Legitimacy is increase by fairness in the process of enacting and applying laws, and the content of the laws and policies.77 Inequality and income distribution in a society has a negative effect on cohesion and autonomy. Wilkinson and Picket conclude: ‘We have seen how inequality affects trust, community life, and violence, and how – through the quality of life – it predisposes people to be more or less affiliative, empathic or aggressive.’78 ‘Considerable research has shown that when people are more focused on competition and attaining money, they are

66 RM Ryan, JP Connell and EL Deci, ‘A Motivational Analysis of Self-determination and Self-regulation in Education’ in C Ames and RE Ames (eds), Research on Motivation in Education: The Classroom Milieu (Academic Press, 1985). 67 ibid, 189. 68 ibid, 190. 69 ibid, 202–08. 70 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 289. 71 534, citing N Doshi and L McGregor, Primed to Perform: How to Build the Highest Performing Cultures through the Science of Total Motivation (HarperCollins, 2015). 72 M Gagné, EL Deci and RM Ryan, ‘Self-determination Theory Applied to Work Motivation and Organizational Behavior’ in DS Ones, N Anderson, HK Sinangil and C Viswesvaran (eds), The SAGE Handbook of Industrial, Work, and Organizational Psychology 2nd edn (Sage, 2017). 73 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 565. 74 RG Craven, RM Ryan, J Mooney, RJ Vallerand, A Dillon and F Blacklock, ‘Toward a Positive Psychology of Indigenous Thriving and Reciprocal Research Partnership Model’ (2016) 47 Contemporary Educational Psychology 32–43; RJ Wlodkowski and MB Ginsberg, Diversity and Motivation: Culturally Responsive Teaching (Jossey-Bass, 1995). 75 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 589. 76 CM Gonzalez and TR Tyler, ‘The Psychology of Enfranchisement: Engaging and Fostering Inclusion of Members through Voting and Decision-making Procedures’ (2008) 64(3) Journal of Social Issues 447–66. 77 See eg A Mankad and M Greenhill, ‘Motivational Indicators Predicting the Engagement, Frequency and Adequacy of Rainwater Tank Maintenance’ (2014) 50 Water Resources Research 29–38. 78 RG Wilkinson and KE Pickett, The Spirit Level: Why Equality is Better for Everyone (Penguin, 2010), 236.

Simplification  83 likely to be less autonomously motivated79 and more likely to display a variety of negative social behaviors and a lower relatedness to their community.’80 The more hierarchical the power structure of a group is, the less prone are lower ranked members to cooperate.81

Autonomy, Mastery and Purpose Daniel Pink proposed a slightly different set of three criteria from SDT – autonomy, mastery and purpose – as an effective system for motivating people.82 His model was based on fuelling intrinsic desires (Kahneman’s heuristic Type I thinking) instead of extrinsic ones, focusing on the inherent satisfaction of an activity itself rather than any external reward to which it might lead. Pink’s criteria of autonomy and mastery are clearly close to Deci and Ryan’s competence and autonomy criteria. His addition of ‘purpose’ is significant, in that he drew on the need to provide motivational goals, but ones that delivered lasting value and deep psychological satisfaction rather than transitory or competitive advantage. Thus, for example, he advocated paying fair remuneration but not constantly emphasising it (and getting it out of sight) by linking it to targets.

Simplification If you want to make someone do something, then make it easy for them.83 Cognitive overload and conflicting values and priorities make life more difficult, leading to crowding out, lack of focus and confusion. Recent research on regulatory rules found that the more components (what is in the rule) or connections (how the rule inter-relates to other rules) a rule had, the greater the likelihood of non-compliance.84 Thus, in addition to considering compliance with legal rules in the context of economic costs or social costs, cognitive demands on boundedly rational members of a group have to be taken into account. A consequence of this is that generalisations about the effect of rules and controls has to be considered at the level of individual people rather than by generalisations. It has also been found that providing feedback to organisations in inspection reports that specify non-compliance with particular rules can trigger organisational attention on routines as targets, thereby prompting the remediation of noncompliance.85 But this focus on ‘compliance’ might not direct attention to achieving general improvements in performance,

79 Eg EL Deci, R Koestner and RM Ryan, ‘A Meta-analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation’ (1999) 71(1) Review of Educational Research 1–27; J Reeve and EL Deci, ‘Elements of the Competitive Situation That Affect Intrinsic Motivation’ (1996) 22(1) Personality and Social Psychology Bulletin 24–33. 80 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 610. 81 KA Cronin, DJ Acheson, P Hernández and A Sánchez, ‘Hierarchy Is Detrimental for Human Cooperation’ (2015) Scientific Reports 5, available at www.nature.com/articles/srep18634. 82 DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009) ch 3. 83 E Fehr, Behavioral Foundations of Corporate Culture (UBS International Center of Economics in Society, November 2018), UNS Center Public Paper 7. 84 DW Lehman, B Cooil and R Ramanujam, ‘The Effects of Rule Complexity on Organizational Noncompliance and Remediation: Evidence from Restaurant Health Inspections’ (2020) 46(8) Journal of Management 1436. 85 eg G Anand, J Gray and E Siemsen, ‘Decay, Shock, and Renewal: Operational Routines and Process Entropy in the Pharmaceutical Industry’ (2012) 23 Organization Science 1700–16; PR Haunschild, F Polidoro and D Chandler, ‘Organizational Oscillation between Learning and Forgetting: The Dual Role of Serious Errors’ (2015) 26 Organization Science 1682–701.

84  Human Motivation behaviour or culture, or new ways of doing things. Individuals tend to simplify information that can distort its meaning and implications.86

Morality Many scholars have found that morality is an intrinsic component of behaviour: this has been referred to above in the theories of Bandura, Ariely and others. As discussed in chapter three, biologists and anthropologists suggest that human evolution of living in cooperative groups has produced linked genetic and psychological factors that support social relationships through concepts based on ethical values that are shared by group members. Haidt suggests that the mechanisms are primarily intuitive rather than cognitive, and are based on innate needs for care, fairness, loyalty, authority and sanctity – as opposed to avoiding harm, cheating, betrayal, subversion and degradation.87 Religion has played a strong role in defining the ethical code of a people for many centuries. The extent to which relationships are rewarding, fair and equitable is the basis of Equity Theory that supports comfortable relationships: both reward and fairness are critical.88 Fairness has been found to have a positive effect on people’s decisions to cooperate with the collective interest.89 David Johnson, who has studied cooperation extensively, calls simply for the development of moral bonds among citizens:90 Establishing such a moral bond (to act in the service of the common good and shape the destiny of their society) requires (a) citizen participation in their own governance and (b) a common set of values. Participation involves both actively engaging in political discourse and seeking out and valuing the participation of all other citizens, especially when their views conflict with one’s own.

Value-based decision-making, point out Magda Osman and Alex Wiegmann, describes decisionmaking in situations in which we face a choice between options associated with different rewards (eg, monetary, social) and costs (eg, effort, risk, outcome probability).91 Robert Cialdini suggests that it is important to distinguish in a given situation between injunctive norms (what most others approve/disapprove) and descriptive norms (what most others do), and, since they can act antagonistically, to focus attention on the type of norm desired to operate.92 His experiment with providing different information to visitors to Arizona’s Petrified Forest National Park found that focusing message recipients on descriptive information was most likely to increase theft, whereas focusing

86 JE Russo, KA Carlson, MG Meloy and K Yong, ‘The Goal of Consistency as a Cause of Information Distortion’ (2008) 137 Journal of Experimental Psychology: General 456–70; KE van Oorschot, H Akkermans, K Sengupta and LN van Wassenhove, ‘Anatomy of a Decision Trap in Complex New Product Development Projects’ (2013) 56 Academy of Management Journal 285–307. 87 J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 88 E Hatfield and RL Rapson, ‘Equity Theory in Close Relationships’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 36. On the importance of fairness as a social force see also A Biel, ‘Factors Promoting Cooperation’ in A Biel, M Snyder, TR Tyler and M van Vugt (eds), Cooperation in Modern Society: Promoting the Welfare of Communities, States and Organizations (Routledge, 2000). 89 E van Dijk and H Wilke, ‘Differential Interests, Equity, and Public Good Provision’ (1993) 29(1) Journal of Experimental Social Psychology 1–16. 90 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015) 159. 91 M Osman and A Wiegmann, ‘Explaining Moral Behavior: A Minimal Moral Model’ (2017) 64(2) Experimental Psychology 68–81. 92 RB Cialdini, ‘The Focus Theory of Normative Conduct’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 41.

Social Exchange and the Need to Belong  85 them on injunctive normative information was most likely to suppress it.93 Hence, he proposed the Focus Theory of Normative Conduct, which asserts that norms are only likely to influence behaviour directly when they are focal in attention and, thereby, salient in consciousness.

Incentives and Crowding Out Various researchers have identified differential effects between internal and external motivation. Experiments by Ariely and colleagues found that introducing or raising incentives does not necessarily improve performance, it can even make it worse.94 They and Teresa Amabile concluded that tasks that involve algorithmic effort (production of similar items on a production line, as long as the operator does not get tired) can be incentivised by external incentives like contingent rewards and punishments, but they can cause ‘devastating’ impairment of performance for heuristic cognitive (right brain, judgemental) tasks (such as adding numbers or problem solving).95 Amabile summarised the conclusion: ‘Intrinsic motivation is conducive to creativity; controlling extrinsic motivation is detrimental to creativity.’96 Ernst Fehr predicts that external incentives that use monetary rewards or punishments may undermine internal motivation to comply.97 We discuss this further in chapter 11. The theory that specific (ethical) values and intentions can be ‘crowded out’ by other incentives or distractions has been widely supported.98

Social Exchange and the Need to Belong A theory of social exchange was defined by Russell Cropanzano and colleagues to explain interactions, especially behaviour in workplaces.99 The ideas start with understanding people working together in interactions and exchanges100 that are interdependent and generate mutual obligations. They built on Foa and Foa’s model in which different sorts of resources can be exchanged in different sorts of relationships.101 Cropanzano and colleagues suggested that multiple formal 93 RB Cialdini, LJ Demaine, BJ Sagarin, DW Barrett, K Rhoads and PL Winter, ‘Managing Social Norms for Persuasive Impact’ (2006) 1(1) Social Influence 3–15. 94 D Ariely, U Gneezy, G Loewenstein and N Mazar, ‘Large Stakes and Big Mistakes’ (2009) 76 Review of Economic Studies 451. 95 TM Amabile, Creativity in Context (Westview Press, 1996), 119; JC Kaufman and RJ Sternberg (eds), The International Handbook of Creativity (Cambridge University Press, 2006) 18; DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009); E Deci, R Ryan and R Koestner, ‘A Meta-Analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation’ (1999) 125(6) Psychological Bulletin 659; A Kohn, Punished by Rewards. The Trouble with Gold Stars, Incentive Plans, A’s, Praise, and Other Bribes (Houghton Mifflin, 1993 and 2018). 96 TM Amabile, Creativity in Context (Westview Press, 1996) 119. 97 E Fehr and S Gächter, Do Incentive Contracts Undermine Voluntary Cooperation? (2002) University of Zurich Working Paper No 34; E Fehr and B Rockenbach, ‘Detrimental Effects of Sanctions on Human Altruism’ (2003) 422(6928) Nature 137. General review: BS Frey, Not Just for the Money: An Economic Theory of Personal Motivation (Edward Elgar, 2007). 98 S Bowles, ‘Policies Designed for Self-Interested Citizens May Undermine the “Moral Sentiments”: Evidence from Economic Experiments’ (2008) 320(5883) Science 1605–09. 99 R Cropanzano and MS Mitchell, ‘Social Exchange Theory: An Interdisciplinary Review’ (2005) 31(6) Journal of Management 874. 100 R Cropanzano, ZS Byrne, DR Bobocel and DE Rupp, ‘Moral Virtues, Fairness Heuristics, Social Entities, and other Denizens of Organizational Justice’ (2001) 58(2) Journal of Vocational Behavior 164–209. 101 UG Foa and EB Foa, Societal Structures of the Mind (CC Thomas, 1974); UG Foa and EB Foa, ‘Resource Theory: Interpersonal Behavior As Exchange’ in KJ Gergen, MS Greenberg and RH Willis (eds), Social Exchange: Advances in Theory and Research (Plenum, 1980).

86  Human Motivation and informal exchanges succeed in building a relationship if they build trust102 and commitment to mutual support. The subject matter of any individual exchange (such as money, promises, advice or support) is only relevant in that it is ‘the output from a past transaction [that] can be the resource exchanged in a future transaction’.103 Hence, high-quality relationships will only be generated under conditions. Humans’ powerful motivation to form and sustain at least a minimum number of social connections was defined by Roy Baumeister as the ‘Need-to-belong Theory’, explaining selfesteem as an internal measure of a person’s chances of having good relationships.104 Baumeister noted women’s emphasis on close, intimate relationships and men’s orientation towards larger networks of shallower relationships. He also noted research that showed that rejection, thwarting the need to belong, could produce emotional numbness and even aggression. He concluded that culture depends on belongingness. Self-esteem is thought by Mark Leary to be a psychological gauge of the degree to which people perceive that they are relationally valued and socially accepted by others.105 He thought that actions appearing to protect or increase a person’s selfesteem are usually motivated by protecting or enhancing their relational value to others, and thus increasing the likelihood of interpersonal acceptance. Feldman’s overview concluded that the importance of group identity and the individual’s need to belong is beyond debate.106 The motivation to fit into a group is a powerful motivator that can counteract an individual’s self-interest and intrinsic values.107 Kahan puts forward a different explanation that a person may need to believe that other members of society share the same commitment to the law, so as to maintain one’s own commitment to society and its rules.108

Cooperation in Groups There have been various references above to the fact that the ‘behaviour’ of a group or an institution is only a generic generalised observation about the typical actions and culture of (some or all of) the individual members of that body. It is the behaviour of humans that is fundamental in considering an organisation, since it is those involved with it who act, and affect and control the body’s actions and outcomes. Thus, it is important to understand, and affect, the behaviour of people who interact in groups. The type and context of the group will be relevant, such as a loose

102 LD Molm, ‘Theories of Social Exchange and Exchange Networks’ in G Ritzer and B Smart (eds), Handbook of Social Theory (Sage, 2000). 103 R Cropanzano and MS Mitchell, ‘Social Exchange Theory: An Interdisciplinary Review’ (2005) 31(6) Journal of Management 874. Citing R Eisenberger, R Huntington, S Hutchison and D Sowa, ‘Perceived Organizational Support’ (1986) 71 Journal of Applied Psychology 500–07; R Eisenberger, S Armeli, B Rexwinkel, PD Lynch and L Rhoades, ‘Reciprocation of Perceived Organizational Support’ (2001) 86 Journal of Applied Psychology 42–51; R Eisenberger, F Stinglhamber, C Vandenberghe, IL Sucharski and L Rhoades, ‘Perceived Supervisor Support: Contributions to Perceived Organizational Support and Employee Retention’ (2002) 87 Journal of Applied Psychology 565–73. 104 RF Baumeister and MR Leary, ‘The Need to Belong: Desire for Interpersonal Attachments As a Fundamental Human Motivation’ (1995) 117(3) Psychological Bulletin 497; RF Baumeister, ‘Need-to-Belong Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 32. 105 MR Leary, ‘Sociometer Theory’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) ch 33. 106 Y Feldman, The Law of Good People. Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018) 108. 107 MB Brewer and RM Kramer, ‘Choice Behaviour in Social Dilemmas: Effects of Social Identity, Group Size, and Decision Framing’ (1986) 50(3) Journal of Personality and Social Psychology 543. 108 DM Kahan, ‘Trust, Collective Action, and Law’ (2001) 81 Boston University Law Review 333.

Cooperation in Groups  87 group like a club or a tighter group like a public or private corporation, or an army. The purposes, social behaviours and outcomes of the group will be relevant. But it is human beings that are essentially involved, and the same principles around the effect of external influences from leaders, colleagues and outsiders will influence the internal motivation of individual members through the same psychological mechanisms as outlined above. As we have seen above, drivers of social influence include a drive to conform, the creation of group social norms. Attempts at incentivising behaviour by issuing orders, incentivisation through setting targets and remuneration, and punishment of free riders or those who break rules, may all be counter-productive, depending on how they affect individuals’ senses of purpose, autonomy, competence, relatedness and so on. The problems of focus, crowding out, stress, lack of time to think, tiredness and so on all apply – and may be particularly salient in organisational settings. Morton Deutsch’s social interdependence theory addresses how the accomplishment of each individual’s goals is affected by the actions of others.109 Deutsch and Johnson identify two types of social interdependence:110 Positive interdependence (cooperation) exists when individuals perceive that they can reach their goals if and only if the other individuals with whom they are cooperatively linked also reach their goals. Participants, therefore, promote each other’s efforts to achieve the goals. Negative interdependence (competition) exists when individuals perceive that they can reach their goals if and only if the other individuals with whom they are competitively linked fail to reach their goals. Participants, therefore, obstruct each other’s efforts to achieve their goals.

On people’s need to belong and hence conform to perceived social norms, Deutsch’s ‘Crude Law of Social Relations’ states: ‘The characteristic processes and effects elicited by a given type of social relationship also tend to elicit that type of social relationship; and a typical effect tends to induce the other typical effects of the relationship.’111 Social norms can override ethical norms, as occurs in criminal gangs and the Mafia (social network theory).112 Surveying extensive literature on how institutions influence and shape behaviour, Christoph Engel and Elke Weber113 note that institutions typically resort to routines, procedures and problem-solving cycles,114 as well as skill sets and professionalism,115 to assist rational decision-making

109 M Deutsch, ‘A Theory of Cooperation and Competition’ (1949) 2 Human Relations 129–52; M Deutsch and HG Gerard, ‘A Study of Normative and Informational Social Influence upon Individual Judgment’ (1955) 51 Journal of Abnormal and Social Psychology 629; M Deutsch, ‘Cooperation and Trust: Some Theoretical Notes’ in M Jones (ed), Nebraska Symposium on Motivation (University of Nebraska Press, 1962); DW Johnson and RT Johnson, Cooperation and Competition: Theory and Research (Interaction Book Company, 1989); DW Johnson and RT Johnson, ‘An Educational Psychology Success Story: Social Interdependence Theory and Cooperative Learning’ (2009) 38(2) Educational Researcher 365–79. 110 DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015) 8. 111 M Deutsch, ‘A Theory of Cooperation – Competition and Beyond’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) 283. 112 D Palmer and C Moore, ‘Social Networks and Organizational Wrongdoing in Context’ in D Palmer, K Smith-Crowe and R Greenwood (eds), Organizational Wrongdoing: Key Perspectives and New Directions (Cambridge University Press, 2016); SE Asch, ‘Effects of Group Pressure Upon the Modification and Distortion of Judgments’ in H Guetzkow (ed), Groups, Leadership and Men (Carnegie Press, 1951); DJ Brass, KD Butterfield and BC Skaggs, ‘Relationships and Unethical Behaviour: A Social Network Perspective’ (1998) 23 Academy of Management Review 14. 113 C Engel and EU Weber, ‘The Impact of Institutions on the Decision How to Decide’ Journal of Institutional Economics (2007), 3:3, 323–49. 114 eg JV May and AB Wildavsky, The Policy Cycle (Sage, 1978). 115 A Gehlen, ‘Mensch und Institutionen’ in A Gehlen (ed), Anthropologische Forschung: Zur Selbstbegegnung und Selbstentdeckung des Menschen (Rowohlt, 1960), 69–77, 71; WM Goldstein and RM Hogarth, ‘Judgment and Decision Research. Some Historical Context’ in WM Goldstein and RM Hogarth (eds), Research on Judgement and Decision Making (Cambridge University Press, 1997) 3–65, 29.

88  Human Motivation (Kahneman’s Type II reasoning rather than Type I intuitive heuristic). Introducing a need to justify actions tends to make an individual aware of complexities of a task,116 makes accountability salient117 and typically also raises the stakes. Higher stakes and risk tend to induce greater preparation,118 to be more open to facts,119 to take more of the available information into account,120 to show greater internal consistency121 and to become more risk averse.122 Engel and Weber also note that markets can also induce similar effects,123 helping participants establish mutual expectations. However, they also note the evidence that perceived accountability induces individuals to work harder, but not necessarily smarter.124 As a result, the quality of decisions improves for standard tasks, but may deteriorate for unusual tasks.125 Decision-makers become more likely to exhibit dominant responses126 and focus on what they are good at.127 It follows that the culture of an organisation, or a sub-group, is a powerful influence on how people typically behave, since it influences processes, instinctive reactions and which ethical values are applied. Ernst Fehr’s review affirms the relevance of social norms on culture,128 and his research notes the large body of evidence that much human behaviour is not selfishly motivated and that people invest in upholding normative systems involving personal cost.129 We will look at organisational culture in greater depth in chapter eight. People’s shared belief in their collective power to produce desired results is, concludes Bandura, a key element of collective agency.130 ‘Group attainments are the product not only of the shared

116 G Cvetkovich, ‘Cognitive Accommodation, Language, and Social Responsibility’ (1978) 41 Social Psychology 149–55; R Hagafors and B Brehmer, ‘Does Having to Justify one’s Judgments Change the Nature of the Judgment Process?’ (1983) 31 Organizational Behavior and Human Decision Processes 223–32; E Weldon and GM Gargano, ‘Cognitive Loafing: The Effects of Accountability and Shared Responsibility on Cognitive Effort’ (1988) 14 Personality and Social Psychology Bulletin 159–71. 117 R Hagafors and B Brehmer, ‘Does Having to Justify one’s Judgments Change the Nature of the Judgment Process?’ (1983) 31 Organizational Behavior and Human Decision Processes 223–32. 118 PE Tetlock, ‘Accountability and Complexity of Thought’ (1983) 45 Journal of Personality and Social Psychology 74–83. 119 JS Lerner, JH Goldberg and PE Tetlock, ‘Sober Second Thought: The Effects of Accountability, Anger, and Authoritarianism on Attributions of Responsibility’ (1998) 24 Personality and Social Psychology Bulletin 563–74. 120 PE Tetlock, ‘Accountability and the Perseverance of First Impressions (1983) 46 Social Psychology Quarterly 285–92; PE Tetlock and R Boettger, ‘Accountability: A Social Magnifier of the Dilution Effect’ (1989) 57 Journal of Personality and Social Psychology 388–98. 121 R Hagafors and B Brehmer, ‘Does Having to Justify one’s Judgments Change the Nature of the Judgment Process?’ (1983) 31 Organizational Behavior and Human Decision Processes 223–32; RH Ashton, ‘Effects of Justification and a Mechanical Aid on Judgment Performance’ (1992) 52 Organizational Behavior and Human Decision Processes 292–306. 122 JM Blatt, ‘The Utility of Being Hanged on the Gallows’ (1979) 2 Journal of Post Keynesian Economics 231–39. 123 See summaries at GS Becker, ‘Irrational Behaviour and Economic Theory’ (1962) 70 Journal of Political Economy 1–13; CR Plott, ‘Rational Choice in Experimental Markets’ in RM Hogarth and MW Reder (eds), Rational Choice: The Contrast between Economics and Psychology (University of Chicago Press, 1986) 117–44. 124 JW Payne, JR Bettman and EJ Johnson, ‘Adaptive Strategy Selection in Decision Making’ (1988) 14 Journal of Experimental Psychology 534–52. 125 B Pelham and E Neter, ‘The Effect of Motivation on Judgment Depends on the Difficulty of the Judgment’ (1995) 68 Journal of Personality and Social Psychology 581–94, 582; RM Hogarth, BJ Gibbs, CRM McKenzie and MA Marquis, ‘Learning from Feedback. Exactingness and Incentives’ in WM Goldstein and RM Hogarth (eds), Research on Judgement and Decision Making (Cambridge University Press, 1997) 244–84, 247–49. 126 JS Lerner and PE Tetlock, ‘Accounting for the Effects of Accountability’ (1999) 125 Psychological Bulletin 255–75, 259. 127 RM Hogarth, BJ Gibbs, CRM McKenzie and MA Marquis, ‘Learning from Feedback. Exactingness and Incentives’ in WM Goldstein and RM Hogarth (eds), Research on Judgement and Decision Making (Cambridge University Press, 1997), 244–84, 247. 128 E Fehr, Behavioral Foundations of Corporate Culture (UBS International Center of Economics in Society, November 2018), UNS Center Public Paper 7. 129 E Fehr and I Schurtenberger, ‘Normative Foundations of Human Cooperation’ (2018) 2 Nature Human Behavior 458; E Fehr and S Gächter, ‘Cooperation and Punishment in Public Goods Experiments’ (2000) 90 American Economic Review 980. 130 A Bandura, Self-Efficacy: The Exercise of Control (Freeman, 1997).

Conclusions  89 intentions, knowledge, and skills of its members, but also of the interactive, coordinated, and synergistic dynamics of their transactions.’131 The routines and transactions within organisations can generate these shared perceptions, whereas in civil communities the effect has to be produced by more diffuse means, such as the transactional dynamics of multiple social interactions such as common pursuits, involvement in clubs, shared senses of place, security and community.

Conclusions Human cooperation can be powerfully supported or inhibited by people’s motivation. Intrinsic motivation is generally a far more effective and efficient mechanism than external motivation. In other words, external sources of motivation will be particularly effective and efficient if they successfully engage individual motivation. Supporting individuals’ intrinsic motivation to achieve goals that are ethical and satisfy individual and common social purposes will be particularly effective in any organisation and in a fair community and society. People’s actions and motivation to cooperate will be affected by external forces. However, behavioural research has clarified that how external requirements and forces affect people’s basic needs and their internal motivation is critical to effectiveness. Historical ideas on authoritarian incentivisation and punishment have been shown to be erroneous and even damaging – although still widely believed and applied. SDT’s trio of competence, autonomy and relatedness is particularly helpful, and is now supported by a mass of research into the practical implications, some of which will be picked up in chapter 13. It is clearly unhelpful if external attempts at control make people feel that they are not trusted, valued or are being controlled. It is time for the science to be more widely understood and applied. This calls for informed approaches to leadership, management, communities, regulation and policing. The science points to the need to lead and intervene in ways that support individuals’ senses of purpose, competence/mastery, autonomy and relatedness. It is critical to strengthen social moral bonds.



131 A

Bandura, ‘Social Cognitive Theory: An Agentic Perspective’ (2001) 52 Annual Review of Psychology 1–26, 14.

5 Trust Our ability to cooperate depends critically on our belief that we can rely on others. We need to be able to act, and plan our actions, relying on the belief that others and the world in general will behave as we expect. The critical concepts here are trust, confidence, reliance and belief. This chapter examines these concepts in the context of people and organisations that operate in society. Trust is a state of mind that enables us to place sufficient reliance on others to enable us to plan our actions predictably. Trustworthiness is an ongoing state of mind about another, that is highly desirable because of its constancy and consistency as the basis of cooperation. We will need to look at the relations between people within organisations, in internal social relations amongst themselves, and at the relations between organisations and their stakeholders in the external wider society, such as with customers, regulators and other stakeholders. In the following chapter, we will need to add in another critical dimension, that of the ethical content of the behaviour and cultures that are scrutinised. But the central questions for this chapter are: what is trust, and how do we build or undermine it, so as to avoid distrust? We find that trust and trustworthiness is best based on evidence of how a person or organisation has behaved in the past, and is behaving now. We look at research on the type of evidence that founds valuable trust and trustworthiness, and at data on trust in situations like commercial organisations, political and social spheres, and regulation. The key concepts here are to produce evidence on competence, resources, motivation, behaviour and culture. Much of the evidence in this chapter comes from philosophy rather than science. A lot of thinkers have expressed their thoughts on the nature of trust. The analysis can seem complicated, but the essence is very simple – and summarised in the two paragraphs above! A recent extensive review that includes scientific studies has been undertaken by a team led by David Levi-Faur.1 One reason for going into detail in trying to summarise the philosophical analysis is to show how it has changed, and how thinking reflects political preoccupations at a particular time in history. Some decades ago, the dominant ideas were about neoliberal concepts around individualism and self-interest, and that thinking is reflected in the contemporary debates about the nature of trust. It produced a mindset that trust was all about whether people could be relied on to something that benefitted the person placing the trust. A wider view, more in line with current political thinking (as we see reflected in chapter eight), is whether the actions would simply be as trustors expect. In addition, some would say that the actions should be ethical. I agree that actions should be ethical to found string trust, but I argue that trust as a concept is amoral, and that the evidence has to be evaluated also against our ethical values, an issue developed in the succeeding chapter.



1 See

papers at www.tigre-project.eu.

The Basis of Trust  91

The Basis of Trust We are able to cooperate best where we have a high level of justified trust and confidence in those with whom we interact. Trust is invoked on a daily basis by people as the foundation of all relationships between people and institutions – families, friends, social groups, work groups, communities, consumer and commercial markets, citizens and state institutions, and between states. An absence of trust – especially arising as a consequence of something being considered to be unfair – is also cited daily, especially in public debate involving politicians, journalists and media institutions. Trust has also been regarded as a fundamental concept for relationships and societies by almost every major philosopher, even if their analyses differ on how the concept works.2 Trust is a state of mind.3 It is a prediction, based on a sufficiently strong mental conviction, that someone else, or perhaps some institution, will act as we expect. It is a bet about what will happen in the future.4 However, the processes of building or reducing trust involve assessment of evidence.5 Many commentators analyse trust as an essential mechanism as the inter-relations between people, and the social and commercial environment, have over time become increasingly numerous and complex. This has given rise to ever more uncertainties and risks. The mental state of having trust gives sufficient confidence to overcome risk and to bridge vulnerability.6 The above definition of trust that others will act as we expect is intentionally wide. Many commentators on trust in the past century have approached trust as being placed where the trustor expects that the trustee will act in a way that is beneficial to the interests of the trustor, or not harmful to the them. I argue that that self-centred model is incomplete and perhaps best seen in its place in historical evolution. It forms part of an obsession with neoliberal individualism at a particular time, as discussed in chapter nine. However, in advanced democratic twenty-firstcentury societies, a wider view needs to be taken. We can trust someone for a wide variety of causes or reasons, such as as a consequence of our non-self-regarding motivation, their otherregarding commitment7 or their commitment to ethical values. Let me give three examples of why this wide view is necessary. First, we may trust a foreign country, its institutions and leaders, if they pursue policies in which our personal benefit may be limited, such as upholding human rights in their country. Some have argued that that view is one of respect rather than trust, and we do not place reliance on the other country. But a general belief that others in the world deserve trust is still an important part of our confidence in a predictable world, affecting much that we do. Second, regulatory, accreditation and auditing bodies may have higher or lower trust in a business to operate required systems, control risk, avoid causing harm and complying with rules. It is possible to argue that those external bodies and their individual staff have some self-interest in achieving those outcomes but it is usually at best only a limited

2 An interesting summary is J Simon, ‘Trust’ in D Pritchard (ed), Oxford Bibliographies in Philosophy (Oxford University Press, 2013), available at www.oxfordbibliographies.com/view/document/obo-9780195396577/obo-97801953965770157.xml. 3 R Holton, ‘Deciding to Trust, Coming to Believe’ (1994) 72(1) Australian Journal of Philosophy 63; CA Hill and EA O’Hara, ‘A Cognitive Theory of Trust’ (2006) 84 Wash UL Rev 1717; JA Simpson, ‘Psychological Foundations of Trust’ (2007) 16 Current Directions in Psychological Science 264. 4 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999). 5 G Dietz, ‘Going Back to the Source: Why Do People Trust Each Other?’ (2011) 1 Journal of Trust Research 215. 6 N Gold, ‘Trustworthiness and Motivations’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford, Oxford University Press, 2014) 135. 7 K Hawley, ‘Trust, Distrust and Commitment’ (2012) 48(1) Noȗs 1.

92  Trust interest: the reason for the bodies’ existence is precisely to make judgements on whether others should be able to trust or may be harmed by those they regulate – some can be trusted and others less so or not at all. It is part of the job of a regulator or conformity assessment body to make this judgement and to engage with all they regulate, even if (in fact, particularly if) they do not trust them. But the real issue is whether the general public can trust the regulated entity: the regulator has a different kind of self-interest and is not a direct party involved in transactions between the regulated entity and third parties. Further, amongst those we trust, some can be trusted more than others, or in relation to some respects but perhaps not all. Third, we may have no or limited general trust in individual political leaders, say to tell the truth or make decisions that we think are correct (whether or not they benefit us personally), but we may still vote for them or their party’s candidate for a wide variety of reasons. So I suggest that it is helpful to think of trust as a general concept, but that it is still helpful to delve deeper into other concepts, as this helps illuminate how we (do and should) behave. Ken Rotenberg’s work on the development of trust in childhood has led him to analyse three bases of trustworthy behaviour (Basis, Domain and Target Interpersonal Trust Framework):8 (a) reliability by fulfilling a word or promise; (b) emotional trustworthiness by refraining from emotional harm including the acceptance of personal disclosure and maintaining confidentiality of it, and (c) honesty by telling the truth as opposed to lying and engaging in behaviour guided by benign rather than malevolent intentions. … individuals’ trust beliefs in targets vary by the dimensions of familiarity (ranging familiar to slightly unfamiliar) and specificity (ranging from specific to general).9

Rothenberg considers that trust is manifested both in the domain of behaviour-dependent trust and behaviour-enacting trust (ie trustworthiness). Further, he says that trust has a strong reciprocal quality which involves each partner in a dyad matching each other’s beliefs/behaviour and thus establishing a common social history.10 Rotter has found that personal characteristics, such as gullibility, may affect trust, although research indicates that there was little difference in gullibility between those with high and low trust beliefs.11

Trust is Ethically Neutral The relevance of ethical values is a necessary criterion when we consider trust amongst members of a criminal gang, a con-artist12 or officers of a totalitarian state. They undoubtedly trust each other, and need to do so for the continued cohesion and effectiveness of the gang, but their view of ethical commitment (not informing against another gang member, obeying order to harm others) does not accord with the open and ethical values of democratic society. This is vividly illustrated by Diego Gambetta’s classic account of the Mafia.13 Very similar points are made about 8 KJ Rotenberg, ‘The Conceptualization of Interpersonal Trust: A Basis, Domain, and Target Framework’ in KJ Rotenberg (ed), Interpersonal Trust During Childhood and Adolescence (Cambridge University Press, 2010); LR Betts, KJ Rotenberg and M Trueman, ‘Young Children’s Interpersonal Trust Consistency As a Predictor of Future School Adjustment (2013) 34 Journal of Applied Developmental Psychology 310. 9 KJ Rotenberg, ‘The Relation between Interpersonal Trust and Adjustment: Is Trust Always Good?’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021) (emphasis added). 10 ibid, 162. 11 JB Rotter, ‘Interpersonal Trust, Trustworthiness and Gullibility’ (1980) 35 American Psychologist 1–7. 12 E Goffman, ‘On Cooling the Mark Out: Some Aspects of Adaptation to Failure’ (1952) 15(4) Psychiatry 451–63; T Frankel, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims (Oxford University Press, 2012). 13 D Gambetta, ‘Mafia: The Price of Distrust’ in D Gambetta (ed), Trust. Making and Breaking Cooperative Relations (Basil Blackwell, 1988).

The Functions of Trust  93 people who live under the terror of a totalitarian regime, such as after the French revolution, or Geoffrey Hosking’s chilling account of Stalin’s regime in the 1930s:14 trust in the regime is negligible and this can affect otherwise trusting personal relationships. Some philosophers think that any satisfactory theory of trust must include a moral element.15 I suggest, however, that this conflates two distinct ideas. The Mafia example shows that trust can exist in an environment that is thoroughly immoral. Trust is neither intrinsically good or bad, it depends – it is an amoral concept.16 We can trust a person to do something whilst believing that the thing may be good or bad, or that the particular thing may be good but they are generally bad, or vice versa. Hence, in order to conclude whether the intended action or the actor is good or untrustworthy (or vice versa), we need to evaluate the evidence against a different frame of reference, namely our ethical values. Hence, evaluation of whether we can trust another and of the extent to which their previous conduct is ethical are different but related operations. We return to this point in the next chapter.

The Functions of Trust Predictability and Risk Reduction Unless we are able to live as a complete hermit, it is not possible for humans to operate alone. In other words, coordinated social interaction is a requirement of life. Trust is the mechanism that enables social cooperation and achievement of our individual and shared goals. Georg Simmel has been widely quoted as saying that ‘Without the general trust that people have in each other, society itself would disintegrate.’17 It is essential to be able to operate in a state of predicable order, and to avoid chaos, so as to be able to achieve our goals through our individual and collective actions.18 For example, in a simple social unit such as a tribe, it is essential that all members behave in accordance with the relevant perceptions of authority and norms.19 Those who cannot be trusted may be ostracised or worse. As human societies, groups, institutions and ways of interacting have become more complex, trust is a critical means of overcoming risk and complexity.20 Even what may appear to be simple decisions are based on multiple assumptions, which we mentally manage by discounting the materiality of the risks on the basis of trust. If we did not do this, we could never act in a complex global world. If I decide to make monthly payments into a pension fund, I act on the basis of multiple beliefs and expectations: I might die before retirement, the fund might collapse, the

14 G Hosking, Trust: A History (Oxford University Press, 2014). See also M Sedláčková and Jiří Šafr, ‘Trust in Transition: Culturalist and Institutionalist Debate Reflected in the Democratization Process in the Czech Republic, 1991–2008’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021). 15 G Hosking, Trust: A History (Oxford University Press, 2014), 37, distinguishing his conception from a rational-choice account. 16 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999) 114. 17 G Simmel, The Philosophy of Money (Routledge & Kegan Paul, 1978) 178–79. 18 N Luhmann, Trust and Power (John Wiley & Sons, 2018) originally published as Vertrauen (1973), 5; BA Misztal, Trust in Modern Societies (Polity Press, 1996) 63. 19 J Ensminger, ‘Reputations, Trust, and the Principal Agent Problem’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001); V Nee and J Sanders, ‘Trust in Ethnic Ties: Social capital and Immigrants’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 20 T Parsons, The System of Modern Societies (Prentice-Hall, 1071); N Luhmann, Trust and Power (John Wiley & Sons, 2018) (1973), 8.

94  Trust country might be overcome by war or climate change. If I decide to fly to attend a meeting on the other side of the world, I rely on the effective and predictable functioning and safety of various transport, computer and human systems involving the actions of many people, such as those involved in aviation safety (the designers, mechanics, air traffic controllers, pilots, fuel providers, safety regulators and so on) and transportation systems to and from the airports (which are typically higher safety risks than flying, and might misdirect my luggage). I also rely on the organisers of the event I have been asked to attend and their arrangements, the effectiveness and security of the payment systems that I use, the safety of the food and water I will ingest, the professionalism of the border officials, and the systems and activities of many other people whose actions might affect me. It is not possible for me to control how others behave, and how systems perform. I cannot know what is going to happen. Hence, in the absence of knowledge of the future,21 I base my actions and plans – consciously and unconsciously – on what I know, on my general experience of how the world works and how people behave. In a very broad sense, this gap in knowledge is sometimes called trust, but some suggest that it is more accurate to talk of basing our reliance on confidence, or a general expectation of the performance of roles and of the existence of a system that functions as we expect. However, some argue that confidence is not the same as trust, not because of a difference in the degree of certainty attached to each,22 but because of a difference of attribution between them.23 Jack Barbalet argues that confidence relates to contingent events that may actually happen, whereas trust relates to the subject’s own engagements based on personal beliefs about another’s commitment or disposition about their behaviour, over which we have no control.24 Is it right, in the transport example above, to say that we trust the organisers and the systems? Some scholars take far more restricted views. Ruth Holton argued that we can decide to trust, and she distinguished between reliance on something happening and relying on a person to do something.25 Niklas Luhmann distinguished between trust in persons and confidence in institutions,26 but this was criticised by Adam Seligman, who prefers to talk about confidence being based on knowledge and expectations of the performance of the roles that exist and are recognised within a structured society.27 Seligman argues that it is inaccurate to talk of general confidence in role performance as being trust. He thinks that confidence in the unconditionalities of the principles of generalised exchange (Dukheim’s precontracual elements of social life, conscience collective) is the basis for general solidarity, rather than trust. He asserts that trust arises where there is ‘something unconditional and irreducible to the fulfilment of systemically mandated role expectations’, where there is role negotiability, in the ‘open spaces’ of roles, in the interstices or at the extremes.28 Much of the philosophical literature focuses on trust in individuals, or organisations, but it is also relevant to look at processes and systems. We might have little trust in individuals but higher confidence in the processes or systems in which they operate, which in turn affects our

21 J Hardwig, ‘The Role of Trust in Knowledge’ (1991) 88.12 The Journal of Philosophy 693–708. Hardwig points out that when we trust, we don’t know and when we know, we don’t need to trust. 22 BA Misztal, Trust in Modern Societies (Polity Press, 1996) 16. 23 N Luhmann, ‘Familiarity, Confidence, Trust: Problems and Alternatives’ in D Gambetta (ed), Trust: Making and Breaking Cooperative Relations (Blackwell, 1990) 97. 24 J Barbalet, ‘The Experience of Trust: Its Content and Basis’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021) 22. 25 R Holton, ‘Deciding to Trust, Coming to Believe’ (1994) 72(1) Australian Journal of Philosophy 63, 65. 26 N Luhmann, Trust and Power (John Wiley & Sons, 2018). 27 AB Seligman, The Problem of Trust (Princeton University Press, 1997) 25, 75. 28 ibid, 44, 24, 75–81.

The Functions of Trust  95 level of trust or confidence in them. This is particularly relevant in the context of activities involving commercial relations (confidence in the concept of contracting, and of the legal system) or activities that are subject to regulation (confidence in processes like accreditation, approval, inspection, post-marketing surveillance, the regulator and general levels of effectiveness of the system as a whole). Many commentators agree that we need mechanisms that bridge the gap in uncertainty created by lack of knowledge and/or lack of confidence in multiple risks and behaviours, not just of one person or organisation but of multiple inter-relating actors and forces. The need for mental confidence on which we can place reliance to act comprises confidence and trust in people, our immediate social group, all members of our society, and its institutions and systems. As philosopher Onora O’Neill has explained, we need trust because ‘we have to be able to rely on others acting as they say that they will and because we need others to accept that we will act as we say we will’.29 We must be able to act in the future and to make plans with adequate certainty – given many unavoidable and uncontrollable uncertainties. The increasing globalisation and reflexivity seen in the twentieth century,30 the realisation that we live in a ‘risk society’31 and the increase of a ‘network society’,32 have all challenged our abilities to control the future, and increased the need to try to come to control the possibility of future adverse events and damage. Controlling risk requires trust. Both the concepts of risk and trust involve uncertainty but provide us with a mental mechanism for acceptance. Someone who places trust in another accepts risk and individual free choice, and adopts a particular psychological acceptance of future risk. Given that state of mental acceptance, we build our expectations of future behaviour and events, and plan with greater confidence. Trust placed in another may turn out to have been misplaced, but it enables us to act with mental confidence, replacing external uncertainty with internal security.33 If we were to have complete control over future actions and complete information, we would not need trust. ‘Trust is redundant where I have effective guarantees or control of outcomes.’34 Trust is stronger than mere reliance.35 Scholars have distinguished different forms of trust relationships, such as faith, confidence and legal trust.36 The analysis above has been from the position of a trustor’s belief about a potential trustee, but, equally, the placing of trust signifies the trustor’s respect for the trustee’s individual autonomy and agency.37 We recognise that we cannot control others. Indeed, we need to rely on others.38 At least notionally, it involves giving discretionary power to those we trust to decide or control, on a given matter, how our own welfare is best advanced, or if it is to be advanced as we might wish.39

29 O O’Neil, A Question of Trust (Cambridge University Press, 2002) 4. 30 A Giddens, The Consequence of Modernity (Polity Press, 1990). 31 U Beck, Risk Society (Sage, 1992); TK Das and B-S Teng, ‘The Risk-Based View of Trust: A Conceptual Framework’ (2004) 19 Journal of Business and Psychology 85. 32 R Hardin, Trust (Polity Press, 2006). 33 N Luhmann, Trust and Power (John Wiley & Sons, 2018) 93. 34 O O’Neill, ‘Trust, Trustworthiness, and Accountability’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford, Oxford University Press, 2014) 178. 35 A Baier, ‘Trust and Antitrust’ (1986) 96(2) Ethics 231, 234. 36 See chapters by Russell Hardin, Carol Heimer, David Messick, Robert Kramer and others in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 37 AB Seligman, The Problem of Trust (Princeton University Press, 1997) 62. 38 C Castelfranchi and R Falcone, Trust Theory: A Socio-Cognitive and Computational Model (Wiley, 2010). 39 AC Baier, ‘Trust and Its Vulnerabilities’, The Tanner Lectures on Human Values, Princeton, 6–8 March 1991.

96  Trust

Degrees of Trust We can have degrees or levels of trust in another. Hilary Sutcliffe refers to a spectrum of trust.40 Hosking talks of two modes of trust, differentiating between strong or weak trust, and between thick or thin trust.41 Strong trust would support a situation in which we have an extensive relationship to which we commit significant resources, whereas weak trust would cover routine interaction with less at stake. Thick trust rests on extensive knowledge, probably arising from frequent or longstanding contact, whereas thin trust would be based on slight knowledge, probably involving infrequent or superficial contact. Trust is often about something specific. In other words, it is not necessary to trust every aspect of how the trustee may behave in future. There can be levels of cooperation, depending on the situation, risk and benefits.42 These ideas correlate to the theory of moral intensity, which may affect an individual’s ability to recognise an issue, or its seriousness.43 We might trust others to do certain things but not others, in which case the evidence on which we may want to rely may be of certain specific kinds. If we are focusing on them acting in a particular way, or not acting in another way, we only need to trust them in relation to that purpose. Hence, different kinds of evidence will be more relevant and important than others in particular situations. Of course, depending on the issue, it may be relevant for us to trust another holistically, and it may be relevant for us to take into account a wide range of evidence about how they have behaved, such as whether they evidence ethical or other values consistently.

Downsides of Trust Trust may not always be desirable, and may lead to carelessness, complacency or inefficiency.44 It is recognised that the existence of either trust or distrust in a relationship can ‘self-amplify’,45 hindering objective assessment or useful cooperation. If trust grows stronger, the relationship should become more resilient46 but the level of vulnerability, risk and harm may increase, which would necessitate further trust.47 Relations between organisations based on significant trust have been found to risk becoming institutionalised48 but may lead to a ‘trust paradox’ of interorganisational lock-in.49 40 H Sutcliffe, Trust & Tech Governance (SocietyInside and Fraunhofer, 2021), http://static1.squarespace.com/ static/5fc12cea2cf09257bd6dcc01/t/5fca5150ac031d3c8e89ff06/1607094623935/Trust_and_tech_governance.pdf. 41 G Hosking, Trust: A History (Oxford University Press, 2014) 46–47. 42 R Hardin, Trust (Polity Press, 2006) 36. 43 TM Jones, ‘Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model’ (1991)16(2) Academy of Management Review 366–95. 44 See G Möllering and J Sydow, ‘Trust Trap? Self-Reinforcing Processes in the Constitution of Inter-organizational Trust’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021). See also A Zaheer, B McEvily and V Perrone, ‘Does Trust Matter? Exploring the Effects of Inter-organizational and Interpersonal Trust on Performance’ (1998) 9(2) Organization Science 141–59; B McEvily, V Perrone and A Zaheer, ‘Trust As an Organizing Principle’ (2003) 14(1) Organization Science 91–103. 45 S Sitkin and D Stickel, ‘The Road to Hell: The Dynamics of Distrust in an Era of Quality’ in RM Kramer and TR Tyler (eds), Trust in Organizations: Frontiers of Theory and Research (Sage, 1996) 196–215. 46 PS Ring, ‘Processes Facilitating Reliance on Trust in Inter-organizational Networks’ in M Ebers (ed), The Formation of Inter-Organizational Networks (Oxford University Press, 1997). 47 BA Misztal, ‘Trust: Acceptance of, Precaution Against and Cause of Vulnerability’ (2011) 10(3) Comparative Sociology 358–79. 48 F Kroeger, ‘Trusting Organizations. The Institutionalization of Trust in Interorganizational Relationships’ (2012) 19(6) Organization 743–63; O Schilke and KS Cook, ‘A Cross-level Process Theory of Trust Development in Interorganizational Relationships’ (2013) 11(3) Strategic Organization 281–303; BS Vanneste, ‘From Interpersonal to Interorganisational Trust: The Role of Indirect Reciprocity’ (2016) 6(1) Organization Studies 693–714.

The Functions of Trust  97

Trustworthiness and Reputation Where we place trust in someone or an institution on an ongoing basis, or in a context that is important to us, we do this on the basis that we perceive that they deserve trust and are trustworthy. This is a valuable and ideally enduring status. The status of being trustworthy rests on our belief that the trustee acts consistently – and ethically. This is typically based on the trustor’s familiarity with the trustee, that has built up the required level of belief, given the history of consistent or adequate evidence of how the trustee has behaved in the past, especially on a range of different issues. The key elements here, therefore, for the trustee are evidence, consistency, predictability and character; for the trustor the issues are the assessment of the depth, breadth and duration of the evidence and the relationship, and the strength and breadth of the belief. Reputation is a mechanism that supports trustworthiness, as all traders and professionals are aware. The evidence base here is widened by reliance on verifiable facts such as possession of professional qualifications, accreditation against standards, favourable references from customers or influential individuals or bodies, adherence to codes of ethical practice, membership of feedback and regulatory schemes and general transparency of information about motivations, behaviours and cultures. Of course, adverse evidence will also be taken into account. It is widely said that reputations are built slowly but can be lost quickly. Misztal identifies three mechanisms for sustaining reputation: a code of ethics (values), conformity to social pressure (reciprocity of exchanges) and formal control (sanctioning, monitoring and discipline).50

Social Trust Trust has various social functions. It builds cohesion between people, groups, institutions, communities, nations and so on. The aggregated value of multiple relations in a group, organisation or society has been referred to (perhaps imprecisely51) as indicating the extent to which the group can be described as ‘having trust’ in the sense of possessing a social value or cohesion, and also of generally being trustworthy. Misztal analyses the forms of social order as stability (recognised in the practice of habit, reputation and memory), cohesive (family, friends, society) and collaborative (solidarity, toleration and legitimacy).52 Social trust53 supports social cooperation, stability, identity, solidarity and consensus.54 It is a valued public good,55 ‘a lubricant of cooperation’56 and ‘the emotional basis of cooperation’.57 Communications, relationships and

49 HS James Jr, ‘The Trust Paradox: A Survey of Economic Inquiries into the Nature of Trust and Trustworthiness’ (2002) 46(3) Journal of Economic Behavior & Organization 291–307; S Zaheer and A Zaheer, ‘Trust Across Borders’ (2006) 37(1) Journal of International Business Studies 21–29. 50 BA Misztal, Trust in Modern Societies (Polity Press, 1996), 127. 51 AB Seligman, The Problem of Trust (Princeton University Press, 1997). 52 BA Misztal, Trust in Modern Societies (Polity Press, 1996) ch 3; B Barber, The Logic and Limits of trust (Rutgers University Press, 1983) 21. 53 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 54 BA Misztal, Trust in Modern Societies (Polity Press, 1996), 3 and 96; MM Blair and LA Stout, ‘Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law’ (2001) 149 University of Pennsylvania Law Review 1735, 1757. 55 A de Tocqueville, Democracy in America (originally 1835, Penguin Classics, 2003); RD Putnam, R Leonardi and RY Nanetti, Making Democracy Work: Civic Traditions in Modern Italy (Princeton University Press, 1994). 56 P Dasgupta, ‘Trust As a Commodity’ in D Gambetta (ed), Trust: Making and Breaking Cooperative relations (Basil Blackwell, 1988) 49; BA Misztal, Trust in Modern Societies (Polity Press, 1996) 96. 57 JM Barbalet, ‘Social Emotions: Confidence, Trust and Loyalty’ (1996) 16(9/10) International Journal of Sociology and Social Policy 75, 77.

98  Trust transactions should operate more efficiently. Trust provides a solution to a cooperative use of common resources.58 Since trust supports openness and equality in a society59 it can be especially useful where it can be built to overcome social diversity.60 The existence of a cohesive society provides ‘social capital’ and ‘moral density’.61 Conversely, the opposite of trust, distrust, tends to an inability to plan or operate, a barrier or force undermining the social cohesion of society, and hence social capital. Distrust involves the suspension of vulnerability based on negative expectations of the intentions and future behaviour of the other.62 We often rely on distrust as a strategy not only to minimise risks with those with whom we cannot avoid relying on but also to achieve trust through seeking assurance through evidence of trustworthiness and accountability.63 The existence of trust between group members can be exclusionary and a barrier to entry. It can be a problem for outsiders and underdogs.64 O’Neill suggested that the placing of trust invites reciprocal trust, which can create a virtuous spiral: equally, a betrayal of trust can trigger a vicious spiral.65 O’Neill concluded that the real enemy of trust is deception, because deceivers do not treat others as moral equals. Hosking noted that trust is a self-generating and self-renewing resource. ‘Unlike most forms of capital, it does not get consumed by our drawing on deposits of it. On the contrary, trust is self-reinforcing.’66 However, once lost, trust and reputation do not spontaneously renew and are difficult to rebuild. Trust is recognised as having become an essential component of social, commercial and economic life in Western democratic societies, and of neoliberal formations.67 Indeed, the failure of trust has played a major part in crises of the economic and political systems.68 The particularly Western form of trust has been contrasted with different forms found in other societies, such as Japan and China. In China, the model of relationship (guanxi) and society involving close personal monitoring, pervasive hierarchy-based dependence and role obligation has produced a form of trustworthiness (xinyong) based on the need to maintain reputation and face under public scrutiny (triadic relationships and judgements), but not interpersonal trust as understood in the West (dyadic relationships).69

58 E Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge University Press, 1990). 59 E Ostrom, ‘Toward a Behavioral Theory Linking Trust, Reciprocity, and Reputation’ in E Ostrom and J Walker (eds), Trust and Reciprocity: Interdisciplinary Lessons from Experimental Research (Russell Sage Foundation, 2003). 60 J Knight, ‘Social Norms and the Rule of Law: Fostering trust in a Socially Diverse Society’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 61 MS Cladis, A Communitarian Defense of Liberalism: Emile Durkheim and Contemporary Social Theory (Stanford University Press, 1992) 196. 62 P Oomsels, M Callens, J Vanschoenwinkel and G Bouckaert, ‘Functions and Dysfunctions of Interorganizational Trust and Distrust in the Public Sector’ (2019) 51(4) Administration and Society 516; R Lewicki, DJ McAllister and RJ Bies, ‘Trust and Distrust: New Relationships and Realities’ (1998) 23(3) Academy of Management Review 438. 63 B Bodó, ‘Mediated Trust: A Theoretical Framework to Address the Trustworthiness of Technological Trust Mediators’ (2020) New Media & Society 1–23. 64 FB Cross, ‘Law and Trust’ (2005) 93 Georgetown Law Journal 1457, 1531–43. 65 O O’Neill, A Question of Trust (Cambridge University Press, 2002) 25. 66 G Hosking, ‘Why We Need a History of Trust’ (2002) 287 Reviews in History at http://reviews.history.ac.uk/ review/287a. 67 J Barbalet, ‘The Experience of Trust: Its Content and Basis’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021) 14. 68 See the excellent summary of recent history at G Hosking, ‘The Decline of Trust in Government’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021). 69 J Barbalet, ‘The Experience of Trust: Its Content and Basis’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021) 22–23; J Barbalet, Emotion, Social Theory and Social Structure: A Macrosocial Approach (Cambridge University Press, 2014) 63–64.

Judgement and Evaluation Processes  99

Judgement and Evaluation Processes Our judgement that we can trust someone is based on belief about, or our response to what we know about, how they have acted in the past as an indication of how they will act in the future. O’Neill suggested that the benchmarks for intelligent accountability are informed and independent judgement of performance, complemented by intelligible communication of those judgements. She also suggested that we have to know both who and what we are being asked to trust:70 the information and issue are personal and transactional. O’Neill distinguished between our need to judge others’ truth claims and commitments to action (promises).71 She said:72 ‘Trust in others’ truth claims is well placed if their words are, or turn out to be, true of the world. Trust in others’ commitments is well placed if they duly act to shape the world, making some part of it true to their word and specifically to their commitments. Regardless of the direction of fit, trust is badly placed where words and the way things turn out do not fit. It is well placed when conferred on trustworthy truth claims and trustworthy action; ill placed when conferred on untrustworthy truth claims and untrustworthy action.

O’Neill also notes the need for good judgement. It is clear that experience in evaluating trust claims can be significant. A sample of 376 service consumers and nine service industries found that customers’ perceptions of satisfaction, trust and commitment, and ultimately customer loyalty varied between novice and experienced customers.73 This points towards the ideal that we would try to develop and educate ourselves in exercising judgement and would measure our success and learn from failures. Solomon and Flores argued that trust is a skill, not something innate, which must be constantly built up by integrity and good communication.74 Luhmann also refers to the need for processes for differentiating those we can trust from those we cannot, and that trust is helped by familiarity, both by the trustor of the trustee and in fact between those involved.75 It is easier to make this judgement in ongoing relationships, such as that between the members of a group. The group may be a family, group of friends, club, work unit, organisation, community or nation. This broad approach highlights that it is the social nature of the relationships and of the evidence of behaviour that is deeply important. Bart Nooteboom’s research has also found that the degree of cognitive distance between trustor and trustee in relationships affects the extent to which parties might work closely (collaborate) or have the freedom to develop novelty and innovation.76 He recommends adopting an ‘optimal distance’ to facilitate achieving both outcomes. Various studies suggest that performance is supported where debate involves a diversity of views and the ability to express and discuss them openly. The build-up in logic and evidence flows like this. Task conflict enables the decision makers to achieve a better understanding of the task issues.77 A clear understanding of the issues necessary to perform a task is necessary

70 O O’Neill, A Question of Trust (Cambridge University Press, 2002) 64. 71 O O’Neill, ‘Trust, Trustworthiness, and Accountability’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014). 72 ibid. 73 TS Dagger and TK O’Brien, ‘Does Experience Matter? Differences in Relationship Benefits, Satisfaction, Trust, Commitment and Loyalty for Novice and Experienced Service Users’ (2010) 44 European Journal of Marketing 1528. 74 RC Solomon and F Flores, Building Trust: In Business, Politics, Relationships, and Life (Oxford University Press, 2003). 75 N Luhmann, Trust and Power (John Wiley & Sons, 2018) ch 7. 76 B Nooteboom, Learning and Innovation in Organizations and Economies (Oxford University Press, 2000). 77 L Pelled, KM Eisenhardt and KP Xin, ‘Exploring the Black Box: An Analysis of Work Group Diversity, Conflict, and Performance’ (1999) 44 Administrative Science Quarterly 1–28.

100  Trust for successful implementation of decisions.78 A 2000 study found that intragroup trust played a critical role in the interpretation process.79 The researchers suggested that trusting relationships may allow teams to more openly challenge others’ perspectives without fear of ridicule or retribution. A 2007 survey of top management teams from 85 US hospitals found that that cognitive diversity had a strong positive relationship with task conflict and that competence-based trust strengthened this relationship.80 The results suggested that task conflict mediates the effects of cognitive diversity on decision outcomes. More recent studies have confirmed that agreementseeking behaviour and team effectiveness and decision commitment is moderated by process conflict, whereas cognitive diversity has a positive impact on decision commitment and team effectiveness.81

Reciprocal and Negotiated Trust Yamagishi and Yamagishi drew a distinction between trust, namely expectations of benign behaviour based on inferences about a partner’s personal traits and intentions, and assurance, expectations that are based, instead, on knowledge of an incentive structure that encourages benign behaviour.82 Linda Molm and colleagues drew on this distinction to differentiate between reciprocal exchanges and negotiated exchanges. In negotiated exchanges, actors ‘actors engage in a joint decision process, such as explicit bargaining, in which they reach an agreement on the terms of the exchange. Both sides of the exchange are agreed upon at the same time, and the benefits for both exchange partners are easily identified as paired contributions that form a discrete transaction.’83 In reciprocal exchanges, actors spontaneously perform individual acts that benefit another (altruism), without knowing whether, when or to what extent the other will reciprocate in the future. Exchange relations develop gradually over time in social contexts or fail to do so. In a laboratory experiment, Molm and colleagues found that reciprocal exchange produces stronger trust and affective commitment than negotiated exchange, and that behaviours signalling the partner’s trustworthiness have greater impact on trust in reciprocal exchange. Negotiated exchanges with binding agreements provide assurance, while reciprocal exchanges enable trust. It follows that a society in which individuals engage in spontaneous acts of giving will generate stronger trust and affective commitment84 than markets that are based on contractual arrangements. Molm and colleagues concluded that, ironically, the very mechanisms that were created to reduce risk in transactions – the negotiation of terms and strictly binding agreements – have the unintended consequence of reducing trust in relationships. Thus, the forms of social and

78 B Wooldridge and S Floyd, ‘The Strategy Process, Middle Management Involvement, and Organizational Performance’ (1990) 11 Strategic Management Journal 231–341. 79 T Simons and R Peterson, ‘Task Conflict and Relationship Conflict in Top Management Teams: The Pivotal Role of Intragroup Trust’ (2000) 85 Journal of Applied Psychology 102–11. 80 BJ Olson, S Parayitam and Y Bao, ‘Strategic Decision Making: The Effects of Cognitive Diversity, Conflict, and Trust on Decision Outcomes’ (2007) 33 Journal of Management 196. 81 S Parayitam and C Papenhausen, ‘Agreement-seeking Behavior, Trust, and Cognitive Diversity in Strategic Decision Making Teams. Process Conflict As a Moderator’ (2016) 13(3) Journal of Advances in Management Research 292–315. 82 T Yamagishi and M Yamagishi, ‘Trust and Commitment in the United States and Japan’ (1994) 18(2) Motivation and Emotion 129–66. 83 LD Molm, N Takahashi and G Peterson, ‘Risk and Trust in Social Exchange: An Experimental Test of a Classical Proposition’ (2000) 105(5) American Journal of Sociology 1396–427. 84 EJ Lawler and J Yoon, ‘Commitment in Exchange Relations: Test of a Theory of Relational Cohesion’ (1996) 61 American Sociological Review 89–108.

Mental Mechanisms  101 relational exchange affect the extent of trust and social cohesion. A generous warm society is preferable to an individualist contractual society.

Mental Mechanisms Our current understanding of the science of our brains (see chapter four) tells us that a judgement and state of mind to place – or withhold – trust can result from two broad processes, and often from both of them. One mechanism is the operation of automatic very speedy mental processes, without our conscious thought, in which emotion or ‘gut feel’ plays a role.85 This automatic response (heuristics, automatic mental shortcuts) can be trained by experience. Our processing can be affected by factors personal to us, such as our mood, cognitive impairment, emotion, situational factors, appetite for risk and propensity to trust others, perhaps resulting from that propensity being the norm in our peer group or society. Our mental state may be particularly influenced by our emotions, which can be powerful. As Luhmann says, love and hate make one blind.86 The other mechanism is where we apply conscious cognitive thought, evaluating what seem to be relevant items of evidence. Even in this cognitive situation, our mind may have selected or prioritised particular items of evidence rather than others, and the means by which we evaluate the position may be less than what some might consider to be ideally rational and objective. In other words, different people may reach different decisions on placing or withholding trust, and supposedly objective rational evaluation is likely to be mythical. As discussed in chapter four, science has also shown that the quality of our evaluation will usually be better if we take time for careful rational evaluation and seek an evidence base that is adequately wide and deep. Where we make quick decisions, we often overlook or undervalue relevant evidence, which we subsequently persuade ourselves is irrelevant (cognitive dissonance).87 Some people (sociopaths) have limited emotional intelligence, and around 1% of the population lack empathy and conscience (psychopaths).88 Let us look a little more closely at some of the theories on mental mechanisms for decisions on trust, and how they have evolved.

Rational Self-Interest Theory versus Science Leading philosophers throughout history have assumed that the conscious cognitive process was the only mechanism, and it is only in the later twentieth century that the heuristic mechanism has been recognised. Even before the scientific research had been understood, much theoretical scholastic effort in the late twentieth century was directed at analysing behaviour in terms of the self-interest of rational actors, and the economic factors that would tend to support or diminish cooperation and the placing of trust.89 As discussed in chapter 13, that approach often assumes

85 Numerous references eg J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 86 N Luhmann, Trust and Power (John Wiley & Sons, 2018), 89. 87 DC Matz and W Wood, ‘Cognitive Dissonance in Groups: The Consequence of Disagreement’ (2005) 881(1) Journal of Personality and Social Psychology 22. 88 N Gold, ‘Trustworthiness and Motivations’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014) 146. 89 EC Banfield, The Moral Basis of a Backward Society (Free Press, 1958).

102  Trust that people rely on calculations90 about the probable future actions of others, and whether they will reciprocate in a system of social exchange. This postulates a calculative view of trust, perhaps involving calculation of particular types of evidence, mainly focused on costs and benefits. A great deal of the writing about trust around the 1990s and 2000s was focussed on interactions between individuals or commercial transactions, both assuming individual freedom and free markets.91 The frame of analysis of these bilateral relationships was that both parties engaged on the basis that the motivation of each was to maximise their own self-interest, based on a cognitive rational-choice. Hence, the concept of trust was analysed as applying where self-interest was maximised (encapsulated interest).92 Would the other party act in a way that benefited me? Much of the analysis focused on individual situations and interactions. It was rare to consider trust in broader terms of the operation of trust generally in societies, where the bilateral or selfpreserving utilitarian approach might not apply. The selfish rational actor theory was supported in legal philosophy by the ‘legal positivism’ school and its reliance on the centrality of rights and their enforcement through the legal system. That approach supported the widely held idea that human interaction was all about self-interest expressed through personal rights and self-benefiting contracts, and that trust would be created by balancing the opposing self-interests involved and by the existence of legal rules and their enforcement by the state. However, the approach tended to blur the fact that legal mechanisms are not an end in themselves but are only relevant to the extent that they support trust between citizens, between people who enter into contracts, between society and regulated businesses, and so on. It is a fiction that mechanisms such as contract law, regulatory rules, compliance systems, licences, inspection and enforcement guarantee delivery of what is expected or has been promised. Their function is to support desired behaviour and to provide some evidence that people can rely on others. But the underlying requirement and mechanism remains the need for trust. It may not be possible for consumers to obtain redress or for regulators to change the behaviour of organisations or people, in which case trust in the state, businesses and others will be inadequate. We only have to think of corrupt or inefficient authoritarian regimes to understand this. In 1944 the economic historian Karl Polanyi recognised that a view of human action based purely on cold economic calculation was an inaccurate view of the world, and he called for ‘re-embedding the economic in the social’ context.93 He noted that in all human societies before the capitalist industrial market of the eighteenth century, economic exchange was embedded in social relationships. Economic relations had subsequently escaped from social relations and need to re-embedded. He also accepted that economic interests should be understood as informed by social norms and values. The social norms that embed economic activity represent collective rather than ‘self-interests’, demonstrating the ‘primacy of society’. Social interests are not necessarily altruistic but can serve self-interests. Further, Polanyi said that regulation should be viewed as an institutional component in the re-embedding of market competition in non-market schemes

90 A good example of an economic analysis of trust, assuming that a contract model is generally applicable, is: O Williamson, ‘Calculativeness, Trust, and Economic Organisation’ (1993) 36 Journal of Law and Economics 453 (‘relentless application of calculative economic reasoning is the principal device that I employ’). 91 See Carolyn McLeod, ‘Trust’ in EN Zalta (ed), The Stanford Encyclopedia of Philosophy (2006) rev 2011. Online. For opposition to the near-obsession with contractualism, see AC Baier, ‘Trust and Antitrust’ (1986) 96(2) Ethics 231–60; AC Baier, ‘Trust and Its Vulnerabilities & Sustaining Trust’ Paper presented at the Tanner Lectures on Human Values, Salt Lake City, 1991. 92 A classic example is R Hardin, Trust (Polity Press, 2006). 93 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (first published 1944, 2nd edn, Boston, Beacon Press, 2001); B Lange, F Haines and D Thomas (eds), Regulatory Transformations: Rethinking EconomySociety Interactions (Hart Publishing, 2015).



Mental Mechanisms  103 of coordination, thus redefining the relationship between economy and society in coping with the uncertainty that derives from the dynamics of markets. Markets are always politically embedded in legal rules and institutions. Yet they are also always morally embedded in specific values and norms that support rule compliance and trust within the particular market and social contexts. In line with Polanyian thinking, ‘selfish rational actor’ analysis began to be challenged as it was recognised that human action can be based on feeling a moral obligation to cooperate and conform,94 irrespective of any calculations about anticipated personal gain or loss owing to the actions of others,95 and often influenced by identification with the norms of the social group with which they identify.96 Barbara Misztal makes the telling observation that any family where self-interest is the main motivation governing its members’ relations will be recognised as not functioning properly.97 The relevance of factors other than self-interest are clearly visible. In 2009, John Ermish and colleagues found that 40% of people in Britain were willing to trust a stranger, and their trust was rewarded half of the time.98 Trusting was more likely if people were older, their financial situation was either ‘comfortable’ or ‘difficult’ compared with ‘doing alright’ or ‘just getting by’, they were a homeowner or they were divorced, separated or never married compared with those who were married or cohabiting. The current position seems to be that behavioural science (especially psychology, sociology, neuroscience) has provided explanations for how we make decisions that have transcended the assumptions of earlier thinkers.99 The philosophical literature is, nevertheless, still enlightening about how we ought to think, and about categories of evidence that may be more or less important.100 94 P Brann and M Foddy, ‘Trust and the Consumption of a Deteriorating Common Resource’ (1988) 31(4) Journal of Conflict Resolution 615. 95 TR Tyler and R Dawes, ‘Fairness in Groups: Comparing the Self-interest and Social Identity Perspectives’ in BA Mellers and J Baron (eds), Psychology Perspectives on Justice (Cambridge University Press, 1993). 96 R Dawes, AJC van de Kragt and JM Orbell, ‘Cooperation for the Benefit of Us – Not Me or My Conscience’ in J Mansbrdige (ed), Beyond Self-interest (University of Chicago Press, 1990) 199. 97 BA Misztal, Trust in Modern Societies (Polity Press, 1996) 22. 98 J Ermish, D Gambetta, H Laurie and others, ‘Measuring People’s Trust’ (2009) 172 Journal of the Royal Statistical Society 749. 99 As long ago as 1958, Elizabeth Anscombe suggested that moral philosophy should be set aside pending a clear understanding of the emerging findings of psychology: GEM Anscombe, ‘Modern Moral Philosophy’ (1958) 33(124) Philosophy 1. Confusion in theories caused difficulties for empirical research: AB Seligman, The Problem of Trust (Princeton University Press 2000); JS Maloy, ‘Two Concepts of Trust’ (2009) 71 The Journal of Politics 492. An example of a recent analysis, viewing legal negotiation through the lens of social science research, is: R Korobkin, ‘Behavioural Ethics, Deception, and Legal Negotiation’ (2020) 20(3) Nevada Law Journal 1209. 100 Works that have illuminated the current account of trust include: N Luhmann, Trust and Power (John Wiley & Sons, 2018) originally published as Vertrauen (1973); D Gambetta, Trust, Making and Breaking Cooperative Relations (Basil Blackwell, 1988); F Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (1995); BA Misztal, Trust in Modern Societies (Polity Press, 1996); P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999); AB Seligman, The Problem of Trust (Princeton University Press 2000); KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001); O O’Neil, A Question of Trust (Cambridge University Press, 2002); RC Solomon and F Flores, Building Trust: In Business, Politics, Relationships, and Life (Oxford University Press, 2003); E Ostrom and J Walker, Trust and Reciprocity: Interdisciplinary Lessons for Experimental Research (The Russell Sage Foundation, 2003); RM Kramer and KS Cook, Trust and Distrust in Organizations: Dilemmas and Approaches (Russell Sage Foundation 2004); TK Das and B-S Teng, ‘The Risk-Based View of Trust: A Conceptual Framework’ (2004) 19 Journal of Business and Psychology 85; R Hardin, Trust (Polity Press, 2006); T Frankel, Trust and Honesty (Oxford University Press 2006); R Hardin, Trust and Trustworthiness (Russell Sage Foundation, 2006); JA Simpson, ‘Psychological Foundations of Trust’ (2007) 16 Current Directions in Psychological Science 264; CA Hill and EA O’Hara, ‘A Cognitive Theory of Trust’ (2006) 84 Wash UL Rev 1717; A Seldon, Trust: How We Lost It and How We Get It Back (Biteback, 2009); J Ermish, D Gambetta, H Laurie and others, ‘Measuring People’s Trust’ (2009) 172 Journal of the Royal Statistical Society 749; C Castelfranchi and R Falcone, Trust Theory: A Socio-cognitive and Computational Model (Wiley, 2010); O O’Neill, ‘Trust, Trustworthiness, and Accountability’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford, Oxford University Press, 2014); G Hosking, Trust: A History (Oxford University Press, 2014); O O’Neill, ‘Linking Trust to Trustworthiness’ (2018) 26(2) International Journal of Philosophical Studies 293.

104  Trust The shift in thinking from mechanisms based on self-interest and utilitarian rationality towards involvement of heuristics and evaluation against internal feelings and moral values is not, however, universal. The literature on trust of the past 40 years reveals considerable confusion as understanding has changed. However, a review of experimental research in 2014 concluded that the existence of strong trust between people is far more effective than trying to affect choices by the threat of punishment.101 Although there is strong popular belief in the value of punishment, there is extensive evidence that it is in fact of little value in affecting future behaviour.102 In contrast, social responses to doing something that one’s group regards as wrong are powerful, such as social embarrassment, disapproval or ostracism.103

Motivation, Social Groups and Procedures Tom Tyler and colleagues have carried out extensive research that indicated that trust in the motives of group authorities encourages both voluntary deference to their decisions and feelings of obligation to obey social rules.104 Thus, the generic state of trustworthiness of authorities facilitates this voluntary deference to rules and authorities.105 Tyler was unimpressed by traditional authoritarian means of control: ‘Typically, authorities have, at best, a limited ability to influence the favourability of the outcomes for group members or to alter the risk of detection and punishment for rule-breaking.’106 Tyler argued that promoting voluntary deference to authorities and rules through trust mechanisms is essential. He advocated strengthening means of building social trust, especially through communicating information that demonstrates the motivation of groups and their authorities, and supports individuals’ identification with a group and status as a member of it. Tyler argued that emphasising a person’s social status builds support, thus ‘respectful treatment by authorities communicates to people that they are valued members of groups, while disrespect conveys lack of status.’107 An individual’s status within a group mediates the impact of the quality of treatment received from group authorities.108 101 D Awrey and D Kershaw, ‘Toward a More Ethical Culture in Finance: Regulatory and Governance Strategies’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014). 102 C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015). 103 R Ellickson, Order Without Law: How Neighbors Settle Disputes (Harvard University Press, 1994); L Bernstein, ‘Opting Out of the Legal System: Extralegal Contractual Relations in the Diamond Industry’ (1992) 21(1) The Journal of Legal Studies 115–57; L Bernstein, ‘Private Commercial Law in the Cotton Industry: Creating Cooperation through Rules, Norms and Institutions’ (2001) 99 Michigan Law Review 1724–90; A Greif, ‘Contract Enforceability and Economic Institutions in Early Trade: The Maghribi Traders’ Coalition’ (1993) 83 American Economic Review 525–48. 104 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 105 TR Tyler and S Blader, Cooperation in Groups: Procedural Justice, Social Identity, and Behavioural Engagement (Psychology Press, 2000); TR Tyler and YJ Huo, Trust and the Rule of Law: A Law-Abidingness Model of Social Regulation. Working Paper (Russell Sage Foundation, 2000). 106 TR Tyler, ‘Procedural Fairness and Compliance with the Law’ (1997) 133(2) Swiss Journal of Economics and Statistics 219. 107 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001) 289; JH Smith and TR Tyler, ‘Choosing the Right Pond: The Influence of the Status of One’s Group and One’s Status in That Group on Self-esteem and Group-Oriented Behaviour’ (1997) 33(2) Journal of Experimental Social Psychology 146; TR Tyler, P Degoey and JH Smith, ‘Understanding Why the Justice of Group Procedures Matters’ (1996) 70(5) Journal of Personality and Social Psychology 913. 108 TR Tyler, P Degoey and JH Smith, ‘Understanding Why the Justice of Group Procedures Matters’ (1996) 70(5) Journal of Personality and Social Psychology 913.

Mental Mechanisms  105 Tyler and colleagues’ research showed that perceptions that procedures are fair and decisions are dispassionate have strong effects on voluntary deference, irrespective of whether the individual benefited from a decision.109 They even found that decisions that were biased or unfair had little or no negative effect provided that citizens inferred that the motives of the authorities were benevolent.110 Similarly, where people have an ongoing relationship with a group or authority, and hence derive some sense of self and social identity from this, they are more concerned with its trustworthiness. Tyler and Degoey demonstrated the importance of social connections in finding that ‘inferences about the trustworthiness of a managerial authority more strongly influence the willingness to voluntarily accept the decisions of that authority when the authority is a friend or when the employee expects to have a long-term social relationship with the authority’.111,112 Further studies113 suggested ‘that people care more about the quality of their treatment by authorities if they feel that they share the organisation’s values. When people share the organisation’s values, how they are treated by authorities has a stronger influence on their willingness to defer to those authorities’.114 These findings were supported by research on treatment both within groups and across group boundaries.115 People who perceive themselves as having been unfairly treated tend to confront decisions and act uncooperatively.116 The obverse effect is the finding that that regulatees have higher compliance where they perceive that inspectors treat them with respect and trust.117 Employees’ ethical values are shaped primarily by employee perceptions of how fairly they are treated by management.118

109 EA Lind and TR Tyler, The Social Psychology of Procedural Justice (Plenum, 1988); TR Tyler and EA Lind, ‘A Relational Model of Authority in Groups’ in MP Zanna (ed), Advances in Experimental Social Psychology (1992) 25. 110 TR Tyler, Why People Obey The Law (Yale University Press, 1990). 111 TR Tyler and P Degoey, ‘Trust in Organizational Authorities: The Influence of Motive Attributions on Willingness to Accept Decisions’ in R Kramer and TR Tyler (eds), Trust in Organizations (Sage Publications, 1996). 112 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001), 293. 113 TR Tyler, ‘The Psychology of Legitimacy’ (1997) 1(4) Personality and Social Psychology Review 323. 114 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001), 294. 115 TR Tyler, EA Lind, K Ohbuchi, I Sugawara and YJ Huo, ‘Conflict and Outsiders: Disputing Within and Across Cultural Boundaries’ (1998) 24(2) Personality and Social Psychology Bulletin 137; HJ Smith, TR Tyler, DJ Ortiz and EA Lind, ‘The Self-Relevant Implications of the Group-Value Model: Group Membership, Self-Worth, and Procedural Justice’ (1998) 34(5) Journal of Experimental Social Psychology 470. 116 TR Tyler and HJ Smith, ‘Social Justice and Social Movements’, in DT Gilbert, ST Fiske and G Lindzey (eds), The Handbook of Social Psychology 4th edn, Vol II (Oxford University Press, 1998) 595–629; TR Tyler and P Degoey, ‘Trust in Organizational Authorities: The Influence of Motive Attributions on Willingness to Accept Decisions’ in RM Kramer and TR Tyler (eds), Trust in Organizational Authorities (Sage Publications Inc., 1996) 331; K Murphy, ‘“Trust Me, I’m the Taxman”: The Role of Trust in Nurturing Compliance’ (2002) Centre for Tax System Integrity Working Paper no. 43 1–31. 117 J Braithwaite and T Makkai, ‘Trust and Compliance’ (1994) 4(1) Policing and Society 1–12; K Aoki, L Axelrad, and RA Kagan, ‘Industrial Effluent Control in the United States and Japan’ in RA Kagan and L Axelrad, Regulatory Encounters (University of California Press, 2000) 64–95; M Wenzel, ‘The Impact of Outcome Orientation and Justice Concerns on Tax Compliance: The Role of Taxpayers’ Identity’ (2002) 87(4) Journal of Applied Psychology 629–45; M Wenzel, ‘Principles of Procedural Fairness in Reminder Letters: A Field-Experiment’ (2002) Center for Tax System Integrity Working Paper no. 42; K Murphy, ‘Procedural Justice and Tax Compliance’ (2003) 38(3) Australian Journal of Social Issues 379–407. 118 TR Tyler and SL Blader, Cooperation in Groups: Procedural Justice, Social Identity, and Behavioral Engagement (Psychology Press, 2000); TR Tyler and SL Blader, ‘The Group Engagement Model: Procedural Justice, Social Identity, and Cooperative Behaviour’ (2003) 7 Personality and Social Psychology Review 349 (finding that over 80% of compliance decisions are driven by the credibility of the organisation’s leadership message and congruence of organisational and personal values, and less than 20% are driven by formal rewards and punishments).

106  Trust Underlying this social identity theory is the idea that people value interacting with others so as to use the information ‘to define their social identity, an important component of their sense of self ’.119 Tyler summarised his conclusions on social trust like this:120 When people interact with others, how they are treated communicates status-relevant information. This information is communicated through the behaviour of authorities and institutions. That behaviour produces both a procedural justice effect and an influence of relational judgments about the quality of one’s treatment. Of particular importance are the relational elements of procedure: respect from others, neutrality, and evidence of trustworthiness (‘quality of treatment’).

It follows from these findings that trust and compliance are more likely where relationships and groups exist. Hence, one would predict, for example, that those regulatory authorities that seek to engage with regulatees in respectful engagement are more likely to promote compliance outcomes than authorities that do not engage or who rely on an authoritarian enforcement approach. Similar conclusions apply as between governments and citizens, and managers and staff. Tyler presented evidence that identification with small groups is natural and more easily maintained because of everyday personal interaction. Identification with larger groups (eg nations) is more difficult to establish and maintain. Where there is no personal commitment, identification must be maintained through commitment to abstract symbols and institutions with which people may have few contacts.121 These findings have implications for the size of human groups, such as clubs, and creating sub-groups within large organisations. National symbols such as a Constitution, flag, national anthem, politically neutral monarchy, and the right size of local government institutions with relevant powers may all be relevant. At the time Tyler was writing, he was careful not to attack the dominant self-interest calculative theory head on, but to suggest that the empirical evidence showed that there was a ‘secondary’ motivation theory. We would now say that the relative strength of these two arguments has evolved.

Evidence of Trustworthiness There are cogent reasons why it is sensible to base decisions on trustworthiness on conscious evaluation of sufficient relevant evidence. We noted above that decisions are often better where they involve time for reflection, challenge and debate. Where we use conscious thought processes, we tend to rationalise the rightness of our decisions. We may increase the accuracy of our decisions by adopting strategies such as taking time over them, maximising the evidence that we consider, and being open to challenge. Thus, our view that a government or institution is trustworthy should rationally be supported where we can rely on a significant body of relevant evidence of how the potential trustee has acted and intends to act, and his capacity to do so. We should, therefore, aim to build mechanisms that produce relevant and reliable evidence. What sort of evidence would be relevant? There is an interesting approach to time, involving an amalgamation of three time periods. Much of the evidence will be historical, but on the basis of which we make a judgement in the present about how someone will behave in the future. Thus, we can aim to affect others’ judgement of our trustworthiness, and aim to increase others’ trust

119 T Tyler, ‘Why Do People Rely on Others? Social Identity and Social Aspects of Trust’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001) 302. 120 ibid, 301. 121 ibid, 303.

Evidence of Trustworthiness  107 in us, by providing evidence of how we have acted in the past and present so that it is rational and socially reliable for others to place trust in how we will act in future.122 The relevant evidence may be partly historical (the other’s record of how they have acted in the past) and partly current (how they act now). The mere existence of evidence is insufficient: it must be communicated to the truster, possibly also with a means of verification of facts. Various classifications have been proposed for types of relevant evidence. Some commentators refer to evidence as clues.123 But there can be far more sophisticated evidence systems. Sztmopka refers to three grounds for trust (reasons, predilections and rules), to reflected trustworthiness, based on three forms of primary evidence (reputation, performance and appearance) and secondary contextual cues (accountability of the trustee, pre-commitment and trust-­inducing situational facilitation).124 He points out that evidence is often not directly from or about the trustee but secondary evidence from others, such as witnesses, auditors, accreditation bodies, professional qualifications and records. Experts in management have suggested that trustworthiness is based on four characteristics: ability, benevolence, integrity and predictability.125 It has also been suggested that it is much easier for people to assess and develop trustworthiness when it is associated with ability and predictability. In cases where trustworthiness was mainly about integrity and benevolence, some organisations made use of development tools such as master classes, activity-based learning and case studies. However, assessing these quantitatively was much more challenging and hence there was a stronger focus on making judgements based on personal interactions and having a ‘sense’ or ‘feel’ of the person.126 In 2001 McKnight and Chervany analysed definitions of trust from 80 articles and books and found two broad groupings of definitions: different conceptual types (such as attitudes, beliefs, behaviours and dispositions) and different referents (trust in something, in someone or in a specific characteristic of someone, eg one’s honesty).127 They summarised the findings under the five main categories: competence (including expert and dynamic), predictable, benevolent (including moral, caring, responsive), having integrity (honest, credible, reliable and dependable) and a residual category (open, careful, safe, shared understanding, personally attractive). McKnight and Chervany also cross-referenced the five referent characteristics (competence, benevolence, integrity, predictability and other) against six conceptual types of trust: structural/ institutional, disposition, attitude, belief, intention, behaviour. They constructed a sophisticated model of high-level trust for those involved in the internet. McKnight and Chervany also proposed a sequence of four trust constructs:128

Disposition to Trust: the extent to which one displays a consistent tendency to be willing to depend on general others across a broad spectrum of situations and persons.

122 O O’Neil, A Question of Trust (Cambridge University Press, 2002). 123 N Luhmann, Trust and Power (John Wiley & Sons, 2018) 37; P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999) ch 4. 124 Sztompka, ibid, ch 4. 125 RC Mayer, JH Davis and D Schoorman, ‘An Integrative Model of Organizational Trust’ (1995) 20(3) Academy of Management Review 709–34; G Dietz and D Den Hartog, ‘Measuring Trust Inside Organisations’ (2006) 35(5) Personnel Review 557–88. 126 University of Bath School of Management, Cultivating Trustworthy Leaders (Chartered Institute of Professional Development, 2014). 127 DH McKnight and NL Chervany, ‘Conceptualizing Trust: A Typology and E-commerce Customer Relationships Model’, Proceedings of the 34th Hawaii International Conference on System Sciences (IEEE, 2001); DH McKnight and NL Chervany, ‘What Trust Means in ECommerce Customer Relationships: An Interdisciplinary Conceptual Typology’ (2001) 6(2) International Journal of Electronic Commerce 35–59. 128 ibid.

108  Trust

Institution-based Trust: one believes the needed conditions are in place to enable one to anticipate a successful outcome in an endeavour or aspect of one’s life.129 Trusting Beliefs: one believes (and feels confident in believing) that the other person has one or more traits desirable to one in a situation in which negative consequences are possible. Trusting Intentions: one is willing to depend on, or intends to depend on, the other person in a given task or situation with a feeling of relative security, even though negative consequences are possible.

They suggested that institution-based trust involves two elements: (a) Structural Assurance means one believes that success is likely because guarantees, contracts, regulations, promises, legal recourse, processes or procedures are in place that assure success.130 (b) Situational Normality means one believes that success is likely because the situation is normal or favourable. One might expand the category of ‘benevolence’ and its references to ‘good, moral, caring’. A profound type of evidence concerns motivation and intention. Further, although trust as a concept is, as we said above, ethically neutral, we are able to evaluate the evidence against the criterion of our (or society’s) ethical values. Accordingly, in an ethical society, it is highly relevant to apply a criterion of the extent to which the evidence supports or undermines whether the potential object of our trust is ethically trustworthy.

Some Complex Situations Modern organisations and societies are complex. They may contain many individuals who each pursue different goals or act in particular ways and form multiple groups. Individuals may belong to a number of different social groups and play different roles in each. The motivation and causation of any particular action that may affect others might involve many actors and factors. Faced with this complexity, we take steps to build order by preventing the disruption of trust and expectations, and the reduction in uncertainty, by institutionalising relevant mechanisms that support our engaging with critical others on the basis of trust.131 A number of commentators have identified not only how the need for trust has grown in the complex modern world but also how the diffusion of society and relationships, plus globalisation and digital communications, have reduced previous mechanisms for familiarity, trust and confidence, and currently present serious challenges for contemporary relations.132 Let us review some illustrative examples. We bear in mind especially the characteristics of competence, benevolence, integrity, predictability and ‘other’, and the four trust constructs noted above.

129 N Luhmann, Trust and Power (John Wiley, 1979); JD Lewis and AJ Weigert, ‘Trust as a Social Reality’ (1985) 63 Social Forces 967–85; LG Zucker, ‘Production of Trust: Institutional Sources of Economic Structure, 1840–1920’ in BM Staw and LL Cummings (eds), Research in Organizational Behavior (JAI Press, 1986) 53–111. 130 SP Shapiro, ‘The Social Control of Impersonal Trust’ (1987) 93 American Journal of Sociology 623–58; LG Zucker, ‘Production of Trust: Institutional Sources of Economic Structure, 1840–1920’ in BM Staw and LL Cummings (eds), Research in Organizational Behavior (JAI Press, 1986) 53–111. 131 N Luhmann, Trust and Power (John Wiley & Sons, 2018) 69. 132 eg AB Seligman, The Problem of Trust (Princeton University Press, 1997); G Hosking, Trust: A History (Oxford University Press, 2014).

Some Complex Situations  109

Commercial Organisations There does seem to have been limited emphasis during the past century on elements of benevolence, motivation and integrity and more reliance on rules-based systems and competence. Mechanisms that have deep historical roots include adherence to family, religious rules, professional codes or ethical values. More recent mechanistic trust-supporting institutions exist in legal systems: guarantees, contract, regulatory requirements (eg compliance requirements, licences, accreditation, inspection, audit and verification, testing, surveillance, intervention, means of legal enforcement (courts, arbitration, public or private sanctions (fines etc or damages)). It is true that competence is clearly linked to performance133 and essential for compliance. Compliance and regulatory systems have assumed central important in producing evidence. A manufacturer’s quality management system should give assurance that every item it makes conforms to the design, is identical and of the same quality. Essential surrounding evidence will cover an evaluation of the design, evidence of the continuous operation of the quality and manufacturing system and sampling procedures. For more complex products, ongoing surveillance systems of the safety of the product in use will be relevant. Use of trust language, though, may not be all it seems. The use of trust-related words in financial returns (section of 10-K filings) of United States companies was found to be connected to inefficient investment decisions and poor operating performance.134 Furthermore, firms making more frequent use of trust-related words were subject to less monitoring by institutional investors or analysts, and their accounting relied more heavily on discretionary accruals. The authors considered that these results were consistent with the notion that managerial rhetoric to advertise trustworthiness points towards agency problems plaguing the firm. Gary Miller’s research supported the need for trust inside organisations in order to motivate productivity, irrespective of any other forms of incentives.135 He said in 2001 that the interdependent technology of many modern organizations ‘requires cooperation by a variety of stakeholders – cooperation that is inhibited by the unilateral commitment of the firm to shareholder profits’. Miller argued that the constitutional development of the firm must be guided by more factors than simple maximisation of shareholder influence – a point discussed in chapter 11. It is now seen as important for businesses who wish to gain the trust of their stakeholders to avoid being seen as just driven by profit maximisation or placing the self-interest of any of its shareholders, directors or staff above any of other groups, or of customers, suppliers or society.136

133 TK Das and B-S Teng, ‘The Risk-Based View of Trust: A Conceptual Framework’ (2004) 19 Journal of Business and Psychology 85. 134 W Breuer, A Knetsch and AJ Salzmann, ‘What Does It Mean When Managers Talk About Trust?’ (2020) 166 Journal of Business Ethics 473. 135 G Miller, ‘Why Is Trust Necessary in Organizations? The Moral Hazard of Profit Maximization’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001) 329. See also TM Jones, ‘Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model’ (1991) 16(2) Academy of Management Review 366. 136 Communication: A Renewed EU Strategy 2011-14 for Corporate Social Responsibility COM(2011) 681, 25.10.2011; J Ruggie, The Special Representative of the Secretary-General, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Business Corporations and other Business Enterprises, Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, A/HRC/17/31, 21 March 2011. See JL Campbell, ‘Why Would Corporations Behave in Socially Responsible Ways? An Institutional Theory of Corporate Social Responsibility’ (2007) 32(2) Academy of Management Review 946; J Eijsbouts, Corporate Responsibility, Beyond Voluntarism. Regulatory Options to Reinforce the Licence to Operate’ Inaugural Lecture (Maastricht University, 2011); Corporate Responsibility. Good for Business and Society: Government Response to Call for Views on Corporate Responsibility (Department for Business Innovation & Skills, 2014).

110  Trust A 2012 meta-review of the evidence suggested that higher levels of integrity are correlated with commercial success in many contexts.137 The case that corruption is bad for markets and businesses was developed in a more recent paper, drawing together a range of evidence.138 Nicholls’ overview review also found that the weight of evidence suggests that higher levels of integrity are correlated with commercial success in many contexts.139 The relationship between high trust in brands and commercial success is widely recognised. Companies with anti-corruption programmes and strong ethical guidelines are found to suffer up to 50% fewer incidents of corruption than those without such programmes, indicating integrity programmes are an effective means of minimising losses which can be incurred as a result of corruption, especially where it is detected.140 US scholars asserted in 2017 that strengthening ethical culture makes a firm more competitive.141 Trust involving organisations involves multiple actors typically operating at multiple levels and relationships.142 A failure of trust in an organisation calls into question its legitimacy.143 A tranche of research has examined inter-organisational trust between commercial companies, especially in supplier-manufacturer supply chains. Comparisons between Germany and Britain from the 1970s to 1990s noted the widespread phenomenon of higher-trust in Germany in supplier relations,144 as well as in labour relations.145 This was attributed in particular to the ability to build ‘process-based trust’ and ‘institutionally-based trust’.146 Process-based trust builds over time through ‘lived experience’ of long-term relationships, fostered by stability of ownership, physical proximity between organisations and longevity of business relations. Institutionallybased trust is assisted through societal structures such as the coordinating role of Chambers of Commerce, plus their requirements for ethical behaviour of members, and the reliance on Civil Codes and general trading conditions, rather than on individually negotiated contracts. Another illuminating comparison was between Nissan’s need to drastically reduce the number of its suppliers in Japan from 2000, significantly undermining previously strong but complacent trust, and Honda’s approach to building trust with American suppliers when it entered that market from 1992 on.147 The researchers concluded that ‘optimal trust’ is needed, since relations that are too set and informal can become lax in information gathering and responsiveness or ability to correct excessive dependence. Honda achieved success by working first with smaller local firms and communities and later having to scale up to large suppliers, using different techniques but devoting considerable managerial attention aiming throughout to replace negative

137 PM Nichols, ‘The Business Case for Complying with Bribery Laws’ (2012) 49(2) American Business Law Journal 325–68 at http://onlinelibrary.wiley.com/doi/10.1111/j.1744-1714.2012.01134.x/ abstract. 138 M Jenkins, The Relationship Between Business Integrity and Commercial Success (Chr. Michelsen Institute, 2017). U4 Helpdesk Answer 2017:14. 139 PM Nichols, ‘The Business Case for Complying with Bribery Laws’ (2012) 49(2) American Business Law Journal 325. 140 PricewaterhouseCoopers. 2007. Economic Crime: People, Culture and Controls: The Fourth Biennial Global Economic Crime Survey, 33, www.whistleblowers.org/storage/documents/pwc_survey.pdf. 141 P Nichols and P Dowden, Improving Ethical Culture by Measuring Stakeholder Trust (SCCE 10 April 2017) at http://complianceandethics.org/improving-ethical-culture-by-measuring-stakeholder-trust/. 142 N Gillespie and S Siebert, ‘Organizational Trust Repair’, in RH Searle, A-MI Nienaber and SB Sitkin (eds), The Routledge Companion to Trust (Routledge, 2018), 284. 143 ibid, 286. 144 C Lane and R Bachmann, ‘The Social Constitution of Trust: Supplier Relations in Britain and Germany’ (1996) 17(3) Organization Studies 365–95. 145 A Fox, Beyond Contract: Work, Power and Trust Relations (Faber, 1974). 146 LG Zucker, ‘Production of Trust. Institutional Sources of Economic Structure 1840–1920’ (1986) 8 Research in Organizational Behavior 53–111, 65. 147 M Stevens, JP MacDuffie and S Helper, ‘Reorienting and Recalibrating Inter-organizational Relationships: Strategies for Achieving Optimal Trust’ (2015) 36(9) Organization Studies 1237–64.

Some Complex Situations  111 with positive attributions, restore balance in the social equilibrium, and develop structural changes that not only prevent future problems but were a symbol of resolve to avoid such problems. Their approach contrasted with the adversarial purchasing behaviour that was the norm in the American automakers’ market. Given the fact that it is humans who (make judgements on) trust, rather than organisations, various scholars have theorised about the mechanisms by which individual trust relations between people working in different organisations are transferred to the relationships between their respective organisations. Kroeger argues that an institution can provide a symbolic repertoire of – often imprecise – expressions that can accumulate (or not) through a path dependent trajectory into an attribute of an organisation.148 Relevant clues are provided through objectification of a common understanding and habitualisation of alliance routines and involving public information on general reputation, personal and collectively experienced memory, feedback and other facts.149 Vanneste has noted the importance of indirect reciprocity between firms in establishing interorganisational trust, where people observe trustworthy behaviour towards colleagues that signals trustworthiness towards themselves and others. The larger the number of observers the greater the strength of this effect.150 Since the global financial crisis of 2008, reliance on formalised structures of accountability and legal duties of accountability have been seriously questioned – even to the extent of no longer being viewed as credible in delivering compliance – and the relevance of strengthening of ethical mechanisms has been recognised.151 Philip Nichols and Patricia Dowden summarised the importance of trust for businesses as at 2017:152 Trusted firms have stronger and more productive relationships with suppliers, distributors, and other members of value chains. Trusted firms receive better business terms when working with other entities. Trust enhances the likelihood of innovation and successful entrepreneurship. Trusted firms have more loyal, productive and engaged employees.

A major aim of the OECD since the GFC has been to rebuild trust in business.153 The basis of human interaction is not money or selfishness but trust.154 Trust and trustworthiness have emerged as essential components of effective regulation and compliance. The objective here is more than that a business can be trusted not to break rules but that its performance will be maintained and improved, and it will do the right thing whatever occurs. The situation almost always involves a matrix of trust relationships and stakeholders – staff, managers, investors, customers, citizens, suppliers, local communities, accreditation and standards bodies, auditors, regulators, politicians, officials, the environment.

148 F Kroeger, ‘Trusting Organizations. The Institutionalization of Trust in Interorganizational Relationships’ (2012) 19(6) Organization 743–63. 149 O Schilke and KS Cook, ‘A Cross-level Process Theory of Trust Development in Interorganizational Relationships’ (2013) 11(3) Strategic Organization 281–303. 150 BS Vanneste, ‘From Interpersonal to Interorganisational Trust: The Role of Indirect Reciprocity’ (2016) 6(1) Organization Studies 693–714. 151 N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014). 152 See multiple references cited by P Nichols and P Dowden, Improving Ethical Culture by Measuring Stakeholder Trust April 10, 2017 by SCCE, at http://complianceandethics.org. 153 Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015) (the objective is ‘to create an environment of trust, transparency and accountability necessary for obtaining long-term investment, financial stability and sustainable growth. If nothing is done, the very fabric and foundation of doing business in an effective and sustainable fashion is at risk’). 154 Strengthening Trust in Business. OECD Business and Finance Outlook 2019 (OECD, 2019).

112  Trust The existence of various systems will produce evidence of different kinds on which a judgement can be made that someone can be trusted, such as: a legal system that supports the making and enforcement of contracts; management, business, quality and market systems that support reliable and predictable operations and behaviours; third-party verification through auditing and assessment systems; adherence to codes of ethical practice and relevant standards; evidence of an ethical organisational culture, and so on.

Political and Social Spheres A number of political scientists recognised in the 1990s the link between trust and socio-political and economic success. Robert Putnam argued that trust creates ‘social capital’ that facilitates cooperation and civic-mindedness and makes democracy work.155 Different profiles of trust have been identified across nations, or patterns across groups of nations.156 World Bank research found that the level of social capital affected the economic performance of places, such that investing in trust is recommended in order to produce substantial welfare returns.157 Developing the concept of social capital, the economic advantage of trust mechanisms over legal mechanisms was championed by Francis Fukuyama in 1995:158 People who do not trust each other will end up cooperating only under a system of formal rules and regulations, which have to be negotiated, agreed to, litigated, and enforced, sometimes by coercive means. This legal apparatus, serving as a substitute for trust, entails what economists call ‘transaction costs’. Widespread distrust in a society, in other words, imposes a kind of tax on all forms of economic activity, a tax that high-trust societies do not have to pay.

Thus, Fukuyama argued that relationships or societies that are able to operate on trust, as opposed to formality, incur lower transaction costs. He suggested that the social capital that is created within a community from the level of trust that it is able to generate – based on shared ethical values like loyalty, honesty and dependability, cooperativeness and a sense of duty to others – has major consequences for its economy. Fukuyama contrasted two economic groups. On one side were high-trust societies with plentiful social capital – Germany, Japan and the United States – which had the ability to create large, private business organizations and develop large, modern, professionally managed hierarchical corporations. On the other side were relatively low-trust societies like Taiwan, Hong Kong, France and Italy, which had traditionally been populated by family businesses. He concluded:159 A high-trust society can organise its workforce on a more flexible and group-oriented basis, with more responsibility delegated to lower levels of the organization. Low-trust societies, by contrast, must fence in and isolate their workers with a series of bureaucratic rules.

It is interesting to speculate whether calculative trust is a necessary evolutionary stage before the resurgence of social trust, but many contemporary commentators identify the risks of a society

155 RD Putnam, Making Democracy Work (Princeton University Press, 1993); RD Putnam, ‘Turning In, Turning Out: The Strange Disappearance of Social Capital in America’ (1995) 28(4) PS: Political Science and Politics 644. 156 G Mackie, ‘Patterns of Social Trust in Western Europe and Their Genesis’ in KS Cook (ed), Trust in Society (Russell Sage Foundation, 2001). 157 K Hamilton, JF Helliwell and M Woolcock, Social Capital, Trust and Well-being in the Evaluation of Wealth, Policy Research Working Paper No 7707 (World Bank, 2016). 158 F Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Penguin Books, 1995) 27. 159 ibid.

Some Complex Situations  113 dominated by calculative trust and the absence of social trust. It is certainly true that political legitimacy is a complex, multi-level concept.160 Scholars working with David Levi-Faur have found that multiple variables affect trust in governments and public administration, with citizens broadly taken a broad assessments of governments as a whole, not usually distinguishing greatly between different parts of public administration, such as regulatory authorities.161 A US study found that constituents’ trust in their Congressional representatives was directly influenced by personal contact with the representative and trust in the political system, and indirectly influenced by perceptions of waste in government, economic evaluations and socioeconomic status operating through system trust.162 Writing in 1999, Max Kaase noted that the spectacular decline in confidence in political institutions and actors found in the US between 1981 and 1996 was not paralleled in Europe.163 Comparing data from the Eurobarometer surveys and the European/World Values Studies, he found that the statistical relationship between interpersonal trust and political trust in nine European countries was small, though generally positive. Thus, he concluded that interpersonal trust cannot be regarded as an important antecedent or consequence of political trust. However, he found that a different picture emerged regarding the relationship between political trust and legal non-institutionalised participation: the lower political trust, the higher the probability of engaging in direct action. Finally, he found a positive relationship between interpersonal trust and direct action, thereby pointing to trust as a precondition or consequence of non-institutionalised political involvement. Many writers have commented on a decline in trust in the United States. Tamar Frankel said in 2006 that America was ‘becoming used to abuse of trust and deception’.164 A 2020 report noted a 10% rise from 1995 in the level of dissatisfaction by majorities of citizens in 25 countries with the performance of their democracies, rising from 47.9 to 57.5%.165 Highest-ever levels of dissatisfaction were recorded in the United States, Brazil, Mexico, the United Kingdom, South Africa, Colombia and Australia. Marek Kohn, noting the increasing prominence of a lack of trust in public life, argued that conversations needed to focus more on happiness, community, equality and respect.166 In 2021, commentators spoke of a ‘trust recession’ in America.167 Issues of ‘fake news’, foreign political interference, and the behaviour around President Trump have raised concerns whether truth remains relevant in politics, and whether any source, such as experts, can be trusted.168 Another recent example is a 2019 review by Irene Daskalopoulou of the relationship between social and institutional trust in Greece.169 Analysing data from the European Values Surveys (2002–10), she constructed values for social trust from data on generalised trust, fairness and helpfulness, and for institutional trust from trust in political institutions, civil security institutions and supranational political institutions. She found a two-way causal relationship between social trust and institutional trust. 160 BA Misztal, Trust in Modern Societies (Polity Press, 1996) 254. 161 K Verhoest and F Six, ‘Trust and Distrust in Government’ in Report on Trust in Government, Politics, Policy and Regulatory Governance (TiGRE Project, 2020); and see associated surveys at www.tigre-project.eu. 162 SL Parker and GR Parker, ‘Why Do We Trust Our Congressman?’ (1993) 55(2) The Journal of Politics 442. 163 M Kaase, ‘Interpersonal Trust, Political Trust and Non-institutionalised Political Participation in Western Europe’ (1999) 22(1) West European Politics 158. 164 T Frankel, Trust and Honesty (Oxford University Press, 2006) 3. 165 RS Foa, A Klassen, M Slade, A Rand and R Collins, The Global Satisfaction with Democracy Report 2020 (Centre for the Future of Democracy, 2020). 166 M Kohn, Trust. Self-Interest and the Common Good (Oxford University Press, 2008). 167 J Unseem, ‘A Trust Recession Is Looming Over the American Economy’ The Atlantic 24 November 2021. 168 M Schwartzberg and P Kitcher (eds), Truth and Evidence: NOMOS LXIV (New York University, 2021). 169 I Daskalopoulou, ‘Individual-Level Evidence on the Causal Relationship Between Social Trust and Institutional Trust’ (2019) 144(1) Social Indicators Research 275.

114  Trust Edelman’s useful annual Trust Barometer survey described the themes in 2020 as ‘competence and ethics’ and in 2021 as ‘declaring information bankruptcy’.170 In 2020, business had become the only trusted institution, trusted as both competent and ethical, ahead of NGOs, governments and the media. All the most powerful countries were reported as having lost trust capital since 2019, with many public leaders not being trusted to do what is right – although people trusted what is local – and the pandemic had added to persistent personal and societal fears. Edelman reported from many countries increased desires of people to see improvement in their national healthcare system, address poverty in the country, improve its education system, address climate change, find ways to combat fake news, protect people’s individual freedoms, close the economic and social divide, and address discrimination and racism. In the 2022 review, in the light of over a full year of the pandemic, business retained its level of trust (globally 61% but it had fallen in UK and USA to 49% and Germany to 48%) whilst trust in governments and media declined and were seen as divisive.171 Trust was reported to have fallen in democracies (and to be particularly low in Russia). IPSOS’ review in 2021 was that levels of trust in key societal institutions were ‘not great, but they often never have been’, that trust in politicians and the media continued to be low, but that it was incorrect that there was ‘a crisis’ in trust, especially trust in business.172 However, differences in trust in governments have been associated with striking differences in behaviour and outcomes in the Covid pandemic. If every country were in the 75th percentile in trust in government (where Denmark was) this might have prevented 13% of global infections, or in the 75th percentile of trust in fellow citizens (where South Korea was) it might have prevented 40% of global infections.173

Activities, Compliance and Regulation The role of confidence and trust in organisations may include individual transactions – such as investment, employment or purchase – but also encompasses wider and ongoing aspects. For example, society – represented by a regulatory authority – may wish to know not just that a business or educational or healthcare establishment complies with all relevant rules, but also that it can be expected to ‘do the right thing’ whatever circumstances arise. Some of the expected behaviour may not be required in legal rules, such as to be transparent and effective when adverse events occur. That broad approach points towards the benefit of having an approach that is based on the culture of the organisation and its commitment to ethical practice (see chapter eight).

Problems of Globalised Intermediated Trust Balázs Bodó has identified that the forces of globalisation and digitisation, through the internet and intermediary platforms, have produced a commodification of trust sources and confusion

170 Edelman Trust Barometer 2021 at www.edelman.com/sites/g/files/aatuss191/files/2021-01/2021-edelman-trustbarometer.pdf. 171 Edelman Trust Barometer 2022 at www.edelman.com/sites/g/files/aatuss191/files/2022-01/2022-edelman-trustbarometer.pdf. 172 IPSOS Global Trustworthiness Monitor. Is Trust in Crisis? (IPSOS, 2022). 173 TJ Bollyky et al, ‘Pandemic Preparedness and Covid 19: An Exploratory Analysis of Infection and Fatality Rates, and Contextual Factors Associated with Preparedness in 177 Countries, from Jan 1, 2020, to Sept 30, 2021’ The Lancet 1 February 2022, http://doi.org/10.1016/ S0140-6736(22)00172-6.

Conclusions: Building Trust  115 over the reliability of trust in strangers. In this world, trust is intermediated by technology owned by private trust producers (online reputation management, distributed ledgers and AI-based predictive systems), where the trustee is the trust-producing technology itself, whose trustworthiness may be impossible to establish, leading to issues over reliability, fraud and fake news.174 Bodó suggests that the trustworthiness of trust-producing technologies is based on perceptions of competence, benevolence and integrity. By integrity, he means that the trustee’s actions are congruent with their words, and that there is some shared moral and ethical ground between the trustor and the trustee.175 He identifies the risk that this environment of private, monopolistic, radically disembedded technosocial systems mass-produce radically disembedded, commodified trust – which has unverifiable trustworthiness.

Conclusions: Building Trust This chapter has reviewed solid evidence that the mental mechanism of trust is critical for cooperation between humans and groups, institutions and organisations. Further, this mental mechanism, innate within our brains, is universal amongst our species and acts automatically but has been neglected, leading to sub-optimal outcomes. If we are going to cooperate more, we should build trust between us. There is evidence throughout this book that levels of trust and confidence between different groups in society, and trust in and between institutions, is under threat in modern societies. It is, therefore, important to consider how we should build and maintain trust and confidence. The lessons here point towards the need to maximise access to evidence that is relevant to whether the trustee is trustworthy in relation to specific tasks and also in general.

Strengthening Networks of Trust At a general level, the objective is to aim for the creation of thick and strong trust on an enduring basis, in all relationships. We should recall Linda Molm’s findings on the value and strength of a generous giving society noted above. This means strengthening a matrix of relationships and of increasing familiarity and evidence in all such relationships and conditions of generalised exchange. We need relationships and familiarity, so as to foster social solidarity. Points made by Sztompka in 1999 included the need to strengthen institutions, maintain open government, improve the coherence of laws and support the feeling of the social order through consistency and irreversibility of policies.176 He also called for education for trust, the raising of public enlightenment, and evocation of tradition, emphasising continuity of life-ways, rules, customs and so on.177 One conclusion from chapter nine is that doctrines of individual self-fulfilment and economic liberty have undermined social trust, social solidarity and social capital. If that is right, then

174 B Bodó, ‘Mediated Trust: A Theoretical Framework to Address the Trustworthiness of Technological Trust Mediators’ (2020) New Media & Society 1–23; B Bodó, ‘The Commodification of Trust’ Amsterdam Law School Legal Studies Research Paper No 2021-22. 175 B Bodó, ‘Mediated Trust: A Theoretical Framework to Address the Trustworthiness of Technological Trust Mediators’ (2020) New Media & Society 1–23. 176 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999) 135. 177 ibid, 137.

116  Trust the response would involve building mechanisms that produce evidence that people and institutions can be trusted because they involve an appropriate level of other-regarding and altruistic purposes, actions and outcomes. Barbara Misztal called in aid the views of Habermas and Durkheim. Habermas emphasised the importance of communicative action in negotiating shared understanding, thereby coordinating interaction, based on validity claims of truth, rightness and sincerity.178 Durkheim viewed social order as being based on the submission of the individual to the supreme authority of society, through consciousness of social obligations, with social integration and common action being based on consensus on common moral values and beliefs.179 Anthony Seldon also stressed the need for a universally accepted moral code, education on ethics and the need to address social issues such as social inclusion, civic values and responsibilities.180 Religious values are powerful tools but otherwise there should be strong shared values. Victoria McGeer talked of the value in our empowering capacity to hope as underpinning the development of trust in society, and the need for a connection between our hopes for others and what they value.181 The conclusion of Geoffrey Hosking’s investigation led him to believe that trust is the default position of most human beings,182 and it provides a very valuable basis for mutual benefit.

Strengthening Individual Relationships of Trust At an individual level, the objective is to build an evidence base over time that is sufficiently relevant, extensive, deep, consistent and reliable so as to strengthen and thicken trust, and so move beyond the uncertainty that placing trust involves and get closer to a position of certainty. For individuals, it would be relevant to be trained in identifying ethical dilemmas and how to respond to them. In many work contexts, this would involve professional training and ongoing development. In business or regulatory contexts, therefore, traditional evidence of competence will continue to be relevant on operating systems that cover training, management, quality, third party accreditation, licensing, compliance and so on. But the wider dimensions of trust and of ethical practice (see next chapter) also require evidence of integrity and ethical practice, and maturity, such as: –– –– –– ––

adherence to comprehensive codes of ethical practice, open, ethical and just cultures existing throughout the operation, processes delivering consistent quality outcomes, feedback and response mechanisms, involving openness to challenge and to making changes in how things are done, –– how all the above operate in practice, especially in identifying and responding to problems. Models of trust repair emphasise mechanisms (involving sense-making, relations, regulation and controls, ethical culture, transparency and transference) and stages of recognising a violation, determining its nature, admitting its destructive impact and accepting responsibility.183

178 J Habermas, The Theory of Communicative Action (Beacon Press, 1984). 179 E Durkheim, The Division of Labour in Society, trans G Simpson (Free Press, 1964). 180 A Seldon, Trust: How we lost it and how we get it back (Biteback, 2009). 181 V McGeer, ‘Trust, Hope and Empowerment’ (2008) 86(2) Australasian Journal of Philosophy 237. 182 G Hosking, Trust: A History (Oxford University Press, 2014) 43. 183 N Gillespie and S Siebert, ‘Organizational Trust Repair’ in RH Searle, A-MI Nienaber and SB Sitkin (eds), The Routledge Companion to Trust (Routledge, 2018) 284.

Conclusions: Building Trust  117 Some analysts have suggested that the presence of disciplinary systems is important. These take the place of the inability of the trustor to exercise vigilance and coercion over the trustee’s actions.184 They may also act as a deterrent against the trustee breaching the trust. However, I will argue in chapter 14 that a more sophisticated approach is now called for. Annette Baier argued that the continuation of a trust relationship need not rely on threats held over the trusted, and the moral trust of trust relationships is that they be ‘able to survive awareness by each party to the relationship of what the other relies on in the first to ensure their continued trustworthiness or trustingness’.185 A strong relationship should include each side having knowledge of the other’s reasons for confident reliance on the other. The converse would be that reasons for the absence of such knowledge or belief would be relevant for building the relationship. Elements that might reduce trust would be the existence of factors that are known to increase risk, such as having a purpose that is essentially anti-social, excessive incentivisation and remuneration practices, lack of or failure to observe relevant processes and standards, lack of transparency and openness to challenge and feedback, institutional inertia (not my problem, turning a blind eye, everyone is doing this even if it’s wrong), siloed and excessive competitive thinking and so on.

Evidence We have said above that trust and confidence will be strengthened where those placing trust are able to rely on a body of evidence about the intentions and competence of the trustee, comprising an adequate body of records of past consistency of behaviour, current competence and intentions, and whatever might be relevant to future actions and commitment. The exact mix and extent of relevant types of evidence may vary depending on the nature of specific situations and the maturity of the actors involved. These issues should be discussed and reviewed between the stakeholders. An important point is that there is no reason why our mechanisms or categories of evidence should not continue to evolve. Historian Geoffrey Hosking identified the evolution of seven types of social structure, each of which used particular structures of trust: tribal society; city states; ancient empires; medieval feudalism; post-medieval monarchy; nation state and market economies; and international community and globalised economy.186 Hosking’s analysis is that the nature of trust in the post-modern era has shifted from thick towards thin trust, and that strong thin trust has become the dominant mode in our society.187 He called for greater focus on strengthening the systems of trust in the social, commercial and political systems of our world. Bart Nooteboom has suggested a model for diagnosing or building trust that categorises evidence on the reliability of intentions in two dimensions.188 One dimension distinguishes evidence from outside a relationship, based on institutions (eg contract, law, reputation, ethics, go-between, generalised trust), or inside a relationship, based on the relationship itself, where trust is both the basis and the outcome of the relationship (eg hierarchy, rewards, routinisation, loyalty, familiarity). The other dimension makes use of the notion of reliance, which can be based on control or on trust, beyond control. Nooteboom illustrates high trustworthiness in Japan, characterising the style as ‘beyond self-interest’ with that in the USA, characterised as 184 D Gambetta, Trust. Making and Breaking Cooperative Relations (Basil Blackwell, 1988) 220; AC Baier, ‘Trust and Its Vulnerabilities’, The Tanner Lectures on Human Values, Princeton, 6–8 March 1991, 113. 185 A Baier, ‘Trust and Antitrust’ (1986) 96 Ethics 231, 255–59. 186 G Hosking, Trust: A History (Oxford University Press, 2014); G Hosking, ‘Why We Need a History of Trust’ (2002) 287 Reviews in History at http://reviews.history.ac.uk/review/287a. 187 G Hosking, Trust: A History (Oxford University Press, 2014) 199. 188 B Nooteboom, Trust: Forms, Foundations, Functions, Failures, and Figures (Edward Elgar, 2002).

118  Trust ‘calculative self-interest’.189 Nooteboom’s focus is on inter-personal trust, although a similar matrix could be applied to evidence on competence and intentions in commercial, regulatory and political contexts. After the GFC, O’Neill emphasised mechanisms of accountability in relation to financial institutions, instead of traditional regulatory mechanisms and use of sanctions, through ‘rendering and receiving accounts of what has been done, and of holding to account where there are discrepancies between the account rendered and the obligations that were to be discharged’.190 The benchmarks for intelligent accountability would be ‘informed and independent judgment of performance, complemented by intelligible communication of those judgments’. She later highlighted asking questions about evidence, expertise and professionalism.191 Those who enter into commercial transactions might rely for past, present and future evidence on legal contracts, evidence of historical record, reputation and acceptable ongoing management, compliance and verification systems. Similar mixtures of evidence would be relevant for regulatory authorities who decide the level of trust to place in those they regulate. It would include management and quality systems, accreditation, observance of relevant standards, operation of feedback and surveillance systems, consistent ethical behaviour whether things go well or not and ethical organisational culture. Hilary Sutcliffe and the TIGTech Project have suggested that organisations need three new competencies in order to found adequate public trust in the regulatory system:192 1. 2. 3.

Evidence of trustworthiness – a new approach to communication. Building trusted environments for collaborative governance. ‘Nothing about us without us’ – involving citizens.

She adds: Perhaps the most valuable finding of the TIGTech project is the importance of respecting and taking seriously the views of others – particularly those we don’t agree with or whose values and beliefs clash with our own. Not just to demonstrate respect and understand concerns, but also gain new knowledge, diversity of input and spot early warnings of potential problems.

The TIGTech Project proposes seven drivers of trust:193 1. 2. 3. 4. 5. 6. 7.

Intent: Focus on the public interest – upheld through purpose, process, delivery and outcomes. Competence – delivering against expectation effectively, reliably, consistently, responsively. Respect – seeing others as equals; listening to and taking seriously their concerns, views and rights. Considering the impact of words and deeds on others. Integrity – operating honestly, being accountable, impartial and independent of vested interests. Inclusion – being collaborative, inclusive, involving others. Openness – being transparent and accessible in processes, communications, explanations and interactions. Fairness – enshrining justice and equality in governance processes, application, enforcement and outcomes.

189 See summary at B Nooteboom, ‘Uncertainty and the Economic Need for Trust’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021) 60–67. 190 O O’Neill, ‘Trust, Trustworthiness, and Accountability’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford, Oxford University Press, 2014) 180. 191 O O’Neill, ‘Linking Trust to Trustworthiness’ (2018) 26(2) International Journal of Philosophical Studies 293. 192 H Sutcliffe, Trust & Tech Governance (SocietyInside and Fraunhofer, 2021), http://static1.squarespace.com/ static/5fc12cea2cf09257bd6dcc01/t/5fca5150ac031d3c8e89ff06/1607094623935/Trust_and_tech_governance.pdf. 193 ibid.

Conclusions: Building Trust  119

An Outward Looking Focus Many accounts of trust ask why I or we should trust others, and then suggest how others should produce evidence to earn our trust. The point about looking at trust from a perspective of social solidarity and social capital is simply to turn the question round. Why should anyone else trust me or us? Molm’s finding that voluntary and spontaneous trust is stronger than negotiated trust seems to me to be critical. It is the foundation for my suggestion in the OBC model that people should ask themselves the questions: ‘Why should anyone trust me? What evidence can I produce that would found others’ strong trust in me, be they friends, teammates, colleagues, employees, investors, customers, suppliers, communities, regulators, governments?’ These thoughts, of course, reverse the usual thought ‘Why should I trust this other person?’ The strength of trust generated if the former questions are answered well should be greater and created more quickly than in the latter situation. The thoughts then prompt the idea that those seeking to establish trust in themselves may be able to create a single ‘trust evidence bank’ that contains relevant evidence that can be relied on by multiple audiences. Thus, it is sensible for those who seek to earn the trust of others to provide enough convincing and reliable evidence on whether they can be trusted or not, so that others will be able to make and update their judgements. Evidence will be built up over time, and from diverse sources, of how a person acts and reacts. It will demonstrate competence, resource, motivation, behaviour and, for an organisation, culture. The more evidence, over a longer period, and from more diverse sources, the stronger the fact base and the more reliable the evaluation. The greater the range and depth of evidence, the higher should be the level of trust. A major lesson is that calculative trust may have more predictable effects but has the disadvantage of driving a selfish society. The evidence points to the way forward involving strengthening social trust and mechanisms that produce reliable evidence of ethical motivation and outcomes.

6 Morality and Values I have argued in the previous chapter that cooperation requires trust and trustworthiness, but that trust is morally neutral and our evaluation of evidence of behaviour has to be based on the criteria of our values. This chapter looks at research on values and morality. Values have the sociological function of supporting individuals interacting in groups. Some people believe that values are immutable, set and revealed by deity. I do not necessarily see mutual inconsistency between science and religion, but do not enter into that debate here, which is about faith rather than science. The focus for present purposes is on the function of values, and different values, in guiding human behaviour. We find that many values work as opposites, and are considered as dominant in particular circumstances. However, the scientific evidence is that ethical values are ultimately essential for strong trust and cooperation. Behaviour that is immoral will not be the foundation of strong cooperation. Values also need to be clearly manifested in behaviour, and not just proclaimed. Fairness (implying right, good, justice) is a particularly important enduring value.

Morality The nature of morality has been illuminated in the past century by scientists studying moral development, especially through infancy, childhood and adolescence. As with other areas, debate over different theories, and the interpretation of empirical data, continues and it is difficult for a non-expert to state if there is a concluded position, or exactly what it is. On my reading, the current position seems to be that there are two essential components to morality, which have been called the right and the good, or justice and empathy.1 The first component has a strong base in rationality, the second in emotion.

The Right The ‘right’ thing to do rests on rational objective thought, a cognitive process. Its key concepts are justice, reciprocity and equality. Jean Piaget’s work, published in 1932, emphasised the link between morality and logic. On this basis, the ideals of justice are constructed by human thought, usually based on the principle of reciprocity between humans.2 It is clear that humans go through

1 The following account draws on the overview of JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019). 2 J Piaget, Moral Judgment of the Child (1932) (Free Press, 1965).

Morality  121 a number of stages in moral reasoning. The classic work on this was done by Lawrence Kohlberg, arising out of work on cognitive development in children and adolescents.3 Broadly, developmental theory involves evolution from an initial stage involving punishment and obedience orientation, through stages in which other orientations apply, such as feelings, ability to understand others’ perspectives, and concepts of duty (law and order), consensus (social contract) and universal ethical principles. This developmental approach therefore involves human moral judgement as dynamic.4 Although many may believe that ‘the right thing to do’ is immutable and unchanging, developmental theory points to the conclusion that people at different stages of cognitive and hence moral development may reach different conclusions on what is right. Philosophical thinking has produced various forms of rational justice. One is utilitarianism, involving an evaluation of all costs and benefits of an action and basing choice on a mathematical outcome of whichever option produces the most benefit for the most people. The calculation might be from the viewpoint of an individual (hence self-centred) or of a group. The calculation might be of the total supposed costs and benefits of (all members of) the group as a whole. A related phenomenon is that the idea of justice results from social practice, in which the forces for protection of individuals and/or of their group are internalised and developed through the dominant social behaviours that emerge, hence through the group’s culture. However, on the theory that rational thought on the ideal or ‘right’ actions is paramount, any social explanation would be less important. Another approach to evaluating moral behaviour rests on adopting a social perspective, which means viewing things from the perspective of others rather than from a self-centred perspective. Thus, an act can be evaluated as objectively wrong if it does not satisfy Kurt Baier’s ‘condition of reversibility’. The behaviour must be acceptable to a mentally and emotionally healthy person, as well as an adequately informed person, ‘whether he or she is at the “giving” or “receiving” end of it’.5 This idea of ‘ideal reciprocity’6 and ‘ideal speech’7 can be seen in the numerous versions of the Golden Rule that are at the centre of leading religions:8 treat others as you would wish them to treat you. Despite the strong influence of cognitive ideas on the values, culture and traditions of a group of society, especially those of particular individual philosophers, it is also argued that cultural practice requires deeper moral evaluation in practice. After all, individuals and groups can be wrong about what is asserted to be rationally and socially moral, as is illustrated by practices such as female genital mutilation and slavery. These practices fail the condition of reversibility.9

The Good The ‘good’ in morality rests on ideas of welfare, beneficence and empathy. The shift in focus from the cognitive approach to the affective strand of motivation in moral development was led by 3 Amongst extensive literature, see L Kohlberg, Essays on Moral Development, Vol 2: The Psychology of Moral Development (Harper & Row, 1984). The specific stages of development initially proposed by Kohlberg have been criticised, and are not relevant for our inquiry, but his ideas on the phenomenon of moral development over a lifespan are widely recognised. 4 B van Rooij and A Fine, The Behavioural Code. The Hidden Ways the Law Makes Us Better … Or Worse (Beacon Press, 2021) 85. 5 K Baier, The Moral Point of View: A Rational Basis of Ethics (Random House, 1965) 108. 6 J Piaget, Moral Judgment of the Child (1932) (Free Press, 1965). 7 J Habermas, Moral Consciousness and Communicative Action (MIT Press, 1991). 8 S Pinker, The Better Angels of Our Nature: Why Violence Has Declined (Viking Penguin, 2011). 9 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) 5.

122  Morality and Values Martin Hoffman.10 The need for a level of cooperative and prosocial or altruistic behaviour for the survival of societies applies here. Hoffman argued that the socialisation and internalisation of moral behaviour involves a biological predisposition to accept prosocial norms, which he calls empathy. Thus, an internalised norm of considering others is constructed by children. As John Gibbs says, caring and feeling provide complex responsiveness to the joys, sufferings and life situations of others. Sentiments such as loyalty, group identity, purity, and honour figure in our evaluations.11 Further, empathy will not be cultivated by parental discipline that emphasises power – it may indeed reduce prosocial behaviour.12

Co-Primacy of Right and Good Review of evidence from social psychology led Jonathan Haidt to propose a synthesis of moral reasoning based on three mechanisms: how groups create social solidarity, the existence of affective behaviour and social persuasion.13 The first element rests on extensive evidence of in-group activity, which binds people into groups, builds the group and also blinds the members to other influences. The second element is based on the alleged primacy of affective intuitions in humans, and the argument that concerns of justice, care, loyalty, authority and purity are all best characterised as moral intuitions or emotions. Haidt argues that these affects, or emotions, are more powerful than moral reasoning as they are triggered more quickly (pre-rational) and are hence primary. The third element posits that the object and hence rationale of moral thinking is to persuade others in a social context and enable the individual to succeed in the social order. Jonathan Haidt suggests the following explanation of morality. It is both innate (the product of automatic intuitions, that vary between individuals depending upon our brains) and learned (influenced by our application of those intuitions in a particular social culture).14 We have evolved intuitions (ways of thinking in advance of experience) that operate around five series of opposing pairs of ‘foundations’ (the Moral Foundations Theory): –– The Care/harm foundation evolved in response to the adaptive challenge of caring for vulnerable children. It makes us sensitive to signs of suffering and need; it makes us despise cruelty and want to care for those who are suffering. –– The Fairness/cheating foundation evolved in response to the adaptive challenge of reaping the rewards of cooperation without getting exploited. It makes us sensitive to indications that another person is likely to be a good (or bad) partner for collaboration and reciprocal altruism. It makes us want to shun or punish cheaters. –– The Loyalty/betrayal foundation evolved in response to the adaptive challenge of forming and maintaining coalitions. It makes us sensitive to signs that another person is (or is not) a team

10 Amongst extensive literature, see ML Hoffman, Empathy and Moral Development: Implications for Caring and Justice (Cambridge University Press, 2000). Hoffman’s work should be considered with refinements and challenges from de Waal, Decety, Zahn-Waxler and Bloom. 11 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) 6. 12 ibid, 148, 149. See DCR Kerr, NL Lopez, SL Olson and AJ Sameroff, ‘Parental Discipline and Externalizing Behavior Problems in Early Childhood: The Roles of Moral Regulation and Child Gender’ (2004) 32 Journal of Abnormal Child Psychology 369–83, 370; ML Hoffman, Empathy and Moral Development: Implications for Caring and Justice (Cambridge University Press, 2000). 13 J Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion (Penguin, 2012). 14 ibid. See previously J Haidt and J Graham, ‘When Morality Opposes Justice: Conservatives Have Moral Intuitions That Liberals May Not Recognise’ (2007) 20(1) Social Justice Research 98–116.

Morality  123 player. It makes us trust and reward such people, and it makes us want to hurt, ostracise, or even kill those who betray us or our group. –– The Authority/subversion foundation evolved in response to the adaptive challenge of forging relationships that will benefit us within our social hierarchies. It makes us sensitive to signs of rank or status, and to signs that other people are (or are not) behaving properly, given their position. –– The Sanctity/degradation foundation evolved in response to the adaptive challenge of the omnivore’s dilemma, and then to the broader challenge of living in a world of pathogens and parasites. It includes the behavioural immune system, which can make us wary of a diverse array of symbolic objects and threats. It makes it possible for people to invest objects with irrational and extreme values – both positive and negative – which are important for binding groups together. Haidt suggests that different individuals will tend to be programmed towards one or other end of each foundation pair as a result of learned experience, especially dependent on the social groups that we find ourselves in, on the basis that we wish to maintain our self-image, and our sense of belonging and influence, as righteous individuals (‘our lifelong struggle to win friends and influence people’). He considers that five good candidates for being ‘taste receptors’ of the righteous mind’s innate processing are care, fairness, loyalty, authority and sanctity. Our processing of information is automatic (gut feeling), precedes any moral reasoning process, and we then tend to rationalise the innate reaction we feel so as to maintain our sense of self-righteousness (‘we care more about looking good than about truly being good’). This can lead us to lie, cheat and cover things up. ‘The worship of reason is a delusion.’ Psychopaths cannot feel but only reason, which can drive anti-social behaviour. It is possible for people all to behave as Homo economicus in an organisation, but organisations that are built on a socially moral matrix will trigger our conditional ability to transcend self-interest and activate pride, loyalty and enthusiasm among employees, monitor them less closely, build cohesion and be more successful in competition with other groups. Haidt considers that moral systems are:15 [I]nterlocking sets of values, virtues, norms, practices, identities, institutions, technologies, and evolved psychological mechanisms that work together to suppress or regulate self-interest and make cooperative societies possible.

He notes that the Fairness foundation begins with reciprocal altruism, its duties expanded once communities evolved, so that most people have a deep intuitive concern to see cheaters punished and good citizens rewarded in proportion to their deeds. Indeed, only groups that can elicit commitment and suppress free riding can grow. Individuals within different societies may lean towards more liberal or more conservative tendencies that are reflected in their gut responses. Moral capital – which Haidt defines as the resources that sustain a moral community – refers to ‘the degree to which a community possesses interlocking sets of values, virtues, norms, practices, identities, institutions, and technologies that mesh well with evolved psychological mechanisms and thereby enable the community to suppress or regulate selfishness and make cooperation possible’.16



15 J

Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion (Penguin, 2012) 314. 341.

16 ibid,

124  Morality and Values Despite the strengths of Haidt’s model, especially in highlighting cultural diversity, its universality has been criticised, not least for omitting the condition of reversibility. Claims for the foundation status of, for example, respect for authority, need to take account of the need for respect for and obedience to legitimate authority,17 which brings in considerations of the right of fairness:18 ‘a morality defined by loyalty, obedience, duty, law, or convention’ is not necessarily ‘morally defensible’.19 Reviewing all the above theories, John Gibbs considers that both the right and the good elements apply to the construction of morality – the two approaches both have validity, and both operate (co-primacy). He supports the combined actions of justice and care, of moral reciprocity and empathy, of cognitive and affective modes.20 Largely consistent with Gibbs’ conception is that by Beauchamp and Childress, who conceptualise two primary principles: ‘first, justice (constructed knowledge with its corresponding virtue, the character ideal of fair-mindedness) and respect for the person (autonomy); and, second, non-maleficence or beneficence (the empathic predisposition with its corresponding virtue, the character ideal of benevolence)’.21 Gibbs notes an epistemological difference in moral motivation between the good and the right:22 In the former case, knowledge concerning beneficence per se is inert; the cognition per se entails no inherent property of motivation. Such information (an inductive message, causal attribution, script, heuristic, etc) motivates only insofar as it is infused, charged, or rendered hot by an affect such as empathic distress (cf classical conditioning). Accordingly, Hoffman’s theory champions the empathic predisposition as the basic ‘infuser’ of knowledge with moral motivation (affective primacy). … In contrast, in the case of the right, the motivation is in some sense inherent or internal to the exploratory or ‘effectance’ motive, which eventually leads, with expanding working memory and experience, to the coordination of perspectives or relations and the construction of ‘necessary’ logico-mathematical knowledge.

This difference highlights the issue of whether motivation is external or internal to obligatory knowledge. Affective primacy means that knowledge arises from some prior external force, whereas cognitive primacy means that external knowledge is motivationally secondary to the force that something is nor right (a necessary truth or ideal has been violated).23 In situations in which the good and the right conflict, William Frankena suggests a cognitive process of weighing the two sides, evaluating the comparative substance, and justifiably giving greater weight to whichever side is more substantial or justifiable.24 Gibbs also considers that moral identity can be considered to be a primary source of moral motivation in addition to affective and cognitive sources.25 It is clear that individuals vary in the extent to which they may have high moral maturity, moral empathy and moral identity (perceiving

17 See W Damon, The Youth Charter: How Communities Can Work Together To Raise Standards For All Our Children (Free Press, 1977), for the role of reciprocity in the mature understanding of authority. 18 See J Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion (Penguin, 2012) 144. 19 S Pinker, The Better Angels of Our Nature: Why Violence Has Declined (Viking Penguin, 2011) 641. 20 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) 269. 21 Gibbs’ summary of: TL Beauchamp and JF Childress, Principles of Biomedical Ethics (Oxford University Press, 2013). 22 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) 279. 23 ibid. 24 WK Frankena, Thinking about Morality (University of Michigan Press, 1980). For more complex cases see TL Beauchamp and JF Childress, Principles of Biomedical Ethics (Oxford University Press, 2013) 18–25. 25 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) 165 ff.

Values and their Function  125 morality as central to their sense of self). Gibbs also supports observations that people need grit or ego strength (affect-regulating goal-attaining skills) in order to take sustained effective action, even if they are highly prosocial.26 In addition to the duality of the cognitive and empathic approaches, research has recorded the accounts of people whose brain activity has ceased yet who, on recovering, recount experiencing memories of light, recall of life events and their moral evaluation.27 Consideration of such evidence has given rise to a question of whether moral truths, or aspects or reality, may exist in some permanent sense that has not been explained outside religion. Steven Pinker has also noted that ‘the principle behind the Golden Rule and its equivalents’ has ‘been rediscovered in so many moral traditions’.28 Criticising the fact that both cognitive and emotivist theories rely on internalisation of morality, without a requirement that a person is accountable to anybody except their own conscience, Rolf Reber suggests the concept of moral realism, which assumes that values are ‘out there’.29 Identifying the sources of antisocial behaviour can suggest solutions to reduce it. Gibbs notes three major sources of problems. First, in-group identity can be too familiar or robust and promote immoral behaviour (morality can ‘bind, build and blind’). Frans de Waal notes that a major problem exists with excessive loyalty to some nations, groups of religions.30 Second, egotistic motivation can drive bad behaviour. Perception of the vulnerability of others can elicit empathy or exploitation. Gibbs suggests that social culture must support morality and moral development. Third, cognitive distortions – wrong judgments, errors, inaccuracies, mistakes, departures from veridical perception – can sabotage incipient perspective-taking. ‘Many people are simply wrong about morality.’31 The correction would be to promote social perspective-taking, through moral education, development of social skills, identification of those with self-serving cognitive disorders, transparency of groups and organisations and intervening in or disruption of unethical groups.

Values and their Function Values are ultimate principles held ‘by those committed to them as intrinsically worthy and requiring no special justification’.32 A value has been called a prescription for what to do,33 and values as ‘the energetic drivers of our aspirations and intentions’ based on our needs.34 Values provide the criteria against which we evaluate thoughts and actions, whether of ourselves or of others, and also whether someone else can be trusted or not. We evaluate evidence against our internal value systems. Values therefore guide thought, feeling and action.35 Values also constrain

26 A Duckworth, Grit: The Power of Passion and Perseverance (Scriber, 2016). 27 See JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019) chs 9 and 10. 28 S Pinker, The Better Angels of Our Nature: Why Violence Has Declined (Viking Pengiun, 2011) 694–95. 29 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016) 83. 30 FBM de Waal, The Age of Empathy: Nature’s Lessons for a Kinder Society (Harmony, 2009) 203. 31 S Harris, The Moral Landscape: How Science Can Determine Human Values (Free Press, 2010) 87. 32 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19. He quotes Weber that values are held for their ‘own sake’: M Weber, Economy and Society: An Outline of Interpretive Sociology, (G Roth and C Wirth (eds), University of California Press, 1968) 25–26. 33 M Rokeach, The Nature of Human Values (Free Press, 1973). 34 R Barrett, The Values Driven Organization 2nd edn (Routledge, 2017) 3. 35 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016) 83.

126  Morality and Values the self-interests of an actor, by having to take the legitimate interests of others into account.36 They apply to all people both individually and collectively as groups. Values differ from beliefs, which are assumptions about what is true that may or may not be correct, and are not driven by need. Richard Barrett comments that values unite and beliefs divide.37 Academic literature has in fact not given particular attention to the difference between values and beliefs. For a considerable period of history, many have considered values to have been divine commands, revealed by God to mortals. In that form, they are theoretically immutable and perpetual. As a separate strand, philosophical thinkers have used rational thought and logic to propose values, therefore being perhaps equally theoretically immutable but open to analysis and dispute.38 Alasdair MacIntyre suggests that our (conscious) moral deliberation is based on our trying to make sense of ourselves and what we care about in the context of the story of our individual lives: it is more interpretation than an act of will.39 Social anthropologists argue that research shows that most human brains contain an inherent, and not learned, sense of right and wrong,40 and hence can, if required, think and articulate generalisations, and identify general ethical values and principles, which are then used to decide on or judge actions. The argument that ‘values’ are inherent in humans flows from the research finding that our brains typically react too quickly for conscious cognitive thought and that humans across the globe work with mental concepts of ethics and values.41 The anthropologist Edward O Wilson concluded that humans evaluate evidence against our internal value systems that are based on our inherent ability to distinguish between right and wrong, which arose from a critical genetic mutation that gave the species homo sapiens this unique powerful advantage over other species.42 Nicholas Christakis supports this idea and builds on RM Hare’s experience43 that people freely choose values where they are constrained (ultimately by nature).44 Where there are no constraints, he says, people seem to focus less on values. Sociologists have crystallised the idea that the function of values is to provide the essential element in the construction of society (the community’s glue), through providing an answer to the identity of the members and of the particular social group, as well as a mechanism for binding the members together. The existence of different societies across the globe, in different stages of development, leads to plurality, each with its own mix of values and beliefs, although always with the idea that the corpus of values and beliefs is ‘right’. These give justification to the community and its individuals for what they perceive to be ethically correct actions. Major examples of this self-justification are the Christian crusades in the middle ages and the jihad of Islamic State in the twentieth century. As Roger Cotterrell says: ‘values are sociologically significant only insofar as

36 LT Hosmer, ‘Trust: The Connecting Link Between Organizational Theory and Philosophical Ethics’ (1995) 20(2) Academy of Management Review 379. 37 Personal communications between R Barrett and R Steinholtz. 38 I Kant, The Metaphysics of Morals (1797) (Cambridge University Press, 1996); J Rawls, A Theory of Justice (Harvard University Press, 1971). 39 A MacIntyre, After Virtue (Bloomsbury, 3rd edn 2007, first published 1981). 40 EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 41 Haidt, ibid. 42 EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). Interesting history at J Haidt, ‘Morality’ (2008) 3(1) Perspectives on Psychological Science 65. 43 RM Hare, The Language of Morals (Clarendon Press, 1952). 44 NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019).

Values and their Function  127 people, individually or collectively, actually recognise them as important; so, their social salience is always relative to time and place’.45 In the same way that individuals need to think of themselves as righteous, a society has a similar need. As Piotr Sztompka explained:46 Viable society is perceived not only as the coalition of interests, but as a moral community. … Morality, as understood here, refers to the ways in which people relate to others, and it identifies the right, proper, obligatory relationships, invoking values rather than interests as the justification for prescribed conduct. As Fukuyama characterizes it, moral community is based on ethical habits and reciprocal moral obligations.47 ‘This idea of society has less to do with formal organization than with a sense of belonging, trust and responsibility, and duties towards others who share our values, interests and goals’.48

In short, the inherent ability to distinguish between ethical options and to react in accordance with ethical principles can be thought of as the heuristic for our survival as a community. There is mounting evidence of the effect of values on controlling human activity in groups, and on the origins and need for this mechanism. Many recent sociologists have asserted that values are defined by the community or group as immutable ideas (principles) to govern the behaviour of the individuals of that group.49 Without this accepted but inherent mental discipline, it is argued that individuals could not cooperate in cohesive groups. Richerson and Boyd summarise this point:50 Humans have evolved a social psychology that mixes a strong element of cooperative dispositions, deriving from group selection on cultural variation, with an equally strong selfish element deriving from more ancient primate dispositions.51

The self-interest of each individual is moderated by the need for survival in, and of, the group, and the mental mechanism of values provides the ability to achieve this. Thus, Oliver Goodenough and Monika Gruter Cheney say:52 [M]any of us have considered values as non-situational commitments to particular principles of character and action, commitments that may require sacrifice and self-denial, and that, particularly when shared, can reframe strategic interactions, providing solutions to dilemmas of positive interaction.

We have quoted Christakis expressing the same view in chapter three. Values make transaction possible.53 Reber comments that ‘moral norms are defined through practices, and virtually all practices converge on some basic moral values that are irrevocable’ and that ‘most moral values are bound to their community, and their interpretation depends on the social and institutional 45 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19. 46 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999) 4. 47 F Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Penguin Books, 1995) 7. 48 BA Misztal, Trust in Modern Societies (Polity Press, 1996) 206–07. 49 Yuval Noah Harari asserts that in the millennia following the Agricultural revolution, humans organised themselves in mass-cooperation networks by creating imagined orders and devising scripts, which together filled the gap left by our biological inheritance. Yuval Noah Harari, Sapiens. A Brief History of Humankind (Vintage, 2015) 149. 50 PJ Richerson and R Boyd, ‘The Evolution of Free Enterprise Values’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 114. 51 PJ Richerson and R Boyd, ‘The Evolution of Human Ultrasociability’ in I Eibl-Eibesfeldt and FK Salter (eds), Indoctrinability, Ideology, and Warfare; Evolutionary Perspectives (Berghahn Books, 1998). 52 O Goodenough and MG Cheney, ‘Preface’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) xxvi. 53 OR Goodenough, ‘Values, Mechanism, Design, and Fairness’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 239. See earlier M Weber, ‘The Social Psychology of the World Religions’ in From Max Weber: Essays in Sociology, eds and trans H Gerth and CW Mills (Oxford University Press, 1948) 280.

128  Morality and Values context’.54 Studies in the effects of ‘nudging’ individuals’ behaviour found, first, that intrinsically oriented goals (self-acceptance, affiliation, community feeling and physical health) were more powerful than extrinsic motivation – supporting self-determination theory (see chapter four) – and, second, that self-transcending rather than self-interested motives are more effective at increasing prosocial behaviour.55 Both the internal and social accounts of values have in common the conclusion that values are ‘a critical link between principles and actions’. They can drive, incentivise, rationalise and judge actions. They drive the dual function of personal discipline and communal discipline, and of selfprotection and protection of the group.

Ethical Values Are values just whatever a particular social group needs, or considers essential, for its existence? Is there an extra ethical element? The answer is readily apparent if we consider whether there is a difference between a criminal gang, an authoritarian regime, a nation that wages war on its neighbours or a modern democracy based on human rights – or other examples of individual people with those characteristics? If we consider what the ‘right’ thing to do is, we call on our ethical values, or moral principles, as the guiding determinant criteria. We need to feel that our actions are justified – that we are in the right: ‘people do not only want to do what they think is best; they want to feel good when they think and act well’.56 This introduces the idea of critical feeling. It links with other research on the widely-recognised tendency for self-justification, moral disengagement,57 ‘bounded ethicality’58 and cognitive dissonance.59 Religions have played a strong role in guiding behaviour and encouraging wider cooperation – see Henrich – but major modern religions have claimed to be based on ethical principles and other-regarding behaviour, such as love for one’s neighbour.60 At the other end of the moral spectrum, we talk of extreme culpable actions as evil, and individuals who does what they want to do, causing us harm, and whom we cannot easily change to conform to our behaviour, as evil.61 The ‘cardinal virtues’ of hope, faith, charity, justice, courage, temperance and prudence,62 constituted 54 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016) 89 and 23. 55 FM Grouzet T Kasser, A Ahuvia, JM Dols, Y Kim Y et al, ‘The Structure of Goal Contents across 15 Cultures’ (2005) 89(5) Journal of Personality and Social Psychology 800; SH Schwartz, ‘Universals in the Content and Structure of Values: Theoretical Advances and Empirical Tests in 20 Countries’ (1992) 25 Advances in Experimental Social Psychology 1. 56 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016); citing J Annas, Intelligent Virtue (Oxford University Press, 2011); BJ Fowers, ‘Psychotherapy, Character, and the Good Life’ in BD Slife, JS Reber and FC Richardson (eds), Critical Thinking About Psychology: Hidden Assumptions and Plausible Alternatives (American Psychological Association, 2005). 57 A Bandura, ‘Moral Disengagement in the Perpetration of Inhumanities’ (1999) 3(3) Personality and Social Psychology Review 193–209. 58 MH Bazerman and AE Tenbrunsel, Blind Spots: Why We Fail to Do What’s Right and What to Do About It (Princeton University Press, 2012) 5; Y Feldman, The Law of Good People: Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018); Y Bereby-Meyer et al, ‘Honesty Speaks a Second Language’ (2020) 12 Topics in Cognitive Science 632; CM Barnes, BC Gunia and DT Wagner, ‘Sleep and Moral Awareness’ (2015) 24(2) Journal of Sleep Research 181. 59 See chapter three. N Mazar, O Amir and D Ariely, ‘The Dishonesty of Honest People: A Theory of Self-Concept Maintenance’ (2008) 45(6) Journal of Marketing Research 633–44. 60 In this respect, some religions hold more than just two distinct criteria of (1) holding that there is a superhuman order, which is not the product of human whims or agreements, and (2) based on this superhuman order, establishing norms and values that it considers binding. YN Harari, Sapiens. A Brief History of Humankind (Vintage, 2015) ch 12. 61 L Russell, Evil. A Philosophical Investigation (Oxford University Press, 2014). 62 T Aquinas, Treatise on the Virtues (1270/1984), trans JA Oesterle (University of Notre Dame Press).

Ethical Values  129 foundations of the development and flourishing of free-market capitalism in the West and also Eastern wisdom traditions.63 Values that sustain relationships and lives are all about how, not how much.64 Many commentators identify fairness as a critical value, and as a mechanism for evaluating a choice.65 Sarah Brosnan illustrates the operation of fairness and inequity in humans as driving well-documented behaviour:66 We respond badly when treated unfairly; we give more than the minimum required in experimental games67 and we frequently punish in situations in which another individual behaves non-cooperatively.68 To varying degrees, these inequity averse responses are seen across a vast array of cultures and differ significantly depending on the quality of the relationship between individuals involved.69 They have recently been linked to emotional as well as rational processes.70

Piotr Sztompka argues that a moral community – a specific way of relating to others whom we define as ‘us’ – has three basic components: trust (the expectancy of others’ virtuous conduct towards ourselves), loyalty (the obligation to refrain from breaching the trust that others have bestowed upon us and to fulfil duties taken upon ourselves by accepting somebody’s trust) and solidarity (caring for other people’s interests and the readiness to take action on behalf of others, even if it conflicts with our own interests).71 He considers that these three vectors delineate the specific ‘moral space’ in which each individual is situated. He builds on Pierre Bourdieu’s idea of ‘cultural capital’: ‘institutionalized, i.e. widely shared, high status cultural signals (attitudes, preferences, formal knowledge, behaviours, goods and credentials) used for cultural and social exclusion, the former referring to exclusion from jobs and resources, the latter, to the exclusion from high status groups’.72 These ideas also help delineate the extent of well-being and health of a society.73 Sztompka has recently suggested that six moral bonds – that people value simply because they feel happier to live in a society pervaded with good inter-relations – are crucial: trust, loyalty, reciprocity, solidarity, respect and justice.74

63 DN McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press, 2006). 64 D Seidman, How: Why HOW We Do Anything Means Everything (John Wiley & Sons, Inc., 2007) xviii. 65 OR Goodenough, ‘Values, Mechanism, Design, and Fairness’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008). 66 SF Brosnan, ‘Fairness and Other-Regarding Preferences in Nonhuman Primates’ in PJ Zack, Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 80. 67 J Henrich, R Boyd, S Bowles, C Camerer, E Fehr, H Gintis and R McElreath, ‘In Search of Homo Oeconomicus: Behavioural Experiments in 15 Small-scale Societies’ (2001) 91 American Economic Review 73. 68 E Fehr and B Rockenbach, ‘Detrimental Effects of Sanctions on Human Cooperation’ (2003) 422 Nature 137; D Kahneman, JL Knetsch and R Thaler, ‘Fairness As a Constraint on Profit Seeking: Entitlements in the Market’ (1986) 76 American Economic Review 728; DJ Zizzo and A Oswald, ‘Are People Willing to Pay to Reduce Others’ Incomes?’ (2001) 63–64 Annales d’Economie et de Statistique 39. 69 MS Clark and NK Grote, ‘Close Relationships’ in T Millon and MJ Lerner (eds), Handbook of Psychology: Personality and Social Psychology Vol 5 (Wiley, 2003). 70 RH Frank, Passions with Reason: The Strategic Role of the Emotions (Norton, 1988); RH Frank, ‘Cooperation through Emotional Commitment’ in RM Nesse (ed), Evolution and the Capacity for Commitment (Russell Sage Foundation, 2001); AG Sanfey, JK Rilling, JA Aronson, LE Nystrom and JD Cohen, ‘The Neural Basis of Economic Decision-making in the Ultimatum Game’ (2003) 300 Science 1755. 71 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999). 72 P Bourdieu and J-C Passeron, The Inheritors. French Students and their Relation to Culture (University of Chicago Press, 1979) 158. 73 S Harris, The Moral Landscape: How Science Can Determine Human Values (Free Press, 2010): quoted in K Malik, The Quest for A Moral Compass (Atlantic Books, 2014) 314. 74 P Sztompka, ‘Trust in the Moral Space’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021).

130  Morality and Values We can see how powerful shared values can be in a community of people, such as a large organisation, especially if they are self-governing through enlisting our inherent sense of right and wrong (ethical values). Organisational values can therefore by embedded within organisations through diffusion by different stakeholders at multiple hierarchical levels win whom they are internalised.75 It is useful to bear in mind Thomas Jones’ comments on moral intensity.76 He adopts the approach of Kelman and Hamilton that an ethical decision is defined as a decision that is both legal and morally acceptable to the community.77 He then suggests that ethical decision-making is issue contingent; that is, characteristics of the moral issue itself, collectively called moral intensity, are important determinants of ethical decision-making and behaviour. Jones identifies six such characteristics: magnitude of consequences, social consensus, probability of effect, temporal immediacy, proximity and concentration of effect.78 He argues that the intensity of these features will tend to make moral issues more frequently recognised, although he accepts that some cognitive processes will affect moral decision-making and behaviour in general, without regard to the moral intensity of the issue itself.79

Diversity, Change and Culture Values are highly stable in individuals80 but can evolve.81 Further, our application of our values is not as immutable as we may think. First, there is the obvious point that different values may conflict and may need to be reconciled in deciding how we should behave in particular situations. Second, values, feelings and emotions sometimes conflict.82 Socio-legal scholar Roger Cotterrell is clear that ‘[v]alues and interests, however conceptualised, sometimes intertwine in complex and sociologically significant ways’.83,84 Kate Raworth notes Henrich’s finding that social norms of reciprocity clearly vary across diverse cultures according to the structure of the economy, particularly the relative importance of the household, market, commons or state in provisioning for society’s needs.85 She comments that ‘People’s sense of reciprocity appears to co-evolve with

75 WS Harvey, S Osman and M Tourky, ‘Building Internal Reputation from Organisational Values’ (2022) 25 Corporate Reputation Review 78. 76 TM Jones, ‘Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model’ (1991) 16(2) Academy of Management Review 366. 77 HC Kelman and VL Hamilton, Kelman, Crimes of Obedience: Toward a Social Psychology of Authority and Responsibility (Yale University Press, 1989). 78 TM Jones, ‘Ethical Decision Making by Individuals in Organizations: An Issue-Contingent Model’ (1991) 16(2) Academy of Management Review 366, 372. 79 ibid, 389. 80 Values and Identities. A Policymaker’s Guide (European Commission Joint Research Centre, 2021) 12. 81 OR Goodenough, ‘Values, Mechanism, Design, and Fairness’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008). 82 PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008), xiii: ‘Many moral decisions have both cognitive and emotional components, including market decisions.’ 83 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19. 84 See eg V Gecas, ‘The Ebb and Flow of Sociological Interest in Values’ (2008) 23 Sociological Forum 344; A Miles, ‘The (Re)genesis of Values: Examining the Importance of Values for Action’ (2015) 80 American Sociological Review 680; JL Spates, ‘The Sociology of Values’ (1983) 9 Annual Review of Sociology 27; R Wuthnow, ‘The Sociological Study of Values’ (2008) 23 Sociological Forum 333; R Swedberg, ‘Can There Be a Sociological Concept of Interest?’ (2005) 34 Theory and Society 359; V Van Dyke, ‘Values and Interests’ (1962) 56 American Political Science Review 567. 85 J Henrich et al, ‘In Search of Homo Oeconomicus: Behavioural Experiments in 15 Small-scale Societies’ (2001) 91(2) Economics and Social Behaviour 73.

Identifying Values  131 their economy’s structure: a fascinating finding with important implications for those aiming to rebalance the roles of the household, market, commons and state in any society.’86 We need critical thinking to decide on the prioritisation between different values or their comparative importance in a particular situation. Ralf Reber has shown that critical feeling is an equally important component of how we think: ‘The reflective use of feelings that is focused on guiding attention, evaluating information, and guiding action according to the values we like to implement.’87 He identifies three proficiencies here: interrupting inappropriate feelings (guiding attention), extracting information (accurate information) and changing context (implementing values) externally and internally. He notes that people can make systematic mistakes as a result of their feelings.88 They can also be influenced by their working environment through noise, temperature, the quality of air, light, colours, whether an office has a window and spatial arrangements.89 It follows that there is value in critical thinking to train and debate our values and how they apply in different contexts.90 Value commitments are part of a society’s culture, which is ‘an ever-shifting pattern of values, beliefs, traditions, projects and allegiances holding … communal networks together’.91 ‘Values-related issues are often magnified when coupled with group identities, where winning or the domination of a group can be more important than living up to one’s own values.’92 Sztompka notes the duality of the relevance and impact of culture:93 On one hand, culture provides a pool of resources for action that draws from it the values to set its goals, the norms to specify the means, the symbols to furnish it with meaning, the codes to express its cognitive content, the frames to order its components, the rituals to provide it with continuity and sequence and so forth. In brief, culture supplies action with axiological, normative, and cognitive orientation. In this way it becomes a strong determining force, releasing, facilitating, enabling, or, as the case may be, arresting, constraining, or preventing action. On the other hand, action is at the same time creatively shaping and reshaping culture, which is not a God-given constant, but rather must be seen as an accumulated product, or preserved sediment of earlier individual and collective actions. In brief, action is the ultimate determining factor in the emergence, or morphogenesis of culture.

Identifying Values Scholarly research has tended to focus on discrete areas and ideas. Let us, therefore, examine a number of recent compilations of values in differing contexts. This will also allow us to note how some views or priorities have changed. A valuable source is the World Values Survey, initiated in 1981, that reports on changes in the beliefs, values and motivations of people in almost

86 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017) 106. 87 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016) 60. 88 N Schwartz, LJ Sanna, I Skurnik and C Yoon, ‘Metacognitive Experiences and the Intricacies of Setting People Straight: Implications for Debiasing and Public Information Campaigns’ (2007) 39 Advances in Experimental Social Psychology 127. 89 Summary at R Gifford, Environmental Psychology: Principles and Practice (Optimal Books, 2002). 90 R Reber, Critical Feeling. How to Use Feelings Strategically (Cambridge University Press, 2016). 91 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19. 92 Values and Identities. A Policymaker’s Guide (European Commission Joint Research Centre, 2021) 11. 93 P Sztompka, Trust. A Sociological Theory (Cambridge University Press, 1999) 2.

132  Morality and Values 100 countries.94 This has been extensively relied on by international policymakers. It includes a cultural map that identifies cultural change and the persistence of distinctive cultural traditions. It supports the thesis that socioeconomic development is linked with a broad syndrome of distinctive value orientations. The authors use a series of indicators to contrast two dimensions, namely reliance on traditional values versus secular values, and on survival or self-expression values.95

Personal and Social Compilations of general principles have been crystallised for centuries in religious texts, philosophical writings,96 states’ constitutions and statements of human and fundamental rights. All major religions of the world are based on the same simple principle, of treating others how you would wish them to treat you – known as the Golden Rule.97 It’s the opposite of selfishness. The theologian Hans Küng suggested that four ‘directions’ flow from the twin principles of treating others as you wish them to treat you and ‘humanity’: respect for life, speak and act truthfully, deal honestly and fairly and respect and love one another.98 Moving beyond philosophical assertions, scientists in the twentieth century have undertaken research across multiple societies and cultures and found not only similar manifestation of universal values but also similar content and structure.99 Milton Rokeach defined a value in 1973 as ‘an enduring belief ’ or standard that guides and evaluates behaviour and action.100 His detailed work led to the conclusion that people tend to have only a small number of values, which they learn and then organise into value systems of ‘preferable modes of conduct or end-states of existence along a continuum of relative importance’.101 Rokeach also thought that differences amongst individuals may not be so much in the presence or absence of particular values as in the arrangement of values, their hierarchies or priorities. The perceived or dominant criteria of desirability might emphasise certain values over others at particular times or circumstances.102 Social psychologist Shalom Schwartz developed Rokeach’s ideas and identified ten clusters of basic personal values that are recognised across cultures in 44 countries: self-direction, stimulation, hedonism, achievement, power, security, conformity, tradition, benevolence and

94 www.worldvaluessurvey.org/wvs.jsp. 95 R Inglehart and C Welzel, Modernization, Cultural Change and Democracy: The Human Development Sequence (Cambridge University Press, 2005). 96 Aristotle defined eight values: courage, temperance, liberality, magnificence, proper pride, good temper, modesty and friendliness. 97 S Webley, Towards Ethical Norms in International Business Transactions (Institute of Business Ethics, 2014). 98 H Küng, The World’s Religions: Common Ethical Values (speech, 2005). See H Küng, Global Responsibility: In Search of a New World Ethic (Crossroad Publishing Company, 1991). 99 E Spranger, Types of Men: The Psychology and Ethics of Personality (GE Stechert, 1928/1914); GW Allport, PE Vernon and G Lindzey, Study of Values (Houghton Mifflin, 1960); HC Triandis and MJ Gelfand, ‘Converging Measurement of Horizontal and Vertical Individualism and Collectivism’ (1998) 74 Journal of Personality and Social Psychology 118. 100 M Rokeach, The Nature of Human Values (The Free Press, 1973). 101 ibid, 5. 102 Rokeach suggested that there are various types of values. Instrumental values concern desirable modes of conduct, and are either personal (eg ambitious, courageous, honest, and loving) or social (eg cooperative, secretive, trusting). Terminal values concern desirable end-states of existence (eg salvation, peace of mind, freedom, security, pleasure, and prosperity), and can be either moral values (eg behaving honestly and lovingly) or competence values (eg imaginatively and logically). This distinction may be useful in analytical terms, but Schwartz’s empirical work found no evidence for this distinction in his structure of values.

Identifying Values  133 universalism.103 Critical to Schwartz’ thinking was the assumption that actions taken in the pursuit of each type of values have psychological, practical, and social consequences that may either conflict or may be compatible with the pursuit of other value types. He was then able to suggest a categorisation of the content of values that could be presented as a structure of value systems. Schwartz grouped certain values together as being closely related (and people might in practice not tend to distinguish much between them) but in opposition to other values. Schwartz noted that adjacent vales share motivational force. They can, therefore, be invoked at the same time and will tend to mutually reinforce each other, activating supporting values or suppressing opposites. He presented the values as a circle, showing adjacent and opposing values. Schwartz ­subsequently updated his model, expanding the list to 19 values, tested against results from 10 countries.104 The circle has a series of more detailed levels of values.105 His basic oppositions were growth and anxiety-free against self-protection and anxiety-avoidance. At another level, he opposed personal focus and social focus. At the next level he identified values such as self-transcendence and openness to change, as opposed to conservation and self-enhancement. A 2012 updated list moved from freedom to cultivate one’s own ideas and abilities, and freedom to determine one’s own actions, through stimulation, hedonism, achievement, exercising power over others and resources, maintaining public image (face), security, tradition, conformity, humility, benevolence in being dependable and in caring for others, to preserving the natural environment and acceptance and understanding of others.106 These values are: –– –– –– ––

focus on attaining personal or social outcomes, promote growth and self-expansion or anxiety-avoidance and self-protection, express openness to change or conservation of the status quo, and promote self-interest or transcendence of self-interest in the service of others.

The circular motivational continuum of 19 values (in the central circle) with the sources that underlie their order. The second circle from the centre shows the four ‘higher order’ value types, divided into two dimensions: –– Openness to Change (including self-direction and stimulation) versus Conservation (tradition, conformity, security) and –– Self-Enhancement (power, achievement) versus Self-Transcendence (universalism, benevolence). In the outermost circle, the values towards the top express growth and self-expansion and are more likely to motivate people when they are free of anxiety. The values in the lower half are

103 SH Schwartz, ‘Universals in the Content and Structure of Values: Theory and Empirical Tests in 20 Countries’ (1992) 25 Advances in Experimental Social Psychology 1; S Schwartz, ‘Are There Universal Aspects in the Structure and Content of Human Values?’ (1994) 50(4) Journal of Social Issues 19–45. 104 SH Schwartz, J Cieciuch, M Vecchione, E Davidov, R Fischer, C Beierlein, A Ramos, M Verkasalo, J-E Lonnqvist, K Demirutku, O Dirilen–Gumus and M Konty, ‘Refining the Theory of Basic Individual Values’ (2012) 103(4) Journal of Personality and Social Psychology 663. The countries were Finland, Germany, Israel, Italy, New Zealand, Poland, Portugal, Switzerland, Turkey and the United States. 105 S Schwartz, ‘Are There Universal Aspects in the Structure and Content of Human Values?’ (1994) 50(4) Journal of Social Issues 19–45, Fig 1. 106 SH Schwartz, J Cieciuch, M Vecchione, E Davidov, R Fischer, C Beierlein, A Ramos, M Verkasalo, J-E Lonnqvist, K Demirutku, O Dirilen–Gumus and M Konty, ‘Refining the Theory of Basic Individual Values’ (2012) 103(4) Journal of Personality and Social Psychology 663.

134  Morality and Values directed toward protecting the self against anxiety and threat. The values on the right side have a personal focus, whilst those on the left have a social focus. Geert Hofstede, whose work on social culture is discussed in chapter eight, followed Rokeach in identifying opposing sets of non-rational values that lead us to prefer certain states of affairs over others,107 such as: evil versus good; dirty versus clean; dangerous versus safe; decent versus indecent; ugly versus beautiful; unnatural versus natural; abnormal versus normal; paradoxical versus logical; irrational versus rational; and moral versus immoral. He believed that108 Our values are mutually related and form value systems or hierarchies, but these systems need not be in a state of harmony: Most people simultaneously hold several conflicting values, such as ‘freedom’ and ‘equality’. Our internal value conflicts are one of the sources of uncertainty in social systems: Events in one sphere of life may activate latent values that suddenly affect our behavior in other spheres of life. A change in our perception of a situation may swing the balance in an internal value conflict – in particular, the extent to which we perceive a situation as ‘favourable’ or ‘critical’.

The most recent survey of moral attitudes was published in 2019 by Curry, Mullins and Whitehouse, who analysed records of cooperative behaviours from anthropological data from 60 societies across the world and coded them into seven types.109 The seven basic moral rules were all held almost universally in common: help your family, help your group, return favours, be brave, defer to superiors, divide resources fairly and respect other people’s property. The researchers’ theoretical framework was to test the ‘morality-as-cooperation’ proposition that morality consists of a collection of biological and cultural solutions to the problems of cooperation in human social life. That theory ‘predicts that specific forms of cooperative behavior – including helping kin, helping your group, reciprocating, being brave, deferring to superiors, dividing disputed resources, and respecting prior possession – will be considered morally good wherever they arise, in all cultures’. The finding was that the moral valence of these behaviours is uniformly positive and observed in the majority of cultures, with equal frequency across all regions of the world. They therefore concluded that the seven cooperative behaviours are plausible candidates for universal moral rules, and that morality-as-cooperation could provide the unified theory of morality that anthropology had hitherto lacked. In short, they concluded: People everywhere face a similar set of social problems, and use a similar set of moral rules to solve them. As predicted, these seven moral rules appear to be universal across cultures. Everyone everywhere shares a common moral code. All agree that cooperating, promoting the common good, is the right thing to do.

Various limitations have been noted of these studies. The Curry, Mullins and Whitehouse study, for example, did not investigate the moral valence or prevalence of other cooperative traits, such as forgiveness and generosity. The morality-as-cooperation theory does not necessarily show that humans do not moralise other sorts of behaviour than the seven types (such as a prohibition on killing or eating cows) and is restricted to a theory about cooperation. Morality may be viewed as functioning in fostering and regulating intrapersonal coherence of motivation through presentation of ideals of character and of the fulfilling and worthwhile human life.110 As Paul Bloom commented, nobody yet knows which theories, if any, are correct.111 107 G Hofstede, Culture Consequences. Comparing Vales, Behaviors, Institutions, and Organizations Across Nations 2nd edn (Sage, 2001). 108 ibid, 6. 109 OS Curry, DA Mullins and H Whitehouse, ‘Is it Good to Cooperate? Testing the Theory of Morality-as-Cooperation in 60 Societies’ (2019) 60(1) Current Anthropology 47. 110 DB Wong, Natural Moralities: A Defense of Pluralistic Relativism (Oxford University Press, 2006). 111 See Comments at the end of the Curry article, including by Paul Bloom, Herbert Gintis, Kristopher M Smith, Robert Kurzban and David B Wong.

Identifying Values  135

Fairness It is interesting that fairness does not appear directly in Schwartz’s list. Social psychologist Jonathan Haidt found that six fundamental values are applied around the world: loyalty, fairness, liberty, hierarchy, care and sanctity.112 (Fairness and other values in Haidt’s list may arguably be included indirectly.) Gibbs has challenged Haidt’s claim that these values have primary or foundational status in human evaluation.113 However, fairness is clearly at the centre of the human neurological evaluation of evidence against criteria of distinguishing between right and wrong, and humans’ need to feel self-justification, which are identified in chapter four and are referred to by many philosophers and thinkers noted below in this chapter and book.

Political and Ideological Wide differences in political values can be clearly observed. Claims to freedom, equality and autonomy are familiar in Western political theory.114 The choice of which values to emphasise is a political one, although the power may be exercised by all or just some in a society. Rokeach noted that115 the four major political ideologies of the 20th century – communism, fascism, socialism, and capitalism – differed most fundamentally from one another in the distinctive positions they take with respect to two political values, equality and freedom. Socialism is hypothesized to be an ideology that holds both of these values in high regard, whereas fascism holds them in low regard; communism values equality but not freedom, whereas capitalism values freedom but not equality.

As Schwartz recognised, the inherent opposition of core values in each of us has implications not only for personal interactions and relationships but for issues relating to power (ie politics). The juxtaposition of freedom and independence with self-restraint, or of status and personal success with concern for the wellness of all, can cause conflict within and between ourselves.116 James Whitman has extensively explored what he sees as a dichotomy between a fundamental value of liberty that characterises much American law and a contrasting value of dignity that he sees as deeply embedded in continental European law.117 He suggests that these fundamentally different approaches arise from the different history of the two areas: in Europe, the political evolution was one of ‘levelling up’ the entire population in place of previous aristocratic elites, whereas in the United States the objective of egalitarianism was one of ‘levelling down’ by proclaiming there were no aristocrats. Roger Cotterrell warns that118 this research is

112 J Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion (Penguin, 2012). See J Graham and J Haidt, ‘Beyond Beliefs: Religion Binds Individuals into Moral Communities’ (2010) 14 Personality and Social Psychology Review 140–50. 113 JC Gibbs, Moral Development & Reality 4th edn (Oxford University Press, 2019). 114 HS Richardson, Democratic Autonomy. Public Reasoning about the Ends of Policy (Oxford University Press, 2002). 115 See also M Rokeach (ed), Understanding Human Values. Individual and Societal (The Free Press, 1979) 5. 116 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017). 117 JQ Whitman, ‘Enforcing Civility and Respect: Three Societies’ (2000) 109 Yale Law Journal 1279; Whitman, ‘Two Western Cultures of Privacy: Dignity versus Liberty’ (2004) 113 Yale Law Journal 1151; GS Friedman and JQ Whitman, ‘The European Transformation of Harassment Law: Discrimination versus Dignity’ (2003) 9 Columbia Journal of European Law 241. 118 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19.

136  Morality and Values controversial and, although based on very intricate comparative examination of legal doctrine, necessarily results in very broad generalisations.119 The problem with the opposition of values described by Schwartz is that you can claim that almost any action or behaviour accords with a value, so widely differing behaviour can be claimed to be justified. Chris Paley has recently argued that humans evolved not to be good but to seem good.120 He maintains that human morality is concerned with maintaining moral reputations but is of no use in solving problems like climate change. This is why, I would argue, we need to use a framework of agreed goals, purposes and outcomes in addition to a moral compass. As we discuss in chapter nine, Mark Carney argues that the essential values needed for societies at present are: dynamism, resilience, sustainability, fairness, responsibility, solidarity and humility.121 The dramatic social power of a policy of a ‘culture of kindness’ is illustrated where the Mayor of Anaheim, California, adopted a slogan ‘What would kindness do?’. This led to tangible developments in community culture and the creation of new social institutions and connections, reported by former US Surgeon General Vivek Murthy.122

Market, Business and Corporate Paul Zack argues that modern market exchange is inconceivable without moral values.123 However, he accepts that as our ancestors moved from a tightly-knit community, with strong character values,124 to a more open community of commercial actors, who may come from different geographical communities, there was a need to create institutions to bind action and through values, such as a common law, lex mercatoria, trade and professional bodies and dispute resolution facilities such as commercial arbitration. Exchange is easier where it occurs between parties who are familiar with each other in repeated transactions. There is a need for flexibility and responsiveness, to vary prices and quantities bought and sold and to modify the rules of exchange. Zack notes the flexibility afforded by institutions based on English common law, in which rules evolve on a case-by-case basis, only slowly codifying.125 He noted that similar inflexibility had crippled most Islamic economies.126 However, Michael Sandel has noted how market values crowd out valuable nonmarket norms.127 That view is supported by research that payment schemes intended to promote ecological conservation unintentionally crowded out people’s intrinsic motivation to act.128 119 An extreme example of the difficulties of providing empirical grounding for broad characterisations of ultimate values claimed as dominating societies or cultures is found in Pitirim Sorokin’s sociology, mentioned earlier. Sorokin made strenuous efforts to gather quantitative data (often presented in graphs and tables) to support claims about the shifting values of civilisations but the vastness of his generalisations almost guaranteed that the data would seem inadequate. On Sorokin as a socio-legal theorist see M Deflem, Sociology of Law: Visions of a Scholarly Tradition (Cambridge University Press, 2008) 879. 120 C Paley, Beyond Bad. How Obsolete Morals Are Holding Us Back (Coronet, 2021). 121 M Carney, Value(s) (William Collins, 2021). 122 VH Murthy, Together. Loneliness, Health and What Happens When We Find Connection (Profile Books & Wellcome Collection, 2021) 71–75. 123 PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) xi. 124 J Henrich et al, Foundations of Human Sociality: Economic Experiments and Ethnographic Evidence from Fifteen Small-Scale Societies (Oxford University Press, 2004). 125 PG Mahoney, ‘The Common Law and Economic Growth: Hayek Might be Right’ (2001) 30(2) Journal of Legal Studies 503. 126 T Kuran, Islam and Mammon: The Economic Predicaments of Islamism (Princeton University Press, 2004). 127 MJ Sandel, What Money Can’t Buy: The Moral Limits of Markets (London, Penguin, 2013). 128 J Roe, E Gómez-Baggethun and T Krause, ‘Motivation Crowding by Economic Incentives in Conservation Policy: A Review of the Empirical Evidence’ (2015) 117 Ecological Economics 270–82.

Identifying Values  137 Solomon identified the three most basic business virtues as honesty, fairness and trustworthiness.129 Since the 1990s at least, statements have been made about virtue-based personal and organisational business ethics.130 Many corporations have issued mission and values statements. But it has been found that official statements are of little value in affecting the behaviour of staff unless the values are demonstrated and supported throughout an organisation.131 In 2015, Luigi Guiso and colleagues found that values proclaimed by corporations (notably integrity, teamwork, innovation, respect, quality, safety, citizenship, communication and hard work) appeared irrelevant, but that a firm’s performance was stronger when employees perceived top managers as trustworthy and ethical.132 They aggregated the 50 most recurring values of the 500 leading S&P companies and found that nine categories or units of meaning emerged from the data: • Integrity, Ethics, Accountability, Trust, Honesty, Responsibility, Fairness, Do the right thing, Transparency, Ownership • Teamwork, Collaboration/Cooperation • Innovation, Creativity, Excellence, Improvement, Passion, Pride, Leadership, Growth, Performance, Efficiency, Results • Respect, Diversity, Inclusion, Development, Talent, Employees, Dignity, Empowerment • Quality, Customer, Meet needs, Commitment, Make a difference, Dedication, Value, Exceed expectations • Safety, Health, Work/Life balance, Flexibility • Community, Environment, Caring, Citizenship • Communication, Openness • Hard work, Reward, Fun, Energy In the decade since the Global Financial Crisis (GFC) many statements have been made about the importance of values but there have been few attempts to state a particular set of values.133 For example, values have been said to be fundamentally important for financial institutions and for the corporate governance of a company,134 but the prevailing approach has been to refrain from stipulating what the values of a business or organisation should be135 and to leave the selection of a particular prioritised set of the values of an organisation to the leaders (or all staff) of the organisation itself. Hodges and Steinholtz recommended that those involved in each organisation should agree their (and its) core values, and that the process of doing this helps to embed

129 R Solomon, The Joy of Philosophy (Oxford University Press, 1999). 130 RC Solomon, Ethics and Excellence (Oxford University Press, 1992); RC Solomon, A Better Way to Think About Business: How Personal Integrity Leads to Corporate Success (Oxford University Press, 1999); RC Solomon, ‘Business with Virtue: Maybe Next Year’ (2000) 10 Business Ethics Quarterly 319–31; RC Solomon, ‘Aristotle, Ethics and Business Organizations’ (2004) 25 Organization Studies 1021–43; RC Solomon, It’s Good Business: Ethics and Free Enterprise for the New Millenium (Rowman & Littlefield, 1997). 131 LS Paine, Value Shift. Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance (McGraw-Hill, 2003); S Killingsworth, ‘Modeling the Message: Communicating Compliance through Organizational Values and Culture’ (2012) 25 Georgetown Journal of Legal Ethics 961. 132 L Guiso, P Sapienza and L Zingales, ‘The Value of Corporate Culture’ (2015) 117(1) Journal of Financial Economics 60. 133 Governing Values: Risk and Opportunity – A Guide to Board Leadership in Purpose Values and Culture (City Values Forum with Tomorrow’s Company, 2016). 134 Toward Effective Governance of Financial Institutions (Group of 30, 2012). 135 Some public bodies may be exceptions: the NHS Constitution for England sets out seven key principles.

138  Morality and Values them.136 The Institute of Business Ethics in London has consistently called for ethical values to be at the heart of business. One of its many useful publications analyses how seven major organisations recovered from a major failure in public trust, and how relying on a robust ethical culture was critical to their success.137 One can find many references in discussions about corporations to the importance of personal integrity,138 but this is often in discussion about where things have gone wrong.139 The failure of the financial services sector to understand their dislocation between the values of society and their operations endangered the whole global economic system. The Archbishop of Canterbury said that the banking system should return to ‘a broad sense of promoting the wellbeing’ of those whom it serves.140 The action of destroying trust in financial services as a sector crumbles its social licence to operate.141 General codes of ethics have appeared in the banking sector,142 but the link between them and observation in day-to-day operational practice and ‘enforcement’ is unclear. Annual surveys by the Banking Standards Board show improvement over time in some issues surveyed but also show that consistently ethical cultures in financial organisations remain far from universal.143 A finding from gang culture is worrying here: ‘individuals are not loyal to you; they are loyal to the code’.144 Analysis of codes of financial ethics in 2010 found that they were built on seven core principles or values: integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence.145 Statements of corporate goals and ethics have both external and internal value. But they may be mere window dressing and not applied in practice. Whilst much attention has been devoted to ‘the tone from the top’, values need to be applied throughout an organization in the behaviours of multiple discrete sub-groups.146 Employees should feel they are trusted by their managers: the converse will provoke misconduct.147 Negative experiences are much more salient,

136 C Hodges and R Steinholtz, Ethical Business Practice and Regulation. A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017) 179. 137 G Dietz and N Gillespie, The Recovery of Trust: Case Studies of Organisational Failures and Trust Repair (Institute of Business Ethics, 2012). The organisations were: Siemens, Mattel, Toyota, the BBC, BAE Systems and Severn Trent Water. 138 TR Malloch and JD Mamorsky, The End of Ethics and a Way Back: How to Fix a Fundamentally Broken Global Financial System (John Wiley, 2013) (‘the rules all come down to personal integrity. Pay your debts. Don’t cheat your neighbour. Don’t use false weights and measures. Keep your financial commitments.’ xxvi). 139 Standards Matter: A Review of Best Practice in Promoting Good Behaviour in Public Life (Committee on Standards in Public Life, 2013), Cm 8519; Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015); Corporate Culture and the Role of Boards. Report of Observations (Financial Reporting Council, 2016) (this found that integrity was most valued by FTSE 100 companies (35%) but responsibility, trust and honesty only scored 14% each); Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (Financial Stability Board, 2017); Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises (OECD, 2019). 140 J Welby, ‘How Do We Fix This Mess?’, speech given on Monday 21 April 2013, www.archbishopofcanterbury.org/ articles.php/5050/how-do-we-fix-this-mess-archbishop-justin-on-restoring-trust-and-confidence-after-the-crash. 141 M Carney, Speech, ‘The Future of Financial Reform’, 2014 Monetary Authority of Singapore Lecture, 17 November 2014: ‘A trusted system can retain its social licence to support the real economy in innovative and efficient ways.’ 142 The Banking Code was established in UK in 1991, the voluntary Business Banking Code was introduced on 31 March 2002, and is revised regularly. See www.bcsb.co.uk/. 143 See http://financialservicescultureboard.org.uk/. 144 VH Murthy, Together. Loneliness, Health and What Happens When We Find Connection (Profile Books & Wellcome Collection, 2021) 162. 145 JA Ragatz and RF Duska, ‘Financial Codes of Ethics’ in J Boatright (ed), Finance Ethics: Critical Issues in Theory and Practice (John Wiley, 2010) 297–324. 146 S Killingsworth, ‘Modeling the Message: Communicating Compliance through Organizational Values and Culture’ (2012) 25 Georgetown Journal of Legal Ethics 961. 147 Compliance and Ethics Leadership Roundtable, 2007. Corporate Executive Board research; M Griffin and T Davis, Corporate Executive Board Research Alert, Sourcing Competitive Advantage from Organizational Integrity: the Hidden Cost of Misconduct, at www.celc.executiveboard.com/public/CELC_ResearchAlert.html; Ethics Resource Center, National Business Ethics Survey, 2 (2007), www.ethics.org/resource/2007-national-business-ethics-survey.

Identifying Values  139 memorable and influential than positive ones.148 Feelings of shame may lead to distancing, resistance and a dismissive, antagonistic stance.149 The Financial Reporting Council stated in 2018 that the ‘Common attributes of a healthy culture’ were:150 Honesty, openness, respect, adaptability, reliability, recognition, acceptance of challenge, accountability, and a sense of shared purpose. In relation to financial institutions, G30 identified the following values:151 Honesty, integrity, proper motivations, independence of thought, respect for the ideas of others, openness/transparency, the courage to speak out and act, and trust are the bedrock values of effective governance. …. Absent impeccable personal values – honesty, personal integrity, and motivation – nothing is possible. Honesty and personal integrity are self-explanatory and important in any business, but especially in FIs, where public trust and a reputation for honesty and integrity are essential to the value proposition.

How do such ‘ethical’ statements of professional or personal ethics work in the context of a system based on maximising self-interest, organisational profit, maximising financial targets, career advancement, and professional social standing? For example, does the above G30 list justify maximising profit for ourselves and our organisation, or logically indicate that such behaviour in fact conflicts with these values? The two worlds of the economic-political-market goals and values and professional-societal-personal values simply do not seem to be integrated. So one set of statements is for public consumption and hides what is really demanded in practice. The Schwartz perspective highlights the inherent conflict between ‘values’ of maximising shareholder value and maximising stakeholder value, the latter taking account of the fair treatment, development and sustainability of staff, suppliers, customers, communities, the environment and so on as well as the financial interests of shareholders. This insight highlights the need for a mechanism for reconciling – balancing or prioritising – particular values in particular circumstances. Various commentators have characterised market capitalism as amoral.152 The values of external society – and even perhaps as between traders and colleagues – are left at the door. As Lynn Stout has said:153 ‘Economic Man does not worry about morality, ethics, or other people. Instead, Economic Man is cold, calculating, worries only about himself, and pursues whatever course brings him the greatest material advantage.’ Core values can be used as a veneer: organizational core values are never enough.154 They are merely wallpaper unless they drive behaviour and decision-making.

148 RF Baumeister et al, ‘Bad is Stronger than Good’ (2001) 5 Review of General Psychology 323. 149 V Braithwaite, ‘Is Reintegrative Shaming Relevant to Tax Evasion and Avoidance?’ in H Elffers, P Verboon and W Huisman (eds), Managing and Maintaining Compliance (Boom Legal publishers, 2006). 150 Guidance on Board Effectiveness (Financial Reporting Council, 2018) Figure 1. 151 Toward Effective Governance of Financial Institutions (Group of 30, 2012). 152 eg RC Solomon, A Better Way to Think about Business. How Personal Integrity Leads to Corporate Success (Oxford University Press, 1999) xxi; S Davis, J Lukomnik and D Pitt-Watson, What They Do With Your Money. How the Financial System Fails Us and How to Fix It (Yale University Press, 2016); B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019) 184. 153 LA Stout, ‘Taking Conscience Seriously’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 158. 154 JG Blumberg, Return on Integrity. The Individual’s Journey to the One Essential Thing (Keynote Concepts, Inc, 2019).

140  Morality and Values The difference can be seen in recent restatements of corporate goals. In 2019, 181 CEOs of major US corporations made a Statement on the Purpose of a Corporation that upheld the pluralist approach of a fundamental commitment to all of their stakeholders, by delivering value to customers, investing in employees, dealing fairly and ethically with suppliers, supporting the communities in which they work and generating long-term value for shareholders.155 That was a major statement but it will need to be manifested in behaviours if it is to have impact in practice. An example of this pluralist approach is the Economics of Mutuality model, which aims to empower businesses to adopt a more complete and mutual form of capitalism that is fairer and more efficient than the dominant profit-maximising business model.156 A widely admired set of corporate guidance is that of Netflix,157 which is a set of illustrations of good and bad actions and processes, rather than a set of values. It starts with ‘Seven aspects of our culture’: • • • • • • •

Values are what we Value High Performance Freedom & Responsibility Context, not Control Highly Aligned, Loosely Coupled Pay Top of the Market Promotions & Development.

Netflix then specifies ‘two types of necessary rules’: (1) prevent irrevocable disaster and (2) moral, ethical and legal issues. The 2019 Australian Banking Code or Practice has been developed with the assistance of experts in ethics and aims to take a wide view:158 In signing this important document, these banks make a commitment to you, their customers, to ethical behaviour, to fair and responsible lending practices and to the protection of your privacy. The Code is underpinned by our Statement of Guiding Principles 1.

Trust and confidence •• We are committed to earning and retaining the trust of our customers and the community. •• We are committed to making promises and keeping them to deliver good customer and community outcomes. •• We will comply with all laws relating to banking services. •• We will protect your privacy. •• We recognise our role in society and our impact on the wider community. 2. Integrity •• We will act honestly and with integrity. •• We will be fair and responsible in our dealings with you. •• We will build and sustain a culture based on strong ethical foundations.

155 www.opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-o f-a-Corporation-with-Signatures-1.pdf. 156 B Roche and J Jakub, Completing Capitalism (Berrett-Koehler Publishers, 2017). 157 Netflix Culture of Responsibility & Freedom Deck: www.slideshare.net/reed2001/culture-1798664. 158 Banking Code of Practice (Australian Banking Association, 2019).

Identifying Values  141 3. Service •• We will deliver high customer service and standards. •• We will ensure banking services are accessible, inclusive and provided to you in a fair and ethical manner. •• We will raise awareness of the basic (low, or no fee) banking products that we may offer. •• We will take a responsible approach to lending. •• We will work to help you if you are experiencing financial difficulty. 4. Transparency and accountability •• We will communicate with you in a clear and timely manner. •• We will be accountable in our dealings with you. •• We will be transparent in our communications with you.

It is relevant that this document combines various techniques. Although it is based on a list of idealistic values, it gives more detail of practical actions, states personal and community commitments, and requires assent through a signature. The 2021 EU food code, signed by companies and associations throughout the food chain, aims to unite signatories ‘behind a common aspirational path towards sustainable food systems … to align with this common agenda and to contribute with tangible actions to help achieve the objectives’ that it sets out.159 It talks about legal compliance, positive collaboration, good faith and collegiality, inclusiveness, being based on science and evidence, ensuring a high level of food safety, sharing knowledge, expertise and good practices in achieving the objectives in a transparent way, and active participation. It also sets out a sequence of aspirational objectives and targets. Richard Barrett has developed the Seven Levels of Organisational Consciousness Model, a framework based upon and extending Maslow’s Hierarchy of Needs to organisations as well as individuals. It describes the seven areas that people and organisations must focus on. Barrett then allocated specific values to the areas they relate to, whether they are positive or potentially limiting, and further realised that in doing so, it was possible to measure and make sense of culture in organisations, as shown in Table 6.1 and Figure 8.1.160 Table 6.1  Barrett’s Seven Levels of Organisational Consciousness and Associated Values and Behaviours161 Levels of organizational consciousness

Description of the focus at this level

7

Contribution

Living Purpose

Social responsibility, future generations, compassion, long-term perspective, vision

Not applicable

6

Collaboration (Making a difference)

Cultivating Communities

Community involvement, Environmental awareness, collaboration, partnership, Leadership development, employee fulfilment

Not applicable

Positive values/behaviours (P)

Potentially limiting values/behaviours (PLV)

(continued) 159 EU Code of Conduct on Responsible Food Business and Marketing Practices. A Common Aspirational Path Towards Sustainable Food Systems (European Commission, 2021), https://ec.europa.eu/food/system/files/2021-06/ f2f_sfpd_coc_final_en.pdf. 160 See now R Barrett, The Values-Driven Organization: Cultural Health and Employee Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017). 161 Updated Table prepared by Ruth Steinholtz from R Barrett, The Values-Driven Organization: Cultural Health and Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017) 98.

142  Morality and Values Table 6.1  (Continued) Levels of organizational consciousness

Description of the focus at this level

5

Alignment (Internal cohesion)

Authentic Expression

Trust, commitment, honesty, integrity, creativity, transparency, passion, purpose, openness

Not applicable

4

Evolution

Consciously/ Courageously Evolving

Adaptability, accountability, innovation, continuous learning, diversity, teamwork, personal growth, transformation, empowerment, agility, courage

Not applicable

3

Performance

Achieving Excellence

Productivity, best practices, efficiency, quality, professional growth, excellence, order, competence

Bureaucracy, confusion, information hoarding, silo mentality, status, hierarchy, long hours, power,

2

Relationship

Building Relationships

Open communication, respect, friendship, listening, loyalty, customer satisfaction, caring, recognition

Blame, internal competition, manipulation, jealousy, back-stabbing

1

Viability

Ensuring Stability

Financial stability, profit, employee health and safety, organizational growth

Control, caution, chaos, short-term focus, greed, risk-averse, cost reduction

Positive values/behaviours (P)

Potentially limiting values/behaviours (PLV)

The two right hand columns give examples of positive values that create the desired outcome and, by contrast, the limiting values, ie those that would undermine or block the achievement of the outcome. The extent to which potentially limiting values are present in an organisation is an indication of the amount of dysfunction, frustration, wasted time or similar factors that will detract from both personal and organisational well-being and success. For example, Barrett identified the following positive and limiting values for individuals:162 Positive personal values include honesty, integrity, courage, making a difference, caring, fitness, friendship and trust. Potentially limiting personal values include fear, control, blame, caution, being liked and status.

In 2017, Barrett identified the following positive and stress-inducing values for organisations:163 Positive organizational values include teamwork, creativity and financial stability, customer satisfaction, making a difference, commitment, employee fulfilment, continuous improvement, humour/fun, shared vision, customer collaboration, balance (home/work), teamwork.

162 R Barrett, The Values-Driven Organization: Unleashing Human Potential for Performance and Profit (Routledge, 2014). 163 R Barrett, The Values-Driven Organization: Cultural Health and Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017) 143.

Identifying Values  143 Stress-inducing limiting values include: long hours, confusion, short-term focus, blame, information hoarding, manipulation, hierarchy, results orientation, bureaucracy, quality.

At the lowest three levels of organisational consciousness, Barrett identified various behaviours that are stress-inducing (such as work overload, existence of competing values, breakdown of community, absence of fairness, insufficient reward and lack of control), and associated with potentially limiting values (such as bureaucracy, hierarchy, confusion, silo-mentality, manipulation, internal competition, blame, favouritism, cost reduction, micro-management, short-term focus).164 Cultural Values Assessment (CVA) tools such as that developed by Barrett illustrate the alignment or misalignment (disconnection) between people’s personal values that guide their social interactions and decisions, and the values and behaviours that they perceive as being encouraged at work. In addition, a CVA uncovers the values that are perceived as being drivers of a success in an organisation. The Barrett Values Centre originally established by Richard Barrett has recently mapped the UN’s SDGs onto his Seven Levels Model, showing that they together give an integrated and comprehensive approach to maturity. Barrett undertook a national Values Assessment in the UK in 2012 that found (at 59%) one of the highest levels of cultural entropy (level of dysfunction in society) in European countries surveyed, and higher than in the USA, Australia and Canada.165 It found that citizens of England, Northern Ireland, Scotland and Wales shared seven personal values in common – caring, family, honesty, humour/fun, friendship, fairness and compassion – so supporting meaningful close relationships, kindness and empathy, treating people with justice and fairness, enjoyment of life and appreciating freedom and autonomy. People from all four nations identified four common issues at the community level – uncertainty about the future, drugs/alcohol abuse, crime/violence and wasted resources. Most worrying, six values were shared at the national level that were limiting – bureaucracy, crime/violence, uncertainty about the future, corruption and blame, as well as being concerned about drugs/alcohol abuse. The researchers’ conclusion was that people in the UK did not feel that their national society was on the right track. Barrett later commented that Brexit was almost inevitable.

Human Rights Many parts of our civilisation have placed greater emphasis on values other than individual freedom. Roger Cotterrell cites values such as ‘absolute commitments to human rights, to racial equality, to the sanctity of private property, to liberty of contract, to social welfare or wealth redistribution, to religious freedom, to religious beliefs that seek expression in law, to democracy, and to national sovereignty or national legal autonomy’.166 These concerns prioritise the sustainability of human respect and relationships. Important statements of human rights are the UN Universal Declaration of Human Rights,167 the European Convention on Human Rights,168 the Charter of Fundamental Rights of the

164 ibid, 143. 165 P Clothier and R Barrett, The United Kingdom Values Survey. Increasing Happiness by Understanding What People Value (Barrett Values Centre, 2012). 166 R Cotterrell, ‘Theory and Values in Socio-Legal Studies’ (2017) 44 Journal of Socio-Legal Studies S19. 167 www.ohchr.org/EN/UDHR/Documents/UDHR_Translations/eng.pdf. See also the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). 168 www.echr.coe.int/Documents/Convention_ENG.pdf.

144  Morality and Values European Union,169 the UK Human Rights Act 1988 and the Ruggie Principles.170 For businesses, UN (Ruggie) principles address consumers and companies who, at the consuming end of supply chains that benefit from breaches of human dignity and poverty at their source, have been shamed into accepting responsibility for trying to change such behaviour through positive action.171 A similar issue is modern slavery. There are over 40 million people in modern slavery worldwide, linked with money laundering and other financial crimes, with an estimated 130,000 people being connected to slavery exploitation in the UK, but a 2021 survey found that 45% of senior managers were unaware that modern slavery exists in UK.172 The answer to tackling the problem has to lie in cooperation between governments, financial institutions and other unwitting intermediaries.

Values for the Public Sector Seven Principles of Public Life were proclaimed in UK in 1995:173 selflessness, integrity, objectivity, accountability, openness, honesty, leadership. Under a 2006 Act, regulators must have regard to the principles that regulatory activities should be carried out in a way which is transparent, accountable, proportionate and consistent, and that regulatory activities should be targeted only at cases in which action is needed.174 In 2011 the UK Government stressed the need for openness to support democratic accountability, contrasting this with internal bureaucratic accountability:175 Accountability through transparency 5.21 Our plans to create open public services replace bureaucratic accountability with democratic accountability. That means recognising that citizens have a right to know how government works and why it makes the decisions it does. This in turn allows the public and their representatives to scrutinise the link between money spent and the quality of the service provided, and helps to create a culture where public sector professionals are rigorous in assessing the impact of their decisions because the cost effectiveness of these decisions can be scrutinised.

The Committee on Standards in Public Life commented in 2016 on the importance of promoting ethical standards by authorities’ leadership:176 Our evidence demonstrated the importance of visible and engaged leadership for promoting ethical standards within the regulatory agency. Where the Board takes integrity, openness, and accountability seriously, the ethical culture of the regulatory organisation reflects this.

They were extended to apply to private public service providers from 2013.177 However, a review in 2018 found that very little had been done to implement the recommendations and that the majority of service providers to government were not demonstrating best practice in ethical

169 www.europarl.europa.eu/charter/pdf/text_en.pdf. 170 UN Office of High Commissioner for Human Rights, Guiding Principles on Business & Human Rights. Implementing the UN ‘Protect, Respect and Remedy’ framework (UN, 2011). 171 Guiding Principles on Business and Human Rights (United Nations, 2011). 172 Preventing Modern Slavery & Human Trafficking: An Agenda for Action across the Financial Services Sector (Independent Anti-Slavery Commissioner, Tribe Foundation and THEMIS, 2021). 173 The Seven Principles of Public Life (Committee on Standards in Public Life, 1995). 174 Legislative and Regulatory Reform Act 2006, s 21. 175 Open Public Services. White Paper (HM Government, 2011). 176 Striking the Balance. Upholding the Seven Principles of Public Life in Regulation (Committee on Standards in Public Life, 2016) 54. 177 Ethical Standards for Providers of Public Services (Committee on Standards in Public Life, 2014).

Identifying Values  145 standards.178 The Committee called for both commissioners (especially led by HM Treasury and the Cabinet Office) and providers of public services to refocus on ethical service delivery and adopt ‘a wider view of value for money, one that embeds ethical considerations at every level’. The Committee recommended that all public service providers must, at the point of commissioning, publish a ‘Statement of Providers’ Intent’ providing their plan for embedding a culture of high ethical standards in their service delivery approach during the life of the contract. The statement should reference the providers’ approach to ethical leadership, performance management, induction and ongoing professional training on ethical issues and honesty in reflecting performance issues during the life of the contract. One of the values highlighted was the need for ‘moral courage’, especially on the part of accountants, lawyers and other professionals and their professional bodies, when they witnessed irregularities. Concern about pressures on standards in public office led the Committee to review the situation in 2021. It said that ‘[s]ocial media, intimidation, political polarisation and a more intense and immediate public debate on politicians’ conduct has led to increasing risks to public standards’ and that ‘[u]pholding high ethical standards in this changing context is a political and leadership challenge’.179 The Committee decided to amend the descriptor of leadership to be: ‘Holders of public office should exhibit these principles in their own behaviour and treat others with respect. They should actively promote and robustly support the principles and challenge poor behaviour wherever it occurs.’ The importance of respect is notable here as well as the requirements on demonstration and challenge of ethical behaviour. The Committee concluded that the government should take a more thorough and professional approach to ethics rules and develop a compliance function across government. By comparison, in the Netherlands, three Basic Principles for Good Enforcement were officially adopted by the Government in 2000 – independence, professionalism and transparency— and a further three principles were added in 2005, reflecting the increased emphasis on reducing burdens on business – selective, effective and cooperating.180 In Ontario,181 the Public Service of Ontario Act established the values of professionalism, integrity, accountability and excellence for all public servants and a code provides further organisational values and elements of professionalism for regulatory ministries (see Table 6.2). Table 6.2  Organisational Values and Elements of Professionalism for Ontario Officials Organisational values

Elements of professionalism

Trust

Honesty and integrity

Diversity

Objectivity

Creativity

Timeliness

Efficiency

Respect

Fairness

Confidentiality

Excellence

Knowledge

Collaboration Responsiveness 178 The

Continuing Importance of Ethical Standards for Public Service Providers (Committee on Standards in Public Life, 2018). 179 Upholding Standards in Public Life. Final Report of the Standards Matter 2 Review (The Committee of Standards in Public Life, 2021). 180 R Velders, ‘Cooperative Approaches: The Work of the Inspection Council in the Netherlands’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019) ch 11. 181 Regulator’s Code of Practice: Integrity in Pursuit of Compliance (Government of Ontario, 2011).

146  Morality and Values

Reapplying Values Frans de Waal has said that ‘When we became cooperative animals, we abandoned the right-ofthe-strongest principle and moved on to a right-of-the-contributor principle.’182 Small groups need contributors, but as much larger modes of organisation developed, individuality, freedom and self-interest have been prioritised. We are now seeing the disadvantages of moving … but leading philosophers have pointed out that a society involves relationships in which individuals have rights but also have mutual responsibilities. Individual rights may be grounded in a society’s values but not vice versa. Philosopher Michael Sandel concludes that justice is a concept that is larger than either maximising utility or welfare, or respecting freedom of choice, and involves cultivating virtue and reasoning about the common good, involving:183 (a) (b) (c) (d)

a strong sense of community: citizenship, sacrifice and service; recognising the moral limits of markets; confronting inequality, solidarity and civic virtue; and the need for a politics of moral engagement.

Jonathan Sacks, the former Chief Rabbi, issued a powerful call in his last book for a shift from the self-centre to the social: ‘It is about “Us” not “Me”; about “We” not “I”.’184 He asserted that both the economy and the state are institutions that need to be governed by the society’s moral system, which ‘is the voice of society within the self; the “We” within the “I”; the common good that limits and directs our pursuit of private gain. It is the voice that says No to the individual “Me” for the sake of the collective “Us”.’ He approved of Lord Devlin’s comment that ‘Society means a community of ideas; without shared ideas on politics, morals, and ethics, no society can exist.’185 The moral system not only directs and controls but ideally inspires its members in their activities, both individually and together as a community. Similarly, Sztompka’s six moral bonds are all about the basis of relations between individuals, so that they may live harmoniously and productively in society – trust, loyalty, reciprocity, solidarity, respect and justice.186 These bonds can all be identified as being innate in human’s DNA but some have been overlooked in recent socio-political and market environments. Sacks said that we are currently undergoing the cultural equivalent of climate change. We (in the West) have placed too much emphasis on the economy, the market and the state, and not enough on our moral system. Indeed, our moral system has collapsed under the weight of expressive individualism and an epidemic of narcissism,187 and we are our societies are now paying the price. ‘We will be left only with the market and the state. The market cannot deliver distributive justice. The state cannot deliver dignity and resilience, civility and responsibility, for and in its citizens.’188 ‘The displacement of the community by the state meant the replacement

182 FBM de Waal, ‘How Selfish an Animal?’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 66. 183 MJ Sandel, Justice. What’s the Right Thing to Do? (Penguin Books, 2010; first pub Farrar, Strauss and Giroud, 2009). 184 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020). 185 P Devlin, The Enforcement of Morals (Oxford University Press, 1965) 10. 186 P Sztompka, ‘Trust in the Moral Space’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021). He defines solidarity as ‘the readiness to sacrifice one’s own interests for a larger or smaller community (family, neighbours, professional, ethnic, religious, national, continental, all-human) in the hope that such a community will show concern for our problems and will reciprocate with compassion, help and care when we are in need’: 36. 187 ibid, 44. 188 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020) 128.

Reapplying Values  147 of morality by politics.’189 ‘We will have to rebuild families and communities and voluntary organisations.’190 Sacks thought that it is not enough to have a new social contract, which is just about transactions, self-interests and benefit. He called for a social covenant, which is about relationships, identity, commitment and transformation. ‘A covenant creates a moral community. It binds people together in a bind of mutual responsibility and care.’191 Sacks refers back to Aristotle’s concept of eudaimonia, the idea of a happy, moral life, living well and faring well. Naturally, Sacks points out that religion – in fact, at least Jewish, Christian and Buddhist religions – provide the necessary personal commitment and sense of shared values and spaces for negotiation of the application of values in everyday life, based on the following principles: Love your neighbour. Love the stranger. Hear the cry of the otherwise unheard. Liberate the poor from their poverty. Care for the dignity of all. Let those who have more than they need share their blessings with those who have less. Feed the hungry, house the homeless, and heal the sick in body and mind. Fight injustice, whoever it is done by and whoever it is done against. And do these things because, being human, we are bound by a covenant of human solidarity, whatever our colour or culture, class or creed.192

Similarly, Paul Collier’s vision for the future of capitalism is based firmly on ethical values being the foundation of all activities and institutions – the state, the firm, the family, the world.193 The ethical quality of a society’s values should differentiate it from others and have consequences for the extent and depth of cooperation between different groups and states. It is notable that the British security and secret intelligence services derive moral strength from operating in a ‘social compact model’, with the following basis:194 [A]n ideal of a democratic licence to operate being given, after open debate, to the security and intelligence authorities and their law enforcement partners that defines their lawful purposes, regulates their intrusive methods, provides for independent oversight by judicial commissioners and by a committee of senior parliamentarians, and establishes a specialist court (the Investigatory Powers Tribunal) to investigate and adjudicate on allegations of abuse.

Three conditions govern the secret activities: ‘all activity is conducted within the rule of law; there is regulation and proper democratic accountability, and authorities exercise restraint to respect the privacy of the individual and apply the legal principles of proportionality and necessity at every stage’.195 Is it time for countries’ citizens to debate what their values are? How might this be done? Online polls can be useful here and The Values Centre’s Personal Values Assessment, which is available free of charge globally, has come to some conclusions.196 What follows is a preliminary consideration of the implications of the priority values for some aspects of economic, commercial, regulatory and social systems. The analysis could only be definitive if based on firm evidence of the precise list of prioritised values. But since that is not available, and since it seems important

189 ibid, 317. 190 ibid, 318. 191 ibid, 327. 192 ibid, x. 193 P Collier, The Future of Capitalism (Allen Lane, 2018). 194 D Ormand and M Phythian, Principled Spying. The Ethics of Secret Intelligence (Oxford University Press, 2018) 50–51. The authors contrast this with a ‘legal compliance model’ applied in the United States of America. 195 ibid, 51. The governing legislation is the Investigatory Powers Act 2016. 196 See http://survey.valuescentre.com/survey.html?id=OhBC0zfDaO99OHGlc8torO_4V4qzs1br.

148  Morality and Values to suggest that values will have profound implications on architectures, systems and approaches, some assumptions will be made here so as to illustrate what seems necessary.197

Conclusion All humans, unless they have some cognitive impairment, use values constantly to guide and assess their and others’ behaviour. The research, particularly by Schwartz, indicates that the same set of major values are present in all of us, and we draw on them constantly in evaluating past events, present situations and future choices. The set of values, and their effect on the way we think and act, are genetically inherent in us. They derive from, and provide us with, two basic needs: protection and growth. That double axis of values leads in differing circumstances to a need to prioritise different and indeed competing values. Some people can sometimes be driven by power, achievement, hedonism, whereas others feel benevolence, caring, humility. Since different values conflict, we rely on different (sets of) values at different times, with different priorities depending on our personalities, moods, influences and situations. Indeed, dominance of opposing ‘states’ of value can be triggered by our feelings or external forces. Some people may consistently favour certain values instead of others, such as those clustered around tradition or caring, liberty, dignity or solidarity. The inherent existence of conflict between values requires us to exercise our choice of emphasis carefully in relation to important decisions and actions. We have to live with the existence of inconsistency and hence our brains have developed a mechanism for making us feel good, irrespective of when we act in ways that is inconsistent with (some of) our values, so as to maintain our sense of self-worth (cognitive dissonance, referred to in chapter four). We use values both through rational cognitive thought (to determine what is right, consistent and will achieve our objectives) and automatically (through heuristics, natural tendencies or predisposition, ‘character’, residual strength, mood, social influence). We have inherent ability to differentiate between what we believe to be ‘good’ and ‘bad’ behaviour – in other words, an inherent ethical compass and order of ranking our values. Whether this comes from divine source or not, it is a human property and characteristic, that enables us to cooperate together on the basis of confidence and trust. The trajectory of ‘ethical’ values lies in the slow evolution from individualistic self-preservation to widespread collaborative life. It emphasises the need to be fair to others and treat them as we would wish to be treated. Given that the emphasis that we place on different values can vary, and be influenced by external factors, it is wise for us to use mechanisms to examine our prioritisation of values and behaviours. Schwartz shows the value of our being open to challenge. This is so not only individually but for groups. When different people interact in any significant way, other than in simple transactions or relationships, there is a need to identify the extent to which the values of the participants are shared or differ, and what behaviours, cultures and outcomes they produce in practice. The presence of alignment or conflict between the predominate set of values of different people and groups will determine the extent to which they are able to trust and cooperate with each other. An obvious example of this occurs in relations between dictatorships and democratic

197 See S Mangalam, ‘The World After Covid-19: An Opportunity for Reset’ at www.medium.com/@srikanth_68593/ the-world-after-covid-19-an-opportunity-for-reset-dbd55fa843bc, suggesting that extensive rethinking should be based on needs, trust and empathy.

Conclusion  149 states. Value sets can in fact vary widely between cultures and individuals,198 and they sometimes change emphasis surprisingly quickly. The values that are emphasised by an individual, organisation, community, society or state are important for guiding behaviour and culture in internal and external relationships. However, little attention has been given to debating and stating our values in recent times. Events such as Nazism, the GFC and the Covid-19 pandemic have demonstrated that some societies have needed to reconnect with what they – and others – value.199 The pandemic has certainly highlighted the value of caring, prioritising health and essential services, and supporting those whose income disappears. The humanitarian response to refugees from the Ukraine illustrates the strength of feeling, inviting people into homes and driving across Europe to deliver support. The scientific evidence is that adopting ethical values is inescapable if we wish to build trust, cooperation and sustainable achievement of good, desired outcomes. We are clearly capable of making our societies more ethical if we wish. The value in requiring ourselves to behave more ethically is the goal of spreading cooperative, innovative and peaceful life on the planet. It is time to evaluate what we value and be open to challenge about this – as species, nation, society, organisation, business and individuals. We need mechanisms for debating, renewing and affirming our values, ensuring that they are ethical, and deciding how different values are to be applied, balanced and reconciled in particular actions. A charter of fundamental rights may be useful at a certain stage of social evolution, but a mature approach would rely on a (national, organisational, etc) concordat of ethical values and principles, debated and reviewed in a national conversation. Also, as Jonathan Sacks said, we need to be able to reason well together,200 decide on what we value and then ‘mainstream’ our values. The European Commission proposed in 2021 that the UN SDGs should be ‘mainstreamed’ by being included in every EU legislative proposal.201 For these reasons, the OBC and OBCR models include the idea of an agreed Code of Ethical Practice governing how people should behave so as to support their productive engagement. The debate needs to involve all stakeholders, rather than to be decided by some in authority and imposed on everyone else. Further, the matrix of values of the individuals and institutions that operate within a state, or group of states, should be consistent. It will not produce ethically based cooperation if a state espouses a set of ethical values whilst groups of individuals who operate within it have conflicting values. For example, criminal gangs are both identified and condemned by their reliance on anti-social values. This logic supports not only a requirement for public bodies to espouse values of achieving the public good,202 but also for private commercial organisations to avoid the sole objective of maximisation of profit.

198 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017). 199 M Carney, Value(s) (William Collins, 2021). 200 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020). 201 Communication from the Commission to the European Parliament, the Council, the European and Social Committee and the Committee of the Regions: Better Regulation: Joining Forces to Make Better Laws May 2021. 202 The Seven Principles of Public Life (Committee on Standards in Public Life, 1995).

7 Purposes and Outcomes This chapter builds on three propositions. First, an individual will achieve something if it is established in his or her mind as an important purpose (or objective or goal). This idea is explained by psychology as the ability of the brain to focus on one or a small number of big ideas as motivating forces. Many examples come to mind that link purpose and motivation to achievement. For example, people who decide to run a marathon, devote themselves to healing or teaching others, achieving sales targets, stealing from others can focus on their goal and its achievement. The second proposition is that groups of individuals who share a set of common goals – and common values – will achieve more by being able to cooperate more effectively.1 This is a reasonably self-evident claim, and one which has received considerable attention since the Global Financial Crisis (GFC) in changes to corporate governance arrangements around the world and in a campaign for corporations to adopt social purposes led by Colin Mayer. Third, the proposition in this book is that the purposes of all stakeholders need to be aligned so as to provide clarity over how different purposes can be shared, and conflicting purposes balanced, as part of a common endeavour, in order to achieve all the outcomes that are accepted by all stakeholders as valid. It is more effective and efficient to identify and balance multiple purposes before embarking on a common endeavour than to try to reconcile differences during the operational phase of trying to achieve competing purposes.

Basic Purposes Humans and their organisations organise their actions generally around achieving intended purposes, rather than acting randomly. We usually behave and act in order to achieve some aim. For example, we eat to stay alive but also to give ourselves pleasure. Where several of us need to act together to achieve a common end, it is axiomatic that we are more likely to succeed if we share the same aims, objectives and purposes. Public officials will generally seek to act to achieve the public good and the interests of the state authority for which they work. A business organisation will seek to achieve its corporate objectives, increasingly expressed as its mission and subsidiary objectives. A regulatory authority will seek to protect those who may be harmed by the activities of those whom it regulates, which include regulatees themselves as well as third parties who may be harmed.



1 The

following analysis drawn on C Hodges, Law and Corporate Behaviour (Hart, 2015) ch 21.

The Evolution of Corporate Purpose  151

The Evolution of Corporate Purpose In recent decades, commercial organisations have learned that they need to integrate purposes and values. This evolution of thinking and practice is instructive. Collins and Porras studied ‘high achieving’ companies, as measured by their stock price values. Their initial 1994 analysis concluded that the successful ones had an all-consuming internal vision that was shared by all staff and drove them to excel.2 They did not then think that any specific ideological content was essential to being a visionary company.3 They thought that the authenticity of the ideology and the extent to which a company attains consistent alignment with the ideology counts more than the content of the ideology. However, the initial cohort of companies subsequently failed to maintain their primacy in terms of market valuation, and indeed some failed, so some fresh thinking was called for.4 Collins’ 2001 analysis of what made companies shift from being ‘good to great’ concluded that they all involved creating ‘a climate where truth is heard’, based on open dialogue and debate, and not coercion or authoritarian leadership or bureaucracy. Consensus was not specifically sought, but discussion and challenge were encouraged. The ‘good to great’ firms also selected people who were self-motivated (and not de-motivated) to work passionately within a cultural framework of freedom and responsibility to fulfil their responsibilities.5 That unified cultural approach inside a multinational organisation was able to take account of variations in national cultures across multinational companies whilst still allowing for the firm’s values and purposes to be unified.6 However, that was not the end of the story. Collins’ 2001 analysis noted that the executive compensation patterns of the most successful companies were not systematically different relative to comparison companies in the use of stock (or not), high salaries (or not), bonus incentives (or not) or long-term compensation (or not). The only significant empirical difference was that the executives in the former category received slightly less total cash compensation 10 years after the transition than their counterparts at the still-mediocre comparison companies.7 They concluded that ‘It’s not how you compensate your executives, it’s which executives you have to compensate in the first place.’ ‘The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.’8 A similar shift in understanding was noted by Pfeffer. In 1998 he stated seven ‘high performance practices’ that could lead to innovation, productivity and sustained profitability: employment security, selective hiring, self-managed teams and decentralisation, extensive training, reduction of status differences, sharing of information and high and contingent compensation.9 However, in 2007 he found little evidence of the widespread use of these

2 J Collins and JI Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins, 1994, 12th edn 2005). 3 ibid. 4 J Collins, How The Mighty Fall And Why Some Companies Never Give In (Random House Business Books, 2009). He postulated that five stages of decline could be seen: hubris born of success, undisciplined pursuit of more, denial of risk and peril, grasping for salvation and capitulation to irrelevance or death. I do not think that this is the full story. 5 J Collins, Good to Great (Harper Business, 2001). 6 L Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Addison-Wesley, 1995) 4 (rather than embracing a standardized way of behaving, the company’s French, German and British managers ‘had values and behaviours more French, more German and more British than those of their compatriots working for local, domestic companies’). 7 J Collins, Good to Great (Harper Business, 2001) 49. 8 ibid, 50. 9 J Pfeffer, The Human Equation (Harvard Business School, 1998).

152  Purposes and Outcomes practices in contemporary organisation.10 Others commented that exclusive focus on shareholder wealth creates organisations typically characterised by a culture of compliance and control.11 Employees, particularly those with high aspirations, were said to be likely to find the culture constraining, and the culture itself tends to stifle innovative thinking from the lower ranks.12 The shock of the GFC in 2008 produced a major focus on the importance of the need for corporations to have broader social purpose than a fixation on profits and shareholder value. John Kay swiftly observed that business exists to serve social purposes and enjoy legitimacy in the short term and survival in the long term only to the extent that such businesses meet these purposes. Accordingly, he said that profit cannot be the ‘defining purpose’ of a business.13 Mackey and Sisodia drew on their academic and practical business experience in creating what might be called caring business environments, looking after the interests of customers, staff and investors. They affirmed that it is critical to hire people who align strongly with the purpose of the enterprise. Mackey and Sisodia’s conception of ‘conscious capitalism’ recognised that there is no ‘right’ purpose for every business but proposed the following related concepts of purpose, mission and vision:14 Purpose, the difference you’re trying to make to the world; mission, the core strategy that must be undertaken to fulfil that purpose; vision, a vivid, imaginative conception or view of how the world will look once your purpose has been largely realized.

Mackey and Sisodia drew on psychological thinking emanating from accounts of Auschwitz that people could discover meaning and purpose in their lives in three ways: by doing work that matters, by loving others unconditionally, and by finding meaning in their suffering.15 They also referred to Plato’s articulation of the transcendent ideals as: The Good

Service to others; improving health, education, communication, and quality of life

The True

Discovery and furthering human knowledge

The Beautiful Excellence and the creation of beauty The Heroic

Courage to do what is right to change and improve the world

The ‘value’ of having transcendent humanitarian or social ideals had also been noted by Collins and Porras, who quoted George Merck II, founder of the pharmaceutical firm: We never try to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been.16

10 J Pfeffer, What Were They Thinking? Unconventional Wisdom about Management (Harvard Business School, 2007). 11 J Buckingham and V Nilakant, ‘Introduction: Globalizing Corporate Social Responsibility – Challenging Western neo-Liberal Management Theory’ in J Buckingham and V Nilakant (eds), Managing Responsibly. Alternative Approaches to Corporate Management and Governance (Gower, 2012). 12 CC Manz and HP Simms, Business Without Bosses (John Wiley, 1993). 13 J Kay, Obliquity (Profile Books, 2010) 154. 14 J Mackey and R Sisoda, Conscious Capitalism. Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2014). 15 V Frankl, Man’s Search for Meaning (Rider, 2008, original 1947). 16 Speech to Medical College of Virginia, 1 December 1950, quoted in J Collins and J Porras, Built to Last: Successful Habits of Visionary Companies (Random House Business Books, 2000) 49.

The Evolution of Corporate Purpose  153 In other words, as Colin Mayer pithily commented, shareholder value is an outcome, not an objective.17 The point is supported by research by Regenerate published in 2020, which found strong evidence that having a purpose beyond profit leads to success because employees and customers reward it.18 A 2015 study of 474 executives found that a firm’s level of commitment to purpose influenced a business’ growth and broader success.19 Respondents included the following disconnect between aspirations and reality, which can be seen half way down this list of survey results: An organization with shared purpose will have employee satisfaction

89%

Our business transformation efforts will have greater success if integrated with purpose

84%

Purpose-driven firms deliver higher-quality products/services

81%

An organization with shared purpose will have greater customer loyalty

80%

Our organization’s strategy is reflective of our sense of purpose

50%

My organization has a strong shared sense of purpose

46%

There is a disconnect between our senior executives and our employees over purpose

41%

Our staff have clear understanding of organizational purpose and commitment to core values/beliefs

38%

Our business model and operations are well-aligned with our purpose

37%

Mayer has led a concerted attempt to place social purpose at the centre of businesses and of corporate governance. He first published research that showed that commercial organisations for most of history have had, and should now have, social purpose and long-term sustainability.20 A collection of papers published by the British Academy in 2019 under Mayer’s chairmanship stated:21 [T]he purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems’ and that purpose goes before profit. ‘This new corporate purpose should be the reason for a corporation’s existence and its starting point. Profit should then be a product of a corporation’s purpose, but not the purpose of the corporation. The ability to deliver on this purpose would be enabled by a renewed commitment to developing trust between corporations and the parties involved or impacted, and an embedded culture of ethics and values.

Mayer argues that purpose and values hold management to account to a degree that enlightened long-term shareholder value cannot.22 A framework has been proposed for how an

17 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013) 167. 18 The Case for Purpose-Driven Business (Regenerate, 2020). 19 The Business Case for Purpose (Harvard Business Review Analytic Services, 2015). 20 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); C Mayer, Prosperity (Oxford University Press, 2019). 21 Principles for Purposeful Business. How to Deliver the Framework for the Future of the Corporation (The British Academy, 2019). 22 C Mayer, ‘Shareholderism Versus Stakeholderism – a Misconceived Contradiction. A Comment on “The Illusory Promise of Stakeholder Governance” by Lucian Bebchuk and Roberto Tallarita’ http://papers.ssrn.com/sol3/papers. cfm?abstract_id=3617847.

154  Purposes and Outcomes organisation should enact purpose, and linking purpose to outcomes based on the following elements (SCORE):23 Simplify: make your purpose simple and convincing Connect: make sure your purpose connects with practice Own: boards need to own their company’s purpose Reward: incentivise and track purposeful behaviour Exemplify: tell great stories about your purpose

The UK Financial Conduct Authority has used a focus on purpose as a means to affect the culture of banks, rather than vice versa.24 However, the FCA’s use of a corporation’s purpose and culture may be largely reactive in reducing the risk of non-compliance and facilitating enforcement action rather than in driving business success.25 Evolution in the central importance of purpose in Corporate Governance Codes can be seen in the series of extracts in Box 7.1. Box 7.1  References to Purpose in Corporate Governance The UK Corporate Governance Code (Financial Reporting Council, 2014) Governance and the Code 1. The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company. G20/OECD Principles of Corporate Governance (OECD, 2015) Preface The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies. Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015). Preface. Angel Gurria, Sec-Gen. This report is about better corporate governance as a way to prevent corporate misconduct and to rebuild trust in private business. It is a timely response to a succession of disturbing corporate scandals to which no industry or country appears to be immune. While these issues certainly have an ethical dimension they are also hard-wired to the very functioning of our economies. The purpose of corporate governance is precisely to create an environment of trust, transparency and accountability necessary for obtaining long-term investment, financial stability and sustainable growth. If nothing is done, the very fabric and foundation of doing business in an effective and sustainable fashion is at risk. …

23 Enacting Purpose within the Modern Corporation: A Framework for Boards of Directors (University of Oxford Saïd Business School; Berkeley University Business in Society Institute; Bright House; Federated Homes; Wachtel, Lipton, Rosen & Katz, 2020). 24 Transforming Culture in Financial Services. Driving Purposeful Cultures. Discussion Paper (Financial Conduct Authority, March 2020), DP20/1, see Introduction. 25 Speech by S Mills, ‘A Regulatory Perspective: Measuring and Assessing Culture, Now and in the Future, the Role of Purpose and the Importance of D&I’ Investment Association, 22 September 2021.

The Evolution of Corporate Purpose  155 Corporate Culture and the Role of Boards. Report of Observations (Financial Reporting Council, 2016) Connect purpose and strategy to culture. Establishing a company’s overall purpose is crucial in supporting the values and driving the correct behaviours. The strategy to achieve a company’s purpose should reflect the values and culture of the company and should not be developed in isolation. Boards should oversee both. … Blueprint for Better Business encourages companies to first establish their purpose. Companies including Unilever, Old Mutual and Vodafone actively support this approach to ‘uniting corporate purpose and personal values to serve society’ which starts with having a purpose which delivers long-term value.26 The Wates Corporate Governance Principles for Large Private Companies (FRC, June 2018) PRINCIPLE ONE – PURPOSE An effective board promotes the purpose of a company, and ensures that its values, strategy and culture align with that purpose. The UK Corporate Governance Code (Financial Reporting Council, July 2018) 1 BOARD LEADERSHIP AND COMPANY PURPOSE Principles A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. Guidance on Board Effectiveness (Financial Reporting Council, July 2018) 1 BOARD LEADERSHIP AND COMPANY PURPOSE AN EFFECTIVE BOARD 11. An effective board defines the company’s purpose and then sets a strategy to deliver it, underpinned by the values and behaviours that shape its culture and the way it conducts its business. It will be able to explain the main trends and factors affecting the long-term success and future viability of the company – for example technological change or environmental impacts – and how these and the company’s principal risks and uncertainties have been addressed. 12. A company’s purpose is the reason for which it exists. The board is responsible for setting and reconfirming the company’s purpose. A well-defined purpose will help companies to articulate their business model, and develop their strategy, operating practices and approach to risk. Companies with a clear purpose often find it easier to engage with their workforce, customers and the wider public. Building a regulatory framework for effective stewardship. Discussion Paper (FRC and FCA, 2019), DP19/1.



26 Blueprint

for Better Business www.blueprintforbusiness.org/.

156  Purposes and Outcomes 2.10 Effective stewardship by asset owners and asset managers may include the following key attributes: • A clear purpose – A clear understanding of the scope, role and purpose of stewardship and good communication across the institutional investment community to align stewardship objectives Board leadership, transparency and governance – principles (Ofwat, 2019). 2. Objectives and provisions 2.1 Purpose, values and culture The regulated company board establishes the company’s purpose, strategy and values, and is satisfied that these and its culture reflect the needs of all those it serves. Principles for Purposeful Business. How to deliver the framework for the Future of the Corporation (The British Academy, 2019). We concluded that the purpose of business is to solve the problems of people and planet profitably, and not profit from causing problems. We proposed a framework for 21st century business based on corporate purposes; commitments to trustworthiness; and ethical corporate cultures. Principles for purposeful business A purposeful business will organise itself on all levels according to its purpose. We propose eight principles for business leaders and policymakers. They do not prescribe specific actions, but set out the features of an operating environment that will enable the delivery of those purposes, while remaining flexible to a diversity of business models, cultures and jurisdictions. 1. 2. 3. 4.

5. 6. 7. 8.

Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them. Regulation should expect particularly high duties of engagement, loyalty and care on the part of directors of companies to public interests where they perform important public functions. Ownership should recognise obligations of shareholders and engage them in supporting corporate purposes as well as in their rights to derive financial benefit. Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture. Measurement should recognise impacts and investment by companies in their workers, societies and natural assets both within and outside the firm. Performance should be measured against fulfilment of corporate purposes and profits measured net of the costs of achieving them. Corporate financing should be of a form and duration that allows companies to fund more engaged and long-term investment in their purposes; Corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of corporate purposes.

The Evolution of Corporate Purpose  157 Davos Manifesto (World Economic Forum, 2019)27 The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders – employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company. A company is more than an economic unit generating wealth. It fulfils human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility. A company that has a multinational scope of activities not only serves all those stakeholders who are directly engaged, but acts itself as a stakeholder – together with governments and civil society – of our global future. Corporate global citizenship requires a company to harness its core competencies, its entrepreneurship, skills and relevant resources in collaborative efforts with other companies and stakeholders to improve the state of the world. The Enacting Purpose Initiative. Report #2 (European Purpose Initiative, 2021)28 Purpose sets out why an organization exists. The purpose of an organization should be durable and relatively stable, lasting well beyond the tenure of any one leadership team. An organization’s purpose informs its mission, vision, and values. … Policy & Practice for Purposeful Businesses. The final report of the Future of the Corporation programme (The British Academy, 2021). A group of scholars and business experts proposed in 2021 a three-stage framework for measuring performance in relation to purposeful business practice: see Figure 7.1.29 Figure 7.1  A Measuring Purpose Framework

27 K Schwab, Davos Manifesto 2020: The Universal Purpose of a Company in the Fourth Industrial Revolution (World Economic Forum, 2019), www.weforum.org/agenda/2019/12/davos-manifesto-2020-the-universal-purpose-of-acompany-in-the-fourth-industrial-revolution/. 28 The Enacting Purpose Initiative. Report #2 (European Purpose Initiative, 2021), www.enactingpurpose.org/assets/epireport-final.pdf. This sought to draw distinctions between the concepts of purpose and mission (which are in reality almost the same concept), vision (where the organisation thinks it is heading, which is sometimes not where it is actually heading) and values (which, as analysed in ch 5, are what motivates people and against which they evaluate purposes and behaviours). 29 C Barby et al, Measuring Purpose, An Integrated Framework, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3771892.

158  Purposes and Outcomes The model aims to align measurement of business impacts with the strategic motives of an organisation and monetisation. The framework identifies the need to distinguish between inputs, outputs, outcomes and impacts. It also noted a second form of reporting – a societal valuationbased approach – which attempts to establish the impact of a company’s activities on society and the environment. The authors noted that metrics are developing and tend to measure outcomes and impacts from different viewpoints (investors and particular groups of stakeholders). It listed a number of the most widely cited initiatives: • Accounting for Sustainability (A4S) provides a framework for sustainable reporting. • The Carbon Disclosure Project (CDP) promotes a global environmental disclosure system. • The Global Reporting Initiative (GRI) is a stakeholder-focused form of reporting. • The International Integrated Reporting Council (IIRC) sets out a framework for integrating ESG measures relevant to investors with financial information. • The Sustainability Accounting Standards Board (SASB) focuses on financially material reporting for investors. • The Task Force on Climate-related Financial Disclosure (TCFD) is concerned with climate related reporting. • The World Economic Forum (WEF) identifies standardised metrics for reporting on value creation to investors and stakeholders. The Enacting Purpose Initiative proposed in 2021 that a corporation’s Statement of Purpose could address the following topics:30 1. The organisation’s purpose; 2. How the board measures the company’s resource allocation and performance against its purpose; 3. How the board aligns its management oversight, including incentive structures, to advance the organisation’s purpose; 4. How the organisation’s purpose acts as a guiding star and a guardrail to help the board make key strategic decisions; 5. The organisation’s key stakeholders, including its investors; 6. The organisation’s strategy for seeking regular input from key stakeholders; 7. How the board receives information from stakeholders, either directly or through management or external advisors or intermediaries; 8. The issues and factors that are most important to the organisation’s stakeholders; 9. How the board uses information from stakeholders to advance its purpose; and 10. How the board has taken the impact on key stakeholders into account when making key decisions or weighing trade-offs.

Whose Purposes? Groups exist for different purposes. Also, the activities of different groups may conflict and impede the effective and efficient achievement of the purposes and objectives of one or more of them. The attainment of multiple purposes, and the coordination of multiple actors, requires some coordination of a system – or multiple systems – as a whole. A common phenomenon of 30 The Enacting Purpose Initiative. Report #2 (European Purpose Initiative, 2021), above. One of the limitations with this approach is the assumption that every organisation has a single purpose.

The Evolution of Corporate Purpose  159 siloed actors and purposes needs to be overcome. A related problem may be that there are barriers or gaps in the achievement of outcomes, for example where actors work sequentially. This gap problem was identified recently in relation to failures in the oversight of safety of medical products, which led to patients suffering significant harms over lengthy periods.31 The current thinking in corporate governance is that it is for the board of directors to ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’. Academic debate theorising corporations has produced competing ideas about whose interests and powers are controlling or relevant, ranging from shareholder primacy,32 to the reality that directors exercise power in practice,33 to ‘team production’ theory of wider involvement of multiple actors managed by shareholder-elected boards.34 A recent contribution in Anglo-American thinking – but has been central in German and some other models – is ‘shared governance’ between directors, workers and the owners of residual rights (shareholders) as a means of aggregating the preferences of different groups and interests based on political models of democratic participation.35 This academic debate has been sceptical about the practicality or relevance wider interests being involved in governing or operating a commercial organisation. However, the work of Mayer and others argues for wider stakeholder involvement if an organisation is to maximise success in achieving its purposes and outcomes. This wider view – involving the purposes and values of staff, customers, suppliers, communities, the environment as well as investors – can be seen emerging in statements by other bodies.36 The most significant may be the 2019 statement by the US Business Roundtable of ‘An “All Stakeholders” Approach’ in its Statement on the Purpose of a Corporation, discussed in chapter nine. This includes the following multi-stakeholder commitments: While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. 31 First Do No Harm. The report of the Independent Medicines and Medical devices Safety Review (HM Government, 2020), at www.immdsreview.org.uk/downloads/IMMDSReview_Web.pdf. See later Government response to the Report of the Independent Medicines and Medical Devices Safety Review (Department of Health & Social Care, 2021). 32 LA Bebchuk and RJ Jackson Jr, ‘Corporate Political Speech: Who Decides?’ (2010) 124 Harvard Law Review 83; LA Bebchuk, ‘The Case for Shareholder Access: A Response to the Business Roundtable’ (2005) 55 Case Western Law Review 557. 33 SM Bainbridge, ‘Director Primacy: The Means and Ends of Corporate Governance’ (2003) 97 Northwest University Law Review 547. 34 MM Blair and LA Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review 247. 35 GM Hayden and MT Bodie, reconstructing the Corporation. From Shareholder Primacy to Shared Governance (Cambridge University Press, 2021). 36 An influential early example is recorded in J Mackey and R Sisoda, Conscious Capitalism. Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2014).

160  Purposes and Outcomes The Davos Manifesto referred to above declared allegiance to ‘stakeholder capitalism’. I suggest that if a nation or system is to function in a cooperative manner, both the system as a whole and its constituent institutions need to evolve to a form of governance and a mode of operation in which the purposes and outcomes of all stakeholders are taken into account on a systemic basis. This would need current ideas about the governance of, for example, a corporation to evolve a stage further. If a corporation is considered to be governed by investors or professional directors, even taking into account some form of consultation with other stakeholders, that is not in fact a fully co-creational model. Steps towards this can be seen in models that involve seats on boards being allocated to staff or external stakeholders. The need to address this issue comes into focus when an organisation switches from asking ‘Why should I trust you?’ to ‘Why should anyone trust me?’. It is interesting to consider statements about the value of the views of a range of stakeholders and to ponder how their views on purposes and outcomes could be better taken into account in an organisation’s governance, decision-making and review of operations. BSI’s code of practice for customer service states the principle that ‘good customer service should result in the customer’s complete satisfaction with the product or service that they have received’.37 It continues: ‘In order to establish good customer service the organization should show commitment and credibility to its customers and offer an experience that achieves increased customer satisfaction and loyalty. In order to achieve this the organization should demonstrate commitment to providing effective customer service by all employees within the organization, starting with the board, chief executive officer and top management. Promises should be kept, service should be delivered at times that suit customers and robust and reliable systems should be in place for every aspect of an organization’s transactions with its customers.38

Some companies have enlisted workers as board Directors on the basis that they have greater experience and duration than short-term non-executives.39 Based on recognition that business promotion of the profit maximisation model during the past 40 years has ‘often been at the expense of the long-term health of individuals, communities and the environment’, business groups have proposed as a corrective Five Principles for a Purpose Driven Business, which refer to a purpose that delivers sustainable performance but is also based on ethical values:40 • • • • •

Honest and fair with customers and suppliers A good citizen A responsible and responsive employer A guardian for future generations Has a purpose which delivers long-term sustainable performance.

Similarly, a definition of value was issued in 2020 by the International Federation of Accountants that focuses on multiple stakeholders defining an organisation’s purpose:41 Value is ultimately: –– Defined by customers, investors and other stakeholders 37 BS 8477:2014, para 3.1. 38 ibid, paras 3.1.4 and 3.1.5. 39 D Walsh, ‘Wetherspoon to Put Workers on Its Board’ The Times 2 October 2021. 40 How Can Businesses Contribute To People’s Health? A Guide for Leaders (A Blueprint for Better Business and The Health Foundation, 2018). 41 Understanding Value Creation (International Federation of Accountants, 2020). See also AA1000 Stakeholder Engagement Standard (AA1000SES) 2015.

The Evolution of Corporate Purpose  161 –– Created through the organization’s purpose, strategy, and business model taking into account all resources, capitals, and relationships in an integrated way –– Delivered to ever-more demanding and sophisticated stakeholders through responsible products and services, and through new channels, at an appropriate price –– Sustained by retaining and protecting value internally, and by appropriate reinvestment and distribution to shareholders and wider society.’

Relying on stating and promulgating a single purpose for and within an organisation is essential for its success but is not enough. As Colin Mayer said, a corporation is:42 [A] rich mosaic of different purposes and values. So not only does the corporation have the potential to determine an almost boundless set of purposes and objectives but, through its ownership and governance, it also has the means to ensure that it delivers on them. It is a vehicle for committing to the fulfilment of its stated purposes.

Some businesses have committed to ‘profit-with-purpose’.43 It is widely understood that proclaiming a social or ethical purpose for an organisation necessarily and adequately affects the front-line culture of staff on a day-to-day operational level throughout the organisation, as the Federation of Small Businesses has noted.44 As Bruno Roche has argued, purpose is not enough by itself, since purpose is not understood as a strategic asset.45 He says that the simple proposition on purpose is that the business should aim to solve a problem for other people: that makes clear who the stakeholders should be. Although 58% of respondents to a 2020 survey said that CEOs treat the management of external engagement as a top three or top priority, only 7% said that their organisations frequently align the interests of stakeholders and of their businesses.46 This is curious, given that intangible assets, such as intellectual property and the quality of relationships with customers, employees and stakeholders, accounts for 70% of global enterprise value of publicly-traded companies.47 The current UK Corporate Governance Code model quoted above is for directors to establish the purpose, culture and values of the organisation. There are proposals to widen the duties of directors to align the long-term interests of people, planet and profit.48 However, it is not apparent how directors can ‘govern’ or ‘set’ the values and culture of all staff within an organisation. This reveals an obsolete ‘command and control’ assumption about how to affect people’s behaviour. Surely all such staff need to be involved, since the corporate culture will reflect their own, possibly diverse range of values? In many instances of misconduct, there is evidence that the norms and expectations that most strongly influence behaviour within financial institutions can be very different from the institutions’ stated values and policies. Practice does not always follow principle. Word and deed can diverge. The culture of an institution can defeat its formal governance. (Some scholars have questioned why a corporation should have a purpose at all, whilst accepting that it could 42 C Mayer, Prosperity (Oxford University Press, 2019) 4. 43 Global Steering Group for Impact Investment https://gsgii.org/. 44 Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (Financial Stability Board, 2017). 45 B Roche and J Jakub, Completing Capitalism (Berrett-Koehler Publishers, 2017). 46 The Pivotal Factors for Effective External Engagement (McKinsey & Company, 2020). 47 J Knowles, ‘Intangible Value is 70% of the Global Economy’ 6 January 2020, www.linkedin.com/pulse/ intangible-value-70-global-economy-jonathan-knowles/. 48 See Regenerative Business Working Group. Amending UK Company Law for a Regenerative Economy (Institute of Directors, 2021). A draft Better Business Act would amend the Companies Act s 172 to advance the interests of shareholders alongside those of wider society and the environment, and to exercise their judgement in carrying out this weighing up exercise. See http://betterbusinessact.org/wp-content/uploads/2021/04/The-Better-Business-Act-2021.pdf.

162  Purposes and Outcomes be useful on instrumental grounds.49 Other scholars have questioned whether UK company law was prevented from providing a purposeful legal ecology, even if it was theoretically capable of doing so, given a constraining legal normality which was supported by, inter alia, investor inertia arising from the incentive structures of modern investment vehicles and the stickiness of default rules.50) Public organisations typically have clear and overwhelming social purpose, but their outcomes, behaviours and cultures frequently fall short. Repeated concerns have been expressed about failures in ethical standards by public service providers.51 We only need to look at the evidence from a series of disasters in the NHS that have consistently been attributed to cultural failings.52 The Mafia has purpose (and its origins were even social, in the protection of its ‘clients’ from other gangs in the absence of an effective state) but the defining characteristic is that its purpose and behaviour is unethical. Values are fundamental and must be defining of both purpose and culture. Firms with high-purpose and high-camaraderie perform well, and it is middle managers and salaried professionals that drive the valuable relationships that support a link between purpose and clarity.53

The Need to Integrate and Balance Different Purposes The conclusion from this line of thinking is the realisation that different stakeholders may (and usually will) have different desired purposes and outcomes and that individual purposes may conflict. For example, historical conflicts between the interests of workers and owners of businesses gave rise to significant strife. The OECD recognises the plurality of requirements on governments and businesses to comply with responsible business standards on corporate governance, human rights, employment and industrial relations, environment, anti-corruption, consumer interests, science and technology, competition and taxation.54 Similarly, the goals of making profit and of protecting people from harm create a constant tension between businesses and regulators. It was the genius of people like George Merck II who managed to state a single purpose about supporting the health of others on the basis that profits were an outcome not a goal that managed to unify the motivations and activities of owners of capital and workers. It is no accident that such simple overarching statements of purpose – about sustaining life, health, safety, relieving poverty and exclusion – are other-regarding rather than self-regarding and demonstrate humility. Whether or not it is possible for the stakeholders of an institution to devise and agree such an inspiring overriding purpose (and it always is), different stakeholders may also hold a series of more detailed purposes that may conflict. I argue that the success of the cooperative enterprise 49 JE Fisch and SD Solomon, ‘Should Corporations have a Purpose?’ (2021) 99 Texas Law Review 1309. 50 D Kershaw and E Schuster, ‘The Purposive Transformation of Corporate Law’ (2022) 20 American Journal of Corporate Law 1. 51 The Continuing Importance of Ethical Standards for Public Service Providers (Committee on Standards in Public Life, May 2018). 52 Learning from Bristol: The Department of Health’s Response to the Report of the Public Inquiry into Children’s Heart Surgery at the Bristol Royal Infirmary 1984–1995, (2002) Cm 5363; Independent Inquiry into Care Provided by Mid Staffordshire NHS Foundation Trust January 2005–March 2009. Volume I. Chaired by Robert Francis QC, HC375-I (2010); Dr B Kirkup CBE, The Report of the Morecambe Bay Investigation (Department of Health, 2015); Report of the Independent Inquiry into the Issues Raised by Paterson. Chairman: The Right Reverend Graham James (2020), HC 31. 53 C Gartenberg, A Prat and G Serafim, ‘Corporate Purpose and Financial Performance’ (2019) 30(1) Organization Science 1–18. 54 Draft OECD Recommendation on the Role of Government in Promoting responsible business practices, at http://mneguidelines.oecd.org/Draft-recommendation-on-the-role-of-government-in-promoting-responsiblebusiness-conduct.pdf.

The Evolution of Corporate Purpose  163 in achieving the major outcomes that its stakeholders’ desire will be affected by the extent to which all purposes and outcomes are debated, evaluated and balanced into an integrated statement. Everyone should be able to see and state how their activities contribute to the achievement of the shared purposes and outcomes, however significant or minor their personal contributions might be. Any individual actor might play a humble role, but can be motivated to play it well if he or she understands how their contribution fits into the achievement of the overall picture. An example of where purposes conflict, and where early discussions about finding the desired balance will support cooperation, is in the regulatory space. The stark conflict is between the business purpose of making profit (more widely expressed as prosperity or growth) and the regulatory imperative of achieving protection (whether in safety, pricing or against multiple types of abuses). However, as discussed in chapter 10, one can see moves on both sides toward a middle space in which an integration of both public and private objectives can be adopted by both sides. Thus: a.

Many businesses have moved to adopt public and social objectives: this follows a trajectory encompassing corporate social responsibility (CSR); supporting communities; Environment, Sustainability and Governance (ESG), stewardship, Sustainable Development Goals (SDGs); preventing planet extinction; modern slavery; anti-bribery; anti-money laundering and other issues. b. Some regulators have moved to include support for business’ attainment of its objectives: eg under the UK Regulators’ Code and its duty to support growth. This transformation in approach by both sides offers considerable scope for building something new, but the area is still incomplete and sometimes contested. Government policy in the UK is moving toward an approach that is ‘outcome-focused and collaborative’55 in order to capitalise on this understanding and opportunity.

Timing of Establishing Purpose It is fairly evident that the time for establishing what it is one intends to achieve should be before one starts to act. Changing direction mid-stream may well be inefficient. This is even more important where different actors are involved in a combined endeavour, especially if they have different ideas about the purposes and outcomes of the endeavour. Where different actors are aiming to achieve different things in a social environment that relies on the activities of other actors, it is both efficient and effective to identify the roles of each actor and their purposes and intended outcomes before embarking on the combined endeavour. The criteria for cooperation will otherwise simply not exist.56 (It also follows that achievements and outcomes that are actually delivered need to be reassessed on an ongoing basis.) One example of where the need to identify, agree and balance potentially conflicting goals and outcomes is a corporation based on a stakeholder model. Another example is a regulatory system, where citizens (the beneficiaries of the system), business (regulatees) and regulators may all have differing perceptions, that will lead to conflict as difficult issues and particular outcomes are delivered or not delivered. If the purposes and outcomes are deliberated on and established at

55 The Benefits of Brexit (HM Government, 2022); I Duncan Smith, T Villers and G Freeman, Taskforce on Innovation, Growth and Regulatory Reform (HM Government, 2021). 56 M Tomasello, Why We Cooperate (The MIT Press, 2009).

164  Purposes and Outcomes the start, later conflict, dissatisfaction and trust may be avoided. It may be impossible to achieve every goal at once, whereas if goals and costs are sequenced, expectations and achievement may be satisfactory. A practical example of conflicting purposes that were not adequately managed beforehand arose in banking. Various commentators think that the banking industry changed from being an industry that sought to help its customers make money, to being an industry that looked for people from whom they could make money – in the UK during the 1980s and at different times in some other countries.57 Ross Buckley argues that banking should objectively have the following objectives (but these have never been adequately debated or agreed), and they are currently not being well met:58 First, banks can enable people to save money safely. Second, banks can intermediate capital, that is supply it to those who can productively use it.59 This matters just as much as other utilities, such as water and electricity. Third, banks can allocate risk in the economy to those who are willing to bear it.60 Fourth, banks can serve as a source of objective ordering of their affairs. As important to society as legal or health care systems.

Sustainable Development At a global level, the United Nations’ Sustainable Development Goals (SDGs: Box 7.2)61 are the current benchmark that encompasses the range of social, humanitarian, environmental and economic goals, and these should be included in all public and private statements of purposes. This is a good example of multiple goals that need to be balanced in practice. Box 7.2  UN Sustainable Development Goals Goal 1. No poverty. End poverty in all its forms everywhere Goal 2. Zero hunger. End hunger, achieve food security and improved nutrition and promote sustainable agriculture Goal 3. Good health and well-being. Ensure healthy lives and promote well-being for all at all ages Goal 4. Quality education. Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all Goal 5. Gender equality. Achieve gender equality and empower all women and girls

57 S Jaffer, N Morris, E Sawbridge and D Vines, ‘How Changes to the Financial Services Industry Eroded Trust’ in N Morris and D Vines (eds), Capital Failure (OUP, 2014) 54. See also Greg Smith, ‘Why I Am Leaving Goldman Sachs’ The New York Times (online) 14 March 2012; Frank Portnoy, F.I.A.S.C.O: Blood in the Water on Wall Street (WW Norton & Company, 2009); Frank Portnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (Public Affairs, 2010). 58 RP Buckley, ‘The Changing Nature of Banking and Why It Matters’ in RP Buckley, E Avgouleas and DW Arner (eds), Reconceptualising Global Finance and Its Regulation (Cambridge University Press, 2016). 59 S Heffernan, Modern Banking in Theory and Practice (Wiley, 1996). 60 P Beaudry and A Lahiri, ‘Risk Allocation, Debt Fuelled Expansion and Financial Crisis’ (Working paper no 15110, National Bureau of Economic research, 2009), 2. 61 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact) (United Nations, 2015), http://sustainabledevelopment.un.org/.

The Evolution of Corporate Purpose  165 Goal 6. Clean water and sanitation. Ensure availability and sustainable management of water and sanitation for all Goal 7. Affordable and clean energy. Ensure access to affordable, reliable, sustainable and modern energy for all Goal 8. Decent work and economic growth. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Goal 9. Industry, innovation and infrastructure. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation Goal 10. Reduced inequalities. Reduce inequality within and among countries Goal 11. Sustainable cities and communities. Make cities and human settlements inclusive, safe, resilient and sustainable Goal 12. Responsible consumption and production. Ensure sustainable consumption and production patterns Goal 13. Climate action. Take urgent action to combat climate change and its impacts* Goal 14. Life below water. Conserve and sustainably use the oceans, seas and marine resources for sustainable development Goal 15. Life on land. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss Goal 16. Peace and justice. Strong institutions. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels Goal 17. Partnerships for the goals. Strengthen the means of implementation and revitalize the global partnership for sustainable development

The SDGs have had considerable influence on organisations of all types. However, nations and commercial, governmental and social organisations vary in the extent to which they have adopted the SDGs or integrated them into their own purposes. A sense of shared purpose is necessary through formal adoption of these goals and of the mode of cooperating to achieve them, namely on the basis of shared ethical values. An interesting example is the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business published by the Government of India in 2011 that starts with ethics, transparency and accountability.62 Are the implications of achieving the SDGs being managed? Achieving net zero carbon emissions, for example, will have significant impact on people’s well-being – health, income and wealth, work and job equality, safety – and impacts will be concentrated among vulnerable groups and

62 Report of the Committee on Business Responsibility Reporting (Ministry of Corporate Affairs, Government of India, 2011).

166  Purposes and Outcomes households, and require managing if inequality is not to deteriorate further.63 On the basis that ‘you can’t manage what you don’t measure’ a global environmental disclosure system operated by CDP brings together 600 investors, 200 major buyers, over 9,600 reporting companies, 810 cities and 130 states and regions.64 Mandatory reporting was introduced in New Zealand in 2020 and is being introduced in the UK from 2023.65

Objectives A purpose exists at a motivational and even existential level. An objective or goal is more strategic and establishes a practical outcome to be achieved at an operational level. For example, a purpose (and outcome) might be to eradicate poverty from a society whereas individual steps along the way can be established as practical objectives over a particular series of time periods. A bank’s purpose might be to keep investors’ money safe and repay it with a fair return whilst using the money to assist people who need finance to achieve their legitimate purposes, such as buy a house or run a business. Strategic objectives might set particular targets for the numbers and types of investors, individual and business clients to be helped. Or reaching net zero might involve a series of goals around reductions in emissions of carbon, carbon dioxide, use of animals as food, use of coal or nuclear sources of energy, and so on. Objectives can be set and revised over different time periods. They will, like outcomes, provide targets that are usually measurable so as enable performance and progress to be evaluated and to provide accountability.

Outcomes Stating purposes inevitably involves considering outcomes. It is essential to be able to confirm if the purposes, objectives, goals and outcomes are being achieved or not. This is so irrespective of whether the goals are finite or involve comparative improvement. The way to identify this is to review data on the outcomes that are being achieved. For example, safety is not being achieved if people are being harmed. Social and community goals is not being achieved if people are still poor, deprived, abused and have no jobs or sense of focus and confidence. Thus, the outcomes that are being produced by our activities and by the system can be identified and measured, as can improvements or lack of them. A system that produces an inadequate number of undesirable outcomes, or fails to improve outcome performance quickly enough, should be challenged. Hence, a focus on measurement of outcomes is essential. A focus on outcomes has emerged recently in relation to the activities of regulators, of which the following are examples. The Regulatory Delivery Model, created by some regulatory officials and explained in chapter 13, places outcomes as a core practice to be delivered by regulators and regulatory systems.66 Specification of intended customer outcomes and examination of

63 The Inequalities-Environment Nexus. Towards a People-Centred Green Transition (OECD, 2021); Strengthening Climate Resilience. Guidance for Governments and Development Co-operation (OECD, 2021). 64 www.cdp.net/. 65 A Roadmap Towards Mandatory Climate-related Disclosures (HM Treasury, 2020). See The Time for Action is Now. Recommendations for Policymakers to Incentivise Corporate Climate Action (CDP, 2020). 66 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019).

Outcomes  167 whether they are being achieved, plus taking corrective action to achieve them, was specified by the National Audit Office in 2019 as necessary for economic regulators.67 The Public Accounts Committee criticised the economic regulators for assuming that competition alone will lead to the best outcomes for people, and that they did not have a good enough understanding of their impact and effectiveness in protecting consumers, and said that the regulators need to work better together and produce more specific, measurable and understandable aims for consumer outcomes in their sectors.68 In the financial services sector, the core rationale behind the introduction of a duty of care for financial services firms is to require firms to focus on outcomes as a means of delivering a higher level of consumer protection in retail financial markets, requiring a ‘significant shift in culture and behaviour’:69 The Consumer Duty would require firms to: • Ask themselves what outcomes consumers should be able to expect from their products and services • Act to enable rather than hinder these outcomes • Assess the effectiveness of their actions.

Some of the SDGs state clear outcomes that can be measured, because they involve absolute endstates. Thus, goals 1, 2, 5 and 6 require no poverty, zero hunger, gender equality and clean water and sanitation. They are either achieved or not, and their achievement should be measurable and verifiable. In other words, the outcomes are clearly identifiable and measurable. Most of the other SDGs, however, require improvements on the current state of affairs, such as reduced inequalities. However, whether the objective is a final state or mere improvement on the current state, metrics can be devised to measure both improvements or movement towards or away from the outcomes and achievement of the goals. The mechanism of accountability operates to identify and evaluate the extent to which a person or organisation is achieving its intended outcomes or not. It is through measuring these achievements in outcomes, and changes in performance in these achievements in outcomes, that a range of metrics (KPIs) should be directed and used. As discussed in chapter 13, it is easier to measure outputs than outcomes and impacts,70 but only the latter are ultimately relevant in identifying whether the purposes are being achieved. For example, the number of traffic violation tickets issued by police is not a measure of how safe the community is. Changes in the number of abuse allegations made and resolved, and the number not reported, may be indicators of the underlying purpose of eradicating abuse, as may information on how many abusers changed their behaviour and made reparation. The relevant metrics that each stakeholder commits to produce should be discussed and agreed with other stakeholders. The objective is to demonstrate that an actor can be trusted, as evaluated against common ethical values, and is achieving appropriate performance in achieving the desired purposes and outcomes. Transparency of information is a general principle here. However, there may be circumstances in which certain data is restricted to certain assessors. This

67 Ofwat, Ofgem, Ofcom and the Financial Services Authority. Regulating to Protect Consumers in Utilities, Communications and Financial Services Markets (National Audit Office, 2019). 68 House of Commons Committee of Public Accounts. Consumer Protection. One Hundred and Seventh Report of Session 2017–19. Report, together with Formal Minutes Relating to the Report, HC 1752, 12 July 2019. 69 A New Consumer Duty (Financial Conduct Authority, 2021), CP21/13. The Consumer Duty would include four outcomes for the key elements of the firm-customer relationship: communications, products and services, customer service and price and value. 70 See G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019) chs 13–15.

168  Purposes and Outcomes might apply to information affecting national security, criminal investigations, or maintaining public confidence. For example, many people might wrongly conclude that an aviation system is unsafe if they had access to all of the technical data on performance and risk issues that is permanently accessed by experts. The important point is to have confidence that all relevant data is being assessed by relevant experts, with appropriate independent oversight. A vivid example of the need for relevant and focused metrics comes from Richard Caplan’s overview of the predictability of a stable peace following civil war.71 He notes widespread lack of understanding, and hence relevant metrics, of effective means of assessing progress towards the achievement of a consolidated peace. The many indices and indicators of peace that are available have proved to be inadequate predictors. His recommendation is to rely on an ethnographic approach, for the purposes of strategic assessment, which would favour greater reliance on knowledge of local culture, local history, and especially, the particular conflict dynamics at work in a given conflict, including the micro level.72 That approach is interesting given the focus we note in chapter nine on the importance of having strong and cohesive local communities for political and economic stability and success.

Some National Level Examples of Purposes The Scottish Government introduced a policy and principle of ‘Fairer Scotland’ in 2010.73 This policy places a legal responsibility on particular public bodies in Scotland to actively consider how they can reduce inequalities of outcome caused by socio-economic disadvantage, when making strategic decisions. The regulator is the Equality and Human Rights Commission. Scotland has published a National Performance Framework and data on how it is performing against its stated outcomes.74 This states purposes, values and outcomes: Purpose: We aim to: –– –– –– –– ––

create a more successful country give opportunities to all people living in Scotland increase the wellbeing of people living in Scotland create sustainable and inclusive growth reduce inequalities and give equal importance to economic, environmental and social progress

To achieve the national outcomes, the National Performance Framework aims to get everyone in Scotland to work together. This includes national and local government (through the Convention of Scottish Local Authorities), businesses, voluntary organisations and people living in Scotland.

71 R Caplan, Measuring Peace: Principles, Practices, and Politics (Oxford University Press, 2019). 72 ibid, 108, drawing on A Autesserre, Peaceland: Conflict Resolution and the Everyday Politics of International Intervention (Cambridge University Press, 2014). 73 Equality Act 2010, Part 1, in force in Scotland from April 2018. See The Fairer Scotland Duty Interim Guidance for Public Bodies (Scottish Government, 2018). 74 http://nationalperformance.gov.scot/.

Outcomes  169 Values The values guide our approach, to: • treat all our people with kindness, dignity and compassion • respect the rule of law • act in an open and transparent way National Outcomes To help achieve its purpose, the framework sets out eleven ‘National Outcomes’, which ‘describe the kind of Scotland it aims to create’. The outcomes: • reflect the values and aspirations of the people of Scotland • are aligned with the United Nations Sustainable Development Goals • help to track progress in reducing inequality The national outcomes are that people: • grow up loved, safe and respected so that they realise their full potential • live in communities that are inclusive, empowered, resilient and safe • are creative and their vibrant and diverse cultures are expressed and enjoyed widely • have a globally competitive, entrepreneurial, inclusive and sustainable economy • are well educated, skilled and able to contribute to society • value, enjoy, protect and enhance their environment • have thriving and innovative businesses, with quality jobs and fair work for everyone • are healthy and active • respect, protect and fulfil human rights and live free from discrimination • are open, connected and make a positive contribution internationally • tackle poverty by sharing opportunities, wealth and power more equally We note in chapter nine that the climate crisis is an issue of fairness between generations. In 2015 Wales adopted the Wellbeing of Future Generations Act that requires public bodies in Wales to think about the long-term impact of their decisions, to work better with people, communities and each other, and to prevent persistent problems such as poverty, health inequalities and climate change.75 The goals are: A Prosperous Wales A Resilient Wales A More Equal Wales A Healthier Wales A Wales of Cohesive Communities A Wales of Vibrant Culture & Thriving Welsh Language A Globally Responsible Wales 75 www.futuregenerations.wales/about-us/future-generations-act/ See Well-being of Future Generations (Wales) Act 2015: The Essentials (Welsh Government) at http://gov.wales/sites/default/files/publications/2019-08/well-being-offuture-generations-wales-act-2015-the-essentials.pdf.

170  Purposes and Outcomes The Welsh approach defines Five Ways of Working: Long-term: The importance of balancing short-term needs with the needs to safeguard the ability to also meet long-term needs Integration: Considering how the public body’s well-being objectives may impact upon each of the well-being goals, on their objectives, or on the objectives of other public bodies Involvement: The importance of involving people with an interest in achieving the well-being goals, and ensuring that those people reflect the diversity of the area which the body serves Collaboration: Acting in collaboration with any other person (or different parts of the body itself) that could help the body to meet its well-being objectives Prevention: How acting to prevent problems occurring or getting worse may help public bodies meet their objectives

Conclusions Groups of humans cannot achieve their purposes and desired outcomes if these are not identified in advance. Given different purposes, objectives and outcomes that may be pursued by individuals and organisations, especially if several individuals or organisations are involved, it is also necessary to moderate and balance them, and to monitor operational performance in achieving them. A cooperative system will be built on the following major features: A. Agreement of the common purposes and outcomes of all stakeholders. There should be a method for moderating and balancing multiple purposes and outcomes, resolving conflicts and the fact that not all goals and outcomes might be achievable at the same time. B. A method for identifying the roles and functions of each actor or stakeholder in how they contribute to achieving the purposes and outcomes. This should lead to acceptance of individual responsibilities by each in such achievement and delivery. C. A method for measuring performance in achieving the strategic objectives and outcomes. This is likely to involve a method for agreeing metrics of each major actor relevant to the outcomes (desirable and undesirable) that that actor’s actions, behaviours and culture deliver. Achievement of certain objectives and outcomes might be relevant as short-term or long-term strategic outcomes. D. A method for agreeing and instituting changes and improvements to aid achievement, or speedier achievement, of the desired outcomes and avoidance of the undesired outcomes, and hence achievement of the purposes. It will be seen that these features involve strategic oversight of the system whether it is working, and operational oversight of particular actions, behaviours and outcomes on an ongoing basis at relevant periods. The principle of co-creation will involve all stakeholders but at different levels of intensity at each of these systemic and operational levels. It is time to set some bold purposes, objectives and outcomes for ourselves, and ones that match the ambition of the transformation needed to achieve plant sustainability, the UN’s SDGs,

Conclusions  171 and the concept of stakeholder value. Some candidates for purposes and outcomes that deserve greater common adoption and scrutiny are: Planetary survival: sustainability of the planet and stable weather systems Peace: co-existence with mutual respect, and eradication of threats to nations, terrorism and destabilisation of other peoples and groups Social solidarity: mutual support of communities and fellow humans based on ethical values Commerce: prosperity, innovation, fair work Health and care: social support, food, water, housing, work Respect: consideration, equality, involvement, altruism; eradication of abuse, slavery, disability, vulnerability, crime, exploitation, fraud Personal development: education, learning, information, culture, enjoyment, sport, arts

8 Cooperative Culture Why do we need to consider the culture of an organisation and what is it? The simple answer is that culture affects how an organisation works internally, and externally, especially the effects and outcomes it creates. The collective behaviour of individuals in a group constitutes the culture of the group or organisation of which they are members. Individuals’ behaviour is a fundamental component of a group’s culture. Equally, the culture of the group affects the behaviour of its members. As discussed in chapter five, humans are significantly influenced in their behaviour by the values and behaviour of others, and by the social practices and norms observed by the social group to which they belong.1 How people behave towards others – inside and outside the group – is both an artifact of group culture and influences the ongoing internal behaviour and culture. There has been a considerable amount of research on the culture of commercial organisations – but little on public organisations. But it is clear that, first, much of the research applies to any organisation of humans, with obvious differences as to the existence or not of commercial drivers, and, second, regulators should be fully familiar with the research if they are going to be effective in affecting the behaviour of those they seek to regulate and in achieving their regulatory purposes. Research has found that cooperative national cultures are as important for a country’s economic performance as corporate cultures are for a firm’s performance.2 An organisation of any size will contain multiple cultures, since the organisation comprises different groups organised as teams, departments, projects, all with different functions, interests, objectives and potentially values that may conflict.3 Gray and Silbey’s research on compliance has shown that interpretations of and responses to – internal or external – regulations vary within the organisation,4 which led them to the conclusion suggests that organisational compliance depends on the mobilisation and engagement of diverse members across the organisation’s hierarchy, which can be a considerable challenge.5 Enlisting cultural mechanisms, especially if based on 1 For general overviews, see NA Christakis and JH Fowler, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives (Little, Brown 2009); DM Kahan, ‘Social Influence, Social Meaning, and Deterrence’ (1997) 83 Virginia Law Review 349; S Bikhchandani, D Hirshleifer, and I Welch, ‘Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades’ (1998) 12 J Econ Persp 151. See also PW Schultz, et al, ‘The Constructive, Destructive, and Reconstructive Power of Social Norms’ (2007) 18 Psych Sci 429, 432–33; RB Cialdini, et al, ‘Managing Social Norms for Persuasive Impact’ (2006) 1 Soc Influence 3, 10–12 (finding that drawing public attention to the existence or pervasiveness of undesirable behavior can increase such behavior); CR Sunstein, ‘Empirically Informed Regulation’ (2011) 78(4) University of Chicago Law Review 1349. 2 Y Algan and P Cahuc, ‘Inherited Trust and Growth’ (2010) 100 American Economic Review 2060; Y Algan and P Cahuc, ‘Trust and Growth’ (2013) 5 Annual Review of Economics 521; L Guiso, P Sapienza and L Zingales, ‘Corporate Culture, Societal Culture, and Institutions’ (2015) 105(5) The American Economic Review 336–39. 3 AW Gouldner, Patterns of Industrial Bureaucracy (Free Press, 1954). 4 GC Gray and SS Silbey, ‘Governing Inside the Organization: Interpreting Regulation and Compliance’ (2014) 129(1) American Journal of Sociology 96. 5 R Huising and SS Silbey, ‘From Nudge to Culture and Back Again: Coalface Governance in the Regulated organization’ (2018) 14 Annual Review of Law and Social Science 91.

The Theory of Culture in Organisations  173 ethical values, thereby engaging intrinsic motivation of actors at all levels across an organisation,6 can be hugely powerful. Since ‘culture’ is such a general term, and there is an almost infinite range of possible cultures – theoretically as many as there are groupings of humans – it should be no surprise that many different definitions have been proposed of ‘culture’ as a concept,7 as have many different lists of components or elements of an organisation’s culture. Indeed, many descriptions of cultures have been made, such as corrupt, toxic,8 evil, criminal, mis-selling,9 non-compliant, bonus culture, process driven, linear, slow, output focused culture, bullying, abusive, authoritarian, impulsive, cliquey, a ‘club culture’,10 secretive, ‘enforcement culture’,11 fair, supportive, respectful, open, transparent, relaxed, captured culture, a culture of personal responsibility12 or lack of it and so on. As we shall see, there is no single ‘right’ organisational culture – although we argue that an ethical culture is absolutely desirable. We start with the theory and evidence on organisational culture generally before we look at culture in commercial organisations and then regulatory organisations. However, it follows from chapter three that if organisations’ cultures are to support trust, trustworthiness and cooperation, they need to be ethical.

The Theory of Culture in Organisations Organisational Culture in General We start with two definitions of culture by two leading scholars that link culture, as a behavioural and sociological phenomenon, inextricably with the values of the members of the group. Cultural psychologist Richard Shweder, drawing on the wide anthropological tradition from studying many societies, defined culture as: Culture is a reality lit up by a morally enforceable conceptual scheme composed of values (desirable goals) and causal beliefs (including ideas about means-ends connections) that is exemplified or instantiated in practice.13

Edgar Schein put forward a highly influential model of organisational culture.14 He defined culture as: the accumulated shared learning of that group as it solves its problems of external adaptation and internal integration; which has worked well enough to be considered valid and, therefore, to be taught to 6 WS Harvey, S Osman and M Tourky, ‘Building Internal Reputation from Organisational Values’ (2022) 25 Corporate Reputation Review 78. 7 W Verbeke, M Volgering and M Hessels, ‘Exploring the Conceptual Expansion Within the Field of Organizational Behavior: Organizational Climate and Organizational Culture’ (1998) 35(3) Journal of Management Studies 303–29 identified 54 definitions of organizational culture. See also JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224. 8 J O’Brien and G Gilligan (eds), Integrity, Risk and Accountability in Capital Markets. Regulating Culture (Hart Publishing, 2013); B van Rooij and A Fine, ‘Toxic Corporate Culture: Assessing Organizational Processes of Deviancy’ (2019) 8 Administrative Science 1; J Suss, D Bholat, A Gillespie and T Reader, Staff Working Paper No 192. Organisational Culture and Bank Risk (Bank of England, 2021). 9 Guidance Consultation. Risks to Customers from Financial Incentives (FSA, September 2012). 10 O O’Neill, ‘Accountability, Trust and Professional Practice’ in N Ray (ed), Architecture and its Ethical Dilemmas (Taylor & Francis, 2005). 11 Smarter Regulation. Strengthening the UK Economy with Fit for Purpose Regulation of Our Financial Services (CBI, 2016). 12 Speech by T McDermott, Acting Chief Executive, FCA, 2 December 2015. 13 RA Shweder, ‘True Ethnography: The Lore, the Law, and the Lure’ in R Jessor, A Colby and RA Shweder (eds), Ethnography and Human Development (University of Chicago Press, 1996). 14 EH Schein, Organisational Culture and Leadership 5th edn (John Wiley & Sons, 2017). See earlier EH Schein, ‘Coming to a New Awareness of Organizational Culture’ (1984) 25(2) Sloan Management Review 3.

174  Cooperative Culture new members as the correct way to perceive, think, feel, and behave in relation to those problems. This accumulated learning is a pattern or system of beliefs, values, and behavioural norms that come to be taken for granted as basic assumptions and eventually drop out of awareness.15

Schein notes that the concept of culture implies ‘structural stability, breadth, and patterning or integration’ which results from the fact that culture is a learned phenomenon for a group.16 He concluded that culture exists at many levels of ‘observability’, notably in observed behavioural regularities when people interact, in the climate of a group, in its formal rituals and celebrations, in its espoused values, it formal philosophy, its group norms, the rules of the game, its identity and self-image, its embedded skills, its habits of thinking and mental or linguistic habits, its shared meanings and its ‘root metaphors’ or integrating symbols.17 Schein summarises this wide range of relevant phenomena into three levels of analysis of the culture of a group:18 Artifacts • Visible and feelable structures and processes • Observed Espoused Beliefs and Values • Ideals, goals, values, aspirations • Ideologies • Rationalizations Basic Underlying Assumptions • Unconscious, taken-for-granted beliefs and values Schein notes that artifacts can be difficult to decipher,19 that espoused beliefs and values may or may not be congruent with behaviour and other artifacts20 and that basic underlying assumptions determine behaviour, perception, thought and feeling. He is clear that cultures evolve, both growing and declining, in response to external and internal stimuli, but adaptation to both types of stimuli present different challenges.21 A critical problem in cultural adaptation is achieving consensus on what to measure, how to measure it and what to do when corrections are needed.22 It is critical to recognise that some elements are difficult or impossible to quantify (so overreliance on metrics will be misleading). Schein asserts that measurement ‘has to be defined by the consensus on targets and goals [but] need not be a formal quantitative measurement’.23 He comments that leadership is key to learning24 and that the distribution of power, authority and status gives rise to particular issues. There is a particular need for everyone to feel psychological

15 Schein, ibid, 6. 16 ibid, 10. 17 ibid, ch 1. 18 ibid, 18. 19 He said earlier that ‘Culture is manifested in overt behavior, but the idea of culture goes deeper than behavior’: ibid, 3. 20 It is well recognised that proclaimed values are irrelevant because the stronger effect is whether employees perceive managers as trustworthy and ethical through demonstrated behaviour: L Guiso, P Sapienza and L Zingales, ‘The Value of Corporate Culture’ (2015) 117 Journal of Financial Economics 60. 21 Schein, ch 9. Schein’s problems of external adaptation are summarised as: mission, goals, means, measurement and correcting and repairing. The problems of internal adaptation are: language, identity and boundaries, authority, trust and openness, and rewards and punishments. 22 ibid, 161. 23 ibid, 161. 24 ibid 14.

The Theory of Culture in Organisations  175 safety if learning is to occur, through people feeling able and valued in speaking up and telling truth upwards.25 Importantly, Schein notes that various typologies of culture have been proposed,26 but concludes that it is not relevant to generalise and assert what typology might be best suited to an organisation at a particular stage of development and in a particular environment – it depends, and is up to those who lead and populate the group. Geert Hofstede devoted a lifetime’s work to studying the culture of nations and organisations. He described culture as the collective programming of the mind that distinguishes the members of one group of people from another.27 Culture begins at childhood, and results in patterns of thinking, feeling and acting. This programming forms the basis of what a person considers to be right and wrong, and to be normal, rational and logical. He believed that such programming is a product of two factors: social environment and the experiences collected during life.28 He noted that culture is a means of comparing societies, whereas values compare individuals.29 Hofstede studied a large multinational (IBM) operating in 72 countries and surveyed staff twice, in 1968 and 1972.30 He analysed the responses into five basic dimensions of culture,31 each basically operating around two opposites or orientations (similar to Rokeach’s idea of opposing values, discussed in chapter six):32 Individualism–Collectivism: The degree to which the society is built around individual rights and duties versus the group being the basic unit of society to which individuals should subordinate themselves. Power Distance: The social and psychological status and authority distance between the highest and lowest powered people in the society. Masculinity–Femininity Distance: The degree to which gender and emotional (‘tough’ or ‘tender’) roles are differentiated and linked to work versus home and family. Tolerance for Ambiguity and Uncertainty: The degree to which members of the society feel comfortable or uncomfortable in uncertain and ambiguous circumstances; the need for clear structures, processes, and rules. Short-Run vs. Long-Run Time Orientation: The degree to which members of society plan for and fantasize about the distant future versus being concerned only about the near future; the extent to which members accept delayed gratification of their material, social and emotional needs.

Two other groups of researchers enumerated similar lists of cultural dimensions. Trompenaars also proposed that there are five orientations that shape behaviour when relating

25 ibid, 172, citing AC Edmondson, Teaming: How Organizations Learn, Innovate, and Compete in the Knowledge Economy (Jossey-Bass, 2012); EH Schein, The Corporate Culture Survival Guide 2nd edn (Jossey-Bass, 2009); EH Schein, Humble Inquiry: The Gentle Art of Asking Instead of Telling (Berrett-Kohler, 2013); EH Schein, Humble Consulting: How to Provide Real Help Faster (Berrett-Koehler, 2016). 26 Such as ‘solidarity’ and ‘sociability’: R Goffee and G Jones, The Character of a Corporation (Harper Business, 1988). Also structural dimensions such as stability/flexibility and how externally or internally focused it is: KS Cameron and RE Quinn, Diagnosing and Changing Organizational Culture (Addison-Wesley, 1999); KS Cameron and RE Quinn, Diagnosing and Changing Organizational Culture 2nd edn (Jossey-Bass, 2006). 27 G Hofstede, Culture Consequences. Comparing Vales, Behaviors, Institutions, and Organizations Across nations 2nd edn (Sage, 2001) 9. 28 G Hofstede et al, Cultures and Organizations: Software of the Mind – Intercultural Cooperation and Its Importance for Survival 3rd edn (McGraw Hill, 2010). 29 ibid, 15. 30 G Hofstede, Cultures and Consequences 2nd edn (McGraw-Hill, 2001); G Hofstede et al, Cultures and Organizations: Software of the Mind – Intercultural Cooperation and Its Importance for Survival 3rd edn (McGraw-Hill, 2010). 31 G Hofstede, Culture’s Consequences: International Differences in Work-related Values (Sage, 1984); M Minkov and G Hofstede, ‘The Evolution of Hofstede’s Doctrine’ (2011) 18(1) Cross Cultural Management: An International Journal 10. 32 This is a compilation of two of Hofstede’s descriptions.

176  Cooperative Culture to others: (1) the extent to which rules prevail over relationships; (2) the degree to which the group is valued over the individual; (3) the range of feelings that are expressed; (4) the range of involvement that is appropriate; and (5) how status is ascribed.33 He creates a typology of corporate cultures, which need to be distinguished, for example in reconciling differences between corporate culture and local culture in multinational companies.34 Robert House and colleagues proposed the following list from their study of 17,500 middle managers in several industries:35 Power Distance: The degree to which members of a collective expect power to be distributed equally. Uncertainty Avoidance: The extent to which a society, organization, or group relies on social norms, rules, and procedures to alleviate unpredictability of future events. Gender Egalitarianism: The degree to which a collective minimizes gender inequality. Future orientation: The degree to which individuals engage in future-oriented behaviours such as delaying gratification, planning, and investing in the future. Collectivism I (Institutional): The degree to which organizational and societal institutional practices encourage and reward collective distribution of resources and collective action. Collectivism II (In-Group): The degree to which individuals express pride, loyalty, and cohesiveness in their organizations or families. Performance Orientation: The degree to which a collective encourages and rewards group members for performance improvement and excellence. Assertiveness: The degree to which individuals are assertive, confrontational, and aggressive in their relationships with others Humane Orientation: The degree to which a collective encourages and rewards individuals for being fair, altruistic, generous, caring, and kind to others.

The behaviour of people who work in an organisation – whose collective behaviour constitutes and defines its culture – will be influenced by a number of factors. Humans acting individually are subject to various biases that influence their behaviour,36 and the position is complicated when they act in groups, especially in relation to the particular structures and cultures of an organisations.37 Outsiders can readily misattribute behaviour of individuals to an institution. Christoph Engel cites numerous sources since the 1982 as pointing to the crucial role corporate culture plays in moulding the behaviour of those inside the corporation.38 Culture as a fixed manner of behaving can be transmitted effectively in formal organisations, even where members

33 F Trompenaars, Riding the Waves of Culture: Understanding Diversity in Global Business (Irwin, 1993) 156. 34 C Mills, ‘Navigating the Tension between Global and Local: A Communication Perspective’ in J Buckingham and V Nilakant (eds), Managing Responsibly. Alternative Approaches to Corporate Management and Governance (Gower, 2012). 35 RJ House, PJ Hanges, M Javidan, PW Dorfman and V Gupta, Culture, Leadership, and Organizations: The GLOBE Study of 62 Societies (Sage, 2004). 36 See J Conlisk, ‘Why Bounded Rationality? (1996) 34 Journal of Economic Literature 669–700; D Kahneman and A Tversky, Choices, Values, and Frames (Cambridge University Press, 2000). 37 See C Engel, ‘The Behaviour of Corporate Actors: A Survey of the Empirical Literature’ (2010) Journal of Institutional Economics 445; NL Kerr, RJ MacCoun and GP Kramer, ‘Bias in Judgment. Comparing Individuals and Groups’ (1996) 103 Psychological Review 687–719. 38 TE Deal and AA Kennedy, Corporate Cultures. The Rites and Rituals of Corporate Life (Addison-Wesley Pub. Co, 1982); JP Kotter and JL Heskett, Corporate Culture and Performance (Free Press, 1992); RM Cyert and JG March, A Behavioral Theory of the Firm (Blackwell, 1992); J Crémer, ‘Corporate Culture and Shared Knowledge’ (1993) 3 Industrial and Corporate Change 351; GM Hodgson, Corporate Culture and the Nature of the Firm. Transaction Cost Economics and Beyond (Kluwer, 1996) 249–69; BE Hermalin, Economics and Corporate Culture (The International Handbook of Organizational Culture and Climate, 2001); CL Cooper, S Cartwright and PC Earley,The International Handbook of Organizational Culture and Climate (Wiley, 2001): ch 10; WR Scott, Organizations. Rational, Natural, and Open Systems (Prentice Hall, 2003); U Berger and I Bernhard-Mehlich, Die verhaltenswissenschaftliche Entscheidungstheorie.

The Theory of Culture in Organisations  177 of the system come and go rapidly and in large numbers.39 Consciously changing a culture may need considerable effort and time.40 We might summarise broad consensus on the factors that can influence the actions of people in groups as follows: –– Individual factors. The individual’s character and ability to decipher and fit into a group’s cultural code (perceptual congruence),41 mood, mental ability and state of attention and stress. –– Layers of social influences. The influence of managers, colleagues, customers, suppliers, stakeholders, family – especially the extent and strength of trust and respect in all these relationships. Studies suggest that group decision-making can make members of the group either make better decisions42 or willing to accept stupid ideas or hazardous risks43 that they would reject if making the same decision alone.44 –– The systemic environment. The purpose and objectives of the group/organisation, its governance. Also, the sense of achievement and effectiveness of the organisation and its individuals. The extent of psychological safety and cooperation. Certainly, its culture and the cultures of relevant sub-groups. –– Values and also conflicts between different values (see chapter six). There is a strong link between culture and ethical values.45 In an organisational context, Lee Treviño and colleagues have recently highlighted the influence of messages received by employees through formal and informal systems:46 Formal Systems

Informal Systems

Executive Leadership

Role Models and Heroes

Employee Selection Systems

Norms

Policies and Codes

Rituals

Orientation and Training Systems

Myths and Stories

Performance Management Systems

Language

Organisational Authority Structures Decision-making Processes Organisationstheorien (Alfred Kieser, Kohlhammer, 2006) 169–85; DC Langevoort, ‘Opening the Black Box of “Corporate Culture” in Law and Economics’ (2006) 162 Journal of Institutional and Theoretical Economics 80; C Cordes, PJ Richerson, R McElreath and P Strimling, ‘A Naturalistic Approach to the Theory of the Firm: The Role of Cooperation and Cultural Evolution’ (2008) 68 Journal of Economic Behavior & Organization 125. 39 JR Harrison and GR Carroll, ‘Keeping the Faith: A Model of Cultural Transmission in Formal Organizations’ (2006) 36 Administrative Science Quarterly 552. 40 J Silvester, NR Anderson and F Patterson, ‘Organizational Culture Change: An Inter-group Attributional Analysis’ (1999) 71 Journal of Occupational and Organizational Psychology 1–23; MJ Hatch, M Schultz and A-M Skov, ‘Organizing Identity and Culture in the Context of Managed Change: Transformation in the Carlsberg Group, 2009–2013’ (2015) 1(1) Academy of Management Discoveries 56–86. 41 R Lu, JA Chatman, A Goldberg and SB Srivastan, ‘Deciphering the Culture Code: Perceptual Congruence, Behavioral Conformity, and the Interpersonal Transmission of Culture’ (2020): arguing that perceptual congruence equips people with the capacity to exhibit behavioural conformity, whereas value congruence promotes long-term attachment to the organisation. 42 See generally EH Schein with P Schein, Organizational Culture and Leadership 5th edn (John Wiley & Sons, Inc, 2017). See also Guidance on Board Effectiveness (Financial Reporting Council, 2018) paras 27–31. 43 See IL Janis and M Mann, Decision Making (Free Press, 1977) 423, where, however, it is also pointed out that there are some studies that an initially dominant risk-averse viewpoint within a group may shift an individual away from risk. 44 B Fisse and J Braithwaite, Corporations, Crime and Accountability (Cambridge University Press, 1993). 45 In addition to the research evidence noted in this chapter, the point is accepted by G30 governments: Toward Effective Governance of Financial Institutions (Group of 30). A New Paradigm. Financial Institution Boards and Supervisors (Group of 30, 2013). 46 LK Treviño, J Haidt and AE Filabi, ‘Regulating for Ethical Culture’ (2017) 3(2) Behavioural Science and Policy 57–70.

178  Cooperative Culture Similarly, the organisational elements that contribute to an organisation’s ethical effectiveness – an organization’s ethical infrastructure – of both formal and informal elements are relevant, including communication, surveillance, and sanctioning systems, as well as organisational climates for ethics, respect and justice.47 The concept of psychological safety, first identified by Schein and Bennis,48 has been researched in depth49 especially by Amy Edmondson.50 The core proposition is that people need to feel safe in order to feel able to speak up and speak truth upward, and this is fostered as a cultural artefact. The results of a 2017 meta-analysis of 117 studies suggested that psychological safety is a facilitator of employee performance in general, including being positively related to positive leader relations, work engagement, task performance (especially when the outcome measure was subjective rather than objective), a supportive work context, commitment, satisfaction, information sharing, citizenship behaviours, creativity and learning behaviour.51 Socio-legal scholar Roger Cotterell, who has examined many cultures of different legal systems, considers that culture is characterised by combinations of different types of relations of community – that is, social relations involving elements of mutual interpersonal trust dependent on (i) shared or convergent instrumental aims, (ii) common values or beliefs, (iii) shared tradition and inherited environments of co-existence or (iv) affective ties.52 Experts from the Barrett Cultural Values Centre recommend that there is no ‘right’ culture, but that a culture of engagement is critical, supporting dialogue between the people and groups that populate a successful organisation.53 Their view is that high performing cultures have values alignment, mission alignment and low levels of fear. They identified five areas for growing an organisation’s desired culture, each of which requires attention and planning: (1) (2) (3) (4) (5)

Leadership Commitment; Roles for Supporting Culture; How to Define & Grow Your Culture; Structural Alignment; and Follow-up and Learning.

Journalist Daniel Coyle’s prescription, based on a series of analyses of different social groups, is that the three most important factors are to ‘build safely’ (creating signals of connection that generate bonds of belonging and identity), share vulnerability (creating habits of mutual risk that drive trusting cooperation) and establish purpose (through narratives that create shared goals and values).54

47 AE Tenbrunsel, K Smith-Crowe, and EE Umphress, ‘Building Houses on Rocks: The Role of the Ethical Infrastructure in Organizations’ (2003) 16 Social Justice Research 285. 48 EH Schein and WG Bennis, Personal and Organizational Change through Group Methods: The Laboratory Approach (Wiley, 1965). 49 WA Kahn, ‘Psychological Conditions of Personal Engagement and Disengagement at Work’ (1990) 33 Academy of Management Journal 692–724. 50 A Edmondson, ‘Psychological Safety and Learning Behavior in Work Teams’ (1999) 44 Administrative Science Quarterly 350–83 and a number of subsequent studies. See recently AC Edmondson, The Fearless Organization (John Wiley & Sons, Inc., 2019). 51 M Lance Frazier, S Fainshmidt, RL Klinger, A Pezeshkan and V Vracheva, ‘Psychological Safety: A Meta-Analytic Review and Extension’ (2017) 70(1) Personnel Psychology 113–65. 52 R Cotterell, ‘A Legal Sketch Map of Culture’ in R Banakar, K Dahlstrand and L Ryberg Welander (eds), Festskrift till Håkan Hydén (Juristförlaget i Lund, 2018). 53 T Eneroth and A Munday, Transforming Culture in Larger Organizations. Key Learnings, Exercises and Case Studies (Barrett Values Centre, 2017). 54 D Coyle, The Culture Code. The Secrets of Highly Successful Groups (Penguin, 2018).

The Theory of Culture in Organisations  179

The Importance of Ethical Culture for Business Organisations The importance of culture has been increasingly recognised in recent decades as a critical element for the success of commercial corporations – widely researched by business school scholars – and described by Ed Schein as a firm’s greatest virtue and a quality that can be leveraged for strategic success.55 The following summaries of leading pieces of research demonstrate the evolution that there has been in thinking on the relevance of culture and on identifying its component elements that are particularly important for successful organisations. One can see a trajectory towards a focus on the need for culture to have an ethical foundation. Research in 1994 by Collins and Porras into the sources of success of US companies that had high stock market valuations found that highly successful companies all had an all-consuming internal vision that was shared by all staff and drove them to excel.56 Examining the results in 2005 the researchers did not find any specific ideological content essential to being a visionary company. They thought that the authenticity of the ideology and the extent to which a company attains consistent alignment with the ideology counts more than the content of the ideology. However, that viewpoint was later revised, not least after the success of some leading companies did not continue. Collins’ 2001 analysis of ‘great’ companies concluded that they all involved creating ‘a climate where truth is heard’, based on open dialogue and debate, and not coercion or authoritarian leadership or bureaucracy. Consensus is not specifically sought, but discussion and challenge are encouraged. The great firms also selected people who are self-motivated (and not de-motivated) to work passionately within a cultural framework of freedom and responsibility to fulfil their responsibilities.57 National cultures may vary across a multinational company but the firm’s values can still be unified.58 Similarly, in 1998 Pfeffer stated seven ‘high performance practices’ that can lead to innovation, productivity and sustained profitability: employment security, selective hiring, self-managed teams and decentralisation, extensive training, reduction of status differences, sharing of information and high and contingent compensation.59 However, in 2007 he found little evidence of the widespread use of these practices in contemporary organisations.60 An extensive line of research by Lee Treviño, Jennifer Chatman, Charles O’Reilly and colleagues has analysed the cultures of business organisations, especially highlighting the importance of cultures based on ethical values.61 Treviño and O’Reilly developed an analytical tool known as the Organisational Culture Profile (OAP). They identified a particularly important change from the viewpoint that managers control employees through formal mechanisms to 55 EH Schein, Organisational Culture and Leadership 5th edn (John Wiley & Sons, 2017) xvi. A recent study of executives in 1,348 North American firms found over half believe that corporate culture is a driver of firm value and 92% believe that improving their culture would increase their firm’s value: JR Graham, CR Harvey, J Popadak and S Rajgopal, Corporate Culture: Evidence from the Field (National Bureau of Economic Research, 2017). 56 J Collins and JI Porras, Built to Last: Successful Habits of Visionary Companies (HarperCollins, 1994, 12th edn 2005). 57 J Collins, Good to Great (Harper Business, 2001). 58 L Hoecklin, Managing Cultural Differences: Strategies for Competitive Advantage (Addison-Wesley, 1995), 4 (rather than embracing a standardised way of behaving, the company’s French, German and British managers ‘had values and behaviours more French, more German and more British than those of their compatriots working for local, domestic companies’. 59 J Pfeffer, The Human Equation (Harvard Business School, 1998). 60 J Pfeffer, What Were They Thinking? Unconventional Wisdom about Management (Harvard Business School, 2007). 61 See especially C O’Reilly, ‘Corporations, Culture, and Commitment: Motivation and Social Control in Organizations’ (1989) 31(4) California Management Review 9; C O’Reilly III, J Chatman and DF Caldwell, ‘People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit’ (1991) 34 Academy of Management Journal 487–516; LK Treviño et al, ‘Managing Ethics and Legal Compliance: What Works and What Hurts’ (1999) 41 California Management Review 131; C O’Reilly, ‘Corporations, Culture, and Commitment: Motivation and Social Control in Organizations’ (2008) 50(2) California Management Review 85–101; LK Treviño, NA den Nieuwenboer and JJ Kish-Gephart, ‘(Un)ethical Behavior in Organizations’ (2014) 65 Annual Review of Psychology 635.

180  Cooperative Culture recognising the power of social control.62 The OAP was updated in 2014 and identified that the personality of the CEO is associated in predictable ways with types of organizational culture and that culture can be related to firm performance.63 Specific positive CEO traits were being open to experience, being conscientious, agreeability and building cultures that emphasised adaptability and detail orientation. In their 2017 summary Treviño, Haidt and Filabi identified the following five aspects of ethical culture that had a profound effect on employee behaviour:64 • Orientation of Ethics and Compliance Programmes.65 The 1999 study had identified four orientation categories: (a) values based, rooted in self-governance and intrinsic motivation; (b) compliance based, focused primarily on preventing, detecting,= and punishing legal and policy violations; (c) external stakeholder based, focused on maintaining relationships with customers, the community, suppliers and others; and (d) protection based, focused on shielding top management from blame in the face of legal or ethical problems. • Ethical Leadership. This was identified as one of the strongest drivers of ethical culture in the 1999 study and a model of ethical leadership was later proposed.66 • Ethical Climate, meaning the extent to which the climate is self-interested or other-interested.67 • Fairness. The two strongest correlations in the 1999 study were between perceptions of fairness and (a) an employee’s commitment to the organisation and (b) an employee’s willingness to deliver bad news to management.68 • Trust.69 Bahram Soltani’s review of corporate failures in three American companies (Enron, WorldCom and HealthSouth) and three European companies (Parmalat, Royal Ahold and Vivendi Universal) between 2001 and 2003 found the following consistent major causes:70 1. 2.

Corporate ethical climate and management misconduct Tone at the top and executive leadership

62 CA O’Reilly and JA Chatman, ‘Culture As Social Control: Corporations, Cults, and Commitment’ (1996) 18 Research in Organizational Behavior 157. See also Charles O’Reilly III and Jennifer Chatman, ‘Organizational Commitment and Psychological Attachment: The Effects of Compliance, Identification and Internalization on Prosocial Behavior’ (1986) 71(3) Journal of Applied Psychology 492; PG Devine, ‘Stereotypes and Prejudice: Their Automatic and Controlled Components’ (1989) 56(1) Journal of Personality and Social Psychology 5. 63 CA O’Reilly III, DF Caldwell, JA Chatman and B Doerr, ‘The Promise and Problems of Organizational Culture: CEO Personality, Culture, and Form Performance’ (2014) 39(6) Group & Organization Management 595–625. 64 LK Treviño, J Haidt and AE Filabi, ‘Regulating for Ethical Culture’ (2017) 3(2) Behavioural Science and Policy 57–70. 65 See LK Treviño, GR Weaver, DG Gibson and BL Toffler, ‘Managing Ethics and Legal Compliance: What Works and What Hurts’ (1999) 41(2) California Management Review 131–51. 66 ME Brown, LK Treviño and DA Harrison, ‘Ethical Leadership: A Social Learning Perspective for Construct Development and Testing’ (2005) 97 Organizational Behavior and Human Decision Processes 117–34. 67 Drawing on B Victor and JB Cullen, ‘The Organizational Bases of Ethical Work Climates’ (1988) 33 Administrative Science Quarterly 101–25; and KD Martin and J Cullen, ‘Continuities and Extensions of Ethical Climate Theory: A Meta-analytic Review’ (2006) 69 Journal of Business Ethics 175–94. However, ethical climate alone was found in a later study to be insufficient to lead to ethical behaviour: A Arnaud and M Schminke, ‘The Ethical Climate and Context of Organizations: A Comprehensive Model’ (2012) 23 Organizational Science 1767–80. 68 See also M Ambrose and M Schminke, ‘The Role of Overall Justice Judgments in Organizational Justice Research: A Test of Mediation’ (2012) 94 Journal of Applied Psychology 491–500. 69 Treviño et al referred to the seven item scale developed in FD Schoorman and GA Ballinger, ‘Leadership, Trust and Client Service in veterinary hospitals’ (2006) Working paper, Purdue University, West Lafayette, IN; FD Schoorman, RC Mayer and JH Davis, ‘An Integrative Model of Organizational Trust: Past, Present, and Future’ (2007) 32 Academy of Management Review 344–54. 70 B Soltani, ‘The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals’ (2014) 120(2) Journal of Business Ethics 251–74.

The Theory of Culture in Organisations  181 3. 4. 5. 6.

Environmental factors including bubble economy and market pressure Accountability, control mechanisms, auditing, and corporate governance Executive personal interest, compensation package and bonus Fraud, fraudulent financial reporting and earnings management.

A 2016 review by leading scholars Jennifer Chatman and Charles O’Reilly71 found convincing evidence that different cultures existed across industries and firms.72 Their viewpoint framed organisational culture in terms of fundamental values and beliefs, explicitly focused on shared meaning, values and norms as sources of collective identity and commitment.73 Thus, their analysis is based on three components of organisational culture relating to norms: norm content, norm consensus and norm intensity. Their research also found that culture, when enforced, has the potential to shape and control behaviour by encouraging members to internalise shared values and norms that have consensus and intensity in the group.74 Thus, a culture is strongest when organisational members share a common set of expectations about appropriate or inappropriate attitudes and behaviours (norm content) and these are consistently shared and reinforced across divisions and management levels.75 However, norms that have very high intensity can drive uncooperative behaviours because members feel more obligated to do whatever is in the group’s collective interests.76 Chatman and O’Reilly note substantial evidence that the congruence of personal norms and values with those of groups and organisations predicts individual outcomes such as attraction, employee attitudes and turnover.77 They concluded: ‘Culture influences organizations, their performance, identity, and reputation, and can determine the well-being of their members.’78 In studying 26 Israeli companies, Yair Berson found that innovative cultures were associated with higher sales growth while bureaucratic cultures were more efficient.79 Adaptability was found to be important for success in the high technology industry.80 71 JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224. 72 eg JA Chatman and KA Jehn, ‘Assessing the Relationship between Industry Characteristics and Organizational Culture: How Different Can You Be?’ (1994) 37(3) Academy of Management Journal 522; EW Christensen and GG Gordon, ‘An Exploration of Industry, Culture and Revenue Growth’ (1999) 20 Organizational Studies 397. 73 JR Harrison and GR Carroll, ‘Keeping the Faith: A Model of Cultural Transmission in Formal Organizations’ (2006) 36 Administrative Science Quarterly 552; CA O’Reilly, ‘Corporations, Culture, and Commitment: Motivation and Social Control in Organizations’ (1989) 31(4) California Management Review 9; CA O’Reilly and JA Chatman, ‘Organizational Commitment and Psychological Attachment: The Effects of Compliance, Identification and Internalization on Prosocial Behavior’ (1986) 71(3) Journal of Applied Psychology 492. 74 CA O’Reilly and JA Chatman, ‘Organizational Commitment and Psychological Attachment: The Effects of Compliance, Identification and Internalization on Prosocial Behavior’ (1986) 71(3) Journal of Applied Psychology 492; CA O’Reilly and JA Chatman, ‘Culture As Social Control: Corporations, Cults, and Commitment’ (1996) 18 Research in Organizational Behavior 157. 75 CA O’Reilly, DF Caldwell, JA Chatman, M Lapiz and W Self, ‘How Leadership Matters: The Effects of Leaders’ Alignment on Strategy Implementation (2010) 21(1) The Leadership Quarterly 10. 76 J Marcus and H Le, ‘Interactive Effects of Levels of Individualism-collectivism on Cooperation: A Meta-analysis’ (2013) 34(6) Journal of Organizational Behavior 813. 77 eg KA Piasentin and DS Chapman, ‘Subjective Person-organization Fit: Bridging the Gap between Conceptualization and Measurement’ (2006) 69(2) Journal of Vocational Behavior 202; AL Kristof-Brown, RD Zimmerman and EC Johnson, ‘Consequences of Individuals’ Fit at Work: A Meta-analysis of Person-job, Person-organization, Person-group, and Person-supervisor Fit’ (2005) 58 Personnel Psychology 281. 78 JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224. 79 Y Berson, S Oreg and T Dvir, ‘CEO Values, Organizational Culture and Firm Outcomes’ (2008) 29(5) Journal of organizational Behavior 615. 80 JA Chatman, DF Caldwell, CA O’Reilly and B Doerr, ‘Parsing Organizational Culture: How the Norm for Adaptability Influences the Relationship between Culture Consensus and Financial Performance in High-technology Firms’ (2014) 35 Journal of Organizational Behaviour 785.

182  Cooperative Culture Benjamin van Rooij and Adam Fine analysed why the corporate cultures at BP, Volkswagen and Wells Fargo had become ‘toxic’, and concluded that the causes were less to do with deliberate law-breaking but lay in the fact that the accumulated strength of the social norms and culture overpowered the external legal rules.81 In all three companies studied, the causative combination of factors was described as leading to cultures (a) that condoned, neutralised or enabled rule breaking; (b) that disabled and obstructed compliance systems; and (c) where actual practices contrasted with expressed compliant values. They noted literature on unethical climates that highlighted (a) the way organisations deal with errors and their type of management culture; (b) how differentiation between employees can be perceived as unfair and give rise to envy and disengagement; and (c) dysfunctional ethical climates.82 They concluded that organisations should address the structures, values and practices that enable violations and obstruct compliance within an organisation, as well as move away from a singular focus on liability management (ie, assigning blame and punishment) to an approach that prioritizes promoting transparency, honesty and a responsibility to initiate and sustain actual cultural change. Daniel Beunza’s 2019 analysis of Wall Street trading rooms built on Ann Swidler’s conclusion that culture influences action not by providing the ultimate values toward which action is oriented, but by ‘shaping strategies of action’.83 ‘Action is not determined by one’s values. Rather, action and values are organized to take advantage of cultural competences.’84 Beunza noted that perceptions of injustice lead to ‘moral disengagement’ by staff.85 This mirrors the well-established importance of perceptions of both procedural and substantive justice as necessary in underpinning trust in a state’s legal system.86 Russell Cropanzano has also argued extensively that justice necessarily includes moral obligations.87 An interesting literature has emerged around the role of compassion in organisations, comprising elements of feelings and responses.88 Claudine Gartenberg and colleagues analysed the results of their 2019 survey of 500,000 US workers’ perceptions about their employers as showing that high camaraderie and high clarity from management, combined as organisational purpose, led to systematically higher financial performance than a focus on financial performance itself.89 The strength of the beliefs of midlevel employees in the purpose of the organisation and the clarity of the path toward that purpose

81 B van Rooij and A Fine, ‘Toxic Corporate Culture: Assessing Organizational Processes of Deviancy’ (2019) 8(3) Administrative Sciences 23. 82 See summary at W Scholten and N Ellemers. ‘Bad Apples or Corrupting Barrels? Preventing Traders’ Misconduct’ (2016) 24 Journal of Financial Regulation and Compliance 366–82. 83 D Beunza, Taking the Floor. Models, Morals, and Management in a Wall Street Trading Room (Princeton University Press, 2019). 84 A Swidler, ‘Culture in Action: Symbols and Strategies’ (1986) 51 American Sociological Review 273–86, 275. Swidler was opposed to the ‘culture as values’ idea. 85 A Bandura, Moral Disengagement: How People Do Harm and Live with Themselves (Worth Publishers, 2016). 86 TR Tyler, Why People Obey the Law (Yale University Press, 2006); TR Tyler, ‘Psychology and the Law’ in The Oxford Handbook of Law & Politics (Oxford, 2008). 87 R Cropanzano, DE Rupp, CJ Mohler and M Schminke, ‘Three Roads to Organizational Justice’ (2001) 20 Research in Personnel and Human Resources Management 1; R Cropanzano, ZS Byrne, DR Bobocel and DR Rupp, ‘Moral Virtues, Fairness Heuristics, Social Entities, and Other Denizens of Organizational Justice’ (2001) 58 Journal of Vocational Behavior 164; R Cropanzano, B Goldman and R Folger, ‘Deontic Justice: The Role of Moral Principles in Workplace Fairness’ (2003) 24 Journal of Organizational Behaviour 1019; CT Kulik and Y Li, ‘The Fork in the Road: Diversity Management and Organizational Justice’ in RS Cropanzano and ML Ambrose (eds), The Oxford Handbook of Justice in the Workplace (Oxford University Press, 2015). 88 PWB Atkins and SK Parker, ‘Understanding Individual Compassion in Organizations: The Role of Appraisals and Psychological Flexibility’ (2012) 37(4) Academy of Management Review 524. 89 C Gartenberg, A Prat and G Serafim, ‘Corporate Purpose and Financial Performance’ (2019) 30(1) Organization Science 1.

The Theory of Culture in Organisations  183 led to better performance. Donald Sull and colleagues’ 2020 analysis of corporate statements on culture revealed a striking number and diversity of values cited, the most common being integrity (65%), collaboration (53%), customer focus (48%) and respect (35%).90 A 2012 meta-review of the evidence suggested that higher levels of integrity are correlated with commercial success in many contexts.91 The case that corruption is bad for markets and businesses was developed in a more recent paper, drawing together a range of evidence.92 Corruption can become normalised in groups.93 Companies with anti-corruption programmes and strong ethical guidelines were found to suffer up to 50% fewer incidents of corruption than those without such programmes.94 Noting that in 2017, 47% of all company representatives reported lost an average of 3% of annual corporate profits to corruption and other irregular practices, the OECD called for a culture of integrity across nations and institutions.95 US scholars asserted in 2017 that strengthening ethical culture makes a firm more competitive and this could be done by measuring stakeholder trust.96 In 2022, embedding ethics in an ecosystem supporting ethical behaviour was said to be at the heart of Novartis’ corporate strategy, and involving empowering employees throughout the organisation in ethical co-creation (‘servant leaders’).97 The company espoused these ethical principles: be open-minded, be honest, be bold and be accountable. Detailed academic work initiated by Bruno Roche and Jay Jakub on indicators for measuring human capital and well-being at work98 identified five drivers that had disproportionately positive effects on human capital and well-being, organised around two categories: self-centred drivers and firm-centred drivers. 1.

Alignment with corporate identity. a. Are the corporate vision, identity, culture, and business strategies (especially the sustainability strategies) all aligned? b. Are an individual’s values aligned with the corporate strategy? ie do individual workers share the company’s values?

2. Employees’ social capital. 3. Prospect of Upward Mobility (POUM) effect. There was a significant POUM effect over an aversion to wage inequalities. Prospects for promotion, embracing opportunities to learn and to grow as individuals and taking on new responsibilities were all relevant. 4. Status (social recognition vis-à-vis others in the company) 5. Line manager effect. Roche concluded that abundant literature has established that the above unconventional sources of human capital and well-being have a positive impact on workplace performance and offer 90 D Sull, S Turconi, and C Sull, ‘When It Comes to Culture, Does Your Company Walk the Talk? Company Practices Often Conflict with Corporate Values. Closing the Gap Starts with Communication’ MIT Sloane Management Review 21 July 2020. 91 PM Nichols, ‘The Business Case for Complying with Bribery Laws’ (2012) 49(2) American Business Law Journal 325. 92 M Jenkins, The Relationship between Business Integrity and Commercial Success (Chr. Michelsen Institute, 2017). U4 Helpdesk Answer 2017:14. 93 BE Ashforth and V Anand, ‘The Normalisation of Corruption in Organizations’ (2003) 25 Research in Organisational Behaviour 1. 94 PricewaterhouseCoopers, Economic Crime: People, Culture and Controls: The Fourth Biennial Global Economic Crime Survey (2007) 33, at www.whistleblowers.org/storage/documents/pwc_survey.pdf. 95 State-Owned Enterprises and Corruption. What Are the Risks and What Can Be Done? (OECD, 2018). 96 P Nichols and P Dowden, Improving Ethical Culture by Measuring Stakeholder Trust (SCCE April 10, 2017) at http:// complianceandethics.org/improving-ethical-culture-by-measuring-stakeholder-trust/. 97 Case Study: How to Apply Behavioral Science and Employee Co-Creation to Reimagine Compliance and Ethics (Novartis) (Gartner, 2022). 98 B Roche and J Jakub, Completing Capitalism. Heal Business to Heal the World (Berrett-Koehler Publishers, 2017).

184  Cooperative Culture the firm a competitive advantage.99 He noted the relevance of issues like degree of hierarchical steepness in a firm, management style, dispersion of wages, prospects for upward mobility, the corporate identity of the firm, its social responsibility and relative position in the wage grid of the firm.100 He particularly emphasised that human capital and well-being tend to promote cooperative behaviour and creativity101 and said that significantly more human capital is created in smaller divisions and teams.

The Rise of Culture in Regulation The importance of corporate culture amongst businesses has been forcibly recognised in three particular areas, where culture has assumed a central place in the regulatory systems. The first area is high-risk safety systems, such as aviation and nuclear safety, and the second is the financial services sector, which has led to changes in the corporate governance and regulatory requirements of companies generally. In these areas it is the culture of the entire sector where the culture is critical, in other words the culture of every organisation (public and private) and individual, not just the culture of individual organisations.102 This point has so far been realised and applied more effectively in the aviation sector than the financial services sector. The third area is that of the governance of companies generally – expressed in corporate governance codes – where there have been changes initiated both after the GFC and recently in response to ongoing corporate scandals and failures. We will examine these three areas in turn.

Open and Just Culture in Aviation We explain the concepts of open and just culture in chapter 13. Two fundamental insights need to be stressed here. First, the concepts of open and just culture have been adopted by all actors across the entire aviation sector, whether they are in private or public organisations, and however critical or modest their roles and functions. Behaviour and reporting by everyone counts. It is a joint effort. The organisational culture of every institution and group therefore counts. The result is a partnership between all stakeholders and can only operate by maintaining mutual respect and trust involving all of them. The role of the regulator might be described as one of coordinator of the entire system, especially in reviewing the data, behaviour and cultures of all actors. Second, one of the academic psychologist experts who was involved in constructing the aviation safety system, James Reason, identified various ways in which an inadequate safety culture can adversely undermine a complex system’s protective layers.103 He quoted Weick’s view that the power of a safe culture lies in instilling a ‘collective mindfulness’ of the many entities that can

99 100 Best Companies to Work for in America; JK Harter, FL Schmidt, JW Asplund, EA Killham and S Agrawal, ‘Causal Impact of Employee Work Perceptions on the Bottom Line of Organizations’ (2010) 5 Perspectives on Psychological Science 378–89; A Edmans, ‘Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices’ (2011) 101 Journal of Financial Economics 621–40; P Böckerman and P Illmakunnas, ‘The Job Satisfaction-Productivity Nexus: A Study Using Matched Survey and Register Data’ (2012) 65 Industrial and Labor Relations Review 244–62. 100 P Warr, ‘Well-Being and the Workplace’ in D Kahneman, E Diener and N Schwatrz (eds), Well-being: The Foundations of Hedonic Psychology (Russell Sage Foundation, 1999). 101 M Riketta, ‘The Causal Relationship Between Job Attitudes and Performance: A Meta-Analysis of Panel Studies’ (2008) 93 Journal of Applied Psychology 472–81. 102 The Salz Review of Barclays’ Business Practices report to the Board of Barclays PLC. (April 2013). 103 J Reason, A Life in Error. From Little Slips to Big Disasters (Ashgate Publishing, 2013) 83.

The Theory of Culture in Organisations  185 penetrate, disable or bypass a system’s safeguards.104 Weick described reliability (and safety) as a ‘dynamic non-event’.105

Culture in Financial Services The Global Financial Crisis (GFC) of 2008–09 almost led to the meltdown of financial markets and key institutions worldwide. Serious analysis has been devoted to its causes. A range of individual actions of misconduct or ineptitude by individuals or organisations were identified, as well as systemic behaviour such as financial and commercial practices (widespread mortgage lending to people who would be unable to repay, followed by bundling of securitised ‘assets’ that were widely held and turned out to be unable to support liquidity or capital requirements when markets turned), excessive focus on short-term profit and stock values in the financial and business systems, systemic examples of behaviour by individuals (‘risk averse culture and bonus culture’),106 plus complacency by regulators or the regulatory systems (‘too much light touch regulation’). It was realised that some of these issues had common root causes in the culture of organisations, and of the markets and systems in which they operated. Hence two streams of reform emerged during the 2010 decade, one on supervision of financial services entities and the other on generic corporate governance rules. Statements strongly condemning behaviour across the financial services industry have included: ‘essentially selfish, arrogant and greedy’107 and a ‘corporate culture that extols greed is, in the end, unable to protect itself against its own employees. Nor does a business with such a culture attract public sympathy when things go wrong’.108 The Financial Conduct Authority stated after its investigation into foreign exchange rigging that: [T]raders at different banks formed tight knit groups in which information was shared about client activity, including using code names to identify clients without naming them. These groups were described as, for example, ‘the players’, ‘the 3 musketeers’, ‘1 team, 1 dream’, ‘a co-operative’ and ‘the A-team’. Traders shared the information obtained through these groups to help them work out their trading strategies. They then attempted to manipulate fix rates and trigger client ‘stop loss’ orders (which are designed to limit the losses a client could face if exposed to adverse currency rate movements). This involved traders attempting to manipulate the relevant currency rate in the market, for example, to ensure that the rate at which the bank had agreed to sell a particular currency to its clients was higher than the average rate it had bought that currency for in the market. If successful, the bank would profit.109

However, there have been no statements in the financial services debates that are similar to the aviation model of a systemic culture across the entire business and regulatory space. Instead, there has been plenty of criticism of individual banks, and statements aimed essentially at the culture of the business side as a whole, such as to state the aim of developing ‘a culture within the banking sector of responsibility and accountability rather than of blame’.110 104 KE Weick, KM Sutcliffe and D Obstfeld, ‘Organising for High Reliability Processes of Collective Mindfulness’ (1999) 21 Research into Organizational Behavior 23–81. 105 KE Weick, ‘Organizational Culture As a Source of High Reliability’ (1991) 29 California Management Review 112–27. 106 J Kay, Other People’s Money. Masters of the Universe or Servants of the People? (Profile Books, 2015). 107 P Cammock, ‘Vocational Calling and the Search for a New Approach to Business Leadership’ in J Buckingham and V Nilakant (eds), Managing Responsibly. Alternative Approaches to Corporate Management and Governance (Gower, 2012). 108 J Kay, Obliquity (Profile Books, 2010) 36. 109 Press release, FCA Fines Five Banks £1.1 Billion for FX Failings and Announces Industry-wide Remediation Programme 12 November 2014. 110 Annual Review 2016–2017 (Banking Standards Board, 2017).

186  Cooperative Culture Statements on the importance of culture were made shortly after the GFC by senior and experienced global supervisors through G30 and the Financial Stability Board. The G30 gave a short definition of culture: ‘Culture is the internal compass that guides individuals’ behavior when no one is looking. It involves soft features that defy quantitative measurement, but they cannot be ignored.’111 The UK’s Financial Conduct Authority has issued a series of thoughtful and well-integrated ‘mission statements’ that set out its approach – in general and to authorisation, supervision and enforcement – as well as policy papers on its approach to culture in its supervisory role. These include a focus on the culture of organisations and whether individuals are ‘fit and proper’ (including issues of honesty, integrity, reputation, competence and capability).112 Assessing culture and business models covers ‘the drivers of culture of the firm, including its governance, and the priority and importance its business model gives to customers, as this directly links to the firm’s suitability to conduct business’.113 A slightly different formulation in relation to supervision is:114 We also know that firms’ culture shapes the conduct outcomes for consumers and market. So we aim to assess and address the drivers of culture including firms’ leadership, purpose, governance and approach to managing and rewarding its employees. Focus on culture and governance • We look at what drives behaviour within a firm. We address the key drivers of behaviour which are likely to cause harm. These include the firm’s purpose (as it is understood by its employees), the attitude, behaviour, competence and compliance of the firm’s leadership, the firm’s approach to managing and rewarding people (eg, staff competence and incentives), and the firm’s governance arrangements, controls and key processes (eg for whistleblowing or complaint handling). • When it comes to governance, we assess effectiveness, not merely design. We pay particular attention to a firm’s conduct risk framework, i.e. whether the firm has effective governance arrangements in place to identify the risk of harm to consumers and markets, and whether they have a strategy in place to manage and mitigate those risks. … The role of culture and individuals We focus on the drivers of behaviour and the role individuals play within firms. A firm and its management are responsible for its own culture, and preventing harm it may cause. We provide feedback and challenge on the drivers of behaviour we observe through our supervisory engagement. We look at the purpose of a firm to understand what it is actually trying to achieve in practice, not just what is written in its mission statement.

In relation to firms, therefore, the FCA considers that the four ‘drivers of culture’ are: (i) leadership; (ii) purpose; (iii) governance; and (iv) approach to rewarding and managing people.115 Explanations of three of these were:116 Leadership including the tone that is set from the very top of the firm, and how effectively that tone cascades through the organisation.

111 A New Paradigm. Financial Institution Boards and Supervisors (Group of 30, 2013). 112 FCA Mission: Our Approach to Authorisation (FCA, 2017), Ch 2. See also Behaviour and Culture of the Irish Retail Banks (Central Bank of Ireland, 2018). 113 ibid. 114 FCA Mission: Our Approach to Supervision (FCA, 2018). 115 The FCA’s 2020/21 Business Plan (FCA, 2020). 116 Speech by Marc Teasdale, Director of Wholesale Supervision, FCA ‘A regulatory perspective: the drivers of culture and the role of purpose and governance’ 17 September 2020.

The Theory of Culture in Organisations  187 People policies, and in particular the types of behaviour that are incentivised or disincentivised within the firm, and how this is done. This most obviously includes remuneration, but also extends to a far broader set of considerations including progression, promotion, recruitment, diversity and inclusion, speak-up culture and psychological safety. Governance, in the broadest sense of how decisions are made within a firm.

The work of the Banking Standards Board (relaunched as the Financial Services Culture Board in 2021), has undertaken annual surveys across banks since 2015 that have mirrored the regulatory discourse, as can be seen from the following list of issues it identified in that year:117 purpose, values and culture: is a firm’s purpose understood and ‘owned’ across the organisation? Are purpose, values and culture fully aligned, or are there in practice tensions between any of these elements, especially in stressed or uncertain environments? culture and compliance: how far does a firm’s strategy for managing culture go beyond managing compliance and conduct risk? Is it focused on avoiding misconduct costs, or does it look more broadly at what influences behaviour and motivation across the firm? leadership and key person risk: strong leadership, and leadership by example, are key to a good organisational culture, but how does a firm ensure that momentum is not dependent on one individual? What is the role of the board in this, and of executive teams and middle managers? incentive and reward structures and practices: are these aligned with the firm’s purpose, value and culture? What is the role of the Remuneration Committees in shaping culture? How does the firm manage the transition from sales targets, and manage any unintended consequences? challenge and speaking up: to what extent does a firm create and foster an environment in which staff feel free to speak up if something isn’t right, or could be improved? What is the firm doing to encourage diversity of thought and experience within its workforce? How is this measured? and the provision, take-up and effectiveness of staff training and support: how are training and development used in practice? Is this consistent with the firm’s objectives on culture? How is the impact of training on staff behaviour and competence, and ultimately on customer and client outcomes, measured? How does this inform future training?

The FCA developed its approach in 2019 by publishing five ‘conduct questions’ that it asks firms:118 1. 2. 3. 4. 5.

What proactive steps do you take as a firm to identify the conduct risks inherent within your business? How do you encourage the individuals who work in front, middle, back office, control and support functions to feel and be responsible for managing the conduct of their business? What support (broadly defined) does the firm put in place to enable those who work for it to improve the conduct of their business or function? How does the Board and ExCo (or appropriate senior management) gain oversight of the conduct of business within their organisation and, equally importantly, how does the Board or ExCo consider the conduct implications of the strategic decisions that they make? Has the firm assessed whether there are any other activities that it undertakes that could undermine strategies put in place to improve conduct?

There have been many references to the ‘tone from the top’ but this has gradually changed into the tone throughout an organisation (cascading consistently, as referred to above) or ‘tone from

117 Annual Review 2015/2016 (Banking Standards Board, 2016). See subsequently http://financialservicescultureboard. org.uk/. 118 ‘Progress and Challenges’ 5 Conduct Questions Industry Feedback for 2018/19, Wholesale Banking Supervision (FCA, 2019).

188  Cooperative Culture within’.119 What is in practice essential, however, is the tone throughout an organisation. The FCA’s 2020 review found that speaking up was still unsafe, and reported pertinent findings on the timing and substance of responding to good and poor behaviour:120 Staff consistently felt that outstanding behaviour was worthy of quick, recognition, not necessarily monetary, and not a key factor for determining a year-end bonus. Conversely, bad behaviour was expected to attract immediate and possibly dire consequences. They were uncomfortable that some promotions still seemed to be awarded solely on what was delivered, as peers might describe the promoted individual’s behaviour as far from perfect. For some, this called actual promotion criteria and decision-making into question.

In relation to individuals, the FCA has introduced a Senior Managers and Certification Regime (SM&CR) which it says ‘supports firms’ development of a culture of responsibility to identify the harm developing from their behaviour and take steps to address the risk’.121 The FCA applies five conduct rules:122 • • • • •

act with integrity act with due care, skill and diligence be open and cooperative with the FCA, the PRA and other regulators pay due regard to the interests of customers and treat them fairly observe proper standards of market conduct.

This conception revels a somewhat fatalistic acceptance that firms’ activities will create harm, and that the regulatory activity should be one of attempted risk reduction, rather than requiring behaviour that is consistently ethical. Similarly, the attitude of the FSB towards culture is not that of trying to drive good outcomes across the financial system but to mitigate the risk of misconduct that arises within individual banks. The FSB undertook a ‘stocktake’ of the causes of misconduct and the steps being taken to guard against it in 2017, in which it noted the gulf between public statements and actual behaviour and culture:123 In many instances of misconduct, there is evidence that the norms and expectations that most strongly influence behaviour within financial institutions can be very different from the institutions’ stated values and policies. Practice does not always follow principle. Word and deed can diverge. The culture of an institution can defeat its formal governance.

The FSB summarised key observations from the literature and scientific review of root cause analyses in relation to culture like this:124 E. Culture In both the financial and non-financial cases reviewed, a variety of cultural aspects were an important determinant for the occurrence of misconduct or industry hazards. In some cases the culture was limited to the organisation, but in others it was the culture of the industry as a whole. 119 ‘Messages from the Engine Room’ 5 Conduct Questions. Industry Feedback for 2019/20 Wholesale Banking Supervision (FCA, 2020). 120 ibid. 121 Our Future Mission (FCA, 2016). Official evaluation of the SM&CR has been broadly positive: Senior Managers and Certification Regime Banking Stocktake Report (Financial Conduct Authority, 2019); Evaluation of the Senior Managers and Certification Regime (Prudential Regulation Authority, 2020). 122 COCON 1.1.2R sets out who COCON applies to. 123 Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (Financial Stability Board, 2017). 124 ibid, Annex E.

The Theory of Culture in Organisations  189 Culture can be defined as follows: ‘organisational culture represents the collective values, beliefs and principles of organisational members and is a product of such factors as history, product, market, technology, strategy, type of employees, management style, and national culture: culture includes the organisation’s vision, values, norms, systems, symbols, language, assumptions beliefs and habits’. According to the literature, important expressions of culture are for example the perception of the balance between reward and risk, the relevance of risk (management) and ethical considerations, the importance of remuneration/bonuses and the opportunities for employees to freely speak up. Mindset and common assumptions at various levels within the organisation influence leadership, decisionmaking and the design of governance frameworks, which in turn influence the way that employees and management think and behave In this respect it is important to note that structural and cultural factors mutually influence each other. The literature shows that over time, they tend to blend together into a common culture, which may reinforce or weaken certain behavioural patterns. Changing culture requires changing the underlying mindset, assumptions and convictions of people, which may in turn change behaviour at several levels within the organisation. Mindset and culture are also reflected in attitudes towards integrity, safety or ethical values. On many occasions the organisations reviewed focused on growth, cost savings, promotion of the business practices or profits and suffered from a lack of transparency and lack of openness. Consequently, employees were typically afraid to speak up, reluctant to pass on bad news and unwilling to raise their hand when they see inappropriate or unsafe behaviour or misconduct.

That was followed in 2018 by the FSB publishing a ‘toolkit’ for firms and supervisors of strengthened governance frameworks to mitigate misconduct risk, as one of a number of measures that included: • Standards and codes of behaviour, such as the FX Global code, and reforms to benchmarksetting practices; • Toolkit of measures related to wholesale market conduct, based on national approaches; • Guidance on compensation practices in addressing misconduct; and • Toolkit for firms and supervisors to strengthen governance frameworks by improving corporate culture, clarifying individual responsibility and accountability and preventing the movement of ‘bad apples’ (employees with a history of misconduct) within or between firms. The toolkit listed the following tools, in which there are multiple references to cultural ‘drivers of misconduct’ and one reference to ‘desired cultural features’:125 Mitigating cultural drivers of misconduct Firms Tool 1: Senior leadership of the firm articulate desired cultural features that mitigate the risk of misconduct. Tool 2: Identify significant cultural drivers of misconduct by reviewing a broad set of information and using multidisciplinary techniques. Tool 3: Act to shift behavioural norms to mitigate cultural drivers of misconduct. National authorities Tool 4: Build a supervisory programme focused on culture to mitigate the risk of misconduct. Tool 5: Use a risk-based approach to prioritise for review the firms or groups of firms that display significant cultural drivers of misconduct.

125 Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors (Financial Stability Board, 2018).

190  Cooperative Culture Tool 6: Use a broad range of information and techniques to assess the cultural drivers of misconduct at firms. Tool 7: Engage firms’ leadership with respect to observations on culture and misconduct. Strengthening individual responsibility and accountability Firms and/or national authorities Tool 8: Identify key responsibilities, including mitigation of the risk of misconduct, and assign them. Tool 9: Hold individuals accountable. Tool 10: Assess the suitability of individuals assigned key responsibilities. National authorities Tool 11: Develop and monitor a responsibility and accountability framework. Tool 12: Coordinate with other authorities. Addressing the rolling bad apples phenomenon Firms Tool 13: Communicate conduct expectations early and consistently in recruitment and hiring processes. Tool 14: Enhance interviewing techniques. Tool 15: Leverage multiple sources of available information before hiring. Tool 16: Reassess employee conduct regularly. Tool 17: Conduct ‘exit reviews’. National authorities Tool 18: Supervise firms’ practices for screening prospective employees and monitoring current employees. Tool 19: Promote compliance with legal or regulatory requirements regarding conduct-related information about applicable employees, where these exist.

Did a decade of attention to culture issues have much effect? G30 concluded in 2019126 that there had been some changes in the accountability regimes of senior management, in performance management, incentives and remuneration, in staff training, and much talk of ‘tone from the top’ and little on ‘tone from above’127 and on embedding culture awareness and stewardship at all levels of the organisation. But overall, the outcomes were ‘slow progress and uneven results’. It even referred to ‘there being ‘culture fatigue’. The G30 reported the following feedback from financial sector leaders as they reflected on the lessons learned and the future of banking culture: 1. 2.

3.

Managing culture is not a one-off event, but a continuous and ongoing effort that must be integrated into day-to-day business operations. Leadership always matters, and banks must embed conduct and culture messages and expectations from the top down, through middle management down to the teller in their organization. There is increasing awareness that tone from above is as important as tone from the top, and this requires a shift in how managers at all levels of the organization are trained, promoted, and supported. Conduct is not just about purposeful misbehavior, but also unintended consequences from decisions and/or lack of skills and knowledge.

126 Banking Conduct and Culture. A Permanent Mindset Change (Group of Thirty, 2019). 127 ibid: ‘By “tone from above” we mean the signals being sent by an employee’s manager or supervisor. Cultural norms are felt and transmitted most directly by a worker’s immediate supervisors. The worker in a large firm is unlikely to have regular contact with senior managers or their CEO. This is why the task of embedding the desired conduct and cultural norms throughout an institution is so important.’

The Theory of Culture in Organisations  191 4. 5. 6. 7.

8.

Managing culture requires a multipronged approach and the simultaneous alignment of multiple levers, including structural elements such as processes and policies, as well as human elements such as beliefs and attitudes. Diversity must become an imperative for the industry as it improves outcomes for all stakeholders. Diversity in thinking, problem solving, and leadership styles helps organizations achieve better results. While cultural norms and beliefs cannot be explicitly measured, the behaviors and outcomes that culture drives can and should be measured. Regulation has a limited role to play given that culture cannot be mandated or defined by rules. Regulation can be an effective tool in outlining basic principles (especially related to good conduct), refocusing banks’ attention on areas of persistent conduct failure, and providing insights and lessons learned from across the industry. Supervision can play a role in monitoring and providing feedback to banks that can aid the bank board and senior management in addressing culture and conduct issues. Industry-wide dialogue and sharing of best practices are key to restoring trust and strengthening the entire banking industry. The cultural health of the industry as a whole benefits all banks.

It will be noted that the G30 accepted that ‘culture cannot be mandated or defined by rules’ so that culture cannot be regulated. The responsibility for ‘addressing’ culture issues rests with those who lead an organisation. The G30 stated the following recommendations for further action, updated from its 2015 list – it will be noted that these all relate to banks (only): RECOMMENDATION 1. Bank boards should reevaluate their governance structure to ensure a specific board committee has oversight of the bank’s conduct and culture. RECOMMENDATION 2. Bank boards and senior management should work more closely with various business units and geographic and functional heads to strengthen the quality and availability of data and insights needed to manage conduct and culture. RECOMMENDATION 3. Banks should consider the potential impact of outsized incentives in their compensation mechanisms. RECOMMENDATION 4. Banks should remove the link between quantitative sales targets and compensation for sales staff to minimize pressure that can lead to misconduct and help staff prioritize meeting customer/client needs. RECOMMENDATION 5. Banks should explore ways to celebrate role models in behavior, both in business decisions and in individual actions. RECOMMENDATION 6. Bank governance structures must recognize the integral role that middle management plays in embedding cultural reforms and promoting values through lower levels of the organization. RECOMMENDATION 7. Banks should make efforts to promote diversity and inclusion in the workplace in their hiring and staff development practices. RECOMMENDATION 8. Banks should promote an environment of “psychological safety” that encourages employees to speak up and escalate issues or share feedback without fear of retribution; bullying or aggressive management styles must not be tolerated. RECOMMENDATION 9. Banks should establish credibility and enforcement through their disciplinary mechanisms for conduct breaches to ensure employees take these measures seriously. RECOMMENDATION 10. Banks should focus on hiring people who align with the bank’s purpose and values as they strive to create the right culture for their organization, recognizing that recruiting is a critical element to creating the right culture. RECOMMENDATION 11. Given the limited progress to date, this is a reinforcement of our 2015 recommendation: Banks should persevere in their efforts to shift primary ownership of conduct risk to the first line of defense to ensure conduct risk is truly owned by the business and is effective. RECOMMENDATION 12. Conduct risk oversight roles and responsibilities should be clear across the various second line functions such as Human Resources (HR), Risk, and Compliance.

192  Cooperative Culture It will be seen that the focus here by both the FSB and G30 is on misconduct in individual organisations, rather than on being systemically positive and preventative. Similarly, the FCA’s justification for its focus on firms having ‘a healthy culture’ is that ‘In almost every instance of poor conduct, deep-set cultural issues have been present. We believe firms with healthy cultures are less prone to misconduct.’128 The impression is that there is tacit acceptance that the activities of some or many financial services organisations carry inherent and possibly serious risk of unethical conduct causing significant harm. The responses have aimed to make commercial organisations and senior staff accountable for managing this risk, but not for eradicating it.129 No discussion has taken place about the attitudes, behaviour or culture of regulators or of the system as a whole. Is this just an exercise in buck-passing from regulators to highly-paid financiers? Has there been a serious attempt to shift culture so as to reduce risk to levels where systemic harm is eradicated?

Culture Driving Sustainability in Corporate Governance Organisational culture has been firmly recognised as a key driver of long-term sustainability for businesses. In the past decade since the GFC, a focus on culture has been included in many revisions to national corporate governance codes (CGCs).130 A 2015 review of codes and recommendations in France, Germany, Italy, the Netherlands and the United Kingdom concluded that they were still unsatisfactory in several respects and did not sufficiently consider the severe shortcomings in ethics and corporate behaviour that had occurred in the past or remained relevant, so ‘no lessons have been learned from the crisis’.131 The Chair of the US Securities and Exchange Commission said in 2018 that ‘culture is not an option’ and that ‘you need to know your culture’, ending with the comment ‘We do not expect perfection; we do expect commitment and action’.132 The UK Code was amended in 2018 after further scandals arose (see chapter 10) and further changes were announced in 2021.133 The thrust of the amendments to Corporate Governance Codes is that directors should focus on the organisation’s purpose, values and culture. In the UK, the FRC explained:134 Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders. 128 S Mills, ‘A Regulatory Perspective: Measuring and Assessing Culture: Now and in the Future, the Role of Purpose and the Importance of D&I’, speech at the Investment Association, 22 September 2021. 129 See R Miles, Culture Audit in Financial Services (KoganPage, 2121). 130 B Soltani and C Maupetit, ‘Importance of Core Values of Ethics, Integrity and Accountability in the European Corporate Governance Codes’ (2015) 19(2) Journal of Management & Governance 259–84; JG Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering’ (2019) 2 University of Illinois Law Review 507. 131 Soltani and Maupetit, ibid. 132 Jay Clayton, Chair of the SEC, ‘Observations on Culture at Financial Institutions and the SEC’ speech www.sec.gov/ news/speech/speech-clayton-061818. 133 Restoring Trust in Audit and Corporate Governance. Consultation on the Government’s Proposals (BEIS, March 2021). See also similar changes to strengthen culture in other codes, such as Charity Governance Code at www.charitygovernancecode.org/en/pdf and Code of Governance 2020 (National Housing Federation, 2020). 134 The UK Corporate Governance Code (Financial Reporting Council, 2018). See also Guidance on Board Effectiveness (Financial Reporting Council, 2018).

The Theory of Culture in Organisations  193 Thus, the UK Code has set out a clear relationship between the concepts of purpose, values and culture. The organisation’s purpose is achieved through its values, strategy and culture, all of which must be confirmed by its board. The Code stipulates that ‘The focus on culture needs to be continuous.’135 There should be periodic reflection on whether the culture continues to be relevant in the changing environment. The UK Code covers five areas: 1. board leadership and company purpose; 2. division of responsibilities; 3. composition, succession and evaluation; 4. audit, risk and internal control; and 5. remuneration. The UK Corporate Governance Code 2018 includes the following statements on culture. The basic requirements are:

1 BOARD LEADERSHIP AND COMPANY PURPOSE Principles A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. The Code states that ‘common attributes of a healthy culture’ are:136 Figure 1 – Common attributes of a healthy culture • Honesty • Openness • Respect

135 ibid, 136 ibid,

para 21. para 21, Figure 1.

194  Cooperative Culture • • • • • •

Adaptability Reliability Recognition Acceptance of challenge Accountability A sense of shared purpose 22. It is important that the board develops a common and consistent language around culture, and pays attention to factors that can influence culture, such as corporate history, local traditions and the pressures of regulatory regimes. Boards will also need to be alert to signs of possible cultural problems such as those in Figure 2.

Figure 2 – Signs of a possible culture problem • • • • • • • • • •

Silo thinking Dominant chief executive Leadership arrogance Pressure to meet the numbers/overambitious targets Lack of access to information Low levels of meaningful engagement between leadership and employees Lack of openness to challenge Tolerance of regulatory or code of ethics breaches Short-term focus Misaligned incentives 23. Monitoring culture will involve regular analysis and interpretation of evidence and information gathered from a range of sources. Drawing insight from multiple quantitative and qualitative sources helps guard against forming views based on incomplete or limited information. The workforce will be a vital source of insight into the culture of the company.

Sources of culture insights • • • • • • • •

Turnover and absenteeism rates Training data Recruitment, reward and promotion decisions Use of non-disclosure agreements Whistleblowing, grievance and ‘speak-up’ data Employee surveys Board interaction with senior management and workforce Health and safety data, including near misses

The Theory of Culture in Organisations  195 • Promptness of payments to suppliers • Attitudes to regulators, internal audit and employees • Exit interviews It is notable that the Code recommends wide and open engagement between management and workforce: 51. Engagement through a range of formal and informal channels helps the workforce to share ideas and concerns with senior management and the board. It provides useful feedback about business practices from those delivering them, and can help empower colleagues.

Immediately after the 2018 amendments to the Corporate Governance Code, the UK water regulator enshrined ‘purpose, strategy, values and culture’ as an explicit requirement for water companies, given that water is a public good.137 This was met by a commitment by water companies to ‘enshrine what it means to operate in the public interest within their business purpose, in line with best practice among leading socially-responsible businesses’.138 The UK Investment Association has supported the approach that culture is essential for investment:139 The role of culture in creating long-term value for a company and its shareholders is increasingly being recognised. There is strong evidence that where employees feel that their company has integrity, companies see an increase in productivity and profitability of the company.140

Similar amendments have been made in the Stewardship Code for investors.141 Signatories should explain: –– The purpose of the organisation and an outline of its culture, values, business model and strategy; and –– Their investment beliefs, i.e. what factors they consider important for desired investment outcomes and why.

In relation to encouraging open and truthful feedback, a culture of psychological safety should be contrasted with a ‘culture of silence’: Effective whistleblowing arrangements are a key part of good governance. A healthy and open culture is one where people are encouraged to speak out, confident that they can do so without adverse repercussions, confident that they will be listened to, and confident that appropriate action will be taken. This is to the benefit of organisations, individuals and society as a whole.142

Have these changes had much effect? A corporate survey of 1,000 executives and employees across five industries in the United States published in 2019 found that although 93% of executives said they were attuned to company culture and had taken steps to strengthen it, 69% of executives

137 Board Leadership, Transparency and Governance – Principles (Ofwat, 2019). 138 Public Interest Commitment (Water UK, 25 April 2019). 139 Supporting UK Productivity with Long-Term Investment (The Investment Association, 2016). 140 Citing L Guiso, P Sapienza and L Zingales, ‘The Value of Corporate Culture’ (2015) 117(1) Journal of Financial Economics 60. 141 The UK Stewardship Code 2020 (Financial Reporting Council, 2019). 142 The Whistleblowing Commission: Report on the Effectiveness of Existing Arranges for Workplace Whistleblowing in the UK (Whistleblowing Commission, 2013).

196  Cooperative Culture did not measure culture.143 It also found that while 76% of executives said their organisation had a defined value system that was understood and well communicated, only 31% of employees believed this to be true. The researchers calculated that organisations that make the right investments in culture are more likely to see stronger business performance. A survey of Chartered Internal Auditors published in 2022 said that adoption of new Code requirements in culture was moving ‘at glacial pace’ and ‘not much has changed’, with ‘nowhere near enough audit committees and boards … taking the risks posed by corporate culture seriously’.144 Two-thirds of those surveyed believed that the Corporate Governance Code should be amended to give directors greater responsibility for promoting, monitoring and assessing culture. Stories emerged in 2022 of systemic culture failures in KPMG, identified after its audit client Carillion collapsed in 2018, with the loss of 3,000 jobs at the company, and affecting 75,000 people working in its supply chain. It was reported that a broad perception in KPMG that ‘as long as someone was commercially successful, then any violation of values would not hold them back in their career’.145 Internal evidence of culture risk was ignored by managers. The link between pay, targets and culture (see chapter 11) has also been frequently cited. There was a strong call in 2021 for issues of people and culture to be formally and constantly on the agenda and responsibilities of boards and managers.146

Culture Changes The culture of any organisation or group of people will change constantly as its constituent elements and influences change. ‘Culture is a journey, not a destination.’147 In the same way that ‘ethics is everyone’s responsibility’,148 culture – maintaining an ethical culture – is a constant concern and should be a shared commitment. The phenomenon of cultural drift has certainly been recognised.149 Long-term change can be seen in the cultures of both business and regulatory authorities as they respond to external influences. For example, business culture has evolved as ideas have changed on the relevance of corporate social responsibility (CSR), environment, social and governance (ESG), sustainable development goals (SDGs), climate change and the need for long-term sustainability of the planet and of tangible assets. These changes affected public discourse and requirements on corporate purpose and governance. In parallel, ideas about companies having, and needing to nurture, their ‘social licence’ and more recently social purpose, and to respond to consumers’ views, and to treat customers and staff fairly and to support those who are vulnerable.150 These changes have affected the customer-focus and ethics of retailers and other businesses.

143 Return on Culture. Proving the Connection between Culture and Profit (Grant Thornton and Oxford Economics, 2019). 144 Cultivating a Health Culture (Chartered Institute of Internal Auditors, 2022). 145 L Clarence-Smith, ‘Crisis of Culture Laid Bare at the Heart of KPMG’ The Times 15 February 2022. 146 Role of the RemCo. How to Achieve Good Governance of Pay, People and Culture (Chartered Institute of Personnel and Development, 2021). 147 T Eneroth and A Munday, Transforming Culture in Larger Organizations. Key Learnings, Exercises and Case Studies (Barrett Values Centre, 2017). 148 R Steinholtz, quoted in C Hidges and R Steinholtz, Ethical Business Practice and Regulation (Hart, 2017) case study 23, 166. 149 J Shipton, Integrity in Financial Markets – Challenges from Asia, Speech to the FCA International Regulators’ Seminar, London, 24 November 2014. Global Financial Stability Report. Risk Taking, Liquidity, and Shadow Banking. Curbing Excess while Promoting Growth, October 2014 (International Monetary Fund, 2014) 129. 150 Finalised Guidance. FG21/1 Guidance for Firms on the Fair Treatment of Vulnerable Customers (FCA, February 2021).

The Theory of Culture in Organisations  197 Equally, one can identify major shifts in policy and approach in some regulatory organisations, reflected in the culture of individual organisations, as theories on ‘command and control’ regulation, enforcement and deterrence have given way to ideas on outcome-focused, risk-based and supportive intervention approaches that can be traced through the 2005 Hampton Report, the application of a Regulators’ Code to many regulators, initially from 2006 and with the major shift of inclusion from 2014 of a requirement for regulators to consider the impact of their actions on business growth (the ‘growth duty’). Equally, ideas on ‘light-touch’ regulation or deregulation can be contrasted with those on Better Regulation. All of these have been associated with changes in regulatory culture.151

Can You Regulate Culture? It may have been hoped, especially by financial supervisors after the GFC, that they could regulate and control the culture of financial organisations.152 This preoccupation drove imposition of deterrent sanctions and the introduction of the SM&CR. However, a thoughtful paper by the FCA in 2018 admitted that ‘record fines, increasing investigations and an expanding compliance industry’ had failed to curb misconduct and posed the rhetorical question: ‘Why? What have we not learned?’.153 The answer lay in a consensus that culture of banks was critical but only individual firms could create and sustain their own culture, reaching a solution that was ‘right’ for each individual organisation. The FCA’s discussion document contained an impressive compilation of different emerging solutions. There were clear statements that traditional ‘economic tools of influence, such as rules and enforcement … are ineffective or create unintended consequences’154 and that ‘regulators are moving away from using strictly rule-based methods and incorporating behavioural science for assessing, understanding and influencing behaviour’.155 Despite this, although the successful ‘open and just culture’ model of aviation safety was noted, no contradiction was remarked on between it and the continuing use of sanctions and extension of the SM&CR. However, the requirements for psychological safety and for ethics to be paramount were clearly stated by various essayists.156 In a subsequent paper reviewing progress in 2020, the FCA focused more on the need to transform business models, noting the importance of organisational purpose in reducing potential harm to consumers and markets.157 Although this was unstated, the logic underlying references to business models and governance remains that the drive to make profits, meet targets, and pay large remuneration packages remains in strong conflict with statements on sustainable, social and ethical purpose.

151 See G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 152 Supervision of Behaviour and Culture. Foundations, Practice & Future Developments (DeNederlandscheBank, 2015). See J Howard-Grenville, S Bertels and B Boren, ‘What Regulators Need to Know About Organizational Culture. Penn Program on Regulation Research Paper’ (2015) www.law.upenn.edu/live/files/4708-howard-grenvillebertelsborenpprresearchpaper0620. For a critical appraisal see JM Conley, CA Williams, L Smeehuijzen and DE Rupp, ‘Can Soft Regulation Prevent Financial Crises?: The Dutch Central Bank’s Supervision of Behavior and Culture’ (2019) 51(4) Cornell International Law Journal 773. 153 Transforming Culture in Financial Services (FCA, 2018). 154 ibid, 11. 155 ibid, 13. 156 See the essays by Azish Filabi, Eric Levy and Linda Treviño and colleagues in Transforming Culture in Financial Services (FCA, 2018) DP18/2. 157 Transforming Culture in Financial Services. Driving Purposeful Cultures. Discussion Paper (Financial Conduct Authority, 2020), DP20/1.

198  Cooperative Culture Major unresolved conflicts in business were identified by the Chartered Institute of Internal Auditors in 2016, when it accepted that businesses and boards face significant cultural trade-offs, such as:158 (a) (b) (c) (d) (e) (f) (g)

Cultural values as a wealth driver versus cultural values as a protector Openness to mistakes versus zero tolerance Leadership versus followership Independence versus involvement Empowerment versus rules and tight rules versus loose rules Risk-seeking versus risk-avoiding Human capital versus human cost

The issue is whether the predictable harm that will arise from these conflicts remains as risks that are at an acceptable level or whether more should be done to resolve the conflicts and prevent the harm. There are currently no formal organisational governance requirements on how such conflicts should be managed, or how directors’ decisions or internal organisational behaviours should be made transparent. The FCA’s Executive Director of Consumers and Competition, Sheldon Mills, accepted in 2021 that culture is difficult to measure and assess and that the FCA is still developing its role in relation to approaching culture, for the moment viewing it through four lenses – purpose, people, leadership and governance – and using a range of supervisory and enforcement tools to address any issues it identifies, whilst seeking assurance from firms that they are guarding their organisations’ culture against threats.159 The evidence that the culture of a regulated entity – coupled of course with the culture of a regulator – especially if they are based on shared ethical principles, is profoundly powerful in driving the performance of desired behaviour (including compliance) and achieving the desired outcomes raises the idea that the achievement of a steady state of ethical, open and just cultures and relationships can form a central mechanism in delivering both regulation and business success. The idea is not to regulate the culture of another organisation – creating and maintaining an appropriate culture is a matter for the all directors, managers and staff of an organisation internally – but of regulating through culture. The essential elements of this model are discussed in chapter 12.

Regulatory Culture We said above that much less research has been done specifically on the culture of public organisations like regulatory authorities than the extensive research over decades into business organisations. It is obvious that the culture of a state authority will be influenced by the culture of its state, government and – at least in a democracy – society.160 The New Zealand Productivity Commission review of regulatory institutions and practices included a chapter on

158 A Duty to Care? Evidence of the Importance of Organisational Culture to Effective Governance and Leadership (Chartered Institute of Personnel and Development, 2016). 159 S Mills, ‘A Regulatory Perspective: Measuring and Assessing Culture: Now and in the Future, the Role of Purpose and the Importance of D&I’, speech at the Investment Association, 22 September 2021. 160 E Meidinger, ‘Regulatory Culture: a Theoretical Outline’ (1987) 9 Law and Policy 355.

The Theory of Culture in Organisations  199 regulator culture and leadership that was based firmly on Schein’s approach and three tier concepts (artefacts, espoused beliefs and values and basic underlying assumptions).161 It should be anticipated that public servants would have and demonstrate a clear sense of ‘public purpose’ and motivation. However, this may not be as strong as expected or desirable. The New Zealand analysis said that ‘on average, central government regulatory workers do not perceive that senior managers communicate a clear organisational mission’.162 Concerns have certainly been raised over the quality in the high volume cases of initial decision-making163 and administrative review in immigration,164 and decisions in social security cases.165 Incorrect or insensitive decisions clearly cause stress, financial hardship and intimidate people.166 Richard Thomas, then head of the Administrative Justice Council, recognised that lessons can be learned from the commercial world in relation to adopting processes that can be improved by applying scrutiny and feedback, a customer-oriented focus, and that organisational culture is the key to good administration.167 Challenges in the public sector are the risks of confusion and ‘falling between stools’ problem that arise when too many public bodies may be involved with those they regulate, each with responsibility for a particular aspect, leading to failure to provide a systemic overview, a consistent approach or the ability to address cultural issues.168 There has been clear evolution in the policy and style of how some systems ‘regulate’ that has changed the culture of relevant regulators – and is continuing to do so. In simple, terms a change in concept from a ‘command and control’ top-down authoritarian model through a more ‘responsive’ model,169 paying attention to the needs of business in complying with regulation,170 the idea of Better Regulation,171 and in greater engagement between regulators in businesses in how regulation is delivered172 and in regulating through ethical cultures.173 The 2014 edition of

161 Regulatory Institutions and Practices (New Zealand Productivity Commission, 2014). 162 ibid, 77. 163 Independent Chief Inspector of Borders and Immigration, An Inspection of Family Reunion Applications (2016). 164 Independent Chief Inspector of Borders and Immigration, An Inspection of the Administrative Review Processes Introduced Following the Immigration Act 2014 (2016). 165 House of Commons Work and Pensions Committee, Decision Making and Appeals in the Benefits System (HC 313 2009–10) and The Role of Incapacity Benefit Reassessment in Helping Claimants into Employment (HC 1015 2010–12), [146]; Social Security Advisory Committee, Decision Making and Mandatory Reconsideration (2016), (Occasional paper No. 18). 166 Getting it Right in Social Welfare Law. The Low Commission’s Follow-up Report (The Low Commission, 2015); R Thomas and J Tomlinson, ‘Mapping Current Issues in Administrative Justice: Austerity and the “More Bureaucratic Rationality” Approach’ (2017) 39(3) Journal of Social Welfare and Family Law 380. See also L Vanhala, ‘Anti-discrimination Policy Actors and Their Use of Litigation Strategies: The Influence of Identity Politics’ (2005) 16(5) Journal of European Public Policy 738. 167 Putting It Right (Administrative Justice Council, 2012) 13. R Thomas, ‘Administrative Justice, Better Decisions and Organisational Learning’ [2015] Public Law 111. 168 Gosport War Memorial Hospital: The Report of the Gosport Independent Panel (Department of Health, 2018); First Do No Harm. The Report of the Independent Medicines and Medical Devices Safety Review (HMSO, 2020). 169 I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (Oxford University Press, 1982). 170 P Hampton, Reducing Administrative Burdens: Effective Inspection and Enforcement (HM Treasury, 2005); the Regulatory Enforcement and Sanctions Act 2008 (RESA) (including a duty on specified bodies not to impose or maintain unnecessary burdens in the exercise of regulatory functions: s 72); Transforming Regulatory Enforcement: Discussion Paper (Department for Business Innovation & Skills, 2011) which called for a ‘more mature relationship’ between regulators and industry, and a presumption that regulators would help businesses comply; Regulatory Futures Review (Cabinet Office, 2017). 171 For academic analysis see S Weatherill (ed), Better Regulation (Hart Publishing, 2007). 172 G Russell and C Hodges, Regulatory Delivery (Hart, 2019). 173 C Hodges and R Steinholtz, Ethical Business Practice and Regulation (Hart, 2017).

200  Cooperative Culture the Regulators’ Code was deliberately shortened from the more discursive 2007 edition so as to assist comprehension and impact.174 The UK’s 2014 Regulators’ Code specified the following principles:175 1. Regulators should carry out their activities in a way that supports those they regulate to comply and grow 2. Regulators should provide simple and straightforward ways to engage with those they regulate and hear their views 3. Regulators should base their regulatory activities on risk 4. Regulators should share information about compliance and risk 5. Regulators should ensure clear information, guidance and advice is available to help those they regulate meet their responsibilities to comply 6. Regulators should ensure that their approach to their regulatory activities is transparent The New Zealand Productivity Commission identified the following attributes of ‘favourable regulator culture’:176 • embrace the organisation’s role as an educator and facilitator of compliance (rather than simply an enforcer of rules) • place a high value on robust, evidence-based regulatory decisions • value operational flexibility and adaption to changes in the regulatory environment • value continuous learning at all levels of the organisation (ie, ‘learning cultures’) • internal debate is the norm and where a ‘speak-up’ culture empowers staff to raise issues • stress the importance of being open, transparent and accountable • place great value on organisational independence and impartiality • recognise the significance of the civic responsibility that comes with using the coercive powers of the state • subcultures align with the overarching objectives of the organisation By 2020 New Zealand had devoted significant effort at developing the idea of professionalism amongst regulators, working with a three pillar model of people capability, organisational capability and the development of a professional community.177

Ethical Values and Leadership We have asserted above that effective achievement of organisational purposes and outcomes is inextricably dependent on the extent to which the values and culture of those who are involved and need to cooperate demonstrate ethical values. This point was central to the concept of Ethical

174 For an intermediate version see Scottish Regulators’ Strategic Code of Practice (Scottish Government, 2015). 175 Regulators’ Code (Department for Business Innovation & Skills, 2013). Originally the Regulators’ Compliance Code: Statutory Code of Practice for Regulators (Department for Business, Enterprise and Regulatory Reform, 2007). The Code is made under the LRRA 2006, s 22(1). 176 Regulatory Institutions and Practices (New Zealand Productivity Commission, 2014) 86–88. 177 P Fentham, W Kale, K Manch, N McGirr, P Mumford and S Raj, Professionalising Regulatory Practice. Lessons from the New Zealand G-REG Initiative (Victoria University of Wellington and Government Regulatory Practice, 2020).

The Theory of Culture in Organisations  201 Business Practice (EBP) put forward by Ruth Steinholtz and me.178 The critical ‘tool’ is for organisations to produce evidence that they can be trusted, and that their culture is ethical. The essence of EBP is that a business strives to create and maintain a culture (or set of sub-cultures across a large organisation, perhaps differing in different functional or geographical areas) that is based on ethical values and produces all relevant evidence of this over time. Two Frameworks are specified for EBP: a Cultural and Leadership Framework and a Values-Based Integrity Framework, summarised in Table 8.1 below. Table 8.1  The Basic Frameworks of Ethical Business Practice Leadership and Culture Framework • The Foundation: • Ethics is everyone’s responsibility • V  alues identified through internal consultation, clearly defined and regularly used • People and Ethos • Leaders walk the talk • Leadership development of relevant skills • Psychological safety • Just culture • A  ligned Systems and Processes, including performance management and incentives

Values-based Ethics and Compliance Framework: The ‘usual suspects done differently’. • V  alues-based Code and policies, developed through consultation • Risk assessments to include culture • C  ommunications, face-to-face awareness & training, Ethics Ambassadors instead of large central compliance departments • E  thical Decision-Making Models and scenario practice • S peak-up in psychological safety rather than whistleblowing • Third party engagement, due diligence • C  ollection of evidence for learning and trust building

The Regulatory Delivery Model (RDM) outlined by Graham Russell and colleagues (see chapter 13) identifies culture as one of the three essential preconditional elements in the framework of a successful regulatory authority.179 They identify three elements of culture for a regulatory authority: values, leadership and competency. The importance of values and leadership have been highlighted above in relation to commercial organisations and essentially apply generically, as is the need for a motivating sense of purpose and mission. Some nations have published generic statements on values that have considerable influence on the culture of its public authorities. We referred in chapter six to the UK’s set seven values-based principles of public life:180 selflessness; integrity; objectivity; accountability; openness; honesty; and leadership. Legal requirements also require due process in dealing with citizens.181 The perceptions of legitimacy are important. The extent to which an authority is perceived as upholding public values (a challenge for police forces in some US states in recent years), as demonstrated by progress in achieving good outcomes of protection and representing the public 178 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017). 179 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 180 The Seven Principles of Public Life (Committee on Standards in Public Life, 1995). 181 See ch 15. See TR Tyler, ‘Procedural Fairness and Compliance with the Law’ (1997) 133(2) Swiss Journal of Economics and Statistics 219.

202  Cooperative Culture interest with big and small businesses, will affect the motivation of the public and those regulated to comply with the rules.182 A number of case studies are available on the effects of change in a regulators’ culture on compliance and engagement, such as by Victoria’s Environmental Protection Agency.183 An inquiry at that time into dangerous methane gas leaks from a landfill site was critical of the agency’s culture and decision-making processes,184 identifying them as one of a number of factors contributing to the fact that ‘the EPA ineffectively utilised the enforcement tools at its disposal’. Through its transformation programme, EPA Victoria sought to address these issues through a clear commitment to ‘a proportionate, risk-based approach that provides the ultimate reassurance that tough action will be taken on those who fail to meet acceptable standards, but still drives environmental improvements and rewards good performance’.185 Leadership and ‘tone from the top’ have been mentioned above in the context of commercial organisations but are equally relevant for public organisations. The UK report on cultural barriers to data-sharing between regulatory agencies discusses the need to ‘develop more effective outcome focused leaders’ in order to overcome a ‘culture of inertia’.186 The Local Better Regulation Office (LBRO)187 recognised the need in the UK for a leadership development programme that was focused on the particular needs of local regulatory leaders. It supported the delivery of a strategic leadership programme in 2008, with its Chair, Clive Grace, noting ‘Issues of leadership and culture are critical to successful and modern local authority regulatory services.’188 LBRO also developed a leadership competency framework as part of its Common Approach to Competency.189 In the Netherlands the Inspection Council has been developing its focus on building leadership capacity190 and one of the early priorities of the Office for Product Safety and Standards was building a leadership development programme for 39 ‘heads of function’.

Competency The importance of competency for regulators is recognised in OECD guidance:191 Inspectors should be trained and managed to ensure professionalism, integrity, consistency and transparency: this requires substantial training focusing not only on technical but also on generic inspection skills, and official guidelines for inspectors to help ensure consistency and fairness.

182 TR Tyler, Why People Obey the Law (Yale University Press, 2006); and numerous other studies by Tyler, see ch 4 above. 183 E Windholz, ‘The Evolution of a Modern (and more legitimate) Regulator: A Case Study of the Victorian Environment Protection Authority’ (2016) 3 Australian Journal of Environmental Law 17; C Webb, ‘Culture as a Transformation Tool, the Experience of the Environment Protection Authority in Victoria, Australia’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019) ch 12. 184 Brookland Greens Estate – Investigation into Methane Gas Leaks (Victoria Ombudsman, 2009). 185 Concise Annual Report 2010: Transforming into a Modern Regulator (EPA Victoria, 2010). 186 Overcoming Cultural Barriers to Information Sharing within Regulatory Services (Centre of Excellence for Information Sharing, 2016), 11. 187 Predecessor body of the Office for Product Safety and Standards (OPSS). 188 The launch of the ‘ Strategic Leadership in Modern Local Government’ was reported by LACORS, available at www. ihsti.com/lacors/PressReleaseDetails.aspx?id=20088. See also ‘LBRO Annual Report and Accounts 2008–9’ (Local Better Regulation Office, 2009). 189 LBRO developed core regulatory skills in partnership with local and national regulators which were launched in 2011. The core regulatory skills were subsequently revised and published as Core Competencies for Regulators (Regulatory Delivery, 2016) available from the Office for Product Safety and Standards. 190 R Velders, ‘Cooperative Approaches: The Work of the Inspection Council in the Netherlands’ in G Russell and C Hodges, Regulatory Delivery (Hart, 2019) ch 11. 191 OECD Best Practice Principles for Regulatory Policy. Regulatory Enforcement and Inspections (OECD, 2014).

Analytical Tools on Culture  203 Providing transparency around the regulatory agency’s approach to competency can provide reassurance to the regulatory agency’s stakeholders.192 Discussion on the RDM noted the following.193 Frontline regulatory officers should be equipped with shared common core regulatory competencies that are transferable between areas of regulation.194 These core regulatory competencies are as important as the officer’s technical and organisational competencies. They incorporate the generic knowledge and skills needed by all regulatory officers to enable them: • to understand the context in which they operate and those they regulate; • to work with risk-based approaches; • to check compliance and respond appropriately to non-compliance; • to support improvements in compliance; and • to evaluate the impact of their activities in order to inform future approaches. The Netherlands established an Inspection Academy, and in the UK an apprenticeship scheme was established to develop frontline regulatory officers working in different regulatory areas, providing them with core skills and knowledge and seeking to embed the key behaviours.195 The incorporation of core regulatory competencies into, for example, training programmes, job descriptions, performance management arrangements, etc ensures that officers are well equipped to deliver their role.196 There may in practice be tension between, on one hand, allowing officers to make the best decisions on a case by case basis, drawing on professional competency, understanding, experience, flexibility and discretion and, on the other hand, legality, predictability, consistency and strict adherence to a rules-based system. This is a matter for ongoing debate in regulatory practice.

Analytical Tools on Culture No-one has yet succeeded in identifying a definitive means of measuring an organisational culture, but a range of tools have been developing. In deciphering an group’s culture, Schein espouses adopting a mixture of techniques, including visiting and observing, identifying artifacts and processes that are puzzling, asking insiders why things are done a particular way, identifying espoused values and asking how they are implemented, and looking for inconsistencies and asking what really determines day-to-day behaviour.197 Insight can be assisted by both quantitative and qualitative techniques.

192 eg Our Purpose, Values and Competencies (The Pensions Regulator, 2013). 193 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019), 158–161. 194 Common Approach to Competency for Regulators (Better Regulation Delivery Office, 2016). Available from the Office for Product Safety and Standards. 195 R Velders, ‘Cooperative Approaches: The Work of the Inspection Council in the Netherlands’ in G Russell and C Hodges, Regulatory Delivery (Hart, 2019). 196 Regulatory Compliance Officer: Details of Standard (Institute for Apprenticeships, 2018), available at www.­ instituteforapprenticeships.org/apprenticeship-standards/regulatory-compliance-officer. For example, in the UK, local fire safety authorities are encouraged to adopt a common Competency Framework for Business Fire Safety Regulators that emphasises core competencies based on the Common Approach to Competency developed by LBRO and its successor organisations. Available at www.cfoa.org.uk/18262. 197 EH Schein, Organisational Culture and Leadership 5th edn (John Wiley & Sons, 2017) 256.

204  Cooperative Culture A range of tools have been used in trying to obtain some measure of an organisation’s culture.198 These have mainly looked at data collected from staff surveys and interviews (often limited to directors and senior staff199), leaving interviews, whistleblowing information, customer feedback and complaints, and recently automated (AI) evaluation of digital data.200 Sociologists are wary of relying on surveys as a methodology, as Schein noted: ‘they reflect what the researcher put into the questions in the first place and are thus limited by the researcher’s model of what should be asked for. It is also not clear whether reliance on individual responses to a survey can reveal collective beliefs, values and norms’.201 Hsieh and colleagues describe the following leading methodologies: • Organisational Culture Assessment Instrument:202 a competing values framework, six questions. • Organisational Culture Model: dynamic with three levels (Iceberg Theory). • Ethical Climate Questionnaire: shared perception of what is correct behaviour and how to handle ethical situations.203 Three main schools of ethical theory (egoism, benevolence, deontology).204 • Corporate Ethics Values.205 • Organisational Culture Survey: 60 item survey.206

198 See overviews at JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224; N-H Hsieh, B Lange, D Rodin and MLA Wolf-Bauwens, ‘Getting Clear on Corporate Culture: Conceptualisation, Measurement and Operationalisation’ (2018) 6(s1) Journal of the British Academy 155–84; TW Reader, A Gillespie, J Hald and M Patterson, ‘Unobtrusive Indicators of Culture for Organizations: A Systematic Review’ (2020) 29(5) European Journal of Work and Organizational Psychology 633. 199 GG Gordon and N DiTomaso, ‘Predicting Corporate Performance from Organizational Culture’ (1992) 29 Journal of Management Studies 783–98; JR Graham, CR Harvey, J Popadak and S Rajgopal, Corporate Culture: Evidence from the Field (National Bureau of Economic Research, 2017); L Guiso, P Sapienza and L Zingales, ‘The Value of Corporate Culture’ (2015) 117 Journal of Financial Economics 60–76; W Nuijts and J de Haan, ‘DNB Supervision of Conduct and Culture’ in Financial Supervision in the 21st Century (Springer, 2013): CA O’Reilly III, DF Caldwell, JA Chatman and B Doerr, ‘The Promise and Problems of Organizational Culture: CEO Personality, Culture, and Firm Performance’ (2014) 39 Group & Organization Management 595–625. 200 Schein cites TinyPulse, Glint, CultureIQ, RoundPegg, CultureAmp. See also http://starlingtrust.com. 201 EH Schein, Organisational Culture and Leadership 5th edn (John Wiley & Sons, 2017). See also J Brehm and M Savel, ‘What Do Survey Measures of Trust Actually Measure?’ in M Saskai (ed), Trust in Contemporary Society (Brill, 2021). 202 RE Quinn and J Rohrbaugh, ‘A Special Model of Effectiveness Criteria: Toward a Competing Values Approach to Organizational Analysis’ (1983) 29 Management Science 363–77. 203 B Victor and JB Cullen, ‘A Theory and Measure of Ethical Climate in Organizations’ (1987) 9 Research in Corporate Social Performance and Policy 51–71; B Victor and JB Cullen, ‘The Organizational Bases of Ethical Work Climates’ (1988) 33 Administrative Science Quarterly 101–25. 204 DJ Fritzsche and H Becker, ‘Linking Management Behavior to Ethical Philosophy’ (1984) 27 Academy of Management Journal 166–75; B Williams, Ethics and the Limits of Philosophy (Harvard University Press, 1985). 205 SD Hunt, VR Wood and LB Chinko, ‘Corporate Ethical Values and Organizational Commitment in Marketing’ (1989) 53 Journal of Marketing 79–90; S Burnaz et al, ‘An Exploratory Cross-cultural Analysis of Marketing Ethics: The Case of Turkish, Thai and American Businesspeople’ (2010) 90 Journal of Business Ethics 371–82; PC Douglas et al, ‘The Effect of Organizational Culture and Ethical Orientation on Accountants’ Ethical Judgments’ (2001) 34 Journal of Business Ethics 101–21; RS Rubin et al, ‘Do Ethical Leaders Get Ahead? Exploring Ethical Leadership and Promotability’ (2010) 20 Business Ethics Quarterly 215–23; B Sweeney, D Arnold and B Pierce, ‘The Impact of Perceived Ethical Culture of the Firm and Demographic Variables on Auditors’ Ethical Evaluation and Intention to Act Decisions’ (2010) 93 Journal of Business Ethics 531–51. 206 D Denison, Corporate Culture and Organizational Effectiveness (Wiley, 1990); D Denison and WS Neale, Denison Organizational Culture Survey (Aviat, 1996).

Analytical Tools on Culture  205 • Organisation Culture Profile: 54 item survey to sort values; proposed eight dimensions207 modified208 and only confirmed five.209 • Ethical Culture Index: interplay between formal and informal systems of behaviour control, eg policies, leadership, authority structures, reward systems, training programmes; examples of behaviour toward others.210 21 item measure (much used) with 26 item questionnaire Victor & Cullen, resulting in 10-dimensional measure. • Corporate Ethics Virtues Model: draws on virtue-based theory of business ethics.211 Kaptein suggests that virtuous companies can develop a culture that stimulates ethical behaviour and prevents unethical behaviour. He assesses seven key organisational virtues that comprise an organisation’s culture: clarity, congruence, feasibility, supportability, transparency, discussability and sanctionability212 and later developed a 37-item questionnaire, clustered around five stakeholder groups: financiers, customers, employees, suppliers and society.213 Current practice in addressing organisational culture identified by internal auditors ranges across methods and proxies.214 Methods include interviews, surveys, assessment of the timely and effective resolution of audit issues and risk exposures, behavioural observation and root cause analysis. Proxies include staff surveys, whistleblowing activity, governance structures, values statements and their incorporation into recruitment and performance management and human resources grievance data and exit interviews. On the basis that unethical behaviour is difficult to observe because it is purposely kept hidden, and that bad news does not travel up most organisations, Treviño and colleagues identify the assessment methodology that has been most used is a combination of anonymous surveys and focus groups.215 As noted above, they identified five aspects of ethical culture as having a

207 CA O’Reilly, J Chatman and DF Caldwell, ‘People and Organizational Culture: A Profile Comparison Approach to Assessing Person-Organization Fit’ (1991) 34 Academy of Management Journal 487–516. 208 JA Chatman and KA Jehn, ‘Assessing the Relationship Between Different Levels of Leadership in Predicting Self- and Collective Efficacy: Evidence for Discontinuity’ (1994) 87 Journal of Applied Psychology 549–56. 209 SK Lee and K Yu, ‘Corporate Culture and Organizational Performance’ (2004) 19 Journal of Managerial Psychology 340–59. 210 LK Treviño, KD Butterfield and DL McCabe, ‘The Ethical Context in Organizations: Influences on Employee Attitudes and Behaviors’ (1998) 8 Business Ethics Quarterly 447–76; LK Treviño, GR Weaver and SJ Reynolds, ‘Behavioral Ethics in Organizations: A Review’ (2006) 32 Journal of Management 951–90. 211 RC Solomon, Ethics and Excellence (Oxford University Press, 1992); RC Solomon, A Better Way to Think About Business: How Personal Integrity Leads to Corporate Success (Oxford University Press, 1999); RC Solomon, ‘Business with Virtue: Maybe Next Year’ (2000) 10 Business Ethics Quarterly 319–31; RC Solomon, ‘Aristotle, Ethics and Business Organizations’ (2004) 25 Organization Studies 1021–43. 212 M Kaptein, ‘Developing and Testing a Measure for the Ethical Culture of Organizations; The Corporate Ethical Virtues Model’ (1998) 29 Journal of Organizational Behavior 923–47; M Kaptein, ‘From Inaction to External Whistleblowing: The Influence of the Ethical Culture of Organizations on Employee Responses to Observed Wrongdoing’ (2011) 98 Journal of Business Ethics 513–30; M Kaptein, ‘Understanding Unethical Behavior by Unravelling Ethical Culture’ (2011) 64 Human Relations 843–69; M Huhtala et al, ‘Does the Ethical Culture of organizations Promote Managers’ Occupational Well-being?’ (2011) 101 Journal of Business Ethics 231–47; WN Webb, ‘Ethical Culture and the Value-based Approach to Integrity Management: A Case Study of the Development of Correctional Services’ (2012) 32 Public Administration and Development 86–108. 213 M Kaptein, ‘Developing a Measure of Unethical Behavior in the Workplace: A Stakeholder Perspective’ (2008) 34(5) Journal of Management 978–1008. 214 Cultivating a Health Culture (Chartered Institute of Internal Auditors, 2022). 215 LK Treviño, J Haidt and AE Filabi, ‘Regulating for Ethical Culture’ (2017) 3(2) Behavioural Science and Policy 57–70.

206  Cooperative Culture profound effect on behaviour, and which assessment tools should aim to identify to determine whether interventions are most needed: 1. Orientation of Ethics and Compliance Programmes 2. Ethical Leadership 3. Ethical Climate, meaning the extent to which the climate is self-interested or other-interested 4. Fairness 5. Trust A recent model published for the Bank of England analysed metrics on 20 indicators for 150 banks and building societies between 2014 and 2020, derived from i) data quality metrics (DQMs) derived from regulatory return submissions; ii) diversity data from the Approved Persons database; iii) customer complaint reports; iv) whistleblowing referrals obtained from PRA intelligence; v) reports of internal fraud cases and costs; and vi) balance sheet and capital requirement information.216 They plotted a correlation matrix and distribution for each of the aggregated scores and found that both the overall culture score and its constituent dimensions are largely static, with the exception of customer orientation, where the average increased slightly in 2020, and inclusivity, which also trended slightly upwards over the period. Only at the end of 2021 did women just outnumber men in non-executive director posts in FTSE 150 companies, yet almost nine in 10 executive directors were male.217 Research was also reported that greater female representation significantly reduces the frequency of misconduct fines paid by the banks, equivalent to savings of $7.48 million per year.218 A Barrett Cultural Values Assessment approach is based on the idea of the maturity of organisations. Abraham Maslow proposed a hierarchy of needs of an individual, mapping these as the person develops in maturity from infancy to mature adulthood.219 Richard Barrett adapted Maslow’s hierarchy of levels of personal need into one for levels of organisational consciousness and maturity,220 amended in 2019221 (see chapter six). Barrett attributed specific ethical values to each level of consciousness, which led to the diagnostic approach that if one could ascertain the values of an individual or an organisation, one could identify which levels of consciousness they were operating from.222 Whatever values, beliefs and fears are foremost in the minds of the leaders of an organisation, determine the levels of consciousness the organisation operates from. This led to the development of a values measuring system based on the Model, which became known as the Cultural Transformation Tools® (CTT). Barrett proposed that both individuals and organisations grow and develop by mastering their needs and desires at each stage of development. The seven levels of organisational consciousness are set out in Figure 8.1 and illustrate how this perhaps rather ethereal sounding concept has quite practical application in organisations.223

216 J Suss, D Bholat, A Gillespie and T Reader, Staff Working Paper No 192. Organisational Culture and Bank Risk (Bank of England, 2021). 217 D Thomas, ‘Women Hold Most Non-executive Director Board Seats in UK for First Time’ Financial Times 13 December 2021, citing www.spencerstuart.com/research-and-insight/uk-board-index. 218 F Arnaboldi, B Casu, A Gallo, E Kalotychou and A Sarkisyan, ‘Gender Diversity and Bank Misconduct’ (2020) Cass Business School. Centre for Banking Research Working Paper Series WP 01/20. 219 AH Maslow, Motivation and Personality (Harper Collins, 1987); AH Maslow, Toward a Psychology of Being 2nd edn (Van Nostrand Reinhold, 1968); AH Maslow, The Farther Reaches of Human Nature (Penguin/Arkana, 1993). 220 R Barrett, The Values-Driven Organization: Cultural Health and Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017) 63 n28. 221 See www.valuescentre.com/. 222 R Barrett, The Values-Driven Organization: Cultural Health and Employee Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017) 63. 223 www.valuescentre.com/ and www.barrettacademy.com/about-2020/the-barrett-model.

Conclusion: Systemic Culture  207 Figure 8.1  The Barrett Seven Levels of Organisational Consciousness

The first three levels focus on the basic needs of business; the fourth level is focused on growth, change and adaptability and the focus of the upper levels is on the common good. The common good is characterised first by organisational cohesion, the ability to build mutually beneficial alliances and partnerships and to safeguard the well-being of society and the planet.224 The presence of fear-driven values and behaviours in the levels related to financial stability, relationships and high performance (Levels 1–3) is due to the inability of the organisation to meet its basic needs and will ultimately undermine the organisation’s culture and performance. Barrett calls this dysfunction Cultural Entropy, and explains that it is the amount of energy expended by employees doing unnecessary work or unproductive work – the amount of conflict, friction and frustration that prevents them from meeting their needs and the organization from achieving peak performance.225 It can also be thought of as culture risk. Culture risk enhances the ability of people to rationalise unethical behaviour and therefore must be minimised. Through the use of a CVA, ‘Regulators and boards can be more confident that they have a true picture of the values and culture in the organisation and the aspects of the culture that may need attention’.226

Conclusion: Systemic Culture The thrust of this book is that it is the culture of an entire community that matters, rather than just the culture of individual constituent entities that populate that community. Thus, the culture of a market and of regulatory system is critical rather than that of its constituent public 224 R Barrett, The Values-Driven Organization: Cultural Health and Employee Well-Being as a Pathway to Sustainable Performance 2nd edn (Routledge, 2017) 68. 225 ibid, 16. 226 R Steinholtz, ‘Putting Respected Research Tools to Work’ in R Miles (ed), Culture Audit in Financial Services (Kogan Page, 2021) 326.

208  Cooperative Culture or private constituent organisations. This insight transforms debate about whether individual banks, or sub-groups within them or even individual ‘bad apple’ individuals, might have a culture that comprises a risk to the compliance of that entity with society’s laws. Instead, the focus is on whether the culture of all individuals and institutions that populate the system is ethical, cooperative, supports trust between constituents, and hence delivers the desired outcomes. Culture risk – the risk that serious or systemic harm will occur because of inadequacies in the culture of participant organisations, people and communities – is managed and reduced. In order to achieve that condition of culture as a systemic quality, all constituents need to consider themselves as integral components who have intrinsic value, worth, competence, espoused values, and unique contribution to achievement of the goals. A culture of cooperation cannot be created, for example, if governments or regulators view valuable ethical businesses as untrustworthy, or, equally, if businesses distrust regulators and other stakeholders. The contribution of all stakeholders has to be recognised, encouraged, heard and valued. The model is not about regulating culture but regulating through culture. In other words, the cultures of all participants are aligned to maximise cooperation between them with the objective of achieving their common goals.

part b Refreshing Cooperative Models

210

part b.i Cooperation in Society

212

9 Cooperation in Society: Challenges of Economic, Political and Social Inequality The logic of the psychology is that happy communities nurture grounded families, productive and innovative workers, and increase social capital. So increasing cooperation and cohesion between citizens in civil society is the foundation of much other success. But what are the major barriers that currently impede this? I focus here on issues of inequality and social justice. We have seen in Part A the scientific conclusions that although social groups, especially as they get larger, form elites, the feeling by those without power can turn to resentment, disenchantment and undermining of intrinsic motivation. The more hierarchical the power structure of a group is, the less prone are lower ranked members to cooperate, vertically or horizontally.1 Self-Regulation Theory (see chapter four) holds that frustration of perceptions of personal needs and opportunity will adversely affect individuals’ needs for autonomy, competence, self-respect. People resent the feeling that they are being controlled, or not trusted or valued for themselves. As noted in chapter three, Nowak says that cooperation ‘has to come from the bottom up and not be imposed from the top down’2 and de Waal refers to the need for ‘a right-of-the-contributor principle’ to replace a right-of-the-strongest principle.3 These are not just issues of individual freedom under a political system based on democracy and respect for individuals, they are profoundly powerful forces of that affect the cohesion of communities and the strength of organisational culture. This analysis draws on the writings of many recent economic, political and social commentators to identify a mixed cocktail of issues around poverty and economic stagnation but particularly the psychological effects of feelings of anxiety, frustrated expectations of individuals and their communities, and perceived resentment of others (rich and more prosperous ‘elite’ groups or geographical areas). If this analysis is accurate, the steps that would deliver rectification of the problems and would build cooperation largely align. They highlight the need to address those issues: create greater equality and perceptions of meaningful contributions in vibrant and supportive local communities, which generate motivation for social solidarity and purposeful contributions to collective goals, outcomes and productivity.

1 KA Cronin, DJ Acheson, P Hernández and A Sánchez, ‘Hierarchy is Detrimental for Human Cooperation’ (2015) Scientific Reports 5, available at www.nature.com/articles/srep18634; M Bertness, A Brief Natural History of Civilization. Why a Balance Between Cooperation & Competition Is Vital to Humanity (Yale University Press, 2020), ch 7. See other references in ch 3. 2 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 282. 3 FBM de Waal, ‘How Selfish an Animal?’ in PJ Zack (ed), Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008) 66.

214  Cooperation in Society

The Manifestation of Inequality: Old and New Victims Poverty The claim of capitalism was that people would rise out of poverty and, through their own hard work, become better off. Thomas Piketty has shown how the world’s inhabitants living close to the subsistence threshold has steadily fallen from three-quarters in the eighteenth century to less than a fifth today.4 Most people in the world live in poverty. 85% of the world live on less than $30 per day, two-thirds live on less than $10 per day, and every tenth person lives on less than $1.90 per day.5 The global data shows that inequality between people has worsened in the past four decades, having previously improved through much of the twentieth century.6 A recent report outlined the ‘complexity’ of poverty, within three inter-related sets of dimensions:7 Core experience: Disempowerment; Suffering in body, mind and heart; Struggle and resistance. Relational dynamics: Institutional maltreatment; Social maltreatment; Unrecognised contributions. Privations: Lack of decent work; Insufficient and insecure income; Material and social deprivation. That list of factors includes not just lack of money or wealth. It includes well-being and health,8 and social, economic and political exploitation. Even if human life survives on the planet, climate change has a profound impact on health, ecology and diversity.9 The implications for health inequality – the fair distribution of health – are profound.10 The Marmot Report was clear that health inequalities result from social inequalities, and there is a social gradient in health – the lower a person’s social position, the worse is his or her health.11 It also said that economic growth is not the most important measure of our country’s success – the fair distribution of health, well-being and sustainability are important social goals. There is extensive evidence that inequality adversely impacts health, happiness,12 prosperity13 and achievement.14 The United Nations has said: The consequences of neglecting poverty and promoting inequality are clear. The United States has one of the highest poverty levels among the OECD countries’ and also ranks near the bottom among wealthy countries in terms of labor markets, safety nets, and economic mobility.15

In 1970 rich countries committed to spending 0.7% of their gross national incomes on aid to low- and middle-income countries. Fifty years later, Oxfam calculated that donor countries had 4 T Piketty, Capital and Ideology (The Belknap Press of Harvard University Press, 2020) 19. 5 M Roser and E Ortiz-Ospina, Global Extreme Poverty (2013), at http://ourworldindata.org/extreme-poverty. 6 See F Alvaredo et al, World Inequality Report 2018 (Harvard University Press, 2018). 7 The Hidden Dimensions of Poverty. International Participatory Research (ATD Fourth World and University of Oxford, 2019). 8 See Fair Society, Healthy Lives. Strategic Review of Health Inequalities in England post-2010 (The Marmot Review, 2010). See also the annual World Happiness Report at http://worldhappiness.report/. 9 M Marmot, P Goldblatt, J Allen et al, Fair Society Healthy Lives (The Marmot Review) (Institute of Health Equity, 2010); M Marmot, J Allen, T Boyce et al., Health Equity in England: The Marmot Review 10 Years on (Institute of Health Equity, 2020). 10 Sustainable Health Equity: Achieving a Net-Zero UK. Advisory Group Report for the UK Committee of Climate Change (Institute of Health Equity, 2020). 11 Fair Society, Healthy Lives. Strategic Review of Health Inequalities in England post-2010 (The Marmot Review, 2010). 12 A Alesina, R Di Tella and R MacCulloch, ‘Inequality and Happiness: Are Europeans and Americans Different?’ (2004) 88 Journal of Public Economics 2009–42. 13 M Marmot and RG Wilkinson, Social Determinants of Health (Oxford University Press, 1999); RG Wilkinson, The Impact of Inequality: How to Make Sick Societies Healthier (WW Norton, 2005); RG Wilkinson and KE Pickett, The Spirit Level (Penguin, 2009); M Marmot and J Allen, ‘Social Determinants of Health Equity’ (2014) September American Journal of Public Health S517. 14 R Wilkinson and K Pickett, ‘Income Inequality and Social Dysfunction’ (2009) 35 Annual Review of Sociology 493–511: referring to mental illness, violence, imprisonment, lack of trust, teenage births, obesity, drug abuse and poor educational performance of schoolchildren. 15 United Nations Human Rights Council, Report of the Special Rapporteur on Extreme Poverty and Human Rights on His Mission to the United States of America, 2018.

The Manifestation of Inequality: Old and New Victims  215 failed to deliver $5.7 trillion in aid.16 It does not help that economic mobility across generations, significantly affected by access to education, remains lower in developing regions than in highincome economies.17 Regional productivity differences were narrowing until 1980s, then the trend reversed.18 Since the 1980s income growth has been very unevenly distributed across different socio-economic groups.19 The benefits of global growth were enjoyed by those lifted out of poverty and into the middle class in emerging economies, especially China, and by the very rich. The poorest had limited income growth, but the dramatic point was that those towards the bottom of the industrialised West stagnated.20 In most OECD countries, country wage shares declined while profit shares rose, and personal distribution of income and wealth became ever more unequal.21 Since 1980, average pretax income of the bottom 60% of US workers has remained static or declined in real terms.22 In 1965 ratio of CEO to worker pay in USA was 20 to 1: by 2018 it was 312 to 1.23 In Britain, the ratio of rewards of CEOs to average employees moved from 45 to 1 in 1998, to 120 to 1 in 2010. The cost of the 2008 financial crisis in misconduct penalties to banks exceeded $320 billion a decade later, capital that could otherwise have supported around $5 trillion of lending to households and businesses.24 The UK is one of the most geographically unequal countries in the developed world.25 The impact of the economic and social environment on the social fabric of the UK has been illustrated by the think tank Onward in a series of metrics.26 They chart a history of community decline, a falling sense of belonging, weakening institutions and widening inequality. The metrics include: • Fewer than half of people in the UK are now members of a group (48%). Just 10% are members of a working men’s or social club and 6% are members of a tenants’ or residents’ association, down 25% and 38% respectively since 1993, and regular church attendance has more than halved from 6.4 million in 1980 to 3.1 million in 2015. Membership of pensioner and professional membership groups, in contrast, has risen seven-fold and twelve-fold respectively since 1993. • Between 2011 and 2017, the share of parents engaging in activities or outings with their children several times a week declined from 36% to 29%. Over the same period, the proportion who do so fewer than once a month rose from 34% to 40%. However, the number of 10–16 year olds having dinner with their family regularly has risen, from a third in 1995 to a half today. • Even though the number of charities and donations are rising, the generosity of donations is in decline. In 2007–08, the average person donated £1 in every £100 they earned to charity. A decade later, in 2017–18, that figure had fallen by more than a quarter, to 73 pence. • Communities are roughly half as likely (47%) to have a local post office than they were nearly two decades ago and three quarters (76%) as likely to have a local pub. This means that there 16 50 Years of Broken Promises (Oxfam, 2020). 17 A Narayan, R Van der Weide et al, Fair Progress? Economic Mobility across Generations around the World (World Bank Group, 2018). 18 J Rosés and N Wolf, ‘The Return of Regional Inequality: Europe from 1900 to Today’ VoxEU 14 March 2018. 19 C Lakner and B Milanovic, ‘Global Income Distribution: From the Fall of the Berlin Wall to the Great Recession’ (2016) 30(2) World Bank Economic Review. 20 M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All (Princeton University Press, 2020) 19–20. 21 An Economy for the 99% (Oxfam, 2017); M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018), 129 and figures 10 (income inequality) and 11 (household debt). 22 A Giridharadas, Winners Take All: The Elite Charade of Changing the World (Allen Lane, 2019). 23 ‘CEO compensation surged in 2017’ Economic Policy Institute 16 August 2018. 24 Frequently Asked Questions about the International Health Regulations (The World Health Organisation, 2005). 25 A Davenport and B Zaranko, Levelling Up: Where and How (Institute for Fiscal Studies, 2020). 26 W Tanner, J O’Shaughnessy, F Krasniqi and J Blagden, State of our Social Fabric (Onward, 2020).

216  Cooperation in Society are now only seven pubs for every 10,000 adults, compared to 11 pubs per 10,000 adults a decade ago in 2010. • Roughly three in 10 people now live on their own, up from just one in 20 (5%) a century ago. Much of the recent increase in the proportion of the population living alone is men aged between 45–64, who account for 42% of the increase in single person households. The Onward report also identifies that places with the strongest social fabric are typically located in the South of England and parts of Scotland, whereas those with fraying social fabric are typically found in the Eastern coast of England, South Wales and the M62 corridor from Huddersfield to Grimsby. The latter group are more likely to be politically volatile and to have voted for Brexit in 2016 and to have switched from Labour to Conservative in the 2019 election. The report also finds that the growth of the private rented sector has contributed to declining social fabric: Just over 56% of people in social housing and 66% of homeowners feel that they belong to their area, compared to just 47% of private renters. In the areas with the strongest social fabric, stable tenures (owner occupied and social rent) have increased since 2001, while in the areas with the weakest social fabric, they have fallen by 8%.

A report by the Institute of Fiscal Studies in October 2020 broadly confirmed the above findings on which regions are ‘left-behind’. They are particularly concentrated in large towns and cities outside of London and the South East, in former industrial regions, and in coastal and isolated rural areas.27 It found that the UK’s regional inequalities are deep-rooted and complex: even well-designed policies could take years or even decades to have meaningful effects. A number of hospitality- and tourism-dependent coastal communities (such as Blackpool, Great Yarmouth and the Isle of Wight), and the centres of some Northern and Scottish cities (such as Liverpool, Glasgow and Dundee), face the ‘double whammy’ of being both ‘left behind’ and vulnerable to the immediate economic fallout from the pandemic. In the UK, 13.5 million people lived in low-income households in 2017, with 1.25 million suffering from destitution, using no financial services.28 As at 2020, just over a million people in the UK did not have a bank account, one in four households lacked insurance protection and one in five adults would not be able to cover more than one month of living expenses if they lost their source of income.29 In 2020, the CEO of the FCA recognised long running issues of ‘gaps between generations in terms of wealth and opportunity’ and ‘increasing pressure on the financially vulnerable, stretched or distressed’.30

The Squeezed Middle Class However, it is not only the gap between rich and poor that is at the heart of the current problem, but that since 1980 the economic position of the sixth to ninth deciles of economic society globally has worsened. It is this middle class that did not benefit much at all from the global economic

27 A Davenport and B Zaranko, Levelling Up: Where and How (Institute for Fiscal Studies, 2020). 28 T Edmonds, Financial Inclusion (Exclusion) House of Commons Library, Briefing Paper 01397, 15 December 2017. See also Tackling Financial Exclusion: A Country that Works for Everyone? House of Lords Select Committee on Financial Exclusion, HL Paper 132, 25 March 2017. 29 Financial Inclusion Commission Strategy 2020 (Financial Inclusion Commission, 2020). 30 N Rathi, ‘Facing the Future – Challenges and Priorities for the FCA’, speech given at the Address to the City regulators, Mansion House, London, 12 November 2020.

Economic, Social and Political Causes of Inequality  217 growth during the period. The critical factor in political instability is that the inequality between the middle and the top has increased. Concern about ‘the squeezed middle class’ prompted the OECD to highlight the need to address the issue in 2019. In recommending that policies need to be geared to the new challenges facing middle-class households, the OECD included the following statements:31 Political instability is an important channel through which a squeezed middle class may upset economic investment and growth.32 A rising sense of vulnerability, uncertainty, and anxiety has translated into increasing distrust towards global integration and public institutions.33 Trust is not only essential for a well-functioning society; is also an important element for economic growth. Higher social trust reduces transaction costs and increases innovation.34 Societies with a strong middle class experience higher levels of social trust but also better educational outcomes, lower crime incidence, better health outcomes and higher life satisfaction.35 The middle class champions political stability and good governance. It prevents political polarization and promotes greater compromise within government.36 Middle classes also provide a solid basis to build a democratic state, not only by financing it through taxes but also demanding regulations, enforcement of contracts and the rule of law.37

Many leading economists and political analysts have contributed to the analysis of the basic causes of inequality, which need to be thought about if we are to make sound conclusions on how to respond.

Economic, Social and Political Causes of Inequality The Political Ideology of Individual Freedom We should start with the political ideologies that guide thinking, policy and action in Western states, and note what consequences these lead to and how they are now changing. As a development of capitalism since the nineteenth century, the dominant political theory since World War II has been described as neoliberalism. It is based on individual personal freedom and hence free

31 Under Pressure: The Squeezed Middle Class (OECD, 2019) para 1.7. 32 A Alesina and R Perotti, ‘Income Distribution, Political Instability, and Investment’ (1996) 40(996) European Economic Review 1203. 33 Meeting of the OECD Council at Ministerial Level: Key Issues Paper (OECD, 2017), www.oecd.org/mcm/ documents/C-MIN-2017-2-EN.pdf. 34 E Gould and A Hijzen, ‘Growing Apart, Losing Trust? The Impact of Inequality on Social Capital Growing Apart, Losing Trust? The Impact of Inequality on Social Capital’ (2016), www.imf.org/external/pubs/ft/wp/2016/wp16176.pdf; D Madland, ‘Hollowed out: Why the Economy Doesn’t Work Without a Strong Middle Class’ (University of California Press, 2015) www.jstor.org/stable/10.1525/j.ctt14qrz80. 35 M Kelly, ‘Inequality and Crime’ (2000) 82(4) Review of Economics and Statistics 530; J Lynch and G Kaplan ‘Understanding How Inequality in the Distribution of Income Affects Health’ (1997) 2(3) Journal of Health Psychology 29; F Graves, ‘Understanding the Shifting Meaning of the Middle Class’ (2017), www.ekos.com/studies/MiddleClass.pdf; G Thorson, ‘The Rise of Inequality, the Decline of the Middle Class, and Educational Outcomes’ (2014), Segovia, Spain, www.umdcipe.org/conferences/DecliningMiddleClassesSpain/Papers/Thorson.pdf. 36 D Madland, ‘Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class’ (University of California Press, 2015) www.jstor.org/stable/10.1525/j.ctt14qrz80. 37 N Birdsall, ‘Middle-Class Heroes’ (2016) Foreign Affairs, www.foreignaffairs.com/articles/2016-02-15/middleclass-heroes.

218  Cooperation in Society markets. Individuals should possess and express their rugged freedom and personal choice, largely unconstrained by external control or interference. A consequence of individualism is a resistance to being told what to believe (religious ­freedom), and to any interference with free choice as an individual. The forces of exchange in markets provide adequate controls and are preferable to governmental control. This includes resistance to regulation, imposed by the state. The concomitant idea is that free markets contain enough selfimposed motivation and discipline that will provide adequate self-regulation. However, where there are deficiencies in markets, the state should step in to correct them. Regulation and the restrictions on free choice and free markets will be acceptable in these circumstances. Philip Pettit has defined a state of non-dominance as ‘emancipation from any … subordination, liberation from any such dependency. It requires the capacity to stand eye to eye with your fellow citizens, in a shared awareness that none of you had a power of arbitrary interference over another.’38 The ideology outlined here has been very powerful, as it involves an integration between theories of personal freedom, free markets, motivation by money, and how to respond to ‘externalities’ in purely monetary terms. It leads to a strong emphasis on individual rights and hence adversarial legalism.39 Individualism can be invoked in attempts to justify the freedom to believe things as facts (conspiracy theories, fundamentalist beliefs, fake news, not losing an election) and to have unfettered right to personal freedom of expression.

The Instability of Capitalism What happened in the late twentieth and early twenty-first centuries to cause this feeling of economic, social and political frustration? After all, didn’t Western liberal capitalism win because Soviet and Chinese communism both collapsed? Didn’t Western democracies win two world wars and deliver freedom and economic growth? Didn’t we manage to ride the Global Financial Crisis with economies intact? Later we will look into the implications of how the concepts of neoliberal capitalism have been manifested in the theory and behaviour of corporations. In this chapter, we note a different aspect. Various writers have pointed their fingers at the ossification of delivery of public functions by governments, at inherent fault lines in liberalism, at the disconnect that the scale of distant globalisation and government brings for many people, their loss of a sense of human scale and of a sense of place, and at popular senses of frustrated expectations that boil over into destabilisation. In their classic study, Daron Acemoglu and James A Robinson demonstrated the symbiotic relationship between the health of states and societies and the state of their political and economic institutions.40 States that have institutions where an elite extracts wealth and power ultimately fail, whether they are repressive or liberal. In contrast, states that have institutions that distribute, and moderate, the sharing of power and wealth between all elements of the population will be healthy, innovative and prosper. Acemoglu and Robinson argued that it is necessary for states to have some element of centralised control, but equally to enable pluralist involvement.

38 P Pettit, Republicanism: A Theory of Freedom and Government (Oxford University Press, 1999). See also P Pettit, Just Freedom: A Moral Compass for a Complex World (WW Norton, 2014). 39 RA Kagan, Adversarial Legalism. The American Way of Law (Harvard University Press, 2001). See also S Farhang, The Litigation State: Public Regulation and Private Lawsuits in the United States (Princeton University Press, 2010); SB Burbank, S Farhang and H Kritzer, ‘Private Enforcement’ (2013) 17 Lewis & Clark Law Review 637. 40 D Acemoglu and JA Robinson, Economic Origins of Dictatorship and Democracy (Cambridge University Press, 2006); D Acemoglu and JA Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (Crown, 2012).

Economic, Social and Political Causes of Inequality  219 They cite four major turning points in history: (a) scarcity of labour in the Black Death after 1349, and subsequent divergences of labour and pay, followed in 1500 by an increase in demand for agricultural goods, met by China and trade, (b) associated with the creation of a centralised state, but (c) a less powerful monarchy in England since Elizabeth and the Civil War of 1642–51, and (d) the critical sharing of power from the 1688 Glorious Revolution settlement between King and Parliament, leading directly to the Industrial Revolution of the nineteenth century. In 2014 John Micklethwaite and Adrian Wooldridge argued that delivery of public functions by a state was clearly too expensive and slow to respond to change, too parochial at the international level and that how we ‘do government’ should change.41 They argued that the modern state is ‘a threat to liberty’, taking half of what we produce and preventing us doing many things. They thought that corporations had rethought almost all assumptions about management, and had replaced steep hierarchies with fluid networks and outsourced resources, which states found impossible to achieve, resulting in a bloated and unresponsive Leviathan – ‘a gigantic mess’. Their prescription was for more personal freedom, more pluralism (eg diversity in education), more localism, and more outsourcing (for example permitting commissions rather than politicians to decide electoral boundaries, similar to the success of giving independent central banks control over monetary policy). They praised India’s adoption of mass production techniques in ­hospitals42 and Brazil’s system of conditional cash transfer in welfare (Bolsa Familia). Political scientists on both sides of the Atlantic have recently identified serious fault lines in liberalism. One of the most profound critiques is by American political scientist Patrick Deneen.43 His analysis is that liberalism has become too successful but has carried the seeds of its own destruction, which is now being manifested. The argument is that the ancient concept of liberty, which Deneen defines as the condition of self-governance, was developed into ‘liberalism’, understood as ‘the greatest possible freedom form external constraints’ and only subject to limitation by democratically ‘enacted laws consistent with maintaining order of otherwise unfettered individuals’.44 Deneen argues that the initial philosophy was created at times of demolishing or supporting authoritarian princely rule by Hobbes and Machiavelli (pursuit of pride, selfishness, greed and the quest for glory), and later put into practice by revolutionaries against kingly regimes led by France and the United States. By the twentieth century, liberalism had supported the expansion of free markets and of the state, in pursuit of claimed freedom of individual rights. However, enabling both uncontrollable markets without borders of any kind and ever greater state bureaucracies and controls produced disasters such as ‘ecological costs of burning of fossil fuels, limits of unlimited application of antibiotics, political fallout from displacement of workforce by technology’.45 Instead of the limitation of government and liberation of the individual from arbitrary political control, Deneen argues that the ideology of liberalism contained inherent instability, generating uncontrollable endemic pathologies that ‘in practice generates titanic inequality, enforces uniformity and homogeneity, fosters material and spiritual degradation, and undermines freedom’.46 Human beings become viewed as ‘by nature, nonrelational creatures, separate and autonomous’47 with all relationships determined by individual choice and calculations of self-interest and immediate gratification, rather than by senses of cooperative solidarity, and so constantly flexible and arbitrary, and subject to change. The function and perception of

41 J

Micklethwait and A Wooldridge, The Fourth Revolution. The Global Race to Reinvent the State (Penguin, 2014). 201–03, referring to Devi Shetty’s work at Narayana Hrudayalaya Hospital, Bangalore. Deneen, Why Liberalism Failed (Yale University Press, 2019). 44 ibid, viii. 45 ibid, 29. 46 ibid, 3. 47 ibid, 32. 42 ibid, 43 PJ

220  Cooperation in Society law is ‘a set of practical restraints upon self-interested individuals’.48 The expansion of state law controls on associations and relationships leads to the dichotomy of ‘the liberated individual and the controlling state’.49 This is unsustainable. Faced with ungovernable economic and political institutions, a populace without power becomes discontented with the titanic economic forces and distant and ungovernable state structures, and the degraded form of citizenship, in which the claim to consent through periodic elections is illusory since the fragmented populace is unable to control multiple state institutions.50 Deneen concludes with a call to move forward by cultivating a system of social interaction based on virtue and customary norms in human-sized structures (family, community, business, state). he says we need new forms of community, a polis with ‘lives shared with a sense of common purpose, with obligations and gratitude arising from sorrows, hopes, and joys lived in generational time, and with the cultivation of capacities of trust and faith’.51 From a British perspective, Adrian Pabst argues that the liberal order is inherently unstable because it erodes its own foundations through producing inevitable economic injustice and divisions in society that threaten the social contact.52 He argues that liberalism instituted ideas of fairness53 and discursive reason54 that promised freedom of choice but without permitting choice over the conditions under which choices are made.55 As a result, when individuals disagree, there is an absence of constraints on the individual other than law and private conscience56 (negative liberty) but a failure of a mechanism for integration. This leads, Pabst proposes, to identity politics, perpetual demagogy and anarchy, illustrated by the regimes of Berlusconi and Trump. An interesting line of analysis is that post-WWII liberalism was in fact a, perhaps disguised, authoritarian liberalism, that is a liberalism pursued by authoritarian means, avoiding robust democratic accountability, since the policy elites feared full democracy.57 One example of this model is the structure of the European Union, with a prime role for the expert bureaucrats of the European Commission. Failures of this model can be traced to the recent rise in the emergence of an authoritarian populism.

Elites, Citizenship, Localisation and Belonging Colin Crouch argued in 2003 that the political system had become dominated by small elites of politicians and the corporate rich, with the result that traditional political parties had ceased to be relevant for most people, and politics was controlled by populist movements, xenophobic, farright parties,58 and use of wealth for political influence.59 By 2020, he argued that the trend had continued and all the major neoliberalist policies – such as privatisation, public-private financial 48 ibid, 32. 49 ibid, 38. 50 ibid, ch 7. 51 ibid, xxvii. 52 A Pabst, The Demons of Liberal Democracy (Polity Press, 2019). 53 J Rawls, A Theory of Justice (Harvard University Press, 1971). 54 J Habermas, Postmetaphysical Thinking: Between Metaphysics and the Critique of Reason, trans WM Hohengarten (Polity, 1995). 55 Z Bauman, Does Ethics Have a Chance in a World of Consumers? (Harvard University Press, 2008) 72. 56 I Berlin, ‘Two Concepts of Liberty’ in Four Essays on Liberty (Oxford University Press, 1969) 118–72. 57 MA Wilkinson, Authoritarian Liberalism and the Transformation of Modern Europe (Oxford University Press, 2021). 58 E Steenvoorden and E Harteveld, ‘The Appeal of Nostalgia: The Influence of Societal Pessimism on Support for Populist Radical Right Parties’ (2017) 41(1) West European Politics 28–52; E Campanella and M Dassù, Anglo Nostalgia: The Politics of Emotion in a Fractured West (Hurst and Co, 2019). 59 C Crouch, Post-Democracy (Polity Press, 2003).

Economic, Social and Political Causes of Inequality  221 initiatives, heavily leveraged secondary stock markets, the maximisation of shareholder value as the sole goal of a company, liberalisation of financial markets, deteriorating welfare states – had become disasters.60 The results were visible in the 2008 financial crisis.61 The goal of companies was no longer profit but the short-term value of a share price.62 But the weakening of democracy, Crouch asserted, was visible in the feeling of remoteness that people had from what goes on in both national parliaments and local council chambers: there is a feeling that no-one ‘stands for us’.63 He argued that it has been forgotten that a strong democracy needs, first, a capacity for citizens to confront established elites with unsettling demands and, second, institutions outside democracy itself that protect its operation, particularly from the conduct of rulers.64 Although he was critical of the lack of citizens’ commitment to, or faith in, the European Parliament, he noted that it and the other EU institutions remained the only attempt to create some transnational democracy.65 The identification of the importance of localism for people and their wellbeing is a strikingly consistent theme in recent writing from both right and left leaning thinkers. Conservative philosopher Roger Scruton built his claim that conservatism is better suited to tackle environmental problems than either liberalism, socialism or interest groups on a foundation of small scale personal social groups (such as the family and local civil associations), and a sense of a shared place (the love of and a feeling for home, which he called oikophilia), generating a sense of tradition, local loyalties and customs, and effective institutions of a self-governing society with inherent accountability.66 American academic Kenneth Stahl identified that distinctive ‘spheres of citizenship’ coexist. In nation states,67 he distinguished between national citizenship and local citizenship. National citizenship is ascriptive and ‘closed’ based on shared identity and an organic sense of belonging, whereas local citizenship is consensual and ‘open’ based on residence and mobility. Stahl argued that the important human need for local citizenship has been diminished by ‘the sprawling, autocentered suburbs, which rarely offer genuine places of civic engagement, but which are seen as models of mobility and consumer choice’. He considered that the market has become the measure of all things, and ‘the republican concern with protecting the city from the world leads it down the path of quasi-nationalist xenophobia, in which outsiders are ostracized and scapegoated’.68 He was concerned that people were often only incorporated into the political life of the city as members of their cultural subgroups rather than as individuals, which reinforces marginalisation of the groups it wishes to empower. Hence, he concluded that attempting to excise liberalism from local citizenship is futile, and liberalism, which has never been only about commerce, needs to be reformed.

60 C Crouch, Post-Democracy After the Crises (Polity Press, 2020) 141. 61 A Tooze, Crashed: How a Decade of Financial Crises Changed the World (Allen Lane, 2018). 62 M Feher, Rated Agency: Investee Politics in a Speculative Age (Zone Books, 2018). 63 C Crouch, Post-Democracy After the Crises (Polity Press, 2020) 119. 64 ibid, 139. 65 ibid, 83, 86. 66 R Scruton, Green Philosophy. How to Think Seriously about the Planet (Atlantic Books, 2009). His concept is based on the Greek oikos, the household, and he praises the German concept of Heimat. Stirred up by witnessing French student riots in 1968, Scruton developed three ideas from Edmund Burke’s thoughts in response to the ‘geometrical’ politics of French revolutionaries: respect for the dead, the ‘little platoon’, and the voice of tradition. His thoughts on the effectiveness of the law of tort in delivering accountability have since been undermined by empirical evidence: see C Hodges, Law and Corporate Behaviour (Hart, 2015). 67 K A Stahl, Local Citizenship in a Global Age (Cambridge University Press, 2020). 68 ibid, 17.

222  Cooperation in Society Also viewing things from the USA, Michael Lind’s analysis is that the post-war sharing through welfare has been dismantled by managers and professionals, who had become the new elite, replacing bourgeois capitalists.69 The elite had captured social power in all three realms of government, the economy and the culture. Under technocratic neoliberalism, corporations had deunionised, outsourced production to workers who are immigrant or based in poor countries (global labour arbitrage), seized control of political parties through the power of donations and media, usurped legislatures by delegating authority to executive agencies, courts and transnational bodies, and marginalised local religious and civic watchdogs in the cultural sphere. These changes have, Lind argues, produced a new class war, by provoking ‘a populist backlash from below by the defensive and disempowered native working class’. He thinks that this is unlikely to be ended through sharing wealth and symbolic gestures, unless the new managerial overclass is willing to share genuine power with the working class majority in all three realms of social power – the economy, politics and culture. Lind’s prescription is ‘democratic pluralism’, involving multiple modes of representation, in mixed membership local political, work and cultural bodies or committees. He said:70 [The] essential insight is that electoral democracy is a necessary but not sufficient condition for democracy … Substantial areas of policy should be delegated to rule-making institutions, which must represent particular portions of the community, like organized labor and business in wage-setting sectoral bodies, or representatives of religious and secular creeds in bodies charged with oversight of education and the media. … While retaining oversight, legislatures can cede large areas of policy making to those with higher stakes and expertise.

Lind argued that local organisation would bring involvement to people, dissipating inter-class tensions, and more easily expose inadequacy and corruption. ‘Functional equivalents would be the “guild” in the realm of the economy, the “ward” in the realm of government, and the “congregation” in the realm of culture.’71 Steve Hilton’s analysis of Britain in 2015 was that the world has become too big, distant, impersonal and inhuman.72 He called for the vast majority of services to be devolved to a human scale: ‘welfare, education, healthcare, social services, planning, conservation, policing, economic development – can and should be delivered locally’. He noted evidence that the best CEOs have delegated responsibility and run highly decentralised organisations.73 Arguing that government was too distant, too uninvolving, he noted that in France, 80% of mayors are responsible for fewer than 1,000 residents each, but they still have local policy discretion. He said that people in the UK had ‘lost a sense of community, of perspective’, amongst the examples citing comments that NHS hospitals have become ‘conveyor belts’ that ‘churn’ out their patients whom they treat like ‘parcels’,74 forgetting the element of simple caring for people. He also argued that important posts should ‘be filled by the best available people, rather than just the best available politicians in the ruling party’. Hilton also noted popular anger at big business for paying ‘obscenely high salaries’

69 M Lind, The New Class War. Saving Democracy from the Metropolitan Elite (Atlantic Books, 2020). 70 ibid, 133. 71 ibid, 136. He approved of Robert Dahl’s view that the ideal (American) political unit has between fifty thousand and several hundred thousand inhabitants: RA Dahl, After the Revolution? Authority in a Good Society, revised edn (Yale University Press, 1990 [1970]) 132. 72 S Hilton, More Human. Designing a World Where People Come First (WH Allen, 2015). 73 W Thorndike Jr, The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (Harvard University Press, 2012). 74 Quotes from The King’s Fund Report and Joyce Robins, quoted in ‘Hospitals “Are Medical Factories”’ BBC News 3 December 2008.

Economic, Social and Political Causes of Inequality  223 but low ones to their workers,75 and a general feeling that after years of stagnating wages people felt they were not ‘getting ahead’. Similar ideas on ‘the politics of the ordinary’ issues that concern people, from being able to spend more time with their friends and family, to crumbling local buildings, roads and services, are proposed by Marc Stears.76 Social and political meltdown, boiling over around 2016, was diagnosed by Financial Times economist Martin Sandbu as frustration of economic and social aspirations that had a notable link to people’s sense of place.77 He argued that the idea of egalitarianism that had been held up for most of the twentieth century had not been updated and had been allowed to disintegrate. The largely incorrect assumption of uncontrolled migration was perceived as real, particularly in small towns. Sandbu argued that economically vulnerable communities turned against the postwar system of liberal openness.78 World Bank economist Branco Milanovic’s economic analysis of the world’s problems includes the effects of migration but considers migration of labour to be a natural effect that can be disruptive for labour but beneficial for capital.79 As Haidt shows, a native population can fear disturbance of the way of life they lead. Existing cultures can, therefore, be disrupted, since migrants carry with them the value systems of their countries, which undermine those of the rich country and undermine institutions necessary for growth.80 Sandbu’s suggestions were to adopt economic policies for empowerment: a renewed welfare system, empowerment in the workplace and addressing market power and abuse. Economist Kate Raworth argues that inequality undermines societies and ‘damages the social fabric of the whole society’ and hence damages democracy.81 She cites Wilkinson and Picket’s evidence that it is national inequality, not national wealth, that most influences nations’ social welfare.82 She also quotes psychotherapist Sue Gerhardt: ‘Although we have relative material abundance, we do not in fact have emotional abundance.’ ‘Many people are deprived of what really matters.’83 Raworth further referred to the five simple acts found by extensive psychological research collated by the New Economics Foundation as proven to promote well-being: connecting to the people around us, being active in our bodies, taking notice of the world, learning new skills and giving to others.84 Kapteyn and colleagues also found that lack of a consistent relation of experienced well-being measures with income, while evaluative well-being is strongly positively related with income.85 What are the causes of continued exploitation and neoliberal capitalism? Don’t blame the populace. ‘The world’s elites have helped to provoke what they feared: a populist uprising against the world economy.’86 The deep alienation between different elements of society in the UK was 75 J Chu, J Faasse and P Raghavendra Rau, ‘Do Compensation Consultants Enable Higher CEO Pay?’ New Evidence From Recent Disclose Rules Changes 23 September 2014. 76 M Stres, Out of the Ordinary. How Everyday Life Inspired a Nation and How it Can Again (Harvard University Press, 2021). 77 M Sandbu, The Economics of Belonging. A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All (Princeton University Press, 2020). 78 ibid, 46. 79 B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019). 80 G Borjas, ‘Immigration and Globalization: A Review Essay’ (2015) 53(4) Journal of Economic Literature 961. 81 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017). 82 RG Wilkinson and KE Pickett, The Spirit Level (Penguin, 2009). 83 S Gerhardt, The Selfish Society: How We All Forgot to Love One Another and Made Money Instead (Simon & Schuster, 2010) 32–33. 84 J Aked et al, Five Ways to Wellbeing: The Evidence (New Economics Foundation, 2008). 85 A Kapteyn, J Lee, C Tassot, H Vonkova and G Zamarro, ‘Dimensions of Subjective Well-Being’ (2015) 123 Soc Indic Res 625. 86 E Luce, The Retreat of Western Liberalism (Abacus, 2018), 73.

224  Cooperation in Society analysed by David Goodhart not in terms of capitalist-worker of class war terms but, strikingly, as a rift between Anywheres and Somewheres.87 The minority group of Anywheres he described as highly educated and mobile, tending to value autonomy and openness, comfortably able to surf social change, and to dominate society and politics. The majority, but less influential, group of Somewheres were more rooted and less well educated, who valued security and familiarity and felt that their more socially conservative intuitions had been excluded from the public space. The disaffection amongst Somewheres was fuelled by the following series of issues stemming from neglect of the private realm: –– A crisis in social care, in part due to decline in family obligation; –– A housing crisis, exacerbated by the decline of the stable two-parent family; –– Over-dependence on immigration, because of the economic and cultural bias against larger families; –– Rise of stress and mental illness, especially amongst young people; –– A curse of loneliness for millions of older people; –– A persistence of gender pay inequality; and –– Difficulty of recruiting people to caring jobs because they are so under-valued and underpaid. Given this ‘Great Divide’ Goodhart suggested that the challenge of modern politics was how to restore dignity and prestige to the domestic realm. He emphasised the need for mobility in society and called for a technocratic state and highly collaborative structures. The historical differentiation between right and left voters has been shown to need revision: a study of Western democracies found that, every year since 1955, 10% of voters with the most years of schooling gravitated towards left-wing parties, and by 2000 the most educated voters had become more left-wing than their less-educated peers.88 Together with the continuation of wealthy people favouring right-leaning politics, the result could easily be referred to by the latter group as elitism – possibly to the surprise of many in the ‘elite’. Impressive scientifically based research published in 2020 found that although the decade of austerity and the vote on Brexit had produced significant polarisation, Britons were not divided so much along traditionally imagined fault lines – class, age, religion and left/right values (or Somewhere/Anywhere division).89 Instead, based on social psychology expertise, the research mapped people according to their values and core beliefs, and identified seven groups from a sample of 100,000: –– –– –– –– –– –– ––

Progressive Activists: 13% Civic Pragmatists: 13% Disengaged Battlers: 12% Established Liberals: 12% Loyal Nationals: 17% Disengaged Traditionalists: 18% Backbone Conservatives: 15%

87 D Goodhart, The Road to Somewhere. The New Tribes Shaping British Politics (Penguin Books, 2017). 88 A Gethin, C Martinez-Toledano and T Piketty (eds), Political Cleavages and Social Inequalities: A Study of Fifty Democracies, 1948–2020 (Harvard University Press, 2021). 89 M Juan-Torres, T Dixon and A Kimaran, Britain’s Choice: Common Ground and Division in 2020s Britain (More in Common, 2020).

Economic, Social and Political Causes of Inequality  225 It was not found that the populace divided into two opposing camps, but different groups formed from the above seven more permanent psychological groups, depending on the nature of particular issues. For example, four of the groups united around concern over inequality and economic policy. Feelings of insularity and threat were found to be major drivers of attitudes, with powerful influence on Loyal Nationals but little impact on Established Liberals. Thus, convergence of different value-based groups around particular issues was critical to the formation of majorities.

Threats and Boiling Point In summary, the issues of perceived migration, undermining of existing communities, values and institutions as much as of employment opportunities, as well as the ‘squeezing’ of the middle class and stories of concentrations of power that are too distant, have all been implicated in the UK’s vote in 2016 to leave the European Union – Brexit. Robert Tombs’ analysis of the Brexit history concludes that many of the arguments advanced by both sides – Leavers and Remainers – were emotional, irrational and unsupported by evidence.90 He argued that the evidence shows that many EU citizens are disaffected and wish to leave, and that the EU’s political and administrative structures and its economic policies are deeply flawed. One problem is, of course, that the UK’s vote was not illuminated by any detail on exactly what arrangements would replace that membership. However, the implications are wider than ‘levelling up’ in economic and employment aspects but involve greater political involvement91 and sense of communities.92 The fact that only 37.5% of those entitled to vote opted to leave the EU had the political effect of being 51% (winner takes all, loser takes nothing) should be a cause for concern, at least in view of what it reveals about the depth of division that it reveals in society. Britain is by some distance the most centralised country in the G7, and regional inequality is a ‘burning issue’.93 The implications for the EU should also raise alarms. Francis Fukuyama has referred to a politics of resentment by those who feel marginalised.94 Psychologist Jonathan Haidt notes that if groups feel threatened, they turn inwards on a protective impulse. That observation goes some way to explaining populist voting and Brexit.95 Haidt’s research into psychology and politics has led him to propose a rational basis for explaining why rural and working-class Americans generally vote Republican when it is the Democratic Party that wants to distribute money more evenly: each group was influenced by, and voting for, their moral interests.96 His consideration of religions leads to the conclusion that only groups that can elicit commitment and suppress free riding can grow. Generating that wider commitment to care about people and things beyond ourselves is vital for religious and political groups. Further, in relation to moral capital, the relevant issue is the degree to which a community possesses interlocking sets of values, virtues, norms, practices, identities, institutions, and technologies that mesh well with evolved psychological mechanisms and thereby enable the community to suppress or regulate selfishness and make cooperation possible.97 90 R Tombs, This Sovereign Isle. Britain In and Out of Europe (Allen Lane, 2021). He identified four categories of ‘remainers’: ideological, professional, worried and status quo. 91 M Freeden, ‘A New Ideological Era’ RSA Journal at http://medium.com/rsa-journal/a-new-ideological-era2172f379a67d. 92 K Hamilton, JF Helliwell and M Woolcock, Social Capital, Trust and Well-being in the Evaluation of Wealth, Policy Research Working Paper No 7707 (World Bank, 2016). 93 Editorial, ‘Levelling up Britain’ The Economist 1 August 2020. 94 F Fukuyama, Identity: The Demand for Dignity and the Politics of Resentment (Profile Books, 2018). 95 J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 96 ibid. 97 ibid, 341.

226  Cooperation in Society Haidt argues that people who are left-leaning in politics have a blind spot in considering the effects of changes on moral capital, whereas those on the right are better at preserving it but fail to notice certain classes of victims, fail to limit certain powerful interests and fail to see the need to change or update institutions as times change. He asks rhetorically why we cannot all disagree more constructively. The uncertainties described above, disrupting voters’ expectations of social, employment, environmental and economic prosperity go a long way in explaining turns to populist political insularity, manifested in Poland, Hungary, Brexit and Trump’s ‘America First’ and protectionist trade wars with China. Election of populist leaders is not a new phenomenon. Previous historical examples include President Andrew Jackson in USA.98

The Amplification of Half-Truths A powerful mechanism by which social groups can be manipulated is through inducing mass anxiety in response to perceived threats that can be amplified by half-truths and through use of pithy slogans. Dictators have made use of this mechanism for centuries. Hitler certainly did, using anti-Semite and racial purity slogans building on depression and resentment at the frustration of visions that a united Germany would lead to empowerment and global success, with later imposition of defeat and obligations for making financial reparation that were too lenient to prevent recovery but too punitive to allow for conciliation.99 Global and digital means of communication increase the speed and spread of this insidious technique. We are rightly concerned at issues around fake news, online harms and finding the balance between truth, freedom of expression and respect. Repetition increases the likelihood that a statement will be accepted as true, especially for ambiguous items, and the effect applies even to highly implausible items.100 The amplification of messages for political ends, often based on conspiracy theory by Orban in Hungary, the populist government in Poland, Bolsonaro in Brazil, Trump in USA and Brexit in UK are dissected vividly by Anne Applebaum.101 Amplification of half-truths was also deployed by Milosevic in Serbia and Tudjman in Croatia.102 As noted above, Haidt explains why it is easier for the political forces on the right rather than the left can trigger the psychological levers involved, producing a swing to populism. One consequence of increased fear and uncertainty in a community is that conspiracy theories ‘fill the vacuum that rational and public discourse would normally occupy’.103 Drochon notes that this unsettled way of thinking can particularly affect those who are economically insecure and views can spill over into violence quite quickly.

98 E Luce, The Retreat of Western Liberalism (Abacus, 2018) 113. 99 JM Keynes The Economic Consequences of the Peace (Macmillan & Co, 1919); see E Luce, The Retreat of Western Liberalism (Abacus, 2018) 154. 100 LK Fazio, DG Rand and G Pennycook, ‘Repetition Increases Perceived Truth Equally for Plausible and Implausible Statements’ (2019) 26 Psychonomic Bulletin & Review 1705–10; D Lacassagne, J Béna and O Corneille, ‘Is Earth a Perfect Square? Repetition Increases the Perceived Truth of Highly Implausible Statements’ (2021) PsyArXiv. June 28. doi:10.31234/osf.io/fce8z. 101 A Applebaum, Twilight of Democracy. The Failure of Politics and the Parting of Friends (Penguin Books, 2021). She draws on Julien Benda, La trahison dec clercs (Beacon Press, 1927). 102 B Walter, How Civil Wars Start (Viking, 2022). 103 H Drochon, ‘Dangerous Deceptions. Belief in Conspiracy Theories Is on the Rise. To Tackle the Problem, It Is the Underlying Causes That Must Be Addressed’ (2021) 2 RSA Journal 20.

Towards Solutions  227 Applebaum illustrates the split in friendships based on diverging worldviews that ensues, and highlights the influence of overemphasis on political ideas and slogans that often have limited connection with objective truth but are expanded in individuals’ minds and the minds of groups (groupthink). She also comments that authoritarianism (which is not conservatism) appeals to people who cannot tolerate complexity so respond to simple slogans and stereotypes: this is antipluralist, suspicious of people with different ideas, allergic to fierce debates and a frame of mind but not a set of ideas. Speculation is emerging at the time of writing that Covid has revealed some political leaders’ ‘populist bluster’ to mask inability to deliver effective public administration, citing examples in Hungary and Brazil.104 This highlights the need simply for administrations to be professional in delivering the day-to-day outcomes that an effective system should provide. At the time of writing, fake news seems inadequate to describe the lies of President Putin to justify invading Ukraine. As Ben Macintyre commented, one version of the truth is ‘based on factual evidence and scholarship, the other is enforced by the repressive organs of the Russian state, buttressed by propaganda and imposed by force of arms. One is true, and the other is a lie’.105

The Consequences of Inequality What happens when significant sections of the population become disaffected? One does not need to be an historian of revolutions to be able to predict social unrest and protest. As Thomas Piketty has reminded us, inequalities in society need to be addressed because if they remain unaddressed, this threatens social and economic stability (‘the whole political and social edifice stands in danger of collapse’).106 The neglect of poverty and inequality have been significant contributors to destabilisation seen in political unrest in countries like Hungary, Poland, France, Italy, the USA and the UK. Michael Sandel identifies the causes of the ‘angry populist backlash’ in 2016 as being ‘decades of rising inequality and cultural resentment’.107 He suggests that the seriousness of the situation is not to be dismissed as either a xenophobic reaction against immigrants or multiculturalism, or as a protest against job losses brought about by global trade and new technologies. Sandel says that the solution lies in recognising that grievances are deeply founded in moral and cultural issues as well as economic ones. Feelings of humiliation, resentment at having no voice or ability to improve one’s position against a rhetoric of individual success and a possibility of rising must all be addressed. He also thinks that ‘meritocracy is corrosive of commonality’108 and calls for both justice in distribution but also contribution.

Towards Solutions The discussion of inequality and its causes has implications for how people are treated in a number of contexts, such as how staff are treated by leaders in organisations (discussed in

104 R

Boyes, ‘At Least Covid Has Dealt a Blow to Populism’ The Times 27 October 2021, 28. Macintyre, ‘Ukraine is Being Wiped Out with a History of Lies’ The Times 5 March 2022. 106 T Piketty, Capital and Ideology (The Belknap Press of Harvard University Press, 2020). 107 MJ Sandel, The Tyranny of Merit. What’s Become of the Common Good? (Farrar, Strauss and Giroux, 2020). 108 ibid, 59. 105 B

228  Cooperation in Society c­ hapter  11), how regulatees are treated by governments and regulators (chapters 12–15), how people are treated in political systems of nations and communities. It is these last contexts that we will pursue here. We will need to start by asking some profound questions about how our systems of capitalism and democracy work, before looking at how communities work. The point in every context is that there need to be trust, respect and hence cooperation. If we are serious about the necessity for those elements, then making changes is vital, or we will fall back inexorably into destructive disorganisation.

Economists’ Ideas on Reform of Capitalism Revolutionary voices in economics have been around for some time, propelled by the Environmental, Sustainability and Governance (ESG) imperatives. In 2011, Charles Eisenstein argued for economic and monetary localisation, and a social dividend for all:109 As community has disintegrated, people yearn for a return to local economies where we know personally the people we depend on. We want to be connected to people and places, not adrift in an anonymous global monoculture.

Arguing that inequality arises in economic terms because capital is concentrated in the hands of its owners, Thomas Piketty makes the case for an acceleration in the circulation of capital. Producing evidence that inequality was reduced between 1932 and 1980 through progressive taxation, he argues for progressive taxes on income, property, wealth and inheritance. His ideas on how the money would be redistributed are (on his own admission) less developed, one idea including giving everyone aged 25 a capital endowment. Further, on the basis of defining a just society as ‘one that allows all of its members access to the widest possible range of fundamental goods … including education, health, the right to vote, and more generally to participate as fully as possible in the various forms of social, cultural, economic, civic, and political life’, he suggests for corporations social ownership systems and sharing of voting rights between owners and workers. This, he suggests, would deliver authentic power sharing and voting rights within firms. The principle is ‘justice through participation and deliberation’. Piketty considers that the justification for any inequality is ultimately ideological. He suggests that the Cold War and subsequent collapse of Soviet communism led to an ideological freeze. Piketty calls for ‘a new ideology of equality, social ownership, education, and knowledge and power sharing’.110 Given Covid-induced ongoing economic austerity, one policy that may follow from Piketty’s analysis would be that the rich (individuals and corporations) should be persuaded that it is in their interests to provide sizeable levels of funding so as to support the middle classes as well as the poor – at least on a one-off basis. A mass perception that some are doing well at whilst others suffer is a powerful source of instability. Without such funding, the risks of profound instability would appear to be considerable. Rebecca Henderson of Harvard Business School thinks that the crisis is serious but fixable within a free market system.111 She worries that ‘wealth is rushing to the top’ with the



109 C

110 T

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Eisenstein, Sacred Economics. Money, Gift & Society in the Age of Transition (North Atlantic Books, 2011). Piketty, Capital and Ideology (The Belknap Press of Harvard University Press, 2020) 3. Henderson, Reimagining Capitalism. How Business Can Save the World (Penguin Business, 2020).

Towards Solutions  229 50 richest people owning more than the poorer half of humanity, while more than six billion live on less than $16 a day.112 She argues that the problem lies with our institutions, and that the power of business should be limited:113 The institutions that have historically held the market in balance – families, local communities, the great faith traditions, government, and even our shared sense of ourselves as a human community – are crumbling or even vilified. In many countries the increasing belief that one’s children will be better off than oneself has helped to fuel violent waves of anti-minority and anti-immigrant sentiment that threatens to destabilise governments across the world.

She suggests that capitalism and investment in it need to be reimagined and to be based on ‘deeply rooted common values’ and shared purpose. She criticises the political concept of freedom as involving ‘immunity from encroachment’ or ‘freedom from’ – the ability to make decisions free from the interference of others.114 She criticises traditional economic analysis as only counting the direct, visible costs of an organisation (such as the costs of raw materials purchased, workforce, production, marketing and insurance) and viewing matters such as impacts on climate change, local communities and inequality as ‘externalities’, and thus not properly priced and dismissed as matters for governments.115 She contrasts Douglas McGregor’s categorisation of people as either X (selfish and lazy, only work for rewards) or Y (intrinsic motivation, autonomy).116 She cites a series of businesses that have succeeded through being based on a clear mission, encouraging people’s inherent personal motivation, and trust based on civilised values and mutual respect, in non-hierarchical environments.117 She also believes that investors can be made to focus on the long term118 (and some do119), for example by giving them better ESG metrics120 and requiring more reporting on ESG issues. Above all, she calls for cooperation to be rebuilt in all situations, especially on an industry-wide basis, and supported by investors, so as to create effective self-regulation.121 At the political level, she identifies a choice ‘between inclusion

112 H Rosling, O Rosling and A Rosling Rönnlund, Factfulness: Ten Reasons We’re Wrong About the World—and Why Things Are Better Than You Think 1st edn (Flatiron Books, 2018). 113 R Henderson, Reimagining Capitalism. How Business Can Save the World (Penguin Business, 2020) 8. 114 ibid, 17. 115 ibid, 9. 116 D McGregor, The Human Side of Enterprise (McGraw Hill, 1960). 117 The cases are Aetna insurance’s introduction of a minimum wage, King Arthur Flour 97-101, Toyota 101-105, a change in GM 108-111, Cadbury in the nineteenth century 111-114. 118 Contrary to the classic view set out by PJ Drucker, Managing for the Future: The 1990s and Beyond (Penguin, 1992). 119 R Henderson, Reimagining Capitalism. How Business Can Save the World (Penguin Business, 2020) ch 4. She gives success stories of the Sustainable Accounting Standards Board, which has produced standards for 27 industries; JetBlue and its investors; the influence on firms of Hiro Mizuno at the Japanese Government Pension Investment Fund; Triodos Bank in the Netherlands; 20,000 mutual insurance companies in USA; 50,000 credit unions; employee ownership is common (remuneration in shares); Publix supermarket; Mondragon (Basque) the vast holding organisation for 100 cooperatives. 120 Such as ESG Sustainable Impact Metrics-MSCI. Henderson notes that although investors do punish firms that miss their earnings, the research overwhelmingly suggests that this is because investors believe that missing earnings is an indication of bad management, rather than because they don’t support investing in the long term, citing D Burgstahelr and I Dichev, ‘Earnings Management to Avoid Earnings Decreases and Losses’ (1997) 24 Journal of Accounting and Economics 99; JR Graham, CR Harevy and S Rajgopal, ‘The Economic Implications of Corporate Financial Reporting’ (2005) 40(1–3) Journal of Accounting and Economics 3. 121 As examples of this, Henderson cites the studies of Elinor Ostrom on communities; and Unilever’s leadership in agreeing an industry cooperative agreement on sustainable palm oil: R Henderson, Reimagining Capitalism. How Business Can Save the World (Penguin Business, 2020) 169.

230  Cooperation in Society (transparent, democratic, effective, market-friendly government supported by a strong society and a free media) and extraction, the rule by the few on behalf of the few’.122 A more depressing view is taken by Branko Milanovic, former Lead Economist at the World Bank.123 He notes that the entire world now operates on the same economic principles – ‘production organised for profit using legally free wage labour and mostly privately owned capital, with decentralised coordination’ – although the liberal, meritocratic capitalism of the West differs from the state-led, political, or authoritarian, capitalism found in China, Singapore, Vietnam, Burma, Russia and Caucasian, central Asia, Ethiopia, Algeria and Rwanda. Nevertheless, people everywhere, he thinks, not only understand the same language of money and profit but will also react to others wanting to get ‘the best possible deal’ by cooperating or competing. Thus, economic strategy drives behaviour, and altruism is rare. However, Milanovic accepts that the biggest threat to liberal capitalism is the ‘creation of a self-perpetuating upper class and polarization between the elites and the rest’. Milanovic considers the cause of the problem in liberal meritocratic countries to be a fall in the income of middle-skilled workers, significantly attributed to companies outsourcing many services. He cites Gerald Davis’ view that outsourcing changed the relationship between workforce and employers, since there was no incentive to reward loyalty or to ensure that the working atmosphere was pleasant and congenial.124 Meanwhile, wealth remains more concentrated than income,125 and richer countries will ‘naturally’ tend to be more unequal, producing long-term inequality and lower intergenerational mobility. The social policies that reduced inequality from World War II to 1980 – strong trade unions, mass education, high taxes and large government transfers – are unavailable or inadequate. Milanovic continues to believe in a Rawlsian egalitarian capitalism based on approximately equal endowments of both capital and skills across the population. In relation to capital he prescribes: deconcentrating ownership of assets; and equalising the stock of endowments. In relation to labour: equalising the returns to the approximately same skill levels; and equalising the returns to the stocks (of education). The major tools required would be tax policies; increased worker ownership through employee stock ownership plans (ESOPs) or other company-level incentives to encourage employee shareholding; inheritance or wealth tax to even out capital; free education; supporting acceptance of migrants through limiting their access to the rights of citizenship and support. Milanovic charts that outsourcing to cheap immigrant workers and to third world countries produces technology transfer that undermines the value of home state workers. Thus, globalisation undermines the welfare state, with its cost and benefits squeezed. He also considers that corruption is intrinsically linked to globalisation, that it has increased, that nothing will be done to control it, and we should learn to accept it. Milanovic concludes that the historical social controls of morality and religion have disappeared, and we are left with law and the law of money:126 The problem is that instead of two handrails to help keep the actions of the rich (or anyone, for that matter) on the right path, we now only have one – laws. Morality, having been gutted out internally, has become fully externalised. It has been outsourced from ourselves to society at large.

122 The problem of extraction has also been highlighted by other economist thinkers, eg M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018). 123 B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019). 124 GF Davis, The Vanishing American Corporation: Navigating the Hazards of a New Economy (Berrett-Koehler, 2016). 125 EN Wolff, A Century of Wealth in America (Harvard University Press, 2017). 126 B Milanovic, Capitalism, Alone. The Future of the System That Rules the World (The Belknap Press of Harvard University Press, 2019) 181.

Towards Solutions  231 We should be hypocritical, he says, and ‘criticize such behaviour in soccer players, banks, hedge funds, rich individuals, or even ourselves by claiming that those who engage in it are morally defective’. The world is now amoral and everyone has to fight for survival using the same (selfinterest-preserving) tools.127 Milanovic is intrigued to see what emerges from Chinese or similar People’s Capitalism, but suggests that the West should protect itself through tax advantages for the middle class, increased tax for the rich, significant funding for public schools, ending the distinction between citizens and noncitizens, and strictly limited funding of political campaigns.128 The view that there is no ‘intellectually coherent alternative’ to capitalism and a market economy was supported by David Green, of the Conservative think tank Civitas, but he ‘admitted that the capitalism we experience today has some fundamental flaws’.129 His proposal in 2017 criticised Britain as having a ‘naïve capitalism’ and he called for an ‘inclusive capitalism’ that would be an economic and political system compatible with democracy, personal freedom, international peace and a market economy that is inclusive rather than extractive. Green cited philosopher Michael Oakeshott’s argument that the secret of freedom ‘is that it is composed of a multitude of organisations in the constitution of the best of which is reproduced that diffusion of power which is characteristic of the whole’.130 Green was strongly against the ‘utopian-building project that is trying to centralise power in a few hands without the consent of citizens’ of the EU. The need to take an inclusive approach to ESG issues was strikingly set out by Kate Raworth in her 2017 book that described an integrated and balanced model, shaped as a doughnut, in which there is a foundation level of social protection, below which no one should be left falling short, and an outer ecological ceiling that should not be breached.131 Economists’ ‘externalities’ are part of the system, not outside it. ‘There are no side effects – just effects.’132 She despairs at the fixation of economists with GDP and national output, and with the theoretical model of rational economic man: self-interested, isolated, calculating, fixed in taste and dominant over nature. Raworth bases her new approach on the creation of what Michael Sandel describes as a ‘moral vacancy’ at the heart of public policymaking.133 Economists have talked of efficiency, productivity and growth – but ignored justice, fairness and rights. ‘Moral Talking about values and goals is a lost art waiting to be revived.’ She believes that the fundamental question is: what enables human beings to thrive? Her answer is: a world in which every person can lead their life with dignity, opportunity and community – and where we can all do so within the means of our lifegiving planet. The goal is to achieve human prosperity in a flourishing wab of life.134 Her doughnut of social and planetary boundaries enables these aims to be achieved by facilitating a dynamic balance between the various interests and expectations of households, communities, organisations and nations. The economy should be embedded within society and the living world: earth, society, economy and household.135 Raworth also asserts that an economy’s vibrancy depends upon the trust, norms and sense of reciprocity nurtured within society.136 She was strongly in 127 ibid, 184. 128 ibid, 217. 129 DG Green, Inclusive Capitalism. How We Can Make Independence Work for Everyone (Civitas, 2017). 130 M Oakeshott, ‘The Political Economy of Freedom’ in Rationalization in Politics (Liberty Press, 1991) 388–89. 131 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017). The elements in the ecological ceiling are: climate change, ocean acidification, chemical pollution, nitrogen and phosphorous loading, freshwater withdrawals, land conversation, biodiversity loss, air pollution and ozone layer depletion. The elements of the social foundation are: food, water, health, education, income and work, peace and justice, political voice, social equity, gender equality, housing, networks and energy. See www.kateraworth.com/doughnut/. 132 ibid, 143. 133 M Sandel, What Money Can’t Buy: The Moral Limits of Markets (Allen Lane, 2012). 134 ibid, 43, 60. 135 ibid, 71 136 ibid, 77.

232  Cooperation in Society favour of strengthening reliance on people’s basic values (see chapter six). She again cited Sandel that market values crowd out non-market norms worth caring about.137 Raworth argues that inequality is not an economic necessity but a design failure,138 and must be countered by making economies far more redistributive of the value they generate. Trickle-down economics is a myth.139 She agrees with Goerner that ‘Economic development must become focused on developing human, community, and small-business capital because long-term, cross-scale vitality depends on these.’140 She proposes that inequality must be tackled at its root, calling for democratising the ownership of wealth ‘because political-economic systems are largely defined by the way property is owned and controlled’.141 Her five opportunities are to reform who controls land, money creation, enterprise, technology and knowledge.142 Hence, her suggestions include value tax on land, control of money by central banks, control of labour through employee-owned and member-owned cooperatives, abolition of copyright, a 1.5% tax on billionaires that would raise $74 billion a year, and the creation of more commons trusts.143 Instead of the caterpillar economy (Take, Make, Use, Lose) we should switch to a butterfly model, with wings that Regenerate and Restore. We should also be agnostic about the necessity for economic growth. Raworth’s Doughnut Economics has been adopted by the city of Amsterdam and in Scotland’s National Performance Framework.144 It is notable that some major investors have adopted strategies aimed at reducing inequality and poverty. Sir Ronald Cohen, for example, records the creation of the Social Investment Taskforce in 2000, investing on the basis of impact rather than profit extraction.145 He charts the work of the G8 Social Impact Investment Taskforce (G8T) and in 2015 the Global Steering Group for Impact Investment (GSG). The tool of a Social Impact Bond has proved useful in planning for incentivising and measuring the social impact of funds. In the past decade, 2,600 investors from over 70 countries signed up to Principles of Responsible Investment (PRI) contributing $90 trillion.146 One of the first projects used private funds to assist and rehabilitate released prisoners at Peterborough, with outstanding success. Another has addressed girls dropping out of schools in India. Requiring charities and other organisations to focus on achieving outcomes rather than activities helps their work and provides philanthropists with the means to differentiate and encourage. Amartya Sen, Nobel Laureate, argued in 2009 that a theory of justice must include ways of judging how injustice is to be reduced and justice is advanced, rather than merely conceptualising, as many political philosophers have done, what a perfectly just society might look like (and, Henrich would add, usually assuming WEIRD values).147 Sen’s conception viewed democracy as public reasoning, and this unavoidably involved participation, dialogue and public interaction.

137 ibid. 138 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017) 164. 139 ibid, 70. 140 S Goerner et al, ‘Quantifying Economic Sustainability: Implications for Free-enterprise Theory, Policy and Practice’ (2009) 69 Ecological Economics 79. 141 Gar Alperovitz, What Then Must We Do? (Chelsea Green, 2015) 26. 142 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017) 177. 143 P Barnes, ‘Capitalism, the Commons and Divine Right’. 23rd Annual EF Schumacher Lectures, 2003, http://center forneweconomics.org/publications/capitalism-the-commons-and-divine-right/. 144 http://nationalperformance.gov.scot/. 145 R Cohen, Impact. Reshaping Capitalism to Drive Real Change (Ebury Press, 2020). See also interview at www.youtube. com/watch?v=LDfxogD41HY&feature=youtu.be. 146 ibid, 32. 147 A Sen, The Idea of Justice (Allen Lane, 2009) see 326.

Towards Solutions  233 Most recently, Minouche Shafik has argued that the twentieth century’s social contract between people needs to be rebuilt.148 She argues that it broke because of a series of impacts that have not been adequately addressed: technology, the changing role of women, ageing, AI and climate change. People’s expectations need to be recognised and fulfilled. The state is failing in its basic role of redistributing our money over the course of people’s lives, given that the vast majority of people in the UK put into the welfare state roughly as much as they take out over the course of their lives.149 Shafik sets out three broad principles for designing a new social contract:150 First, that everyone should be guaranteed the minimum required to live a decent life. This minimum should include basic health care, education, benefits associated with work and a pension that protects against poverty in old age, with the level depending on how much society can afford. Second, everyone should be expected to contribute as much as they can and be given the maximum opportunities to do so with training throughout life, later retirement ages and public support for childcare so women can work. Third, the provision of minimum protections around some risks, such as sickness, unemployment and old age, are better shared by society, rather than asking individuals, families or employers to carry them.

In developing greater detail, she draws on evidence on the need to retrain people with new skills,151 statements on the essential elements of healthcare,152 the need to provide greater security and support (rather than flexibility) for workers and the advantages of redistributing income through public spending on benefits, services and interventions that support the poor rather than just raising taxes on the wealthy.153 Overall, Shafik says ‘we owe each other more’.

Rebuilding Communities The idea of revitalising communities through strategic leadership of local authorities for diverse partners, plus introduction of unitary authorities and regional mayors, building stability, accountability and local empowerment was a major policy of the Blair government in 2006.154 The White Paper referred to ‘fostering a sense of community and civil pride’ and that ‘The challenges of the global economy and of sustainable growth require greater power and resources to be devolved to regional and local levels’. Various reforms were reversed a decade later by the Coalition Government.155 One significant development has been the slow but steady spread of Mayors for combined regional authorities such as Greater London,156 and other combined authorities.157 In describing a revised vision of Britain in 2020, Nick Timothy, Teresa May’s joint chief of staff, is another who encourages the rebuilding of local communities and councils and civic capitalism.158 148 M Shafik, What We Owe Each Other. A New Social Contract (The Bodley Head, 2021). 149 J Hills, Good Times, Bad Times: The Welfare Myth of Them and Us (Policy Press, 2012) 174. 150 M Shafik, What We Owe Each Other. A New Social Contract (The Bodley Head, 2021) 26. 151 Getting Skills Right: Future ready Adult Learning Systems (OECD, 2019). 152 DR Hogan et al, ‘Monitoring Universal Health Coverage within the Sustainable Development Goals: Development and Baseline Data for an Index of Essential Health Services’ (2018) 6 Lancet Global Health e152–68. 153 M Shafik, What We Owe Each Other. A New Social Contract (The Bodley Head, 2021) 173. 154 Strong and Prosperous Communities. The Local Government White Paper (Department for Communities and Local Government, 2006). 155 See Local Government and Public Involvement in Health Act 2007. Post Legislative Scrutiny Memorandum (Department for Communities and Local Government, 2013). 156 The Greater London Authority Act 1999. 157 Greater Manchester, the Liverpool City Region, the Tees Valley, West of England, the West Midlands, Sheffield City Region, Cambridgeshire and Peterborough, North of Tyne and West Yorkshire: under the Cities and Local Government Devolution Act 2016. 158 N Timothy, Remaking One Nation: Conservatism in an Age of Crisis (Polity Press, 2020).

234  Cooperation in Society Boris Johnson’s government has responded to the inequality issue by adopting a ‘levelling up’ agenda, on which The Economist commented:159 Regional inequality is a burning issue. Britain’s geographical inequalities seem to be reinforcing themselves. The perception that their corner of the country is being left to die is dangerous … Although Mr Johnson has an idea and a slogan, he has little clue about how to go about levelling up … the problem lies precisely in the cities … upgrade their infrastructure. More important is to relinquish control. Economists find that, in the developed world, more developed systems tend to be more equal … Britain is by some distance the most centralised country in the G7 … Some 37% of English people now live in places with combined authorities and ‘metro mayors’. These have little formal power but much clout … To make metropolitan government more independent, it should be given greater power over taxation. Britain is overdue a reform of local property taxes, which are too low and not very progressive.

On one view, having 333 Local Authorities is good for engaging local involvement, but against that is the argument that effective planning and sense of regional belonging is better fostered with a far smaller number of regions, such as perhaps 10 in England, plus Scotland, Wales and Northern Ireland. The sizes of populations would then equate not only among themselves but also to the Länder in Germany and the sizes of many smaller EU states. There has even been a call that England should be organised on four ‘mega regions’ (North, Midlands, South East, South West), based on spatial plan models that coordinate industrial strategy, infrastructure planning and local economic development.160 It may be asked whether providing just economic stimuli to areas will be enough to ‘level them up’ adequately by also addressing the underlying issues of values, sense of community and regeneration of local institutions. A cynical view would be that the objective is merely to achieve enough for the ruling party to be re-elected rather than to address the full underlying causes. Let us look more closely at the deeper issues of values, communities and institutions. The concept of ‘communitarianism’ is useful here. As defined by Amitai Etzioni, communitarianism emphasises the importance of society in articulating the good; in contrast with the centrality of the individual and liberalism, in which each individual should formulate the good on his or her own.161 Given that individuals are ‘embedded’ in societies, Etzioni prosed a new ‘golden rule’: ‘Respect and uphold society’s moral order as you would have society respect and uphold your autonomy to live a full life.’162 He argued that special attention should be paid to social institutions, which form the moral infrastructure of society: families, schools, communities and the community of communities:163 The moral voice is most powerful when people are members of only one community, and it can be overwhelming in such cases. It is more moderated when individuals are members of several communities. … Community has two characteristics: first, a web of affect-laden relationships among a group of individuals …; and second, a measure of commitment to a set of shared values, norms, and meanings, and a shared history and identity – in short, a particular culture. … Communities need to be embedded socially and morally in more encompassing entities if violent conflict among them is to be avoided.

159 ‘Editorial. Levelling up Britain’ The Economist 1 August 2020. 160 A One Powerhouse Framework for National Convergence and Prosperity A Vision for Britain. Planned (The One Powerhouse Consortium and the Royal Society for the Encouragement of Arts Manufactures and Commerce, 2020). 161 A Etzioni, ‘Communitarianism’ in MT Gibbons (ed), The Encyclopaedia of Political Thought (John Wiley & Sons, 2015). 162 A Etzioni, The New Golden Rule: Community and Morality in a Democratic Society (Basic Books, 1996) xviii. 163 A Etzioni, ‘Communitarianism’ in MT Gibbons (ed), The Encyclopaedia of Political Thought (John Wiley & Sons, 2015).

Towards Solutions  235 Society should not be viewed as composed of millions of individuals, but as pluralism (of communities) within unity (the society).

Remarkable improvements in human well-being, social capital and economic prosperity have been produced by coordinated initiatives in local communities across the globe. A powerful model of ‘Connected Communities’ was studied between 2005 and 2010 in seven localities across the UK, in which people embedded within local networks of social support reduced social isolation and people experienced greater wellbeing and other benefits from the better understanding, mobilisation and growth of ‘community capital’ in their neighbourhoods.164 It was found that adopting a managed approach to asset-based community development, involving coproduction, relationships and sustainability, delivered a broad range of outcomes. Senses of connection with locality and of shared identity and purpose were essential. The study recommended local coordination of all health, care, police, business enterprise and other social services. Updating with more success stories in 2021,165 Keith Harrison-Broninski noted the power and effective delivery that this model produced over national level governmental initiatives and noted the resemblance to Greek city states or the success of Renaissance Venice.166 He cited Andy Haldane’s view that volunteering created onion-like layers of value that increased across economic, private and social value that around 3.5% of annual UK GDP.167 Examples included the formation of non-partisan collectives in Frome, Somerset that took over the local Council, ousting traditional political party candidates. In Cleveland, Ohio and Preston, Lancashire, local purchasing of most services by local healthcare and other public services had significant impact. Further evidence was cited from cities across Europe.168 Assets of community value that can attract special status because their use furthers the social wellbeing or social interests of the local community have been recognised in English law.169

Values, Division and Solidarity Justin Welby, Archbishop of Canterbury, called in 2018 for a reimagining of Britain that builds on our history of community, courage and stability.170 In relation to community, he emphasised the key features as the universal destination of goods, gratuity, the common good, solidarity and subsidiarity. His ‘Basic Building Blocks’ are: Family – Caring for the Core; dealing with diversity of traditions: how do we understand families? Education – Life in all its fullness: Health – and Healing our Brokenness: Housing – the Architecture of Community: Economics and Finance – Serving and Inspiring. 164 M Parsfield with D Morris, M Bolam M Knapp, A-L Park, M Yoshioka and G Marcus (eds), Community Capital. The Value of Connected Communities (Royal Society for the Encouragement of Arts, Manufactures and Commerce, 2015). 165 K Harrison-Broninski, Supercommunities. A Handbook for the 21st Century (Meghan-Kiffer Press, 2021). 166 Venice was remarkably socially integrated through an arrangement involving pledges of loyalty to the state that were matched by a reciprocal commitment to ensure social justice: see R Mackenney, ‘“In Place of Strife” The Guilds and the Law in Renaissance Venice’ (1984) 34(5) History Today. 167 A Haldane, ‘In Giving, How Much Do We Receive?’, A Pro Bono Economics lecture to the Society of Business Economists, London, 9 September 2014. 168 cles.org.uk/what-is-community-wealth-building/the-principles-of-community-wealth-building. 169 Localism Act 2011; the Assets of Community Value (England) Regulations 2012 (SI 2012/2421). See S Adamyk, Assets of Community Value. Law and Practice (Wildy, Simmonds & Hill Publishing, 2017). 170 J Welby, Reimagining Britain Foundations for Hope (Bloomsbury, 2018).

236  Cooperation in Society The Archbishop also identified the need for values amid global change, and promoted a focus on ‘the common good’:171 For the common good – for solidarity, for community, courage and stability in a reimagined Britain – we need a common effort: courageous, coalition, cohesive and generous working, patience, endurance and stability among the actors who are crucial to the future of our country. … The common good – and all of the values and practices it encompasses – is not something legislated or mandated, but it is the sum of innumerable small and large actions of every participant in society.

Sir Paul Collier’s analysis of the state of capitalism strongly emphasised the need for ethical values to lie at the foundation of societies, which should be based on reciprocal obligations rather than individual rights.172 He said that ‘Deep rifts are tearing apart the fabric of our societies. Place has become a dimension of the new grievances.’ He argued that ‘Economic man is utterly selfish and infinitely greedy, caring about nobody but himself.’ He argued that John Rawls’ ideas on rights identified through reason, specifically on whether their essential purpose was inclusion of all in society on an equal basis, was antipathetic to the inclusive matching of rights to obligations achieved. Citing Jonathan Haidt’s finding that the same values cherished by people around the world (loyalty, fairness, liberty, hierarchy, care and sanctity), Collier argued that morality derives from values, rather than reason. People try to justify their values by citing reasons for them, but if our reasons are demolished we conjure up others, rather than revise our values. Our reasons are revealed as a self-deceiving charade, a sham called ‘motivated reasoning’. Reasons are anchored on values, not values on reasons. … [r]eason itself has evolved for the strategic purpose of persuading others, not to improve our own decision-taking.173 Fairness and loyalty … jointly support reciprocity, which is what links our fundamental drive for esteem to the shame and guilt we feel when we breach an obligation.

Collier noted that Haidt’s finding that for most people fairness means proportionality and desert, rather than equality was simply ignored. Collier proposed ‘an ethical capitalism that meets standards that are built on our values, honed by practical reasoning, and reproduced by the society itself ’, and he emphasised the importance of reciprocal obligations. He developed the approach by considering an ethical state, and ethical firm, an ethical family, and an ethical world. The building blocks started with shared identity and values, and a shared sense of belonging, promoting a discourse of cooperation for mutual benefit. He particularly called for ethically based changes in taxation, and for regeneration based on communities. After the 2000s decade of austerity, the Coronavirus has added not just serious damage to life, health, employment, some areas of commerce and to national economies worldwide, but also stoked pre-existing concerns about inequalities of treatment and response. Not long after the start, concern was expressed that poorly paid workers were exposed on the front line while white collar professionals worked safely at home.174 A year later, arguments broke out between nations or areas over access to vaccines. Tim Harford predicted during lockdown in May 2020 that new ethical codes would be needed within a language of social solidarity as excruciating decisions were made on the prioritisation for reopening schools, restaurants, shops, businesses and pubs.175



171 ibid,

236. Collier, The Future of Capitalism (Allen Lane, 2018). 173 H Mercer and D Sperber, The Enigma of Reason (Harvard University Press, 2017). 174 B Macintyre, ‘Coronavirus Reawakens the Class Conflict Lurking in Britain’s Bloodstream’ The Times 14 April 2020. 175 T Harford, ‘Reopening the Economy Will Divide Society’ Financial Times May 2020. 172 P

Towards Solutions  237 The pandemic certainly magnified inequalities and deprivation across the world.176 Trust in all sources of information was at record lows, and business was more trusted than government in 18 of the 28 countries surveyed, making business the only institution seen as both competent and ethical.177 Women were more likely to be furloughed in the UK, and to spend significantly less time working from home, and more time on unpaid household work and childcare.178 Average anxiety scores increased to the highest levels recorded. The 2020 population researchers found that Britons believed that Covid-19 had demonstrated that most people in the country care about each other to a higher degree (64%) than any other country surveyed.179 Common ground was found on many issues, such as pride in the NHS, the countryside, the volunteer tradition, progress on gender equality and becoming a more tolerant and diverse nation, commitment to gender and racial equality, a need to focus on responsibilities as much as rights, a belief in closing the unfair gap between the haves and have-nots and a belief in the importance of disagreeing but still uniting. The researchers concluded that further division is not inevitable but a matter for national choice. Many examples have been noted of instances where social capital was demonstrated by spontaneous local initiatives of mutual aid and caring during the pandemic.180 However, since the pandemic has produced disproportionate harm to disadvantaged groups, it is vital that the inequalities in healthcare, development, education and access to services and technology, are addressed swiftly.181 The advantages of diversity have been widely researched. The Medici Effect theory predicts that there will be a vibrancy evidenced by innovative ideas emerging from new combinations of diverse people.182 A partnership approach has developed between indigenous peoples and those of European origin in various parts of the globe.183 Recent studies found that greater female representation on boards significantly reduces the frequency of misconduct fines on US and UK banks.184 Female directors were found to be more influential when they reach a critical mass and are supported by women in leadership roles. The experts who compiled the 2021 World Happiness Report recorded that during the pandemic there was greater economic insecurity, anxiety, disruption of every aspects of life and, for many people, stress and challenges to mental and physical health.185 They concluded that 176 See Edelman Trust Barometer 2021 (Edelman, 2021). This survey of 1150 respondents in each of 278 countries reported 62% agreeing that the pandemic had deepened inequities around the world. Those with less education, less money and fewer resources were being unfairly burdened with most of the suffering, risk of illness, and need to sacrifice due to the pandemic. See also Special Report: Brand Trust and the Coronavirus Pandemic (Edelman, 2020). 177 ibid. 178 Coronavirus (COVID-19) and the different effects on men and women in the UK, March 2020 to February 2021 (Office of National Statistics, 2021), www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/ conditionsanddiseases/articles/coronaviruscovid19andthedifferenteffectsonmenandwomenintheukmarch2020tofebruary2021/2021-03-10. On 1 July 2020, there were 2.9 million women on furlough, compared with 2.7 million men. By 31 October 2020, the number of women on furlough reduced to 1.2 million compared with 1.1 million men. Between 31 October and 30 November 2020, the number of women on furlough increased to 1.9 million and 1.8 million for men. This may be a result of the furlough scheme being unexpectedly extended at the end of October. 179 Germany 57%, Netherlands 57%, Italy 53%, Poland 47%, France 40%. 180 J Choukeir, ‘The Living Change Approach’ (2021) 1 RSA Journal 11. 181 Enhancing Access to Opportunities (Group of Twenty, International Monetary Fund and The World Bank, 2020). 182 T Amabile, Creativity in Context (Westview Press, 1996); F Johansson, The Medici Effect. What Elephants & Epidemics Can Teach Us about Innovation (Harvard Business Review Press, 2017), first pub 2004; see R Florida, The Rise of the Creative Class (Basic Books, 2019). 183 eg Honouring the Truth, Reconciling for the Future: Summary of the Final Report of the Truth and Reconciliation Commission of Canada (Truth and Reconciliation Commission of Canada, 2015); E King and S Pasernak, A Special Report: Canada’s Emerging Indigenous Rights Framework: A Critical Analysis (Yellowhead Institute, 2018). 184 F Arnabolidi, B Casu, A Gallo, E Kalotychou and A Sarkisyan, ‘Gender Diversity and Bank Misconduct’ (2021) Journal of Corporate Finance at https://doi.org/10.1016/j.jcorpfin.2020.101834. 185 JF Helliwell, R Layard, JD Sachs, J0E De Neve, LB Aknin and S Wang, World Happiness Report 2021 at http://worldhappiness.report/.

238  Cooperation in Society trust and the ability to count on others are major supports to life evaluation, and that variation in trust was a major factor that explained very large international differences in Covid-19 death rates, which were substantially higher in the Americas and Europe than in East Asia, Australasia and Africa. They pointed to the more individualistic culture of the North Atlantic countries compared to countries in the Asia-Pacific region and the relative looseness of social norms as having contributed to lower public support for non-pharmaceutical interventions. Mark Carney, former Governor of the Bank of England, highlighted the fact that three major issues had revealed a disconnect between how people thought about economic value and the underlying values that had been revealed as important for people.186 First, the Global Financial Crisis had shown that markets are not inherently moral, and that they can distort value and corrode values. Markets could not be trusted to be the judge of what is right,187 and had generated a stunning level of misconduct, as well as driven a shift from a market economy to a market society that had consumed essential social capital that is necessary to create economic and human capital.188 ‘We need to promote values of accountability, responsibility, solidarity, integrity and prudence as best we can through compensation, codes and regulation while recognising that these can be fully developed and lived only through culture and practice.’189 Carney emphasised the importance of values and institutions:190 The market is a social construct whose effectiveness is determined partly by the rules of the state and partly by the values of society. It requires the right institutions, a supportive culture and the maintenance of social licence. If left unattended to allowed to capture the political sphere, the market will corrode those values essential to its effectiveness.

Carney called for the restoration of morality to markets, including through aligning compensation with values, increasing senior management accountability and renewing a sense of vocation in finance.191 Second, Carney noted that the Covid-19 pandemic had revealed that resilience and preparedness had been undervalued by societies and governments,192 and that the values that were necessary for effective responses to the pandemic were legitimacy of governments and reciprocity amongst citizens.193 In making choices between protecting public safety and health and protecting people’s livelihoods and businesses, governments faced difficult decisions. The choices were really those of each society, guided by how each ‘values life, the dignity of work and human flourishing today and tomorrow’.194 ‘The revealed values of citizens in the midst of the Covid pandemic have been those of solidarity, fairness and responsibility.’195 ‘Once the crisis struck, the values of society were revealed. Citizens across the globe acted as Rawlsians and communitarians not libertarians or utilitarians, broadly supporting lockdown measures and massive government spending even if they perceived little risk to themselves personally.196,197

186 M Carney, Value(s) (William Collins, 2021). 187 T Padoa-Schioppa, ‘Markets and Government before, During and After the 2007–20XX Crisis’ Per Jacobsson Foundation Lecture, Basel, 27 June 2010, 8. 188 M Carney, Value(s) (William Collins, 2021) 129. 189 ibid, 209. 190 ibid, 130. 191 ibid, 205. 192 ibid, 223. 193 ibid, chs 9 and 10. 194 ibid, 253. 195 ibid. 196 J Authers, ‘How Coronavirus Is Shaking Up The Moral Universe’ Bloomberg 29 March 2020. 197 M Carney, Value(s) (William Collins, 2021) 244.

Towards Solutions  239 Third, Carney noted that the climate crisis is an issue of intergenerational fairness in use of resources.198 It calls for leadership based on ‘purpose, perspective, clarity, competence, humility’.199 It requires solidarity, people working together, and is more about regenerating than redistributing.200 Overall, he identified the following common values and beliefs to underpin a successful economy:201 –– dynamism to help create solutions and channel human creativity; –– resilience to make it easier to bounce back from shocks while protecting the most vulnerable in society; –– sustainability with long-term perspectives that align incentives across generations; –– fairness, particularly in markets to sustain their legitimacy; –– responsibility so that individuals feel accountable for their actions; –– solidarity whereby citizens recognise their obligations to each other and share a sense of community and society; and –– humility to recognise the limits of our knowledge, understanding and power so that we act as custodians seeking to improve the common good. He also identified legitimacy and reciprocity as values that have been revealed as currently important.202 Acknowledging self-interested motivation of citizens as paramount, he supported the view that a state’s legitimacy ‘derives from the beliefs its citizens hold about the structure of government, its officials and processes’, based on views on procedural justice and general trustworthiness of government.203 The extent of systems of procedural justice and quality of government do tend to occur more in established democracies than in authoritarian regimes.204 Carney noted in the United States the ‘intense partisanship and high degrees of discord between levels of government during the initial phases of the pandemic, which diminished trust and fed into lower compliance’.205 The level of corruption is a key indicator.206

Shifts in Ideologies The tension between persons, their organisations and the state is, of course, far from new. We have a long history of evolutions in conflicts of power between groups and ideas. Magna Carta changed the power balance between the king and the barons. John Locke talked of (some) people possessing liberty when they have ‘perfect freedom to order their actions and dispose of their possessions and persons, as they think fit … without asking leave, or depending upon the will of any other man’.207 The overthrow of the claimed divine right of kings took place in England in 198 ibid, ch 11. 199 ibid, 368. 200 ibid, 466. 201 ibid, 6–7, ch 16. 202 ibid, 238. 203 M Levi, A Sacks and T Tyler, ‘Conceptualizing Legitimacy, Measuring Legitimating Beliefs’ (2009) 53(3) American Behavioral Scientist 354. 204 Bo Rothstein, ‘Creating Political Legitimacy: Electoral Democracy versus Quality of Government’ (2009) 5393) American Behavioral Scientist 311–30; N Charron and V Lapuente, ‘Does Democracy Produce Quality of Government?’ (2010) 49(4) European Journal of Political Research 443–70. 205 M Carney, Value(s) (William Collins, 2021) 241. 206 Transparency International’s Corruption Perceptions Index 2019. 207 J Locke, Two Treatises of Government, I Shapiro (ed) (Yale University Press, 2003), quoted in D Acemoglu and JA Robinson, The Narrow Corridor. How Nations Struggle for Liberty (Penguin Books, 2020) xiii.

240  Cooperation in Society 1645 and in France in 1789. The English theoretical expression by Hobbes was of the need for an all-powerful state, a Leviathan.208 In the eighteenth and nineteenth centuries political philosophy focused on individual liberty – but only slowly recognised the tyranny of racial slavery and much later focusing on the emancipation of women. Europeans who desired to escape from religious persecution emigrated to North America to exert their personal freedoms. The twentieth century started to focus on social welfare, such as through Fabianism and later post-World War II welfare states. However, funding social support, the NHS and social care are continuous problems, linked with issues around the cultures of public organisations.209 Anthropologists Daron Acemoglu and James A Robinson have carried out detailed research into different societies and states around the world through history.210 In their latest book, about liberty, and how and why human societies have achieved or failed to achieve it, they argue that a revised understanding is necessary, without the supposedly balancing ‘checks and balances’ of nineteenth-century Constitutions, that includes both a strong state and a strong society:211 Liberty needs the state and the laws. But it is not given by the state or the elites controlling it. It is taken by regular people, by society. Society needs to control the state so that it protects and promotes people’s liberty rather than quashing it … Liberty needs a mobilized society that participates in politics, protests when it’s necessary, and votes the government out of power when it can.

Acemoglu and Robinson conclude that a state needs constant struggle and engagement to be kept in balance – the Red Queen effect212 – in order to maintain a shackled but effective Leviathan. This involves constant running to maintain balance and deliver redistribution, creating a social safety net and regulating the increasingly complex economy. It requires transparency, oversight and review. They say it constitutes a ‘narrow corridor to liberty’ where the involvement of society in politics creates a balance of power with the state and its elites and general populace, but the cooperation that is necessary ‘engenders greater capacity for the state to deliver the things that society wants and foments greater societal mobilization to monitor this capacity’.213 They also suggest that society needs to be mobilised through relevant institutions, and that more experimentation is currently needed. Two powerful new forces – globalisation and new technologies – have introduced complexities and complicated the discourses of power. The current moment provides an opportunity to evolve beyond previous ideologies and class wars. In recent centuries the social division between landowners and servants morphed with the Industrial Revolution into a polarisation between owners of capital, deployed in businesses and workers, and generated an economic and political conflict through ideas of individual liberty, the rights of man, cold utilitarianism and Marxism to different forms of communism versus democratic capitalism. The collapse of centralised communist states controlled by the Soviet Union

208 T Hobbes, Leviathan, or The Matter, Forme and Power of a Commonwealth Ecclesiasticall and Civil (1651). 209 Culture is a consistent theme running through many reports into NHS disasters, such as Learning from Bristol: The Department of Health’s Response to the Report of the Public Inquiry into Children’s Heart Surgery at the Bristol Royal Infirmary 1984–1995, (2002) Cm 5363, i and 367; Independent Inquiry into Care Provided by Mid Staffordshire NHS Foundation Trust January 2005–March 2009. Volume I. Chaired by Robert Francis QC, HC375-I (2010); Dr B Kirkup CBE, The Report of the Morecambe Bay Investigation (Department of Health, 2015); Report of the Independent Inquiry into the Issues Raised by Paterson, House of Commons, 4 February 2020, HC 31. There are shocking recent examples from USA and UK of cultural issues in police forces over racism and rape. 210 D Acemoglu and JA Robinson, Economic Origins of Dictatorship and Democracy (Cambridge University Press, 2006); D Acemoglu and JA Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (Crown, 2012). 211 D Acemoglu and JA Robinson, The Narrow Corridor. How Nations Struggle for Liberty (Penguin Books, 2020) xvii. 212 L Carroll, Through the Looking-Glass, and What Alice Found There (1871). 213 D Acemoglu and JA Robinson, The Narrow Corridor. How Nations Struggle for Liberty (Penguin Books, 2020) xviii.

Towards Solutions  241 masked a move in American-led capitalism towards individualist capitalism. Labelled neoliberalist capitalism, that form of individualism fuelled ideological and political division (Republican versus Democrat). The polarisation between public and private forms of organisation in the USA led to a polarisation between freedom to pursue individual success without much concern for others conflicting with a lack of trust and social solidarity. The ‘checks and balances’ of the United States’ system214 tend to prevent effective management of government affairs, liberating private individuals’ extensive freedom (right to carry guns) and corporations (excessive remuneration and rent-extraction, asset stripping). One of the re-evaluations that is necessary is the purpose and mode of capitalism: we consider cooperative capitalism in chapter 10. In the UK, Thatcherism was ideologically underpinned by individualism and liberty, but in a context of strongly entrenched post-War social solidarity. The attempt by Labour under Jeremy Corbyn to return to an outdated workers-led socialism was out of touch with the real fractures in society that have been recorded earlier in this chapter. As Michael Freeden commented, political discourse and patterns of political thinking are in a state of rapid and unstable flux.215 The Fourth Industrial Revolution raises challenges for reimagining the science of politics in the light of new technology, economic, social and political pressures. We do in fact have an opportunity to transcend ideological and outdated political polarisation and to build a society based on delivering desired common purposes and outcomes. This would involve peace, prosperity, health, fairness, protection. The means of achieving this is built on the lessons of human science in showing us how humans best cooperate. Humans live in society and need to work together to achieve our legitimate goals. We therefore base ourselves on the human dimension to achieve human purposes and outcomes. This balances liberty and inequality with contribution and responsibility. We are all stakeholders, contributors and beneficiaries. All these ideals raise the opportunity to reform the conceptions of how we work together, of the state, its citizens and institutions, and of the relationship between them and the mode in which they work together as a coherent mechanism.

The Psychology of Intrinsic Motivation The effects of feelings of alienation and lack of self-worth and of not belonging to a community that has value all fit with the limited presence of the three elements of Self-Determination Theory outlined in chapter four. As a brief reminder, the three elements are: (a) Competence: the feeling of satisfaction that accompanies the achievement of effects on one’s environment.216 (b) Autonomy: behaving freely in accordance with the self ’s own overarching values, needs, and interests.217 (c) Relatedness: ‘the feeling of belonging, a basic need to feel responded to, respected, and important to others, and conversely, to avoid rejection, insignificance, and disconnectedness …’218 214 Acemoglu and Robinson, The Narrow Corridor contrasted this model with the success in Sweden of engineering compromise and finding ways of building a broad coalition to support common endeavours: ibid, 484. 215 M Freeden, ‘A New Ideological Era’ (2019–20) RSA Journal 4. 216 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017). 217 ibid, 55–75. 218 ibid, 96.

242  Cooperation in Society

New Democratic and Social Institutions Carney noted that fairness and responsibility are at the heart of how institutions decline, citing work by Niall Ferguson219 and Mancur Olson.220 The destruction of social institutions is a common theme for Marianna Mazzucato,221 Paul Collier222 and Jonathan Sacks.223 They have all called for firm steps to be taken to renew the institutions and means of social engagement in families, organisations, society, communities, markets and nations – plus the inclusion of the extra element of moral standards. Mazzucato cites failure of the policy of New Public Management in offloading delivery of public services to the private sector as leading to excessive extraction, poor performance and under-delivery of desired outcomes. In the process, confidence collapsed in delivery of public goods and in relevant institutions. Collier refers to the demise of provincial cities as a cost of the globalisation revolution, and he calls for their regeneration through ‘thinking local’ in terms of clusters of pioneers, development banks, business zones, investment promotion agencies, knowledge clusters and local universities. He also calls for bolstering stressed families through local support networks covering pre-school care, schools as sites of community support, schools as organisations, activities and mentoring and diverging skills, plus building community through housing and activities. In this context, the shift by business to taking responsibility with governments for delivery of social purposes is highly relevant. But that shift now needs to be cemented, coordinated and built on. The renewal of individuals through feeling dignity in belonging to communities and civic institutions – schools, hospitals, railways, water companies, post offices and housing associations – is also prescribed by Adrian Pabst.224 He cites a new liberalism of TH Green, LT Hobhouse and JA Hobson, with its emphasis on the conditions of individual flourishing sustained by networks of mutual assistance.225 Pabst calls for wider community ownership and self-governance of intermediary institutions such as professional associations, trade unions, universities and free hospitals.226 He cites Paul Hirst’s idea of ‘associative democracy’227 in support of an argument for renewed political architecture, involving strengthened local selfgovernment with a bicameral model: a local assembly with a lower house representing citizens ‘democracy locational’ and an upper house representing people according to profession or trade as ‘democracy vocational’.228 Sherry Arnstein has a useful ‘ladder of citizen participation’ that ranks different levels between control over people and their control of political decisions, which she notes are typically subject to

219 N Ferguson, The Great Degeneration: How Institutions Decay and Economies Die (Penguin, 2014). 220 M Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (Yale University Press, 1984). 221 M Mazzucato, The Entrepreneurial State. Debunking Public vs Private Sector Myths (Penguin, 2018 (originally 2013)). 222 P Collier, The Future of Capitalism (Allen Lane, 2018). 223 J Sacks, Morality: Restoring the Common Good in Divided Times (Hodder and Stoughton, 2020). 224 A Pabst, The Demons of Liberal Democracy (Polity Press, 2019). 225 M Freeden, The New Liberalism (Oxford University Press, 1978); E Franken Paul, FD Miller and J Paulk (eds), Liberalism: Old and New (Cambridge University Press, 2007). 226 J Milbank and A Pabst, The Politics of Virtue: Post-Liberalism and the Human Future (Rowman & Littlefield International, 2016) 179–204. 227 P Hirst, Associative Democracy: New Forms of Economic and Social Governance (Polity, 1996); P Hirst and V-M Bader (eds), Associative Democracy: The Real Third Way (Frank Cass, 2001). 228 A Pabst, The Demons of Liberal Democracy (Polity Press, 2019) 118. He notes organisations such as Southwark Circle and Get Together, to which I add the Jersey Policy Forum.

Towards Solutions  243 heated controversy.229 The levels range from manipulation (non-participation) through informing, consultation and placation (degrees of tokenism) to partnership, delegated power and citizen control (degrees of citizen power). The wide development of new forms of democracy across nations was notably highlighted by the OECD in a 2017 Recommendation on open government,230 defining the policy as ‘a culture of governance that promotes the principles of transparency, integrity, accountability and stakeholder participation in support of democracy and growth’. The OECD’s 2020 report,231 based on 289 case studies from 282 countries, contained this striking Foreword: The increasing complexity of policy making and the failure to find solutions to some of the most pressing policy problems have prompted politicians, policy makers, civil society organisations, and citizens to reflect on how collective public decisions should be taken in the twenty-first century. There is a need for new ways to find common ground and take action. This is particularly true for issues that are valuesbased, require trade-offs, and demand long-term solutions. The OECD has collected evidence and data that support the idea that citizen participation in public decision making can deliver better policies, strengthen democracy, and build trust. This report focuses on representative deliberative processes in particular, as part of a wider effort by democratic institutions to become more participatory and open to informed citizen input and collective intelligence. Assembling ordinary citizens from all parts of society to deliberate on complex political questions and develop collective proposals has become increasingly attractive in this context. Over the past few decades, the ‘deliberative wave’ has been building. … Growing efforts to embed public deliberation into public decision making could be seen as the start of a period of transformation to adapt the architecture of representative democracy. Democratic institutions across the world are beginning to transform in ways that give citizens a more direct role in setting agendas and shaping the public decisions that affect them.

The OECD noted that there was widespread recognition of the argument that the ‘left behind’ were ‘revolting’232 and that inequalities had risen in many countries.233 It recognised that the economic and cultural issues are inextricably linked. The work responded to recognition that public social disaffection could not be solved by economic growth and better policies alone, but held an important political element.234 The report identified 12 models of representative deliberative processes: Citizens’ Assembly;235 Citizens’ Jury/Panel; Consensus Conference; Planning Cell; G1000; Citizens’ Council; Citizens’ Dialogue; Deliberative Poll/Survey; World Wide Views; Citizens’ Initiative Review; the Ostbelgien Model; and the City Observatory. It was clear that experimentation has not completed, and that the present time is one of transition. The OECD set out a series of good practice principles for deliberative processes for public decision making (Box 9.1).

229 SR Arnstein, ‘A Ladder of Citizen Participation’ (1969) 35(4) Journal of the American Institute of Planners 216; SR Arnstein, ‘A Ladder of Citizen Participation’ (2019) 85(1) Journal of the American Planning Association 24–34, DOI: 10.1080/01944363.2018.1559388. 230 OECD Recommendation on Open Government (OECD, 2017). See earlier Open Government. The Global Context and the Way Forward (OECD, 2016). 231 Innovative Citizen Participation and New Democratic Institutions. Catching the Deliberative Wave (OECD, 2020). 232 R Ford and M Goodwin, Revolt on the Right: Explaining Support for the Radical Right in Britain (Routledge, 2014). 233 OECD Employment Outlook 2019: The Future of Work (OECD, 2019). 234 ibid, 21. 235 See also G de Burca, ‘Reinvigorating Democracy in the European Union: Lessons from Ireland’s Citizens Assembly?’ in U Belavusau and A Gliszczynska-Grabias (eds), Constitutionalism under Stress (Oxford University Press, 2020).

244  Cooperation in Society Box 9.1  Good Practice Principles for Deliberative Processes for Public Decision Making (OECD, 2020) 1. 2.

3.

4.

5. 6.

7.

8.

9.

Purpose: The objective should be outlined as a clear task and is linked to a defined public problem. It is phrased neutrally as a question in plain language. Accountability: There should be influence on public decisions. The commissioning public authority should publicly commit to responding to or acting on participants’ recommendations in a timely manner. It should monitor the implementation of all accepted recommendations with regular public progress reports. Transparency: The deliberative process should be announced publicly before it begins. The process design and all materials – including agendas, briefing documents, evidence submissions, audio and video recordings of those presenting evidence, the participants’ report, their recommendations (the wording of which participants should have a final say over), and the random selection methodology – should be available to the public in a timely manner. The funding source should be disclosed. The commissioning public authority’s response to the recommendations and the evaluation after the process should be publicised and have a public communication strategy. Representativeness: The participants should be a microcosm of the general public. This is achieved through random sampling from which a representative selection is made, based on stratification by demographics (to ensure the group broadly matches the demographic profile of the community against census or other similar data), and sometimes by attitudinal criteria (depending on the context). Everyone should have an equal opportunity to be selected as participants. In some instances, it may be desirable to over-sample certain demographics during the random sampling stage of recruitment to help achieve representativeness. Inclusiveness: Inclusion should be achieved by considering how to involve underrepresented groups. Participation should also be encouraged and supported through remuneration, expenses, and/or providing or paying for childcare and eldercare. Information: Participants should have access to a wide range of accurate, relevant, and accessible evidence and expertise. They should have the opportunity to hear from and question speakers that present to them, including experts and advocates chosen by the citizens themselves. Group deliberation: Participants should be able to find common ground to underpin their collective recommendations to the public authority. This entails careful and active listening, weighing and considering multiple perspectives, every participant having an opportunity to speak, a mix of formats that alternate between small group and plenary discussions and activities, and skilled facilitation. Time: Deliberation requires adequate time for participants to learn, weigh the evidence, and develop informed recommendations, due to the complexity of most policy problems. To achieve informed citizen recommendations, participants should meet for at least four full days in person, unless a shorter time frame can be justified. It is recommended to allow time for individual learning and reflection in between meetings. Integrity: The process should be run by an arm’s length co-ordinating team different from the commissioning public authority. The final call regarding process decisions should be with the arm’s length co-ordinators rather than the commissioning authorities. Depending on the context, there should be oversight by an advisory or monitoring board with representatives of different viewpoints.

Towards Solutions  245 10. Privacy: There should be respect for participants’ privacy to protect them from undesired media attention and harassment, as well as to preserve participants’ independence, ensuring they are not bribed or lobbied by interest groups or activists. Small group discussions should be private. The identity of participants may be publicised when the process has ended, at the participants’ consent. All personal data of participants should be treated in compliance with international good practices, such as the European Union’s General Data Protection Regulation (GDPR). 11. Evaluation: There should be an anonymous evaluation by the participants to assess the process based on objective criteria (eg on quantity and diversity of information provided, amount of time devoted to learning, independence of facilitation). An internal evaluation by the co-ordination team should be conducted against the good practice principles in this report to assess what has been achieved and how to improve future practice. An independent evaluation is recommended for some deliberative processes, particularly those that last a significant time. The deliberative process should also be evaluated on final outcomes and impact of implemented recommendations. Various bodies are studying and experimenting with energising inclusiveness in local communities and economies through different mechanisms of public consultation, involvement, collaboration and empowerment.236 Over 13 local citizen assemblies were held in the UK between 2019 and mid-2021, providing participatory democracy.237 Localism has produced a number of strong examples of successful community-sized regeneration projects.238 An example of local partnerships between organisations is that of Integrated Care Systems (ICSs) introduced in England in 2021.239 An ICS coordinates services between NHS health and social care bodies to have responsibility for commissioning NHS care. It will also involve strategic Integrated Care Partnerships between public bodies and voluntary, community and social enterprises. The mechanism has been hailed as potentially reducing inequalities between different groups, shifting from reactive care to preventative approaches and on the wider determinants of health and wellbeing.240 To be successful, however, it will need a culture of different groups and institutions working together in a cooperative manner to achieve desired outcomes. Roger Scruton’s emphasis on cherished local places has been noted above: he gave a highly attractive summary of literary references of ‘somewheres’ in England, ranging from Sir Gawain and the Green Knight through Gilbert White’s Selborne, Cobbett’s Rural Rides and Capability Brown to the National Trust and Poundbury.241 A fascinating illumination of how renewal was formed from the economic depression of the 1920s and 30s highlights the creation of a new vision that emphasised national solidarity and a coming together across difference, deeply affected by local attachments to regions, towns, cities, villages and communities.242 Marc Stears recounts the

236 See T Nabatachi and M Leighninger, Public Participation for 21st Century Democracy (Wiley, 2015); Transitions to Participatory Democracy: How to Grow Public Participation in Local Governance (RSA, 2021). 237 R Hannan, ‘The Good Life’ (2021) 2 RSA Journal 39. 238 Leven Programme Partnership, at www.sepa.org.uk/one-planet-prosperity/sustainable-growth-agreements/levenprogramme-partnership/; Bagehot, ‘North of the Tyne is Mine. A Left-wing Metro Mayor is Helping to Deliver a Right-wing Government’s Signature Policy’ The Economist 22 September 2021, 25. 239 Health and Social Care Act 2021. 240 A Severwright, ‘Reshaping Social Care’ (2021) 3 RSA Journal 16, 18. 241 R Scruton, Green Philosophy. How to Think Seriously about the Planet (Atlantic Books, 2009) ch 10. 242 M Stears, Out of the Ordinary. How Everyday Life Inspired a Nation and How It Can Again (The Belknap Press of Harvard University Press, 2021).

246  Cooperation in Society work of writers such as JB Priestly talking of ‘vocal civic pride’,243 of Dylan Thomas focusing on the power of ordinary humanity, especially of a local community with a sense of place in Under Milk Wood, of DH Lawrence articulating the possibility of people coming together in a spirit of solidarity, of TS Eliot’s spiritual reawakening grounded in a willing subservience to the power of tradition in The Waste Land, of George Orwell’s English Journey and Road to Wigan Pier. Stears cites Anthony Costello’s proposition that244 people need to be members of ‘sympathy groups’, small, informal, but relatively predictable gatherings of people who come together in ways that require little in the way of official, bureaucratic oversight. ‘for sports, choirs, prayer, books, farming, service quality, investment, gardening, yoga, cards, childcare, audit, fraternity and sorority’ and even ‘recreational drug use like qat-chewing, drinking beer, hookah pipes, and wine-tasting’.

It is interesting to note the durability of the Women’s Institute movement from 1897 in Canada and rooted in Britain since 1913.245 More recently, Vivek Murthy, whose book is ostensibly about the damage to health and society caused by loneliness,246 cites the strength that results from the moai social system in Japan (the creation of links between people of all ages, involving mutual social and even financial support),247 a community of the elderly in Goolwa, South Australia, the Village Movement in Boston and the spread of Men’s Sheds.248 Murthy notes that researchers have identified three dimensions of loneliness – intimate, relational and collective – which may suggest the importance of building engaged relationships and cohesion in society.249 An inspiring example of the strength that a local community can enlist to re-energise itself is the Compassion Project created in the town of Frome, Somerset.250 It has been centred on the town’s general medical practice, strongly supported by the district council, that responded to loneliness of citizens251 through creating multiple small links of support, that grew into a coordinated network of Community Connectors and Health Connectors, and a Service Directory signposting lively opportunities through Talking Cafes and multiple clubs and recreational groups. Academic work that inspired these developments pointed to the impact of social relationships and laughter on health.252 Between 2013 and 2017, emergency admissions to hospital in Frome, a population of 28,000 people, were reduced by 14%, while emergency admissions in Somerset as a whole, comprising around 500,000 people, rose by 29%. The lead GP, Dr Helen Kingston, summarised her vision 243 JB Priestley, English Journey: Being a Rambling but Truthful Account of What One Man Saw and Heard and Felt and Thought during a Journey through England during the Autumn of the Year 1933 (1934). 244 M Stears, Out of the Ordinary. How Everyday Life Inspired a Nation and How It Can Again (The Belknap Press of Harvard University Press, 2021) 173, citing: A Costello, The Social Edge (Thornwick, 2018); also H Cottam, Radical Help: How We Can Remake the Relationships Between Us and Revolutionise the Welfare State (Virago, 2018). 245 S Cohen, The Women’s Institute (Shire Publications, 2011). 246 VH Murthy, Together. Loneliness, Health and What Happens When We Find Connection (Profile Books & Wellcome Collection, 2021) 71–150. 247 D Buettner, The Blue Zones: Lessons for Living Longer from the People who Lived the Longest (National Geographic Society, 2010). 248 B Golding, The Men’s Shed Movement: The Company of Men (Common Ground Publishing, 2015). 249 LC Hawkley, MW Browne and JT Cacioppo, ‘How Can I Connect With Thee? Let Me Count The Ways’ (2005) 16(10) Psychological Science 798–804; Stephanie Cacioppo, AJ Grippo, S London and JT Cacioppo, ‘Loneliness: Clinical Import and Interventions’ (2015) 10(2) Science 238–49. 250 J Abel and L Clarke, The Compassion Project. A Case for Hope & Humankindness from the Town that Beat Loneliness (Aster, 2020). 251 Research cited included S Pinker, The Village Effect: Why Face-to-Face Contact Matters (Atlantic Books, 2015); B Meyerowitz, D Bell and E O’Shaughnessy (eds), Against the Tide. The Psychoanalytic Approach of the Fitzjohn’s Unit to Patients with Complex Needs (Taylor & Francis, 2018); CA Nelson, NA Fox and CH Zeanah, Romania’s Abandoned Children: Deprivation, Brain Development, and the Struggle for Recovery (Harvard University Press, 2014). 252 eg J Holt-Lunstad, TB Smith and JB Layton, ‘Social Relationships and Mortality Risk: A Meta-analytic Review’ (2010) 7(7) PLoS Med: e1000316, DOI: 10.1371/journal.pmed.1000316.

Towards Solutions  247 as: ‘We wanted to create a community where people are supported to be creative, active and resourceful in response to their own and each other’s unique and shared needs, with easily accessible integrated care and support available to all.’253 A related development was the election of councillors independent of established political parties who observe a Way of Working based on core principles of independence, integrity, positivity, creativity and respect.254

Re-empowering Communities: Levelling Up In the UK, the moves towards strengthened communities have been gathering momentum. Part of this development relates to organisation and empowerment of local government that goes back two decades,255 whilst part relates to the more recent realisation that building a strong sense of local community is what empowers and energises economic activity. Ideas have circulated about reorganising government in the UK away from several hundred local authorities to say 10 regional authorities. The latest consultation covered creating 24 unitary arrangements in Cumbria, North Yorkshire and Somerset.256 However, important further parts of the overall picture have given significant impetus to ­delivering devolved localism. These are, first, the post-Brexit energisation of government to liberate economic activity through self-determination and improve productivity, and, second, the ‘levelling up’ agenda of Boris Johnson’s government in order to try to consolidate the gain of ‘red wall’ Parliamentary seats in the 2019 election.257 Lord (William) Hague drew attention in late 2021 to the consistent prescription on ‘how to level up’ that had been proposed by the centre-right think tanks, namely ‘Central government will only revive the left-behind places of Britain with radical decentralisation, giving local communities more ownership of their own lives.’258 A glimpse of this appeared in 2020 in policy papers such as that on Build Back Better High Streets, where the vision was certainly expressed in terms of ‘supporting places’, focussing on five key priorities:259 1. 2. 3. 4. 5.

Breathing new life into empty buildings; Supporting high street businesses; Improving the public realm; Creating safe and clean spaces; Celebrating pride in local communities.

The February 2022 Levelling Up White Paper set out a wide holistic vision.260 In seeking to address the UK’s geographical disparities in opportunities, productivity, pay, jobs and living standards, policies were outlined to ‘restore a sense of community, local pride and belonging’ and to ‘empower local leaders and communities’. A Framework for evaluation of disparities was based on evaluating the full set of six different forms of capital – human, financial, social, physical, 253 ibid, 13. See www.fromemedicalpractice.co.uk/why-work-with-us. 254 www.thealternative.org.uk/dailyalternative/2019/10/7/flatpack-democracy-two-zero. 255 See White Paper ‘Strong and Prosperous Communities’ 2006; The Local Government and Public Involvement in Health Act 2007. 256 Consultation on Proposals for Locally-led Reorganisation of Local Government in Cumbria, North Yorkshire and Somerset (Ministry of Housing, Communities & Local Government, 2021). 257 The Conservatives made a net gain of 48 seats, resulting in a Parliamentary majority of 80 seats, and won 43.6% of the popular vote, which was the highest percentage for any party since 1979. 258 W Hague, ‘Localism is the Key to Levelling up Britain’ The Times 5 October 2021, 23. 259 Build Back Better High Streets (Ministry of Housing, Communities and Local Government, 2021). 260 Levelling Up (HM Government, 2022).

248  Cooperation in Society intangible and institutional – especially since their real significance was considered to be where they acted in mutually reinforcing combination.261 The new policy regime included establishing 12 ‘missions’ (rolling endeavours over a decade, summarised in Table 9.1), fundamentally reorienting government decision-making, empowering local decision-makers, a new approach to data and evaluation, and an oversight regime to oversee levelling up (including annual reports and a national Levelling Up Advisory Council). Table 9.1  The UK Levelling Up Missions Focus Area

Mission

Boost productivity, pay, jobs and living standards by growing the private sector, especially in those places where they are lagging Living Standards

By 2030, pay, employment and productivity will have risen in every area of the UK, with each containing a globally competitive city, and the gap between the top performing and other areas closing.

Research & Development (R&D)

By 2030, domestic public investment in R&D outside the Greater South East will increase by at least 40%, and over the Spending Review period by at least one third. This additional government funding will seek to leverage at least twice as much private sector investment over the long term to stimulate innovation and productivity growth.

Transport Infrastructure

By 2030, local public transport connectivity across the country will be significantly closer to the standards of London, with improved services, simpler fares and integrated ticketing.

Digital Connectivity

By 2030, the UK will have nationwide gigabit-capable broadband and 4G coverage, with 5G coverage for the majority of the population.

Spread opportunities and improve public services, especially in those places where they are weakest Education

By 2030, the number of primary school children achieving the expected standard in reading, writing and maths will have significantly increased. In England, this will mean 90% of children will achieve the expected standard, and the percentage of children meeting the expected standard in the worst performing areas will have increased by over a third.

Skills

By 2030, the number of people successfully completing high-quality skills training will have significantly increased in every area of the UK. In England, this will lead to 200,000 more people successfully completing high-quality skills training annually, driven by 80,000 more people completing courses in the lowest skilled areas.

Health

By 2030, the gap in Healthy Life Expectancy (HLE) between local areas where it is highest and lowest will have narrowed, and by 2035 HLE will rise by five years.

Well-being

By 2030, well-being will have improved in every area of the UK, with the gap between top performing and other areas closing.

Restore a sense of community, local pride and belonging, especially in those places where they have been lost Pride in Place

By 2030, pride in place, such as people’s satisfaction with their town centre and engagement in local culture and community, will have risen in every area of the UK, with the gap between top performing and other areas closing. (continued)



261 D

Coyle, Measuring Wealth, Delivering Progress (Bennett Institute for Public Policy, 2019).

Towards Solutions  249 Table 9.1  (Continued) Focus Area

Mission

Housing

By 2030, renters will have a secure path to ownership with the number of first-time buyers increasing in all areas; and the government’s ambition is for the number of non-decent rented homes to have fallen by 50%, with the biggest improvements in the lowest performing areas.

Crime

By 2030, homicide, serious violence and neighbourhood crime will have fallen, focused on the worst affected areas.

Empower local leaders and communities, especially in those places lacking local agency Local Leadership

By 2030, every part of England that wants one will have a devolution deal with powers at or approaching the highest level of devolution and a simplified, long-term funding settlement.

The potential scale of power to be devolved could be significant, although considerable continuing central control may defeat this on finance and many policy areas. An honest scrutiny on ‘what works’ and continued willingness to change may be critical.262

Re-Valuing Values after Covid-19 What do people value now? The Covid-19 pandemic lockdowns in 2020–21 have produced striking evidence that people value: (a) Essential services, such as food, healthcare, social care, water, energy, fuel and other utilities, internet connection, deliveries of post and essentials, teachers (b) People who deliver these services and goods, especially though personal senses of commitment to others and the common good (c) People who put themselves in danger to help others, volunteering, donating and sharing. General emotional responses are affected by stories of the fears of health and social workers exposed to risk, of those who lose jobs and their income, of those who are unable to access care or the use of adequate protection, of those who are deemed to be lower priority for use of treatment, and so on. Equally, certain behaviour is clearly not valued, notably behaviour that revolves around selfishness. It is striking how, overall, these stories support a communal strengthening of the value of caring for others, unselfishness and sharing. We have noted above the tendency for people to turn inwards for protection when they feel threatened. The risk in doing that is that giving expression to caring for people who are other than ‘us’ can be limited by imposing a fear-based restriction of who is ‘other’ or ‘them’. Mark O’Connell, who has written a book about a catastrophic end to the world, noted different signs of life in 2020:263 [N]ot people battening down the hatches, protecting themselves and their property from ‘marauders’, from a society devolved into chaos and violence [but] people putting their lives on hold for a collective cause, for societal as opposed to merely individualistic ends. What I have seen … is how important community still is, and how we are all connected.



262 ibid, 263 M

155. O’Connell, ‘Apocalypse How?’ FT Weekend Magazine 25/26 April 2020, 30, 33.

250  Cooperation in Society Mark Carney argued that not only will what people value change post-Covid but that the gulf between what markets value and what people value will close.264 He quoted philosopher Michael Sandel’s view that we have been subtly moving from a market economy to a market society, in which nothing has value unless it is in a market. ‘The price of everything is becoming the value of everything.’ However, Carney notes: This crisis could help reverse that relationship, so that public values help shape private value. When pushed, societies have prioritised health first and foremost, and then looked to deal with the economic consequences. In this crisis, we know we need to act as an interdependent community not independent individuals, so the values of economic dynamism and efficiency have been joined by those of solidarity, fairness, responsibility and compassion. … All this amounts to a test of stakeholder capitalism. When it’s over, companies will be judged by ‘what they did during the war’, how they treated their employees, suppliers and customers, by who shared and who hoarded. … improvements in the quality and coverage of social support and medical care, greater attention to be paid to managing tail risks, and more heed to be given to the advice of scientific experts.

In reviewing the origins and future of the GFC after a decade of austerity, Sir Paul Collier pointed to the emergence of a Cooperative Society,265 based on inclusivity, ethical practice, connectedness and reciprocity, recognising common membership of groups and humanity. If that approach was true before 2020, it will be needed to a considerably greater extent for the next decade or more.

Building a Cooperative Nation and Economy This history illuminates a cocktail of inter-related fundamental issues. First, globally and nationally, there remains too much basic poverty, despite some alleviation. Many people may have thought that the twentieth century was dominated by the stark political rift between democracy and communism, and that the outcome was that the former had won. However, closer inspection shows that classical economic theory on the form of neoliberal capitalism has exerted a powerful influence on political decisions and the activities of the polis in many Western states. The idea that capitalist growth would trickle down and raise people out of poverty has proved to be far from realisable. It may be thought that poverty is a third world problem, not for first world countries other than in supporting capitalism, world trade and making international grants. Many people have been lifted out of poverty over the twentieth century. But progress been allowed to stagnate under theories of capitalist market economics in Western countries. Second, in the past decade since the GFC, advanced states have experienced a lack of forward momentum in economic, social, employment and political inequality. The effects have been felt unexpectedly by the working and middle classes, whose expectations have been thwarted while they see the rich get richer. The feeling of having been left behind while the rich continue to extract wealth from the system has led to profound economic, social and political resentment and disruption. Large numbers of Western voters are right in feeling that they have drifted backwards and their voice and interests have been excluded and their well-being overlooked. A resentment of elites spreads division and unrest. The sense of inequality in Western societies is deep and now powerful. Its power has potential not only to disrupt but also to turn inwards and be damaging as



264 M 265 P

Carney, ‘Putting Values Above Valuations’ The Economist 18 April 2020, 54. Collier, The Future of Capitalism (Allen Lane, 2018).

Building a Cooperative Nation and Economy  251 it does not include effective solutions. The resulting political destabilisation has surprised leaders and it is not yet clear that the fundamental causes are being addressed. In short, perceptions of social unfairness and frustration of expectations lead not just to poverty and economic disruption but also to social and political instability, distrust and a lack of cooperation. The fundamental causes involve inter-linking of economic, social, political elements. How do we respond and reorganise ourselves so as to build cooperative, co-creative and successful nations and economies? An important lesson is: we need to address poverty and inequality in all manifestations. These issues constitute major barriers to cooperation and delivery of stability and prosperity. All of the aspects of increased political involvement, advancement of prosperity in economic, employment, social and community contexts must be addressed if we are to realise the benefits of cooperation and co-creation. The populist right may typically gain political advantage from widespread feelings of insecurity, and the rich may gain financially, but unless the underlying causes of resentment are addressed society and national economies are likely to continue to be unstable, lacking cohesion and under-productive. Thus, it is ultimately important to address issues of perceptions of unfairness, poverty, inequality, lack of local pride and frustration of socio-economic progress for individuals and communities. This is what ‘levelling up’ agendas need to address.

Renewal of Communities Third, psychological issues have significant impact on populations. Feelings of frustration, exclusion, ‘learned helplessness’, resentment against elites and others’ unfair advancement and lack of local pride and community, which provide powerful amplifiers of reductions in social capital, engagement, commitment and productivity, are all important aspects that need to be addressed. Haidt shows that it is populist right politicians who are short-term beneficiaries of these feelings of destabilisation of populations. However, as leaders like Orban and Bolsonaro have shown, they do not tend to address the underlying issues, and this leads to more fundamental social, political and economic disintegration. A ‘levelling up’ agenda can address the problems, but it needs to go some way beyond providing more cash for communities. It needs to build people’s sense of dignity, grounding and belonging to place and community, and of meaningful personal motivation and valuable contribution to society. We will know things are working when communities feel empowered and demonstrate outcomes of self-regeneration, confidence and positive social outputs. So let us look at a few ideas for taking cooperation seriously.

A Cooperative Nation: A Cooperative Social Covenant? Is it time to restate the values and objectives of our society? The Outcome-Based Cooperative model supports this. The pandemic has caused a re-evaluation of what people value, and it leads to things like functioning healthcare and social care, provision of good food and teaching, pride in where we live and local communities, the realistic expectation of improving our condition through individual and combined effort. The lessons point back to a refocusing on society’s important values and unifying objectives, such as senses of security and solidarity. Is it time for a national code of purposes, objectives, outcomes and of the means of cooperating to achieve these through practice based on shared ethical values? This has been provided in Western nations for two millennia by religion and the organisation of society into local communities. A gap has been created by the expansion and secularisation of social groups in the

252  Cooperation in Society past 50 years. Given that our brains are organised to evaluate behaviour through our internal system of ethical evaluation, society would work better and more cooperatively if we were able to adhere to a clear set of refreshed social values. These values could then be used to measure progress against specific outcomes and targets. The outcomes that could be over a specific period might be achievable targets based on the UN Sustainable Development Goals and similar local goals. A strong idea is to ensure the ability of people to build networks of strong groups of the right size, taking account of the need to limit size (the Dunbar number) but strengthening the sense of purpose and achievement in each, based on trust and ethical values. The interrelation of these groupings of strong trust will build mutual support and feelings of achievement. They will also provide the basis for social licences for organisations and institutions to operate. One suggestion is that inequality can be addressed through action by business based on a new social contract, bringing together companies, governments, workers and their representatives, and civil society organizations. It would involve the elements of stakeholder capitalism, skill development and career pathways, economic security and mobility, just transition to net-zero GHG emissions and worker data protection.266 An example of this is the agreement of parties for regeneration of The Leven area in Scotland. The stakeholder capitalism referred to here would include not just long-term alignment of common objectives but also redesign of performance assessment, accountability systems and external reporting, fair payment of taxes, reduction in the earnings gap between executive and non-executive employees and embedding diversity and inclusion.

Renewal of Institutions A familiar theme emerges of the dangers of too much emphasis on personal freedom as opposed to building cohesive societies. Acemoglu and Robinson’s historical work has shown the need for mutual support between inclusive political institutions and inclusive economic institutions.267 Kate Raworth made an impassioned plea in her ‘doughnut economics’ model that a state’s economic and political institutions should be inclusive rather than extractive: finance should serve society, business with its innovative potential should serve purpose trade should be fair, and power wherever it exists should be checked against abuse.268 We could devise new models of ownership and governance, especially for public goods. The logic points towards community ownership of utilities, such as water, sewage, local energy generation in a world driven by non-extractive renewable sources. Providers of these public goods do not need to be owned and managed nationally or by a local Council, but there are clear advantages if the corporate entity is publicly owned (an example being Scottish Water) rather than owned by distant capitalist investors. (We discuss new forms of corporations in chapter 13.) Are our government institutions the right size? Are they too large or too small for people to feel involvement, ownership, community and involvement in them and strong social solidarity? This idea develops from the Dunbar number (see chapter three). This line of thinking strengthens the idea that regional organisation and devolution and localism in the UK should bring significant benefits. 266 The Business Role in Creating a 21st Century Social Contract (BSR, 2020). 267 D Acemoglu and JA Robinson, Why Nations Fail. The Origins of Power, Prosperity and Poverty (Profile Books, 2012) 333, 430. 268 K Raworth, Doughnut Economics. Seven Ways to Think Like a 21st-Century Economist (Random House Business, 2017) ch 2.

Building a Cooperative Nation and Economy  253

Cooperative Politics Should the governmental institutions be revised to promote greater cooperation? Is a political system based on opposing parties outdated, when the basic requirement is less to further opposing ideologies and more about delivering good and professional administration to achieve shared goals? The political system of the past couple of centuries, as aristocratic elites have ceded power to owners of capital and then the educationally privileged, has been based around political parties that are differentiated by their adherence to opposing ideologies as well as political elites. Thus, conservative capitalists are opposed to working class; conservatism versus communism, Thatcher-Reaganist free markets versus consumerism, populism versus elitism, ‘somewheres’ versus ‘anywheres’. The evidence quoted above suggests that the critical fractures in the UK now involve multiple different groups. Viewed from a distance, perhaps the most consistent feature here, as groupings and ideas have changed, is that of constant division and opposition. What would politics look like if administration and the achievement of common goals were undertaken on the basis of cooperation? Would attacks on bureaucracy be solvable by a new system of governance and accountability for public goals? Better Administration (a much broader concept than Better Regulation), with less traditional politics? Purpose, mission, objectives, Governance, oversight, etc. The OECD’s Deliberative Wave recommendations start, as do the ideas suggested in this book, with a focus on purposes and accountability. I add two other elements. First, many genuine purposes exist, and some of them conflict, so we need to debate and prioritise them, so as to avoid permanent ongoing strife in operational day-to-day implementation. Second, outcomes are a fundamental element, since this enables us to identify and measure if we are achieving the purposes or not. In sum, we need a refreshed national conversation on purposes, ethics, priorities and outcomes. This is especially urgent in a period of considerable cost to achieve sustainability and transition. What is the right thing to do? Who should share more of the burden? Without this, we face falling back into social and political disenchantment, which, as we analysed at the start of this chapter, will itself bring greater destabilisation and disintegration. It is interesting to note a growing number of references to different forms of organisation (shared ownership and governance) such as community enterprises, re-invented co-operative organisations (ie worker owned). In chapter 12, I also describe a new model for regulation that could be expanded to other situations. The important point is: what if we really gave a new and wider commission to regulators to achieve certain non-political public goals, and redesigned the governance etc system around them so they could focus on the basic goals, widened to include the holistic SDGs? Would a new approach enable civil servants and regulators to adopt a wider and longer-term view of their roles and how they might achieve their objectives?

254

part b.ii Cooperation in Business Organisations This section examines how business organisations should ideally be designed so as to enable optimum cooperation. The core proposition is that businesses and markets can only ultimately operate successfully in open democracies if they behave fairly and ethically. Indeed, that should be the expectation and requirement of businesses and those who govern them. The fact that strong trust can only be built on evidence of ethical practices and reputations has been overlooked in business governance and in too many business practices. Once those requirements are recognised, and necessary reorientations are put into practice, things start to work better. Two chapters follow on key aspects that affect the ability of people in businesses to cooperate. First, we consider the rationale for capitalism and business. This charts the transformation away from the profit maximisation theory of corporations, as an aspect of the philosophical and political ideology of neoliberal capitalism. The evolution has been to wider concepts involving social, environmental, sustainability and stewardship issues, culminating in the ideas of corporations having social purpose and of stakeholder capitalism. The concept of stakeholder capitalism has emerged recently, but its form has yet to crystallise. It should logically involve significant change to organisational governance and distribution of successful outcomes. The underlying point about these transformations is that they reflect growing realisation that strong trust cannot exist in work or commerce without an ethical foundation. In order to maximise cooperating amongst staff, suppliers, providers of capital and finance, customers, regulators, governments, communities, the key issue is how an organisation can demonstrate that it is trustworthy. Answering that issue satisfactorily involves producing evidence of trustworthiness in motivation, purpose, governance, processes, management style and systems, observance of standards, verifications, ethical behaviours and culture and outcomes. Second, we review changes in the theory and practice of the incentivisation and remuneration of (especially senior) employees in commercial corporations. Here again we see a move away from ideas of control to ideas based on supportive autonomy. Profit maximisation and control by shareholders or by senior managers is ultimately a dead end. One has to trust people and to get them to trust you. Widespread academic criticism has been levelled at the theory and outcomes of aligning financial incentives of managers with those of shareholders, and the ability of directors to capture rents without effective control by shareholders. Recent ‘say on pay’ votes can be expected to have limited systemic effect. Reasons why large pay differentials between senior and junior staff are relevant are the impression inside and outside the organisation of unfair inequality, selfishness and lack of valuation or respect for others (especially staff and customers). The feelings of resentment, demotivation and lack of commitment that are generated threaten a successful cooperative environment and enterprise, with a reputation for trustworthiness based on embedded fair behaviour. These issues are not being adequately addressed by current law or practice. Trust and cooperation are not supported by the continuation of practices that seek just to get people to make money. Profit is an outcome not an objective. The conclusions of these two chapters show us what the recent concepts of Cooperative Capitalism and Stakeholder Capitalism should look like. The essence is that people should be

256  Cooperation in Business Organisations focused on cooperating on a basis of strong trust to achieve shared, prioritised purposes and outcomes, measuring their performance in achieving them, and identifying problems and solving them, thereby constantly improving performance. This requires the engagement of all stakeholders. Observing ethical values is essential. The means of incentivisation, engagement and governance of staff, managers, suppliers, investors, customers and so on should all be based on the principles of maximising cooperation and achieving desired outcomes. Hence, robust changes need to be made to aspects that represent risks to cooperative achievement, such as externalised control and lack of respect in business relationships. There may be experimentation in who is involved in various aspects, and no single model is prescribed here, although various ideas are identified. The practical questions start with the following. Who is involved in setting and prioritising the purposes and outcomes, and in measuring performance and outcomes? What does a co-creation approach point to? What evidence can each actor produce that they can be trusted, and who verifies this?

Other Applications of the OBC Model The adoption of a cooperative model and new structures could achieve transformative outcomes in a number of current areas. Much of the following two chapters relate to ‘big picture’ issues that affect large businesses. By way of contrast, we set out here illustrations of how things might work for employment relations, and supporting small businesses.

Employment Membership of a trade union was 23.7% of the UK workforce in 2020 (6.6 million people), and membership has for some years reduced in the private sector and shifted towards the public sector (in 2020, 110,000 employees left the former and 227,000 in the latter joined a union).1 Might a different approach to cooperation and performance improve matters? A new model can be proposed for supporting workplace harmony and for resolving employment disputes. From the 1980s, the model of collective negotiation between employers and trade unions gave way to a regime of individual workers’ rights and individual enforcement through Employment Tribunals, supported by conciliation through ACAS. In the past decade, a series of regulatory authorities were created to intervene in serious cases of abuse: (a) The Equality & Human Rights Commission; (b) the Gangmasters and Labour Abuse Authority (GLAA) to deal with labour exploitation across the economy; (c) the section in HM Revenue and Customs that enforces the National Minimum Wage and National Living Wage (NMW/NLW) laws;2

1 The Economist 28 August 2021, 23. 2 At April 2018 it was estimated that 439,000 people were underpaid: Non-compliance and Enforcement of the National Minimum Wage (Low Pay Commission, April 2019). In August 2021, 191 employers were named for underpaying, £2.1 million was found to be owed to over 34,000 workers: Press release ‘Employers ‘named and shamed’ for paying less than minimum wage’ 5 August 2021, at www.gov.uk/government/news/employers-named-and-shamed-for-paying-less-thanminimum-wage. A criticism of the minimum wage regime is that it is selective in attracting publicity towards major businesses and fails to incentivise or recognise improvements in performance, such as in applying complex rules.

Other Applications of the OBC Model  257 (d) the Employment Agency Standards (EAS) Inspectorate to enforce regulations covering employment agencies, particularly focusing on vulnerable agency workers; (e) The Modern Slavery Act 2015.3 The GLAA, EAS and NMW/NLW bodies have been coordinated under the Director of Labour Market Enforcement, and a July 2019 proposal is to merge them in a single labour market enforcement authority.4 The proposal is based on findings that the enforcement landscape is ‘deeply fragmented’ and it is ‘difficult for both workers and employers to know where to go for help’. The proposal argues that there could be significant advantages in creating a new single labour market enforcement body, not least in extending state enforcement (to include commitments to enforce holiday pay for vulnerable workers and regulate umbrella companies) and in providing ‘better support for businesses who want to comply with the rules’. Although these bodies were created primarily to address criminal behaviour by some businesses, their remit is increasingly affecting ‘normal’ businesses, perhaps unintentionally, and there is push-back from the general business community on the focus on enforcement (based on deterrence and ‘naming and shaming’) rather than an approach that is consistent with working collaboratively with businesses and providing support, as experienced in various other regulatory areas. There is some criticism that the spirit of ethical cooperation envisioned in the Taylor Report on Good Work that work should be ‘fair and decent’5 and supported by the Government,6 is not being realised here. The system of individual private enforcement of labour rights has also given rise to various concerns. One concern is the cost of rising claims for individuals; a second is the cost of providing Employment Tribunals (the attempt to introduce fees was overturned by the Supreme Court), a third is the lack of a simple pathway for disputants (that would seamlessly join up initial information, advice, triage, mediation (ACAS) and decision-making (tribunal); a fourth is the gap that exists between a system based on enforcement of rights of individual employees and the ability to identify and effectively address systemic workplace practices. Applying the OBC concept, one would adopt a general Good Work Ethical Code, supported by all major employers and their organisations, with systemic enforcement overseen by the proposed Labour Market Regulator – but with a wider remit to work with collaborative businesses under an EBR-style model and intervene with others in more traditional ways – and based on data from an integrated advice /triage/resolution mechanism that integrates ACAS and ETs. The principle of involvement of stakeholders would call for mechanisms such as the joint forum process at local and regional levels between the Union of Shop, Distributive and Allied Workers (USDAW) and Tesco plc.7 This holistic approach might produce improvements in the approach to regulatory generally, including late payment, various employment situations (NMW/NLW, abuse, equalities, pensions), data protection and general and sectoral regulation.

3 See UK Government Response to the Independent Slavery Review of the Modern Slavery Act 2015 (HM Government, 2019). 4 Good Work Plan: Establishing a New Single Enforcement Body for Employment Rights. Consultation (BEIS, July 2019). 5 Good Work. The Taylor Review of Modern Working Practices, 2017 (HM Government). 6 Good Work. A Response to the Taylor Review of Modern Working Practices. February 2018 (HM Government, 2018). 7 See Creating Positive Culture. Opportunities and Challenges (Financial Reporting Council, 2021) 14.

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Supporting Small Businesses There is extensive evidence that small businesses respond, when they do not comply with laws, to intervention that is supportive and assists them to adapt, rather than to punitive sanctions.8 It can be a challenge to convert small businesses beyond compliance.9 However, there is evidence that small businesses are influenced by the ethics of their owner-managers, who are in turn influenced by market values, and prioritise revenue-based activities.10 It has long been the policy of various enforcement authorities in UK to support small businesses,11 although it is not necessarily universal. The rationale is straightforward: most small businesses have limited knowledge, resources and competence but are well-intentioned and respond to support.12 However, assistance for small businesses has crumbled and dispersed, and needs to be rebuilt.13 Many businesses are reluctant to use courts to complain about late payment and other practices,14 but find helpful the ability to contact anonymously an official body that can use public investigative and enforcement powers to change the behaviour of large customers. Intermediaries such as the Groceries Code Adjudicator,15 the Pubs Code Adjudicator16 and the Small Business Commissioner have proved to be highly effective. They typically involve an ethical code, such as the Prompt Payment Code. An OBC approach would aim to provide focused support to small- and medium-sized businesses, based on shared commitment to ethical practice, and a data system that provides information, assistance with resolving complaints and problems, and provides feedback of aggregated data to identify issues and increases in performance. The data platform would be held by an independent Ombudsman, avoiding its commercial exploitation. There would be simplified arrangements delivering integration between national level institutions (such as departments and regulators covering revenue and customs, health and safety, environment, competition and consumer protection and sectoral issues) and local coordination (such as regional or local authorities, and organisations and support services like Business Hubs, Be the Business, Money Advice Trust, Financial Inclusion Commission). The structures and terms of engagement would be an Ethical Practice Code and structures inspired by the Primary Authority, Regulators’ Code and sectoral Codes of Ethical Practice models. Expert swift dispute resolution and oversight could involve the Small Business Commissioner overseeing a network that includes specialist regulators (Groceries Code Adjudicator, Pubs Code Adjudicator, Trading Standards and others) and general Ombudsmen (a group including energy, small traders, financial, motor, property, data). 8 Challenges Businesses Face When Complying with Regulation. Research Report (BEIS, November 2020); G Lynch-Wood and D Williamson, ‘Regulatory Compliance: Organizational Capacities and Regulatory Strategies for Environmental Protection’ in H Quirk, T Seddon and G Smith (eds), Regulation and Criminal Justice (Cambridge University Press, 2013). 9 I Worthington and D Patton, ‘Researching the Drivers of SME Environmental Behaviour: A Study of the UK Screen-printing Sector’ (2005) 12(5) Business Strategy and the Environment 352–62. 10 D Williamson, G Lynch-Wood and J Ramsey, ‘Drivers of Environmental Behaviour in Manufacturing SMEs and the Implications for CSR’ (2006) 67 Journal of Business Ethics 317–30; R Lewicki, D Saunders and J Minton, Negotiation (McGraw-Hill, 1999); SMEs & Competition Law. Qualitative Research Report (BDRC Continental, 2015). 11 Business Perceptions Survey 2020. Research Report (BEIS, November 2020). 12 Behavioural Insights Team and Cabinet Office, Be the Business: Boosting Productivity in the UK (July 2017); Goldman Sachs, Rethinking Productivity: A 2018 Survey of 10,000 Small Businesses UK Graduates (2018). 13 A retired chairman of one of the major banks was reported as saying: ‘You know, this is all our fault. We’ve spent the last ten or twenty years deskilling the client interface’: J Hurley, ‘Ready to Step into the Breach and Lend to Small Businesses’ The Times 3 August 2020. 14 Tied Up. Unravelling the Dispute Resolution Process for Small Firms (Federation of Small Businesses, 2016). 15 Statutory Review of the Groceries Code Adjudicator: 2016–2019 (BEIS, July 2020). 16 See recently Statutory Review of the Pubs Code and the Pubs Code Adjudicator: 2016–2019 (Department for Business, Energy & Industrial Strategy, November 2020). A somewhat critical review is J Meers, ‘The Emergence of the “Pubs Code Adjudicator”: An Analysis of the Pubs Code Regulations 2016’ ADR Insight, Chartered Institute of Arbitrators, October 2020.

10 Cooperation in Capitalism and Businesses Can you cooperate best in vertical hierarchical organisational structures, or in horizontal ones in which everyone involved has a voice? An extraordinary transformation is occurring in the theory of capitalism and business. The idea used to be that corporations were controlled by shareholders, who controlled directors, who controlled workers. But practice in how to run effective organisations has slowly undermined all that. The changes also reveal a fundamental re-evaluation in personal and political ideology. This can be clearly seen in recent changes to the framework for governance of corporations. In simple terms, the shift is from a policy of maximising shareholder value (MSV) to a pluralist approach of achieving social objectives through stakeholder governance. There is also a fundamental shift in the relevance of time. MSV produces a focus on maintaining short-term returns and value, which is now seen as involving considerable risk for the stability of stable enterprises and systems, as it has driven highly dangerous consequences for the planet and for markets, leading to a shift in focus to long-term sustainability. This chapter will first review the theory of profit maximisation and related consequences such as agency theory and practice in incentivising managers, short-term focus and the theory of attempting to control behaviour through deterrence. We then note powerful problems and criticisms with these theories and their effects. We then review multiple changes that together have contributed to a fresh approach to organisations and the roles of their different stakeholders. The changes include corporate social responsibility; a focus on environmental social and governance issues; issues of corporate purpose, sustainability, stewardship, long-term horizons; stakeholder capitalism; regulation of directors and auditors; and sustainable investment. We then look at radical new models, such as valuing different types of capital (human, social, natural and shared financial) in their own terms, and diversification in models of ownership and participation in business. We do not know how much further these changes will progress on their own. But if cooperative business and capitalism are to survive, further change along directions already taken is required.

Freedom and Neoliberal Capitalism We noted in chapter nine the link in the twentieth century between the political ideology of individualism and the economic theory and commercial practice of neoliberal capitalism. This line of thinking holds that both individuals and corporations should be free to trade in free markets, largely unconstrained by external control or interference. This leads to a strong aversion to state control, especially through regulation. A dominant theme was that corporations should be free to make money, indeed, it was their sole purpose to maximise shareholder value (MSV). This political ideology of individualist capitalism has been criticised as ignoring the need for humans to cooperate, which requires less selfishness and greater solidarity. The two approaches

260  Cooperation in Capitalism and Businesses of neoliberalism and MSV are fully intertwined, mutually supportive and are designed to fit. The era was described as an age of ‘regulatory capitalism’.1 One should expect resistance to external control through regulation of business. That resistance has, indeed, been a strong phenomenon in the United States and in centre-right governments in Europe, under the banner of ‘deregulation’. A politically-inspired policy of leaving the banks alone (‘light touch regulation’) was, however, subsequently implicated in all major reports on the global financial crash.2 Experiments with Better Regulation, trying to do things better, were in fact not a numbers game, and were about quality of outcomes rather than quantity of rules, and did not lead to systemic deregulation.3 When calls for deregulation re-emerged in 2021, Jes Staley, CEO of Barclays, said: ‘I wouldn’t burn one piece of regulation’ on the basis that the UK’s robust regulation was a major strength, not weakness.4

Profit Maximisation Theory Western capitalism has been built for many years on a series of interlocking propositions. The dominant theory was that the only purpose of companies was to maximise shareholder value, which primarily means to maximise profits and, more fundamentally, share price. The policy of MSV value arose in the 1970s as an attempt to revitalise corporate performance. As the principal apologist of MSV in the later twentieth century, Milton Friedman, famously said:5 [T]here is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Friedman’s statement has been repeated endlessly, with such ‘near-complete intellectual and practical dominance’6 as to be considered ‘the end of history for corporate law’.7 A second fundamental tenet was the primacy of capital and its owners in controlling businesses. The argument was that the capital being provided was owned by shareholders so the ultimate benefit from the value of goods or services produced and sold by the enterprise was the

1 J Braithwaite, Regulatory Capitalism. How it Works, Ideas for Making it Work Better (Edward Elgar, 2008). 2 eg White Paper: A New Approach to Financial Regulation: The Blueprint for Reform (HM Treasury, 2011); Independent Commission on Banking: Final Report Recommendations (Independent Commission on Banking, September 2011); The Government Response to the Independent Commission on Banking [Cm 8252] 19 Dec 2011; Report on Risks and Vulnerabilities of the European Banking System (European Banking Authority, 2012); Toward Effective Governance of Financial Institutions (Group of 30, 2012); The Wheatley Review of LIBOR: final report (Martin Wheatley, 2012); Proposal for a Council Regulation Conferring Specific Tasks on the European Central Bank Concerning Policies Relating to the Prudential Supervision of Credit Institutions COM(2012) 511 final, 2012; A New Approach to Financial Regulation: Transferring Consumer Credit Regulation to the Financial Conduct Authority (HM Treasury and Department for Business Innovation & Skills, 2013); Changing Banking for Good: Report of the Parliamentary Commission on Banking Standards: Volume I: Summary, and Conclusions and Recommendations HC Paper No.27-I, II Parliamentary Commission on Banking Standards, 2013. 3 IH-Y Chiu, ‘An Institutional Theory of Corporate Regulation’ (2019) 39(2) Northwestern Journal of International law and Business 85. 4 S Jack, ‘Barclays Urges UK to Focus on US and Asia post Brexit’ BBC News 5 February 2021 at www.bbc.co.uk/news/ business-559398575. 5 M Friedman, Capitalism and Freedom (University of Chicago Press, 1962); M Friedman, ‘Editorial, The Social Responsibility of Business is to Increase its Profits’ New York Times 13 September 1970, at SM17. See also FH Easterbrook and DR Fischel, The Economic Structure of Corporate Law (Harvard University Press, 1991). 6 ST Omarova, ‘The “Franchise” View of the Corporation: Purpose, Personality, Public Policy’ in E Pollman and RB Thomson (eds), Research Handbook on Corporate Purpose and Personhood (Edward Elgar, 2021). 7 H Hansmann and R Kraakman, ‘The End of History for Corporate Law’ (2001) 89 Georgetown Law Journal 439.

Profit Maximisation Theory  261 property solely of investors. Hence, a supporting argument was that the corporation is structurally designed to prioritise the interests of capital on the basis that it renders it a more efficient market actor.8 The classic proposition of the founding theorists Berle and Meals in the 1930s was that ‘[o]wners don’t manage, and managers don’t own’.9 Marianna Mazzucato has explained that the thinking relies on the assumption that the providers of capital are the biggest risk takers and merit large rewards if they succeed.10 It was said that their activity created wealth. This theory was, of course, propounded precisely by the major shareholders and institutions that stood to benefit from it. It was a cover for extensive rent extraction. The sovereignty of owners and their capital align with, or have fed, a series of other theories that fundamentally influenced the behaviour of managers, their incentivisation and remuneration, their focus on maximising short-term share price, and how corporations were supposedly disciplined. We examine these briefly.

Controlling Behaviour of Managers: Agency and Incentivisation First, it was assumed that all staff needed to be incentivised to work hard so as to produce profits for others, the owners of capital (agency theory).11 In other words, no-one would work hard and in the interests of the owners of a firm unless they were incentivised to do so. Second, it was assumed that the way to provide that incentivisation was (simply) through offering financial rewards (rather than through other means of motivation). Hence, money was paramount. These assumptions about human behaviour fitted snugly with the self-interest of owners of capital to maximise their wealth. These two assumptions therefore incentivised greed by the owners of capital and by their employees. They also exposed shareholders to the risk of capture by staff (rent extraction by intermediaries) and the breaking of rules by staff so as to maximise their own personal pay, especially in a competitive environment.

Short-Termism Where the objective is to maintain share-price in an environment of regular reporting (daily and later instant access to listings and quarterly publication of reports), the result will be a short-term focus, provoking instant trading to cash in on any rise and offload any falling risk. This leads to volatility in markets, opportunities for misleading or manipulated information and insider trading. John Kay’s report into the effect of UK equity markets on the competitiveness of UK business concluded that short-termism was a problem in UK equity markets, due to the decline of trust and the misalignment of incentives throughout the equity investment chain.12 As Warren Buffett has said: ‘Managers that always promise to “make the numbers” will at some point be tempted to 8 M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305. 9 AA Berle, Jr and GC Means, The Modern Corporation and Private Property (Macmillan, 1932) xxii. See also AA Berle, ‘For Whom Are Corporate Managers Trustees: A Note’ (1932) 45 Harvard Law Review 1365. 10 M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018) 17. 11 MJ Jensen and WH Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’ (1976) 3(4) Journal of Financial Economics 305; see also LA Stout, ‘On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)’ (2013) 36 Seattle University Law Review 1169. 12 The Kay Review of UK Equity Markets and Long-term Decision Making: Final Report (BIS, 2012).

262  Cooperation in Capitalism and Businesses make up the numbers.’13 It also leads to relatively short terms of office for senior executives. The operational incentives to make decisions for the longer term involve personal risk for managers, and may be under-rewarded.

Controlling Behaviour in Corporations: Deterrence Money was also used as the primary means of discipline for both managers and corporations. The idea is that people make all decisions solely on the basis of a cost-benefit calculation of what is in their best interests. Accordingly, someone can be deterred from harmful behaviour by a mechanism that affects their cost calculation. This has a superficial attraction if a business is considered to be an entity in its own right and one that is solely driven by maximising profits. If the entity causes harm to others, those external costs can be internalised after the event through the legal system (fines or damages, which need to be set at the level of the cost of the harm) and the threat that that re-calculation will occur will deter creating such extra external costs. For some centuries, various philosophers argued that the use of force would control behaviour through the supposed mechanism of deterrence.14 The essence of deterrence is based on triggering either the emotion of fear15 or a utilitarian calculation that the costs would exceed the benefits of committing wrongdoing. The imposition of criminal or civil sanctions after committing a breach of law are supposed to affect future behaviour. Specific deterrence supposedly affects the behaviour of the wrongdoer who is being sanctioned, and knowledge of imposition of the sanction supposedly affects the behaviour of everyone else. It is unclear whether such effects cause complete or only partial deterrence – ie complete or partial future compliance. In economic theory, fines and damages have the same effect, forcing internalisation of the cost of the external harm caused by the breach, on the assumption that an individual or corporation makes decisions solely on the basis of rational action. We discuss the evidence on the inadequacies of deterrence theory in chapter 14. In the twentieth century, it was postulated by economists that any non-compliance with the rules of the free market could be controlled through a costs rectification mechanism involving simple economic levers. Since it was claimed that all actions were the result of a cost-benefit computation, if it was clear that the system would impose the cost of adverse consequences (externalities) on their creator, then this would deter further non-compliance and compensate those harmed. This internalisation of ‘external’ costs would be achieved by imposing either fines or civil damages (the monetary effect on the profit-maximiser’s computation assumed to be the same) after (ex post) harm occurs and would deter people and organisations so as to prevent wrongdoing in the first place (ex ante).16 However, since American business and individualist philosophy denigrated 13 W Buffett and D Clark, Warren Buffett’s Management Secrets: Proven Tools for Personal and Business Success (Simon & Schuster, 2009). 14 eg J Bentham, An Introduction to the Principles of Morals and Legislation (JH Burns and HLA Hart, eds) (Methuen, 1789/1982) 158, referring to ‘reformation’. 15 ‘A common theme in these discussions [of the UK finance industry sponsored by the FCA] was fear. Fear of the shortterm focus on profit and expectations of shareholders, elevated in importance by financial KPIs and short time horizons for reporting. Fear of regulators, and the potential for inadvertently breaching an obscure rule, making regulation a distraction. And fear of being the first mover to do the right thing and getting left behind a pack not yet willing to make a collective bold and purposeful move’: Transforming Culture in Financial Services. Driving Purposeful Cultures. Discussion Paper (Financial Conduct Authority, March 2020) DP20/1. 16 G Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169–217; GJ Stigler, ‘The Theory of Economic Regulation’ (1971) 2 Bell Journal of Economics and Management Science 3–21; M Faure, A Ogus and N Philipsen, ‘Curbing Consumer Financial Losses: The Economics of Regulatory Enforcement’ (2009) 31 Law & Policy 161–91.

Problems and Criticisms  263 public enforcement, as being anti-free market principles, damages should be made available through an easily-accessed civil court system in which individual transactions were funded by the intermediaries (attorneys) and aggregation of multiple individual actions could be achieved through class actions.

Problems and Criticisms For some decades post-World War II, the vibrancy of individualist capitalism did appear to produce prosperity and also liberal democracy. Indeed, the implosion of Soviet communism and the ‘cultural revolution’ in China appeared to vindicate the combination of political freedom in democracy and capitalist free markets as successful political and economic policy. It was hailed by some as ‘the end of history’.17 But over time serious problems began to emerge. The implications of this single-minded pursuit of profit inherently put for-profit corporations in conflict with societies, governments, communities, consumers, suppliers, staff and bystanders. Some of these conflicts led to creation of multiple regulatory requirements so as to try to control some activities of organisations from the outside to give a level of protection from the damaging effects of their activities (externalities).

Criticisms of Agency, Incentivisation, Remuneration and Short-Term Focus Profound criticism has built up of the theories, practice and outcomes of MSV, agency and its associated effects of short-term focus and remuneration practices and a series of unintended consequences.18 We examine in greater detail the first assumption about supposed lack of internal motivation in chapter four, and the effects of excessive remuneration at chapter 11. Marianna Mazzucato is one who has unpicked the narrative that MSV creates wealth and shown how the approach has spawned a massive finance industry that ignores the true value of what is traded and ‘financialises’ products, in which the objective is to manipulate share prices so as to exploit short-term variations through the volume of transactions and hence maximise the extraction of rents.19 This leads to valuing prices rather than value, reacting to ever decreasing timescales in share prices, business managers’ focus on share prices rather than long-term strategies and investment,20 private equity firms that cut costs in the short term by firing staff and reducing investment before selling at quick profit, reduced tenure of CEOs21 and managers, attracting frequent switching of investors rather than long term engagement,22 and so on. In the

17 F Fukuyama, The End of History and the Last Man (Free Press, 1982). 18 J Kay, Obliquity (Profile Books, 2010); C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014); F Vibert, The New Regulatory Space (Edward Elgar, 2014); M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018) 17, chs 5 and 6; J Welby, Reimagining Britain. Foundations for Hope (Bloomsbury, 2018). 19 M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018). 20 BJ Bushee, ‘Do Institutional Investors Prefer Near-term Earnings over Long-run Value?’ (2001) 18(2) Contemporary Accounting Research 207. 21 SN Kaplan and BA Minton, ‘How Has CEO Turnover Changed?’ (2012) 12(1) International Review of Finance 57. 22 F Brochet, M Loumioti and G Serafin, Short-Termism, Investor Clientele, and Firm Risk, HBS Working Paper Number: 12–072 (HBS, February 2012).

264  Cooperation in Capitalism and Businesses period before the GFC, banks that tied executive remuneration closely to their corporate earnings performed worse and took greater risks during the financial crisis than other banks.23 This aligns with extensive evidence that humans tend to underestimate the incidence of many risks.24 McKinsey’s 2017 study of 600 firms showed that those focused on the long term clearly performed better than those chasing short-term profit, with average economic profit 81% better.25 The primacy of shareholders in the corporation was significantly criticised by academics.26 Although the mantra of MSV as the overriding or sole objective was afforded ‘almost axiomatic status’,27 the pure Profit Model is not in fact mandated under the legislation in many countries.28 The duties of directors of UK companies to promote the success of a company were widened under the Companies Act 2006 to take into consideration a number of different criteria, under a model described as ‘enlightened shareholder value’.29 Another example of where the need for transparent explanation was introduced was the ‘comply or explain’ principle applied to corporate governance codes from around the early 2000s, even if practice was far from perfect.30 The agency model also came under attack. For example, leading American corporate scholars proposed a ‘team production’ model to corporate law in 1999, arguing that valuable specialist input could be provided by executives, rank-and-file employees, creditors and local communities as well as shareholders.31 Armour, Gordon and Min found that that stock-based pay creates systematic incentives to short-change compliance.32 They pointed to the disparity between managers’ time-horizon of the date they expect to liquidate stock and the firm’s long-term investment on compliance, which tended to produce myopia in both managers and markets. They proposed more assertive directors’ liability for compliance failures, limited in quantum to a proportionate clawback of stock-based pay. The European Commission noted in 201033 that aligning directors’ interests with those of the wide range of shareholders ‘has amplified risk-taking and, in many cases, contributed to excessive

23 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); citing R Fahlenbrach and R Stulz, ‘Bank CEO Incentives and the Credit Crisis’ (2010) 99 Journal of Financial Economics 11; I-H Cheng, H Hong and J Scheinkman, ‘Yesterday’s Heroes: Compensation and Creative Risk-Taking’ (2010) ECGI – Finance Working Paper No 285/2010. 24 See See A Tversky and D Kahneman, ‘Availability: A Heuristic for Judging Frequency and Probability’ (1973) 5 Cog Psych 207, 221; EU Weber, ‘Experience-Based and Description-Based Perceptions of Long-Term Risk: Why Global Warming Does Not Scare Us (Yet)’ (2006) 77 Climatic Change 103, 107–08; See GF Loewenstein, et al, ‘Risk as Feelings’ (2011) 127 Psych Bull 267, 280. 25 D Barton, J Manyika, T Koller, R Palter, J Godsall and J Zoffer, Measuring the Economic Impact of Short-Termism (McKinsey & Company, 2017). 26 L Stout, ‘The Toxic Effects of Shareholder Primacy’ (2013) 161 University of Pennsylvania Law Review 2003; L Talbot, ‘Trying to Change the World with Company Law? Some Problems’ (2016) 36 Legal Studies 513. 27 J Armour and JN Gordon, Systemic Harms and Shareholder Value, Law Working Paper No 222 (European Corporate Governance Institute, 2013). 28 B Sjåfjell, A Johnston, L Anker-Sørensen and D Millon, ‘“Shareholder Primacy”: The Main Barrier to Sustainable Companies’ in B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability. Legal Barriers and Opportunities (Cambridge University Press, 2015). 29 This came about after a 10-year campaign ‘Tomorrow’s Company’ coordinated by the Royal Society of Arts, with strong business support led by Stuart Hampson, CEO of the John Lewis Partnership: A Howes, Arts and Minds. How the Royal Society of Arts Changed a Nation (Princeton University Press, 2020) 288–89. 30 J Seidl, P Sanderson and J Roberts, ‘Applying the “Comply-or-Explain” Principle: Discursive Legitimacy Tactics with Regard to Codes of Corporate Governance’ (2012) 17(3) Journal of Management and Governance 791. This survey showed a lack of justification in the annual reports of 55.7% of Germany companies and 41.3% of UK companies. 31 MM Blair and LA Stout, ‘A Team Production Theory of Corporate Law’ (1999) 85 Virginia Law Review 247. See also WW Bratton, ‘Team Production Revisited’ (2021) 74 Vanderbilt Law Review 1539. 32 J Armour, JN Gordon and G Min, ‘Taking Compliance Seriously’ (2020) 37 Yale Journal on Regulation 1. 33 Green Paper. Corporate governance in financial institutions and remuneration policies COM(2010) 284, 2.6.2010, at http://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf.

Problems and Criticisms  265 remuneration for directors, based on the short-term share value of the company/financial institution as the only performance criterion’. It appears that adjustment of the power between shareholders and directors has been resisted in the United States but somewhat more welcomed in the United Kingdom, where increased shareholder participation and engagement in corporate governance has been encouraged.34 The continuation of shareholder power in the United States can be seen in the fact that 15% of companies that went public in recent years involved agreements that enshrined rights such as restricting the sale of shares, waiving aspects of the duty of loyalty, securing veto rights over major corporate actions and promises from corporations to indefinitely support shareholders’ board nominees.35 Trends of liberalisation, institutionalisation and technologisation have, for some decades, contributed to unprecedented levels of cross-border activity in securities markets,36 raising a challenge for global regulation. It was (gradually) accepted that the profit motive alone was no longer acceptable, and around 1994 ‘Plan B’ asserted the ‘triple bottom line’ of people, planet and profit.37 As examined in chapter 11, there has been extensive criticism of the incentivisation, and role, of excessive remuneration being paid to senior executives since the 1980s. Compensation practices at large financial institutions have been identified as a major factor that contributed to the Global Financial Crisis by creating incentives that led to disaster because of ‘excessive risk-taking’.38 Recognising the failure of the incentive system of corporate governance to adequately encourage long-term investment, sustainable business practices and, most importantly, fair gainsharing between shareholders and workers, distinguished former academic and judge Leo Strine called for workers and consumers to be given more voice in corporate affairs and greater ability to exercise accountability.39 He considered that corporations are ‘societally chartered institutions of enormous importance and value’ and that a new accountability system was needed that aligns the interests of institutional investors and corporations with those of the human beings whose capital they control. All of this behaviour and state of affairs has been exposed by insiders40 and journalists41 and characterised by leading scholars in derogatory terms, including selfishness and lack of any otherregarding ethic.42 The situation has had significant influence not only on major breaches of law but also crises that have threatened the viability of institutions and the financial system. A widely

34 JG Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering’ (2019) 2 University of Illinois Law Review 507. 35 GV Rauterberg, ‘The Separation of Voting and Control: The Role of Contract in Corporate Governance’ (2021) 38 (4) Yale Journal on Regulation 1124. 36 J Armour, M Bengtzen and L Enriques, ‘Investor Choice in Global Securities Markets’ European Corporate Governance Institute (ECGI) – Law Working Paper No. 371/2017, Oxford Legal Studies Research Paper No. 60/2017 at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3047734. 37 J Elkington and J Zeitz, The Breakthrough Challenge. 10 Ways to Connect Today’s Profits with Tomorrow’s Bottom Line (Jossey-Bass, 2014). 38 FSF Principles for Sound Compensation Practices (Financial Stability Forum, 2009). 39 L Strine, Jr, ‘Toward Fair and Sustainable Capitalism’ (2019) at www.law.nyu.edu/sites/default/files/Fair%20and%20 Sustainable%20Capitalism%20Proposal%20-%20White%20Paper_09.26.19%20FINAL.pdf. 40 D Gentilin, The Origins of Ethical Failures. Lessons for Leaders (Routledge, 2016). 41 eg J Luyendijk, Swimming with Sharks. Inside the World of the Bankers (Guardian Books, 2015) who particularly highlighted reporting of corporate results on a periodic basis, such as quarterly, and the reporting of intra-team results daily. 42 JC Coffee, Jr, Gatekeepers. The Professions and Corporate Governance (Oxford University Press, 2004); C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford University Press, 2014); F Vibert, The New Regulatory Space (Edward Elgar, 2014); P Collier, The Future of Capitalism (Allen Lane, 2018).

266  Cooperation in Capitalism and Businesses quoted example of maximisation of shareholder value by a monopolistic corporation was that of Turing Pharmaceuticals, which raised the price for its medicine from $13.50 to $750 a tablet.43

Criticisms of the Deterrence Model There are now multiple arguments against the effectiveness of deterrence as a means of affecting behaviour (see chapter 13). Empirical evidence of effects of deterrence across a range of situations is unimpressive.44 Unless it is used widely and well, deterrence may have negative consequences as well as positive ones.45 Those running organisations may be unable to control the activities of large numbers of staff, and may merely treat fines and damages as a ‘cost of business’. Sanctions policies may impact more on risk management and compliance activity than preventing occurrence or applying remedial strategies after the event.46 It is unacceptable in a democracy for governments to rule citizens by fear. We now know many other means of affecting the behaviour of people than through deterrence. An extensive empirical study found that in post-1970 common law countries corporate regulation is reactive in nature, and has little role to play in moderating future corporate behaviour.47 In the United States, the practice of holding boards to account, illustrated by decisions of Delaware fiduciary law and federal securities doctrine, has driven courts to place strong reliance on internal reports by legal and compliance personnel.48 Such personnel were at risk for failure to bring facts to the attention of the board, and boards were at risk for failure to react. The United States model of free movement of labour, which includes permitting staff to be dismissed easily, does little to incentivise employee interest in sustainability of the business or the risk of causing harm in the longer-term. The threat of consequences for an individual who engages in ‘corporate’ wrongdoing has negligible deterrence if, for example, a cartel remains secret and there are no incentives of ethical motivation to stop or reveal it: a study found that the average duration of cartels in the US was nine years and the individuals who instigated them had typically moved firms twice before the cartel was discovered.49 In reviewing experience a decade after the Global Financial Crisis, Mark Carney said that a system reliant on total regulation and large ex post sanctions is ‘bound to fail because it promotes a culture of complying with the letter of the law, not its spirit, and because authorities will inevitably lag developments in fast-changing markets.’50 The idea of affecting change through deterrence fails to clarify the mechanism by which change or compliance occurs. Given evidence discussed below on the multiple ways actions can occur, this is profoundly unsatisfactory. The term deterrence also raises a lack of clarity over whether imposition of a sanction is claimed to result in the complete avoidance of future wrongdoing or only some diminution in its incidence or severity. A recent study showed that the type, 43 A Pollack, ‘Drug Goes From $13.50 a Tablet to $750, Overnight’ The New York Times 20 September 2015. 44 TC Pratt, FT Cullen, KR Blevins, LE Daigle and TD Madensen, ‘The Empirical Status of Deterrence Theory: a Meta-analysis’, in FT Cullen, JP Wright and KR Blevins (eds), Taking Stock: The Status of Criminological Theory (Transaction Publishers, 2006). 45 N Gunningham, ‘Enforcement and Compliance Strategies’ in M Cave, R Baldwin, M Lodge (eds), The Oxford Handbook of Regulation (Oxford University Press, 2010). 46 R Baldwin, ‘The New Punitive Regulation’ (2004) 67 Modern Law Review 351–83, 373. 47 L Hail, A Tahoun and C Wang, ‘Corporate Scandals and Regulation’ (ECGI Working Paper 2017) at http://ecgi. global/sites/default/files/working_papers/documents/hail-tahoun-wangunpixelated_0.pdf. 48 S Gadinis and A Miazad, ‘The Hidden Power of Compliance’, at https://ssrn.com/abstract=3123987. 49 DA Crane, The Institutional Structure of Antitrust Enforcement (Oxford University Press, 2011). 50 M Carney, Value(s) (William Collins, 2021) 204.

A Blast of Reality  267 magnitude and frequency of sanctions imposed by statutory bodies and the courts for insider trading vary significantly between countries, even those with similar laws.51 This is alongside any evidence that some countries are more effective than others in the outcomes of their sanctions. Given the empirical evidence, continuing use of the term ‘deterrence’ as a goal or justification for practice starts to look like an excuse for an assumed effect, and hence as an assumed justification for the use of punitive sanctions. Continuing to cite ‘deterrence’ as justification and policy avoids confronting the deeper question of how future behaviour is in fact influenced or controlled.

A Blast of Reality It may be the case that most people obey social norms, organisational rules and state laws most of the time. However, we note in chapter four the evidence that most people break rules surprisingly often. Nevertheless, there is extensive evidence that the models of profit maximisation and behaviour control through deterrence have not prevented a succession of disasters in which there was clear non-compliance with the rules. In too many cases, the causes have been attributed directly to pursuit of the profit model and to the ineffectiveness of the supposed enforcement model. The science reviewed in chapter 11 shows that incentivisation through financial targets and financial rewards is unnecessary, and that above a certain level it is in fact dangerous. The reality of the situation is that excessive external motivation through the greed-based allure of huge financial rewards dominates both the motivation of individuals and the social motivation of the social environment in which they work. The resultant culture is disengaged from the ethical values of society and social purpose, as the process is just rent extraction. In recent years, attempts have been made to control the behaviour of ‘organisations (ie the behaviour of individuals who work in them) through external regulatory and enforcement means, and through internal compliance systems. However, science shows that the assumption that behaviour would be controlled through deterrence is generally incorrect. Empirical evidence suggests that enforcement policies centred on deterrence have limited efficacy and can produce undesirable outcomes.52 Sir Paul Collier53 described the profit-seeking ‘economic man’ of the Profit Model as presumed to be lazy and self-regarding, in contrast to ‘social man’ who is still rational (maximising utility) but gets utility not just from his own consumption but from esteem, and mutual benefit from exchange.54 Compliance systems have little effect unless they are part of a system of organisational ethics and culture.55 There is good evidence of where things work well, such as the open culture and just culture found in aviation safety (see chapter 13). The Institute of Directors said in 2022 that the MSV model is incompatible with current society, and called for a ‘balanced stakeholder’ orientation.56 Saule Omarova has pointed out 51 L Bromberg, G Gilligan and I Ramsey, ‘The Extent and Intensity of Insider Trading Enforcement – An International Comparison’ (2017) 17(1) Journal of Corporate Law Studies 73–110. This studied 1400 sanctions imposed for the contravention of insider trading provisions during the seven-year period from 1 January 2009 to 31 December 2015 in Australia, Canada (Ontario), Hong Kong, Singapore, the United Kingdom and the United States. 52 B Soltani, ‘The Anatomy of Corporate Fraud: A Comparative Analysis of High Profile American and European Corporate Scandals’ (2014) 120(2) Journal of Business Ethics 251–74. 53 P Collier, The Future of Capitalism (Allen Lane, 2018). 54 J Norman, Adam Smith: What He Thought and Why it Matters (Allen Lane, 2018). 55 C Parker and VL Nielsen, ‘Corporate Compliance Systems: Could They Make Any Difference?’ (2009) 41(1) Administration & Society 3–37. David Hess, ‘Chipping Away at Compliance: How Compliance Programs Lose Legitimacy and Its Impact on Unethical Behavior’ (2019) 14 Brook Journal of Corporate Finance and Commerce 5. C Coglianese and J Nash, ‘Compliance Management Systems: Do They Make a Difference?’ in DD Sokol and B van Rooij (eds), Cambridge Handbook of Compliance (Cambridge University Press, 2021). 56 ESG Priorities for UK Companies (Institute of Directors, 2022) 3.

268  Cooperation in Capitalism and Businesses that the supposed primacy of private interests in controlling a (public) corporation is in fact a fallacy since it is the state that grants the privileges of incorporation, such as limited liability, and defines the parameters within which the corporation must operate, both historically and as a matter of current legal constitutional form.57 Such matters are not derived from private property or contractual rights. Accordingly, she argues that the state is entitled to define a corporation’s purposes and privileges in the light of public policy given society’s fundamental interests and needs, such as viewing the achievement of goals related to employment, sustainability and so on. The arrangement could be viewed as an outsourcing to private interests of public purposes.

The Emergence of a Fresh Vision of Capitalism and Business Concerns and Shifts During the late twentieth century and early twenty-first, there was a lengthy period of contestation and change of many aspects that affected the political, economic and social model of neoliberal profit maximisation. Some of the major shifts were: –– A movement based on corporate social responsibility (CSR). –– A later focus on environmental, social and governance (ESG) issues and sustainability of the planet, and the natural environment.58 –– ‘The value at the bottom’ concept that builds communities and lifts poverty.59 –– Calls for a new capitalism.60 –– The ‘stakeholder value’ approach of the US Business Roundtable,61 ousting the exclusivity of profit. –– A focus on corporate purpose and encompassing social purpose.62 –– Changes in corporate governance and the inclusion of ethics, values and culture in corporate governance codes.63

57 ST Omarova, ‘The “Franchise” View of the Corporation: Purpose, Personality, Public Policy’ in E Pollman and RB Thomson (eds), Research Handbook on Corporate Purpose and Personhood (Edward Elgar, 2021). 58 B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability. Legal Barriers and Opportunities (Cambridge University Press, 2015). B Sjåfjell, ‘Redefining the Corporation for a Sustainable New Economy’ (2018) 45(1) Journal of Law and Society 29. 59 CK Prahalad, ‘Ethical Demands and the Global Company: From Compliance to Co Creation?’ The Fourth Coleman Lecture on Ethics, Wharton Business School, 24 October 2005. CK Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Wharton Business Publishing, 2006). 60 Leo E Strine, Jr, ‘Toward Fair and Sustainable Capitalism’ 2019, at https://corpgov.law.harvard.edu/2019/10/01/ toward-fair-and-sustainable-capitalism/. 61 www.opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-o f-a-Corporation-with-Signatures-1.pdf. 62 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); C Mayer, Prosperity (Oxford University Press, 2019); Principles for Purposeful Business. How to Deliver the Framework for the Future of the Corporation (The British Academy, 2019); D Kershaw and E Schuster, ‘The Purposive Transformation of Corporate Law’ (2019) at https://corpgov.law.harvard.edu/2019/04/16/the-purposive-transformationof-company-law/; JE Fisch and SD Solomon, ‘Should Corporations have a Purpose?’ (2020) at https://scholarship.law. upenn.edu/cgi/viewcontent.cgi?article=3165&context=faculty_scholarship. 63 B Soltani and C Maupetit, ‘Importance of Core Values of Ethics, Integrity and Accountability in the European Corporate Governance Codes’ (2015) 19(2) Journal of Management & Governance 259–84; Report of the Committee on Business Responsibility Reporting (Ministry of Corporate Affairs, Government of India, 2011). See UK Corporate

The Emergence of a Fresh Vision of Capitalism and Business  269 Shifts by investors to focus on long-term sustainability.64 The invention of new organisational structures.65 Moves to limit pay (see chapter 11). Moves towards ‘good work’.66 Covid-inspired changes in revaluing the contribution of ‘humble’ workers;67 and in avoiding large dividends and bonuses. –– Focus on organisational culture to deliver better performance, avoiding non-compliance and legal risk.68 –– Questioning the morality of fiduciary law.69 –– –– –– –– ––

–– Adoption of bankers’ oaths: Netherlands70 and Australia.71 Let us look at some of these developments in more detail. Changes occurred in multiple different spheres in parallel that were not necessarily linked or integrated. The following summary should not be regarded as charting chronological events. However, the total corpus of this multiplicity of changes combined to point in similar directions, towards a more value-based world and hence business ethic. Issues relating to research into and understanding of corporate behaviour and culture are discussed in chapter eight. The past decade has seen an acceleration of shifts in how corporations operate and behave across a wide range of issues. Major streams of concern and change have occurred, including sustainability of the environment and of the planet,72 sustainability of human respect and relationships,73 sustainability of investments and pensions in corporations and the need to avoid not only wild fluctuations but also major falls,74 and the sustainability of the financial system and not just of individual bankruptcies.75 Governance Code, amendments made in 2018 edition. Jennifer G Hill, ‘The Trajectory of American Corporate Governance: Shareholder Empowerment and Private Ordering’ (2019) 2 University of Illinois Law Review 507. 64 A Autenne, Y Biondi, G Cavalier, A Cotiga-Raccah, P Doralt, C Haslam, H Horak, C Malberti, D Philippe, K Sergakis and J Schmidt, ‘The Current Challenges for EU Company and Financial Law and Regulation’ in Accounting, Economics, and Law: A Convivium Vol 8(3) (De Gruyter, 2018) 1; P Brest, RJ Gilson and MA Wolfson, ‘How Investors Can (and Can’t) Create Social Value’ (2018) 44 Journal of Corporation Law 205; Mark Fenwick and Erik PM Vermuelen, ‘Institutional Investor Engagement: How to Create a “Stewardship Culture”’ (2018) SSRN at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3098235; Sir Ronald Cohen, Impact. Reshaping Capitalism to Drive Real Change (Ebury Press, 2020); Sustainable Investing: Resilience Amid Uncertainty (BlackRock, 2020) at www.blackrock.com/corporate/about-us/ sustainability-resilience-research. 65 N Boeger, ‘Beyond the Shareholder Corporation: Alternative Business Forms and the Contestation of Markets’ (2018) 45(1) Journal of Law and Society 10–28. 66 Good Work. The Taylor Review of Modern Working Practices, 2017. UA Agarwal, ‘Linking Justice, Trust and Innovative Work Behaviour to Work Engagement’ (2014) 43(1) Personnel Review 41–73. 67 P Ewing, C Bloomfield, O Fahy, N Ben Haddej and T MacDonald, ‘Conduct, Culture and Covid-19’ Insight 10 June 2020, www.fca.org.uk/insight/conduct-culture-and-covid-19. 68 EBR; Australian Royal Commission; N-H Hsieh, B Lange, D Rodin and MLA Wolf-Bauwens, ‘Getting Clear on Corporate Culture: Conceptualisation, Measurement and Operationalisation’ (2018) 6(s1) Journal of the British Academy 155–84. 69 PB Miller, ‘The Morality of Fiduciary Law’ (2021) 62 William & Mary Law Review 1349. 70 JE Soeharno, The Value of Oath (eleven publishing, 2020). 71 The Australian Banking & Finance Oath. 72 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact) (United Nations, 2015); B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability. Legal Barriers and Opportunities (Cambridge University Press, 2015). 73 Guiding Principles on Business and Human Rights (United Nations, 2011). 74 See the UN Principles for Responsible Investment, www.unpri.org/. See recently Larry Fink’s 2020 letter to shareholders ‘A Fundamental Reshaping of Finance’ announcing a policy to ‘place sustainability at the center of our investment approach’, at www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter. See earlier S Davis, J Lukomnik and D Pitt-Watson, The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Harvard Business School Press, 2006). 75 Amongst many references, see FSF Principles for Sound Compensation Practices (Financial Stability Forum, 2009); Green Paper, Corporate Governance in Financial Institutions and Remuneration Policies, European Commission

270  Cooperation in Capitalism and Businesses

CSR Various moves have taken place to take a wider view of corporate activities than just making profit, but they have been hampered by taking place within the straight-jacket of a system that required profit maximising behaviour. A widening of issues to which corporations need to be concerned has been occurring for some time, such as sustainability, community, environment and human rights issues. A good example is the Corporate Social Responsibility (CSR) phenomenon, in which companies funded public goods for local communities and staff were encouraged to undertake voluntary activities. At its most attractive, CSR represents the alignment of business operations with social values.76 CSR emerged in the 1950s from concern for the impact of corporate power on society.77 CSR has proliferated through internationally recognised principles and guidelines, in particular the recently updated OECD Guidelines for Multinational Enterprises,78 the ten principles of the United Nations Global Compact,79 the ISO 26000 Guidance Standard on Social Responsibility,80 the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy81 and the United Nations Guiding Principles on Business and Human Rights.82 Over 8,000 companies in over 160 countries have adopted the United Nations Global Compact on sustainable corporate success, which is based on operating with integrity in human rights, labour, environment and anticorruption.83 However, experts argued that CSR has never had wide take up.84 It has been said that CSR ‘has never been about doing good’ and was ‘born in an age of disillusion as to the proper purpose and conduct of business in the midst of the economic turmoil of the early 1990s’.85 CSR was based on ‘strategies to mitigate some of the negative impacts of business on the environment and on society through ad hoc (often non-scalable) expensive programmes’.86 Only company outputs, such as polluting elements, were measured, rather than inputs or outcomes.

COM(2010) 284; The Financial Conduct Authority: Approach to Regulation (Financial Services Authority, 2011); Consultative Document: Principles for Effective Risk Data Aggregation and Risk Reporting (Basel Committee on Banking Supervision, Bank for International Settlements, 2012); High-level Expert Group on Reforming the Structure of the EU Banking Sector (European Commission, 2012); How the Financial Conduct Authority Will Investigate and Report on Regulatory Failure (Financial Conduct Authority, 2013); Memo. A Comprehensive EU Response to the Financial Crisis: A Strong Financial Framework for Europe and a Banking Union for the Eurozone (European Commission, 10 July 2013) MEMO/13/679; Our Mission 2017. How We Regulate Financial Services (Financial Conduct Authority, 2017); Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (Financial Stability Board, 2017). 76 AV Joseph, ‘Successful Examples of Corporate Social Responsibility’ (2009) 44(3) The Indian Journal of Industrial Relations 402, 403. 77 HR Bowen, Social Responsibilities of the Businessman (Harper & Brothers, 1953). 78 www.oecd.org/daf/inv/mne. 79 www.unglobalcompact.org. Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations). See Impact. Transforming Business, Changing the World. The United Nations Global Compact (United Nations DNV GL, 2015). 80 www.iso.org/iso/home/standards/iso26000.htm. 81 www.ilo.org/empent/Publications/WCMS_094386/lang--en/index.htm. 82 J Ruggie, The Special Representative of the Secretary-General, Report of the Special Representative of the Secretary-General on the Issue of Human Rights and Transnational Business Corporations and other Business Enterprises, Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, A/HRC/17/31, 21 March 2011. 83 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact). 84 B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability. Legal Barriers and Opportunities (Cambridge University Press, 2015). 85 Dr Bill Durodié, ‘Why So-called Corporate Social Responsibility Is Not the Answer to Our Problems’ City AM Opinion 2011, at www.cityam.com/why-so-called-corporate-social-responsibility-not-the-answer-our-problems/amp/. 86 B Roche and J Jakub, Completing Capitalism. Heal Business to Heal the World (Berrett-Koehler Publishers, 2017).

The Emergence of a Fresh Vision of Capitalism and Business  271 Similarly, the concept of a ‘social licence’ of companies has developed informally,87 but as a phenomenon that has some power.88 The concept has been upheld by Amartya Sen in relation to achieving tangible steps to improve social justice,89 in relation to the corporate environmental responsibility of extractors,90 and in the financial services sector as its activities destroy its social licence to operate.91 Paul Polman, the former CEO of Unilever, has advocated that a business should ‘improve well-being for everyone it impacts and at all scales’.92 Even so, although CSR and related issues have been essentially self-regulatory without the compulsive enforcement of state-backed regulation, they represent an expression of conscience on the part of those involved in business, and have, it can be argued, played an important part in further transition.

Responding to Environmental Sustainability Issues The 2015 Paris Agreement of the United Nations Intergovernmental Panel on Climate Change (IPCC) agreed that the global economy must almost halve carbon emissions by 2030 and reach net-zero emissions by 2050 so as to have a 50% chance of limiting warming to 1.5°C.93 Academics have repeatedly called for EU law to enshrine an overarching purpose of companies to create sustainable value within planetary boundaries, pushing back against the primary of shareholder value.94 There has been a rise in activism against and by investors to exert influence on corporate policies on ESG, such as by voting against resolutions on policy and directors’ remuneration.95 Some have gone further and argued that trying to amend policies of individual corporations is merely tinkering and what is required is a fundamental reform of the structures and practices of the financial sector. One group of investors, for example, concluded that the dozens of sustainable finance initiatives would produce only incremental outcomes at best, and launched the Transformation Capital Initiative in 2020 aimed at creating ‘a radically new approach to investing with the explicit aim of systems transformation’.96 The group aimed to address the slew of societal challenges that will define the coming decade: rising social inequality, deteriorating public health, cyber-attacks, structural racism and gender discrimination, forced mass migration, food crises, biodiversity loss, and environmental pollution.97

87 T Donaldson, Corporations and Morality (Prentice Hall, 1982). See also SC de Hoo, In Pursuit of Corporate Sustainability and Responsibility: Past Cracking Perceptions and Creating Codes Inaugural Lecture Maastricht University, 2011, 11, referring to the principle of reciprocity, also a corporate social contracts based approach. 88 A Autenne, Y Biondi, G Cavalier, A Cotiga-Raccah, P Doralt, C Haslam, H Horak, C Malberti, D Philippe, K Sergakis and J Schmidt, ‘The Current Challenges for EU Company and Financial Law and Regulation’ (2018) 8(3) Accounting, Economics, and Law: A Convivium 1. 89 A Sen, The Idea of Justice (Allen Lane, 2009) 361–64 on human rights. 90 N Gunningham and P Grabosky, Smart Regulation. Designing Environmental Policy (Oxford University Press, 1998). 91 M Carney, Speech, ‘The Future of Financial Reform’, 2014 Monetary Authority of Singapore Lecture, 17 November 2014: ‘A trusted system can retain its social licence to support the real economy in innovative and efficient ways’. 92 P Polman and A Winston, Net Positive (Harvard Business Review Press, 2021). 93 The Paris Agreement, United Nations Treaty Series, Registration No 54113 (UNFCCC, 2015). 94 B Sjåfjell, J Mähönen, T Novitz, C Gammage and H Ahlström, ‘Securing the Future of European Business: SMART Reform Proposals’, University of Oslo Faculty of legal Studies Research Paper Series No 2020-11. 95 eg Climate in the Boardroom: How Asset Manager Voting Shaped Corporate Climate Action in 2019 (MajorityAction, 2020) (criticising the largest asset managers BlackRock and Vanguard for voting for 99% of US energy and utility company proposed directors and 100% of their ‘say on pay’ proposals); A Blueprint for Responsible Investment (Principles for Responsible Investment, 2019) and other papers; The Shareholder Commons at http://theshareholdercommons.com/. 96 D Hoffstetter, Transformation Capital. Systemic Investing for Sustainability (EIT Climate-KIC, 2020). 97 ibid, citing The Global Risks Report 2019–14th Edition (World Economic Forum, 2019).

272  Cooperation in Capitalism and Businesses The group recognised the ‘need to shift values and norms on both the individual and collective level to create a more equitable balance of political, cultural, and institutional power in society’.98 The group called for a new approach to investing, which aims at systems transformation. They define Transformation Capital as ‘an investment logic intending to deploy capital to catalyse directional transformative change of socio-technical systems to build low-carbon, climate-resilient, just, and inclusive societies’ and describe it as a systemic investment approach for catalysing sustainability transitions in the real economy. Although use of capital is critical, the group affirms that people and the actions they take ‘are at the core’ and they need ‘a vibrant social space’.

Long-Term Sustainability and the SDGs CSR was increasingly talked about but had limited impact in practice. The concept was recast by the United Nations in 2005 as a focus on environmental, social and governance (ESG) value drivers of business.99 The turning point was realisation that the short-term focus was not only threatening to the long-term stability of markets and investments (one would like one’s pension fund to grow modestly, rather than to constantly fluctuate, which would make retirement a lottery dependent on value at a particular time) but so threatening to the sustainability of the environment that the viability of the planet and all life – let alone human life and all individual wealth – faced extinction. Andrew Forrest, an Australian billionaire mining magnate, pithily summed up the reason for switching his business focus from carbon to electrons: ‘We can’t just keep doing things the way we have always done them, otherwise our planet is going to be toast.’100 A profoundly important transformation was taken in 2015 with agreement of the United Nations Sustainable Development Goals (SDGs),101 which are set out in chapter seven. Important as the SDGs are, they have been criticised as not being ‘informed by a recognition of a potential conflict between indefinite economic growth and planetary boundaries’.102 In particular, Beata Sjåfjell and colleagues believe that it is imperative that the shareholder-primacy model is changed if corporates are not to impede attainment of the SDGs. They argued that it is imperative that business moves away from linear, unsustainable models of overproduction and overconsumption.103 Another group’s review of application of the SDGs in 316 health, energy and the ocean situations104 found that the interactions depended on key factors such as geographical context, resource endowments, time horizon and governance.105 In other words, success is far from automatic. A fundamental point is that if the SDGs are to have both strategic and granular effect on governmental and corporate practice, they need to be made binding obligations on governments

98 ibid, citing Glossary – Special Report: Global Warming of 1.5°C (IPCC), at www.ipcc.ch/sr15/chapter/glossary/. 99 United Nations Global Compact, Investing for Long-Term Value: Integrating Environmental, Social and Governance Value Drivers in Asset Management and Financial Research (2005). 100 Quoted in L Hook and H Sanderson, ‘The New Green Order’ Financial Times Magazine 6/7 February 2021, 16. 101 Guide to Corporate Sustainability: Shaping a Sustainable Future (United Nations Global Compact) (United Nations, 2015), http://sustainabledevelopment.un.org/. 102 B Sjåfjell, ‘Redefining the Corporation for a Sustainable New Economy’ (2018) 45(1) Journal of Law and Society 29. 103 B Sjåfjell, J Mähönen, T Novitz, C Gammage and H Ahlström, ‘Securing the Future of European Business: SMART Reform Proposals’ University of Oslo Faculty of Law Research Paper No. 2020-11 and Nordic & European Company Law Working Paper No. 20-08, at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=3595048. 104 A Guide to SDG Interactions: From Science to Implementation (International Council for Science, 2017). 105 M Nilsson, E Chisholm, D Griggs, P Howden-Chapman, D McCollum, P Messerli, B Neumann, A-S Stevance, M Visbeck and M Stafford-Smith, ‘Mapping Interactions between the Sustainable Development Goals: Lessons Learned and Ways Forward’ (2018) 13 Sustainability Science 1489.

The Emergence of a Fresh Vision of Capitalism and Business  273 and companies, such as being incorporated into the legislation of all nations as requirements to affect national policy and corporate purposes and governance. Such a change would significantly constrain governments’ sovereignty. It would significantly change the operating model of capitalist corporations and business. These constraints highlight that underlying problems lie with the models – and resultant constraints on their ability to cooperate – of nation states and capitalist corporations.

Long-Term Stewardship The long-term survival of the planet and the sustainable use of both natural resources and of wealth has triggered wide shifts in adoption of policies based on ‘sustainability’ and the concept of stewardship of resources by those who are custodians for future generations. Westbrook has argued that finance is social, given that many social goods on which people and their relationships rely (education, health care, employment opportunities and retirement) are provided by the financial system, and that the nature of regulation should be viewed not as permissive but as custodial, involving custody of social assets.106 One idea of stewardship was espoused by large institutional investors, notably three dominant funds and large banks,107 given their leverage on behalf of their portfolio clients. Their influence, through engagement with boards in voting or discussion, could be used to maximise profits but could also encourage longer term sustainable growth.108 A more restricted idea is that the large index funds are ‘stewards’ of their portfolio company clients, which can drive engagement with boards to ensure that their focus is not unduly short-term so as to protect the sustainability of the investment.109 A 2019 paper by UK financial services regulators on ‘effective stewardship’110 aimed to encourage more active engagement by the investment community in stewardship of the assets in which they invest, working together to promote sustainable long-term value creation. The paper identified the key attributes needed: clear purpose; constructive oversight, engagement and challenge; supportive institutional culture and structures (eg remuneration, performance measurement and asset manager selection); and disclosure and transparency. It outlined cooperation between investors, regulators and company boards. It set out an integration between new regulatory rules and a revised Stewardship Code.111 The rise of stewardship codes has been described as part of a ‘sustained international push for greater involvement in corporate governance’.112 At one level, therefore, it is simply about 106 DA Westbrook, ‘The Culture of Financial Institutions: The Institution of Political Economy’ in G Gilligan and J O’Brien (eds), Regulating Culture: Integrity, Risk and Accountability in Capital Markets (Hart, 2013); S Miller, The Moral Foundations of Social Institutions: A Philosophical Study (Cambridge University Press, 2010). 107 In 2009, institutional investors held 50.6% of all US public equities and 73% of the equity of the thousand largest US corporations: M Tonello and SR Rabimov, The 2010 Institutional Investor Report 22, Table 10 (2010). By 2018 44% of US equity funds were managed passively, with BlackRock, Vanguard and State Street holding over 15% of the S&P 500 in 2017. 108 For an overview see RJ Gilson and CJ Milhaupt, ‘Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling’ European Corporate Governance Institute (ECGI) Law Working Paper No 546/2020. 109 See RC Pozen, ‘The Role of Institutional Investors In Curbing Corporate Short-termism’ (2015), available at www.brookings.edu/articles/the-role-of-institutional-investors-in-curbing-corporate-short-termism/. 110 Building a Regulatory Framework for Effective Stewardship. Discussion Paper (Financial Reporting Council and Financial Conduct Authority, 2019), DP19/1. 111 eg The UK Corporate Governance Code (Financial Reporting Council, 2018). 112 JG Hill, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes’ (2018) 41 Seattle University Law Review 497. An example of activism by a small hedge fund, when supported by major institutional investors, was the election of three new directors at ExxonMobil in 2021: S Mufson, ‘Dissident Shareholders Win a Third Seat on ExxonMobil Board’ The Washington Post 3 June 2021.

274  Cooperation in Capitalism and Businesses building power. At another level, it has been a product of a move away from control of corporations by investors and towards control by directors.113 The UK introduced a Stewardship Code in 2010 in response to the Global Financial crisis, and it has been revised in 2012 and 2020. The 2012 revision aimed ‘to promote the long term success of companies’ and specifies that activities of investors should include ‘monitoring and engaging with companies on matters such as strategy, performance, risk, capital structure, and corporate governance, including culture and remuneration’.114 The principles in the 2020 UK Stewardship Code are at Box 10.1. Box 10.1  The UK Stewardship Code 2020: Principles Principles for Asset Owners and Asset Managers Purpose and Governance 1. Signatories’ purpose, investment beliefs, strategy, and culture enable stewardship that creates long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society. 2. Signatories’ governance, resources and incentives support stewardship. 3. Signatories manage conflicts of interest to put the best interests of clients and beneficiaries first. 4. Signatories identify and respond to market-wide and systemic risks to promote a wellfunctioning financial system. 5. Signatories review their policies, assure their processes and assess the effectiveness of their activities. Investment Approach 6. Signatories take account of client and beneficiary needs and communicate the activities and outcomes of their stewardship and investment to them. 7. Signatories systematically integrate stewardship and investment, including material environmental, social and governance issues, and climate change, to fulfil their responsibilities. 8. Signatories monitor and hold to account managers and/or service providers. Engagement 9. Signatories engage with issuers to maintain or enhance the value of assets. 10. Signatories, where necessary, participate in collaborative engagement to influence issuers. 11. Signatories, where necessary, escalate stewardship activities to influence issuers. Exercising Rights and Responsibilities 12. Signatories actively exercise their rights and responsibilities.

113 A battle over whether empirical evidence on this point seems to have come out in favour of boards of directors: KJM Cremers, S Masconale and SM Sepe, ‘Commitment and Entrenchment in Corporate Governance’ (2016) 110(4) Northwestern University Law Review 727. 114 The UK Stewardship Code (Financial Reporting Council, 2012).

The Emergence of a Fresh Vision of Capitalism and Business  275 Principles for Service Providers 1. Signatories’ purpose, strategy and culture enable them to promote effective stewardship. 2. Signatories’ governance, workforce, resources and incentives enable them to promote effective stewardship. 3. Signatories identify and manage conflicts of interest and put the best interests of clients first. 4. Signatories identify and respond to market-wide and systemic risks to promote a wellfunctioning financial system. 5. Signatories support clients’ integration of stewardship and investment, taking into account, material environmental, social and governance issues, and communicating what activities they have undertaken. 6. Signatories review their policies and assure their processes. Engagement by investors, on the basis of ‘meaningful and constructive’ engagement, has been encouraged by stewardship codes that have emerged in many countries.115 Despite these developments, doubt remains that the goal of many investors, and their intermediary representatives, is to earn the highest financial returns, and hence some scepticism remains over their achievement of social objectives.116 In the first year of the 2020 Code, 189 applications were received by the FRC from 147 asset managers, 28 asset owners and 14 service providers for listing as signatories, of which two-thirds were accepted.117

Corporate Purpose The powerful campaign led by Colin Mayer to focus corporations on achieving social purpose has been noted previously. The proposed mechanism is to require corporations to state their purpose, and make this accountable through new corporate governance requirements, and introducing new duties on directors, regulators and investors and reporting obligations.118 A challenge with this mechanism is how it would balance multiple purposes, such as achieving particular social goals and profitability. It talks about measuring achievement of purpose but omits reference to measuring outcomes.

A Stakeholder Model of Corporations Statements by business leaders through the US Business Roundtable have shifted119 from their position on maximising shareholder value (in 1979, partly as a response to corporate raiders) and 115 M Fenwick and EPM Vermeulen, ‘Institutional Investor Engagement: How to Create a “Stewardship Culture”’ (2018) Lex Research Topics in Corporate Law & Economics Working Paper No 2018-1, TILEC Discussion Paper No 2018-006, at http://ssrn.com/abstract=3098235 or http://dx.doi.org/10.2139/ssrn.3098235; W-G Ringe, ‘Stewardship and Shareholder Engagement in Germany’ (2021) 22 European Business Organization Law Review 87. 116 P Brest, RJ Gilson and MA Wolfson, ‘How Investors Can (and Can’t) Create Social Value’ (2018) 44 Journal of Corporation Law 205. 117 See www.frc.org.uk/investors/uk-stewardship-code/uk-stewardship-code-signatories. 118 Policy & Practice for Purposeful Businesses. The Final Report of the Future of the Corporation Programme (The British Academy, 2021). 119 RJ Gilson and CJ Milhaupt, ‘Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling’ European Corporate Governance Institute (ECGI) Law Working Paper No. 546/2020.

276  Cooperation in Capitalism and Businesses a commitment to all stakeholders (2019). The 2019 Statement on the Purpose of a Corporation by 181 CEOs of major US corporations stated:120 Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all. Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth. While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: –– Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. –– Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. –– Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. –– Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. The stakeholder value policy constitutes a highly significant restatement, rejecting a profitmaximising capitalist model to a model encompassing all stakeholders in a concerted enterprise: customers, staff, suppliers, communities and long-term value for shareholders. However, this declaration only constitutes a political statement. There has not, however, yet been a restatement of the associated legal rules on corporations, or the mode of operation of the market and its various constituent bodies, nor the objectives of remuneration so as to align with the declared corporate model. There should be no surprise that the restatement of corporate purpose was met with some cynicism over whether it is achievable,121 or represents past or current practice, or is 120 www.opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-o f-a-Corporation-with-Signatures-1.pdf. 121 It is interesting to speculate over whether the significant concentration in ownership held by large institutional investors that has occurred during the Covid-19 pandemic will assist or hinder wider stakeholder involvement. The three largest investors in the US held a combined average of 23.5% of the equity in listed companies in 2021. See The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis (OECD, 2021).

The Emergence of a Fresh Vision of Capitalism and Business  277 simply illusory.122 But as a model it represents an important restatement of a range of developments towards a pluralist approach that had been occurring over some time. Grant Hayden and Matthew Bodie’s analysis of the evolution of academic and political theories and justifications of the corporation converge on a governance model in which the participants who have an adequate interest in a firm have a right to participate in its governance, akin to political participation in a democracy.123 They categorise those who provide capital and labour as qualifying under the criteria of joint production and interest, in other words shareholders and workers, although they sit on the fence on whether the voting rights of those two constituencies should elect separate groups of directors (as in the model used in Denmark, Germany, Norway, Slovenia and Sweden) or a single set of all directors. Hayden and Brodie cite various studies that suggest that the German model, involving typically a tiered system of a supervisory board overseeing an executive management board, has delivered a notable degree of cooperation between shareholder and employee representatives,124 not least in responding to the pandemic,125 but also on commercial outcomes126 and employment or social outcomes.127 The stakeholder development was not just in the USA. The Government of India published National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business in 2011 that started with ethics, transparency and accountability:128 Principle 1: Businesses should conduct and govern themselves with Ethics, Transparency and Accountability. 1.

Businesses should develop governance structures, procedures and practices that ensure ethical conduct at all levels; and promote the adoption of this principle across its value chain 2. Businesses should communicate transparently and assure access to information about their decisions that impact relevant stakeholders 3. Businesses should not engage in practices that are abusive, corrupt, or anticompetition 4. Businesses should truthfully discharge their responsibility on financial and other mandatory disclosures. 5. Businesses should report on the status of their adoption of these Guidelines as suggested in the reporting framework in this document. 6. Businesses should avoid complicity with the actions of any third party that violates any of the principles contained in these Guidelines

122 LA Bebchuk and R Tallarita, ‘The Illusory Promise of Stakeholder Governance’ (2020) 106 Cornell Law Review 91. See response at C Mayer, ‘Shareholderism Versus Stakeholderism – a Misconceived Contradiction. A Comment on “The Illusory Promise of Stakeholder Governance” by Lucian Bebchuk and Roberto Tallarita’ at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3617847; SM Bainbridge, ‘Making Sense of The Business Roundtable’s Reversal on Corporate Purpose’ UCLA School of Law, Law-Econ Research Paper No. 20-03. 123 GM Hayden and MT Bodie, Reconstructing the Corporation. From Shareholder Primacy to Shared Governance (Cambridge University Press, 2020). 124 O Sandrock and JJ du Plessis, ‘The German System of Supervisory Codetermination by Employees’ in JJ du Plessis, B Großfeld, C Luttermann, I Saenger, O Sandrock and M Casper (eds), German Corporate Governance in International and European Context 3rd edn (Springer, 2017) 186. 125 L Bellman, H-D Gerner and M-C Laible, ‘The German Labour Market Puzzle in the Great Recession’ in P Askenazy, L Bellmann, A Bryson and EM Galbis (eds), Productivity Puzzles Across Europe (Oxford University Press, 2016) 229. 126 R Scholz and S Vitols, ‘Board-Level Codetermination: A Driving Force for Corporate Social Responsibility in German Companies?’ (2019) 25 European Journal of Industrial Relations 233, 235 table 1; U Jirjahn, Őkonomisce Wirkungen der Mitbestimmung in Deutschland: Ein Update (Hans Böckler Stiftung, Arbeitspapier 186, February 2010). 127 EH Kim, E Maug and C Schneider, ‘Labor Representation in Governance as an Insurance mechanism’ (2018) 22(4) Review of Finance 1251, 1286; S Jäger, B Schoefer and J Heining, Labor in the Boardroom 29, at www.nber.org/system/ files/working_papers/w26519/w26519.pdf; R Scholz and S Vitols, ‘Board-Level Codetermination: A Driving Force for Corporate Social Responsibility in German Companies?’ (2019) 25 European Journal of Industrial Relations 233. 128 Report of the Committee on Business Responsibility Reporting (Ministry of Corporate Affairs, Government of India, 2011).

278  Cooperation in Capitalism and Businesses Principle 2: Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle. Principle 3: Businesses should promote the wellbeing of all employees. Principle 4: Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised. Principle 5: Businesses should respect and promote human rights. Principle 6: Business should respect, protect, and make efforts to restore the environment. Principle 7: Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner. Principle 8: Businesses should support inclusive growth and equitable development. Principle 9: Businesses should engage with and provide value to their customers and consumers in a responsible manner.

A 2020 survey of corporate leaders showed increasing prioritisation of stakeholder engagement (as one of the top three priorities), even though it remained a challenge for many companies.129 However, a shift to a stakeholder model has wider implications than for governance and voting structures, and would also cover practices and equality in management and remuneration.

Corporate Governance The importance of corporate purpose for achieving outcomes has been discussed in chapter seven. Focusing on the long-term requires changes in corporate purpose, corporate governance and operational incentives. Corporate Governance Codes around the world have been amended to specify that directors should focus on the organisation’s purpose, values and culture. In 2015, the OECD defined the purpose of corporate governance as ‘to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies’.130 The European Commission produced a report in 2020 on the root causes of ‘short termism’ in corporate governance, responding to data indicating an upward trend in shareholder pay-outs, which increased fourfold, from less than 1% of revenues in 1992 to almost 4% in 2018.131 The study identified the following seven key problem drivers: 1.

Directors’ duties and company’s interest are interpreted narrowly and tend to favour the shortterm maximisation of shareholder value; 2. Growing pressures from investors with a short-term horizon contribute to increasing the boards’ focus on short-term financial returns to shareholders at the expense of long-term value creation; 3. Companies lack a strategic perspective over sustainability and current practices fail to effectively identify and manage relevant sustainability risks and impacts;

129 The Pivotal Factors for Effective External Engagement (McKinsey & Company, 2020). 130 G20/OECD Principles of Corporate Governance (OECD, 2015). See also Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015). 131 Study on Directors’ Duties and Sustainable Corporate Governance. Final Report (European Commission, 2020).

The Emergence of a Fresh Vision of Capitalism and Business  279 4. 5. 6. 7.

Board remuneration structures incentivise the focus on short-term shareholder value rather than long-term value creation for the company; The current board composition does not fully support a shift towards sustainability; Current corporate governance frameworks and practices do not sufficiently voice the long-term interests of stakeholders; Enforcement of the directors’ duty to act in the long-term interest of company is limited.

The European Commission said that possible future EU action should pursue the general objective of fostering more sustainable corporate governance and contributing to more accountability for companies’ sustainable value creation, through: • Strengthening the role of directors in pursuing their company’s long-term interests. • Improving directors’ accountability towards integrating sustainability into corporate decisionmaking. • Promoting corporate governance practices that contribute to company sustainability.

The UK had amended its Corporate Governance Code in 2018. The Financial Reporting Council (FRC) said that boards should ‘promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society’ and ‘establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned’.132 In other words, it is the job of the board to assess and monitor the organisation’s culture. The FRC explained:133 Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.

Thus, the UK Code has set out a clear relationship between the concepts of purpose, values and culture. The organisation’s purpose is achieved through its values, strategy and culture, all of which must be confirmed by its board. The UK Code covers five areas: 1. board leadership and company purpose; 2. division of responsibilities; 3. composition, succession and evaluation; 4. audit, risk and internal control; and 5. remuneration. The specified principles in relation to Board Leadership and Company Purpose are set out in Box 10.2.

132 The UK Corporate Governance Code (Financial Reporting Council, 2018). For similar provisions in relation to asset owners and asset managers, see The UK Stewardship Code 2020 (Financial Reporting Council, 2019). 133 The UK Corporate Governance Code (Financial Reporting Council, 2018). See also Guidance on Board Effectiveness (Financial Reporting Council, 2018).

280  Cooperation in Capitalism and Businesses Box 10.2  UK Corporate Governance Code 2018 Principles on Board Leadership and Company Purpose Principles A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. C. The board should ensure that the necessary resources are in place for the company to meet its objectives and measure performance against them. The board should also establish a framework of prudent and effective controls, which enable risk to be assessed and managed. D. In order for the company to meet its responsibilities to shareholders and stakeholders, the board should ensure effective engagement with, and encourage participation from, these parties. E. The board should ensure that workforce policies and practices are consistent with the company’s values and support its long-term sustainable success. The workforce should be able to raise any matters of concern. Adoption of long-term perspectives has been promoted jointly by the FRC and the FCA,134 and mandated by the UK Investment Association, which said: The role of culture in creating long-term value for a company and its shareholders is increasingly being recognised. There is strong evidence that where employees feel that their company has integrity, companies see an increase in productivity and profitability of the company.135

The views of stakeholders (such as investors, customers or regulators) should be understood and taken into account. ‘Where it is not satisfied that policy, practices or behaviour throughout the business are aligned with the company’s purpose, values and strategy, [the board] should seek assurance that management has taken corrective action.’136 These general changes in corporate governance have been echoed in some individual sectors, notably those involving common goods. The UK water regulator OFWAT has moved to enshrine ‘purpose, strategy, values and culture’ as an explicit requirement for water companies, given that water is a public good.137 This was followed by a commitment by water companies to ‘enshrine what it means to operate in the public interest within their business purpose, in line with best practice among leading socially-responsible businesses’.138 OFWAT included a telling requirement that ‘The board develops and promotes the company’s purpose in consultation with a wide range of stakeholders and reflecting its role as a provider of an essential public service’ (emphasis added). That recognition of joint responsibility and the co-creation of arrangements applies the stakeholder ethos in a way that the top-down Board-focused FRC requirements fail to do. 134 Building a Regulatory Framework for Effective Stewardship. Discussion Paper (FRC and FCA, 2019) DP19/1. 135 L Guiso, P Sapienza and L Zingales, ‘The Value of Corporate Culture’ (2015) 117(1) Journal of Financial Economics 60. 136 ibid. 137 Board Leadership, Transparency and Governance – Principles (Ofwat, 2019). See also Board Leadership, Transparency and Governance – Conclusions on Revising the Principles (Ofwat, 2019); Time to Act, Together: Ofwat’s Strategy (OFWAT, October 2019). 138 Public Interest Commitment (Water UK, 25 April 2019).

The Emergence of a Fresh Vision of Capitalism and Business  281

Regulation of Financial Institutions Extensive reforms were made to the regulatory system for financial institutions from 2010. Major themes were an increasing emphasis on corporate culture and accountability of staff (especially senior staff).139 The approach of the Financial Stability Board to ‘strengthening governance frameworks’ is entirely based on steps to reduce misconduct rather than to refocus governance as a positive and preventative system (see Box 10.3).140 The stance accepts that misconduct is inevitable and should be dealt with through steps aimed at mitigation. Box 10.3  Summary of Tools to Mitigate Misconduct Risk: FSB 2018 Mitigating cultural drivers of misconduct Firms Tool 1: Senior leadership of the firm articulate desired cultural features that mitigate the risk of misconduct. Tool 2: Identify significant cultural drivers of misconduct by reviewing a broad set of information and using multidisciplinary techniques. …. Tool 3: Act to shift behavioural norms to mitigate cultural drivers of misconduct. National authorities Tool 4: Build a supervisory programme focused on culture to mitigate the risk of misconduct. Tool 5: Use a risk-based approach to prioritise for review the firms or groups of firms that display significant cultural drivers of misconduct. Tool 6: Use a broad range of information and techniques to assess the cultural drivers of misconduct at firms. Tool 7: Engage firms’ leadership with respect to observations on culture and misconduct. Strengthening individual responsibility and accountability Firms and/or national authorities Tool 8: Identify key responsibilities, including mitigation of the risk of misconduct, and assign them. Tool 9: Hold individuals accountable. Tool 10: Assess the suitability of individuals assigned key responsibilities. National authorities Tool 11: Develop and monitor a responsibility and accountability framework. Tool 12: Coordinate with other authorities.

139 See ch 8. 140 Strengthening Governance Frameworks to Mitigate Misconduct Risk: A Toolkit for Firms and Supervisors (Financial Stability Board, 2018).

282  Cooperation in Capitalism and Businesses Addressing the rolling bad apples phenomenon Firms Tool 13: Communicate conduct expectations early and consistently in recruitment and hiring processes. Tool 14: Enhance interviewing techniques. Tool 15: Leverage multiple sources of available information before hiring. Tool 16: Reassess employee conduct regularly. Tool 17: Conduct ‘exit reviews’. National authorities Tool 18: Supervise firms’ practices for screening prospective employees and monitoring current employees. Tool 19: Promote compliance with legal or regulatory requirements regarding conduct-related information about applicable employees, where these exist.

Regulation of Directors and Auditing As a series of major and sudden corporate insolvencies plagued the UK, notably BHS in 2016 and Carillion in 2018, the Government pursued reforms aimed at directors, shareholders and auditors.141 A review of the Financial Reporting Council found that the regulator lacked the necessary powers and clarity of purpose to hold auditors and directors sufficiently to account and recommended that it be replaced.142 Powers were proposed for investigation and civil enforcement against directors of large businesses. The Brydon Review concluded that statutory audit needed to become more informative, and that higher expectations should be placed on both directors and auditors to deliver more useful information to the users of reports.143 Directors would be subject to new reporting and attestation requirements (a Resilience Statement and an Audit and Assurance Policy) covering internal controls, dividend and capital maintenance decisions, and resilience planning, designed to sharpen directors’ accountability in these key management areas within the largest companies. Companies should publish annual audit and assurance policies on which shareholders should hold advisory votes, and propose to the audit committee areas of emphasis for the auditor’s annual audit plan. Provisions on malus and clawback of executive directors’ remuneration would be strengthened. A Market Study showed an unhealthy dominance of the statutory audit market for larger companies by a small number of audit firms and called for new measures to increase quality, competition and resilience in the delivery of audit.144 The proposals were for ‘a new, stand-alone audit profession, underpinned 141 Restoring Trust in Audit and Corporate Governance. Consultation on the Government’s Proposals (BEIS, 2021). 142 Sir John Kingman, Independent Review of the Financial Reporting Council (HM Government, 2018). 143 Sir Donald Brydon, Assess, Assure and Inform. Improving Audit Quality and Effectiveness. Report of the Independent Review into the Quality and Effectiveness of Audit (HM Government, 2019). 144 See the UN Principles for Responsible Investment, www.unpri.org/. An early call was S Davis, J Lukomnik and D Pitt-Watson, The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Harvard Business School Press, 2006); Statutory Audit Services Market Study. Final Report (Competition & Markets Authority, 2019); Market Study on Statutory Audit Services. Initial Consultation on Recommendations by the Competition and Markets Authority (Department for Business, Energy & Industrial Strategy, 2019).

The Emergence of a Fresh Vision of Capitalism and Business  283 by a common purpose and principles – including a clear public interest focus – and with a reach across all forms of corporate reporting, not just the financial statements’ that would be separate from accountancy bodies.

Sustainable Investment Institutional investors are increasingly demanding long-term sustainability.145 This policy may have a number of motivations, such as because it is the right thing to do, or so as of protect sustainable wealth, or just because it delivers good returns in current markets. The 2020 annual letter by BlackRock to its investors acknowledged the concept of ‘sustainable investing’ that combined ‘traditional investing with environmental, social, and governance-related (ESG) insights to improve long-term outcomes for our clients’ and that companies that had strong profiles on material sustainability had the potential to ‘outperform’ others.146 It said that outperformance had ‘been driven by a range of material sustainability characteristics, including job satisfaction of employees, the strength of customer relations, or the effectiveness of the company’s board’. A 2021 review estimated that over 50% of company earnings could be at risk from environmental costs in an equity portfolio weighted according to the MSCI All Country World Index.147 That assumes that any investment or property will maintain its value or even existence in a warmer world. Over time, wider views have emerged of what constitutes value, and the rational objectives of investors. CK Prahalad identified the concept of ‘value at the bottom of the pyramid’ possessed by many workers whose power could be motivated and liberated.148 A recent related example is the spontaneous work of Women Self Help Groups in India at the start of the Covid-19 pandemic, who produced facemasks, ran community kitchens, delivered essential food supplies, sensitised people about health and hygiene and combatted misinformation.149 Sir Ronald Cohen has charted the development of Impact Investing.150 This movement arose amongst philanthropists out of concern with inequality and poverty, and produced the idea of investing for creating impact rather than profit. A Social Investment Taskforce was created in 2000 and a UK Investor Forum was established in 2014, with two core objectives: (i) to make the case for long-term investment approaches; and (ii) to create an effective model for collective engagement with UK companies. By 2020, 42 firms had joined the Investor Forum as full members, between them holding or managing almost a third of the market capitalisation of the FTSE All Share index. Impact investing is rigorous in applying measurement to get to governments, management and investors to work together in delivering transparent social impact. Examples range from reducing the rate of prisoners’ reoffending in Peterborough to reducing the number 145 J Kay, Obliquity (Profile Books, 2010). See ‘Unilever: In Search of the Good Business’ The Economist 9 August 2014, 69; L Fink, ‘Sustainability as BlackRock’s New Standard for Investing’ (2020) at www.blackrock.com/corporate/ investor-relations/blackrock-client-letter. 146 Sustainable Investing: Resilience Amid Uncertainty (BlackRock, 2020); L Fink, ‘Sustainability as BlackRock’s New Standard for Investing’ (2020) at www.blackrock.com/corporate/investor-relations/blackrock-client-letter; L Fink, ‘A Fundamental Reshaping of Finance’ Harvard Law School Forum on Corporate Governance (16 January 2020), https:// corpgov.law.harvard.edu/2020/01/16/a-fundamentalreshaping-of-finance/. 147 Universal Ownership. Why Environmental Externalities Matter to Institutional Investors (UNEP Finance Initiative and the Principles for Responsible Investment, 2011). 148 CK Prahalad, ‘Ethical Demands and the Global Company: From Compliance to Co Creation?’ The Fourth Coleman Lecture on Ethics, Wharton Business School, October 24, 2005; CK Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Wharton Business Publishing, 2006). 149 World Bank Feature story April 11, 2020. 150 R Cohen, Impact. Reshaping Capitalism to Drive Real Change (Ebury Press, 2020). See also www.youtube.com/watch ?v=LDfxogD41HY&feature=youtu.be.

284  Cooperation in Capitalism and Businesses of girls dropping out of Indian schools. By 2020 200 Impact Bonds had been created worldwide, providing essential funding to charities whilst accepting venture risk. New forms of stakeholder financing have continued to be created that appear to be cheaper than impact bonds.151 The concept of shared-value investing seeks to create a virtuous cycle by allocating capital to those companies that create the greatest societal returns – both in ‘business as usual’ and in improving the welfare of customers, employees, suppliers and communities.152 This retains the profit motive but takes a wider view of how it can be delivered. Reliance is placed, for example, on research that companies that focus their sustainability efforts primarily on material social and environmental factors significantly outperform the market, with alpha of 3 to 6% annually.153

Wider Transformations All of the above reforms are changes to the existing systems of corporate governance and investing. They leave the basic systems untouched. However, some reforms are more fundamental: we now look at new forms of capital, new ways of valuing capital, and new forms of collective vehicles.

Economics of Mutuality Bruno Roche has led the development of a transformative model of capitalism that is holistic in including the accounting and reward of all aspects of a business’ activities that have internal or external affect.154 Called the Economics of Mutuality (sharing of benefits) as a driver of value creation, it takes its inspiration from the statement of Martin Luther King Jr: ‘All men are caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.’ The model requires business activities to value four categories of capital that are involved in its activity: human capital, social capital, natural capital, and shared financial capital – not just the value of financial capital employed within the firm.155 This accounts for the value that each input brings to the business, not treating any effects as externalities, and for how the business accounts for (measures, manages, values) each of these inputs, including how business grows or diminishes them. Each of these types of capital employed in an organisation must be remunerated with similar forms of capital: human for human, social for social, natural for natural.156 This is essentially a management innovation, leading to new measurements to be 151 K Harrison-Broninski, Supercommunities. A Handbook for the 21st Century (Meghan-Kiffer Press, 2021) 324–26. 152 ME Porter, G Serafeim and M Kramer, ‘Where ESG Fails’ Institutional Investor 16 October 2019. The strategic argument is that ‘shared value can affect strategy at three mutually reinforcing levels: (1) creating new products that address emerging social needs or open currently unserved customer segments; (2) enhancing productivity in the value chain, whether by finding new efficiencies or increasing the productivity of employees and suppliers; and (3) investing to improve the business environment or industry cluster in the regions where the company operates’. Examples cited include Suzano; Maersk; BHP Chile mines; and BD. 153 A Yoon, M Khan and G Serafeim, ‘Corporate Sustainability: First Evidence on Materiality’ (2016) 91(6) The Accounting Review 1697–724. 154 B Roche and J Jakub, Completing Capitalism. Heal Business to Heal the World (Berrett-Koehler Publishers, 2017). 155 A wider approach to identifying different types of capital is spreading: see D Coyle, Measuring wealth, delivering prosperity (Bennett Institute for Public Policy, 2019). 156 In relation to natural capital, for example, if water is drawn from a river and used in a production process, it must be returned in at least as good a state as it was when drawn. Similarly, humans involved should benefit from well-being and be and feel developed and fulfilled. Non-financial social relationships between the organisation and local community should bring well-being, prosperity and sustainability.

Wider Transformations  285 monitored, new accounting practices, changing the definition of profit, and one that transforms outputs: Our view is in order to build a truly sustainable business, we need to develop a model that accounts for the value that each input brings to the business, and for how the business accounts for (measures, managed, values) each of these inputs, including how business grows or diminishes them.157

The four capitals and their selected means of measurement were summarised like this: Human Capital Key drivers of individual well-bring in any cultural context based on individual skills, experience, knowledge, satisfaction (general and job specific), and health Social Capital Nonfinancial relationships that affect a community’s well-being and prosperity in ways that can bring sustainable quality of life increases which, in turn, positively impact performance. Natural Capital The complete input flow of natural resources used across the entire value chain of a product.

Shared Financial Capital How economic benefits of business activities are shared among a value chain’s participants, in order to ensure a sustainable margin and wage and to identify where supply chains are comparatively strong or vulnerable.

Measured through an adapted ‘well-being at work’ survey to guide human resource-type interventions that will bring tangible benefits in talent attraction, retention, and optimisation of performance. Measured by survey through just three key drivers in any business situation or location: trust, community cohesion, and capacity for collective action. Measured through five main metrics: materials (renewable and non-renewable), air, water, and topsoil erosion, the granular understanding of which can guide management investment decisions to make businesses more resource efficient. Measured in economic value created locally and in the wider community.

The model aims simultaneously to promote sustainable, profitable businesses and wider benefits in the form of human, social and environmental well-being.158 Roche and Jakub recount their initial successful case study involving selling chewing gum in the slums of Kenya that produced outstanding improvement in the social, environmental and economic aspects of the local community. Intrinsic in Roche’s approach is reliance on business organisations, as the most distributed and flexible organisations, in being able to solve other people’s problems, rather than leaving this to less-well equipped global institutions or nation-state governments through tools such as taxation. The approach is also expressly based in morality:159 A truly moral system of exchange, however, must be capable of acknowledging and measuring (so that it can be managed in a business sense) the inherent value of different forms of contribution. This would empower each individual involved to maximise the utility of what he or she has received in terms of abilities to fulfil his or her own destiny, while improving the lives of others in the process of pursuing

157 ibid, 158 ibid, 159 ibid,

9. 18. 41. The authors illustrate this text with the parable of the talents.

286  Cooperation in Capitalism and Businesses that destiny. In such a context, some concentration of capital in the hands of talented entrepreneurs – in individuals who have the skills to grow whatever forms of capital they are endowed with – is not only a business imperative but can also be a moral act (or at a minimum, not an amoral one) that should be encouraged, as it can be a very efficient way of creating and sharing greater holistic value, playing to the particular strengths of each individual.

Research commissioned by Roche and colleagues research into the performance of 3,500 companies between 1978 and 2006 showed that160 there was no causal relationship between profit and growth, and no causal relationship between past growth and future growth, regardless of time scale. The only strong causal relationship found was between past profit and future profit, implying that the only long-lasting pattern in business is its ability to generate profit – irrespective of its top line.

They also commissioned research into how best to measure human, social and natural capital. In relation to social capital, literature research undertaken by Gent University into measures of cognitive and structural social capital were tested with 7,500 households across six countries and isolated three variables that explained 75% or more of the variations: 1. Social division or cohesion 2. Trust 3. Capacity for collective actions and behavioural attitudes In relation to natural capital, two simple methodologies were identified for use in practice: Material Input Per Unit of Services and Hot Spot Analysis. The metrics selected were abiotic (inorganic materials), biotic (organic materials), water, air and topsoil erosion. We have noted in chapter four above evidence linking human satisfactions, good health and productivity.

Diversification in Corporate Models Increasing experimentation has occurred in forms of organisational models for shared enterprise. The International Labour Organization (ILO) argued in 2015 that sustainable development was not achievable without the active engagement of workers and based on a strong social consensus.161 The ILO said that social dialogue had to be ‘an integral part of the institutional framework for policy-making and implementation at all levels’.162 It set out a long list of suggested arrangements as a framework for dialogue and operational implementation. A 2018 review by Nina Boeger and Charlotte Villiers found that these alternative business forms differ categorically from the traditional corporation in terms of their governance, objectives and/ or ownership structures, including mission-led businesses, social enterprises, cooperatives and co-owned firms.163 Despite diversity, they found evidence of evolution towards consistent underpinning of a stakeholder model of corporate governance that commits the firm to generating value by maximising the positive impact on its (internal and external) stakeholders while limiting negative impacts, with trade-offs carefully balanced against each other. Commitments internalised a process of democratic contestation, mediating the interests of a wider range of actors and goals. The 160 ibid, 30. 161 Guidelines for a Just Transition towards Environmentally Sustainable Economies and Societies for All (International Labour Organization, 2015). 162 ibid, para 13. 163 N Boeger and C Villiers (eds), Shaping the Corporate Landscape: Toward Corporate Reform and Enterprise Diversity (Hart, 2018).

Wider Transformations  287 new forms attempt to escape from the inherent challenges of an irreconcilable relationship between self-seeking corporations and society or regulators, and to try to achieve better reconciliation of objectives whilst limiting negative impacts.164 It has been argued that employee owned businesses, which in 2018 accounted for over £30 billion annual turnover in the UK, pay off at the three levels of individual workers, business success and for the wider economy.165 Some interesting examples of new forms include small-scale worker cooperatives in rural Greece166 and the United Kingdom,167 social enterprise firms168 and ‘community interest companies’ in the United Kingdom169 that include employee-owned public health spin-outs,170 multi-national ‘B Corps’171 like the ice cream maker Ben & Jerry’s, that are certified for their social impact172 and an increasing number of firms that are co-owned between investors and employees.173 A FairShares model, developed from the historical idea of cooperative companies,174 aims to share returns and solidarity between stakeholders on the basis of ethical values, instead of meeting the needs of a single stakeholder.175 There is also growth in ‘mission-led businesses’ that have a central purpose of creating a positive social impact whilst still fully distributing profits.176 Boeger and colleagues note the increasing change from states seeking to control corporations through traditional regulation to more pluralist political contestation177 between societies and markets along lines predicted in the 1940s by Karl Polanyi,178 and more democratic understandings of the role of workers in their enterprises. Unsurprisingly, there has been push back on the idea of codetermination of corporations between owners and employees, at least in relation to existing US corporate law.179 An integrity 164 N Boeger, ‘Beyond the Shareholder Corporation: Alternative Business Forms and the Contestation of Markets’ (2018) 45(1) Journal of Law and Society 10–28. 165 The Ownership Dividend. The Economic Case for Employee Ownership at http://employeeownership.co.uk/wp-content/ uploads/The_Ownership_Dividend_The_economic_case_for_employee_ownership.pdf. 166 I Gidarakou, ‘Women’s Entrepreneurship in Rural Greece’ (2015) 10 International Journal of Business and Management 129. 167 E Mayo (ed), The Co-operative Advantage: Innovation, Co-operation and Why Sharing Business Ownership Is Good for Britain (2015) at https://library.uniteddiversity.coop/Money_and_Economics/Cooperatives/The_Co-operative_AdvantageInnovation_co-operation_and_why_sharing_business_ownership_is_good_for_Britain.pdf. 168 State of Social Enterprise Survey 2015 (Social Enterprise UK, 2015). 169 See www.gov.uk/government/organisations/office-of-the-regulator-of-community-interest-companies. Companies (Audit, Investigations and Community Enterprise) Act 2004 and Community Interest Company Regulations 2005 (S.I. 2005/1788), as amended by the Community Interest Company (Amendment) Regulations 2009 (S.I. 2009/1942) and Community Interest Companies (Amendment) Regulations 2014 (S.I. 2014/2483). See S Lloyd, ‘Transcript: Creating the CIC’ (2010) 35 Vermont Law Review 31. 170 K Hall, R Miller and R Miller, ‘Public, Private or Neither? Analysing the Publicness of Health Care Social Enterprises’ (2015) Public Management Review 1. 171 See http://bcorporation.net/. 172 D Hunter, ‘The Arrival of B Corps in Britain: Another Milestone towards a More Nuanced Economy?’ in N Boeger and C Villiers (eds), Shaping the Corporate Landscape: Toward Corporate Reform and Enterprise Diversity (Hart, 2018). 173 What Is Employee Ownership? (UK Employee Ownership Association, 2017); JR Blasi et al, The Citizen’s Share: Reducing Inequality in the 21st Century (Yale University Press, 2014). 174 Eg John Lewis Partnership (UK), MindValley (Asia), SEMCO (South America), Mondragon (Spain). 175 R Ridley-Duff, The Case for FairShares (FairShares Association, 2015). 176 Mission-Led Business Review. Call for Evidence (Cabinet Office, 2016). This states the key characteristics of a missionled business are that it: can fully distribute its profits; identifies an intention to have a positive social impact as a central purpose of its business; makes a long-term or binding commitment to deliver on that intention through its business and operations; and reports on its social impact to its stakeholders. 177 N Boeger and C Villiers (eds), Shaping the Corporate Landscape: Toward Corporate Reform and Enterprise Diversity (Hart, 2018); R Munck, Globalization and Contestation: The New Great Counter-Movement (Routledge, 2006); S Wilks, The Political Power of the Business Corporation (Edward Elgar, 2013); EL Rubin, ‘Extending Democracy to Corporate Governance and Beyond: A Theory of Popular Economic Sovereignty’ (2021) 53 University of the Pacific Law Review 39. 178 K Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Beacon Press, 2001/1944). 179 J Dammann and H Eidenmueller, ‘Codetermination: A Poor Fit for US Corporations’ (2020) 3 Columbia Business Law Review http://doi.org/10.52214/cblr.v2020i3.7809.

288  Cooperation in Capitalism and Businesses NGO has concluded that although multi-stakeholder initiatives (MSIs) have been influential as human rights tools, they are ultimately inadequate since they fail to provide adequate standards or methods to detect abuses, to entrench power for human rights holders and civil society, or to provide access to a remedy.180 The authors believed that the failure of MSIs is inextricably linked to the corporate form itself, which retains power in corporations. Improvements would only be widely delivered if workers and affected communities were at the centre of decision-making and if benefits and ownership accrued to the workers involved. An inquiry by senior business leaders and industry experts found that the employee owned sector, in which employees own a substantial stake and a meaningful voice in a business, accounted for over £30 billion in UK in 2018.181 Its evidence review concluded that employee ownership has a significant dividend for individual workers (such as enhanced motivation, engagement, retention and health), for businesses and for the wider economy.182

Conclusions The Big Question: Are Current Changes Fundamental Enough? We have been living and trading through a period of extensive change in the ideas and some practices on the purposes and operation of commercial organisations. Models based on maximising profit and short-term stock value and the incentivisation of these goals through short reporting periods for financial results, setting profit targets and remuneration practices have been identified as major causal factors in global warming, the GFC and a series of serious corporate disasters that have been serious enough to threaten the stability of global equilibrium of climate, financial systems, markets, assets, equalities and humanity. These corporate and economic models have their foundation in the political theory of neoliberal capitalism. A series of changes have been made in corporate governance requirements to focus on longterm sustainability. Possible changes are occurring in shifting from a shareholder value model to a stakeholder involvement model, a widening of corporate focus from making profits, especially as a constant short-term requirement, to considering social, environmental and long-term purposes and sustainability of corporations, value humanity and the planet. There is some evidence that major investors support these general trends. Chapter 11 also records changes in some incentivisation and remuneration practices. In fact, a considerable number of changes have been made in individual elements of the system, notably in corporate governance codes. But are they just tinkering without changing fundamentals of system design and operation? I fear they are simply not effective in supporting trust within and between people and organisations. If that is correct, then serious and avoidable risks have not been reduced. There will be more major corporate disasters and crises. The concern is that the primary model for both individual businesses and capitalism as a system has changed but remains unstable and inadequate. The previous theory of the maximisation of 180 Not Fit-for-Purpose. The Grand Experiment of Multi-Stakeholder Initiatives in Corporate Accountability, Human Rights and Global Governance (MSI Integrity, 2020). 181 The Ownership Dividend. The Economic Case for Employee Ownership (The Ownership Effect Inquiry, 2018). 182 J Lampel, A Banerjee and A Bhalla, The Ownership Effect Inquiry: What Does the Evidence Tell Us? (The Ownership Effect Inquiry, 2017); J Lampel, A Banerjee and A Bhalla, Final Evidence Report (The Ownership Effect Inquiry, 2018); J Lampel, A Banerjee and A Bhalla, The Resilient Decision-Maker: Navigating Challenges in Business and Life (Lioncrest Publishing, 2019).

Conclusions  289 profit accorded with the political ideology of individualist neoliberal freedom and free markets. But those combined models and ideology have largely failed as they gave rise to systemic risk, produced systemic harms, and were incompatible with values of fairness and sustainability. There has been a period of slow change in ideas about corporate purpose, long-term sustainability, and the political, social and economic need to moderate individualism with social solidarity. We have arrived at a time of great threat, in which the theory and purpose of the corporation and of the market have undergone major transformations. The question is: will the changes that have been made be enough to achieve sustainability and social purposes? What else needs to change? Does the shareholder value model remain dominant? Are the statements about corporate social purpose and stakeholder value mere window dressing, with no legal or practical effect on an entrenched system? A number of American scholars are highly sceptical that the shifting of power between the various stakeholders who hold financial interests in corporations, which has shown signs of cyclical variation,183 has not been dislodged from the capitalist purpose of making profit and the associated ‘corporate governance machine’, being entrenched in a system involving multiple institutional players, notably proxy advisors, stock exchanges, ratings agencies, institutional investors and associations.184 Accordingly, it is argued that movements such as those on broadening purpose and ESG/SDG goals, involving sacrificing profits, will fail unless they deliver the advancement of shareholder interests, through the operation of mechanisms that deliver consequences such as falls in share price, downgrading by rating agencies, loss of remuneration by senior staff, adverse actions by proxy advisors and interest advocacy groups.185 In other words, there has been insufficient change in the working of the machine. One would have to make fundamental changes to the model to deliver outcomes that satisfied all stakeholder interests. That pessimistic conclusion might be echoed in some leading statements on regulatory reforms aimed at conduct rather than corporate governance aspects. For example, many of the changes in regulation of financial institutions (illustrated by the FSB above) and corporate governance are aimed at mitigating unavoidable risks, rather than making fundamental changes in the system so as to remove the risks of misconduct. Marianna Mazucato called for better alignment of just deserts, risk and reward, between private and public actors, and recalled Elinor Ostrom’s emphasis on the importance of common pooled resources, and the shaping of systems that take into account collective behaviour, plus limiting the amount of rent that emerges from any non-collective approach to wealth creation.186 Ongoing examples of vitriolic arguments between institutional investors and directors over corporate strategy and value do not inspire confidence.187 The answer to whether we have done enough will emerge empirically as history evolves. But how confident are we that we will achieve the goals of prosperity and protection that are needed? And that we will avoid recurrences of disasters and scandals that are both serious in themselves and carry systemic risks? Should we do more now, perhaps before it is too late? I think so.

183 RJ Gilson and CJ Milhaupt, ‘Shifting Influences on Corporate Governance: Capital Market Completeness and Policy Channeling’ European Corporate Governance Institute (ECGI) Law Working Paper No 546/2020. 184 DS Lund and E Pollman, ‘The Corporate Governance Machine’, University of Pennsylvania, Institute for Law & Economics Research Paper No 21-05 European Corporate Governance Institute – Law Working Paper No 564/2021. 185 ibid. 186 M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018) 263, 268. 187 eg P Hosking, ‘Unilever Has Lost the Plot, Says Investor’ The Times 12 January 2021; ‘Activist Investors Set Their Sights on Shaking Up Boards’ The Times 13 January 2021, 38; P Hosking and L Clarence-Smith, ‘Glaxo Fiasco Shows a Unilever Board out of Touch with Investors’ The Times 22 January 2021, 52.

290  Cooperation in Capitalism and Businesses

An Emerging Fresh Vision of Capitalism and Business The realisation that the performance of any organisation is affected by its design has received considerable attention and widespread reform in the private sector, especially focusing on the structure, governance and culture of organisations.188 The same issues have received attention in relation to public regulatory authorities in the UK. In that latter context, some decades of pressure from business sectors on how regulators operate, coupled with downward pressure from the Treasury on their budgets, has led to a focus on ‘doing more with less’ under the title of ‘Better Regulation’, inherently involving a focus on doing things well.189 A Regulators’ Code has been imposed that includes requirements to help those they regulate to comply and grow.190 The Regulatory Delivery Model for regulatory authorities (see chapter 13) includes the prerequisites of governance, transparency and culture, and the practices of outcome-focus, risk- and intervention choices.191 The systemic operational design of organisations is a large topic on which a great deal more could be said, but some key points to note are these. First, the purpose(s) of an organisation need to be stated clearly and concisely.192 An example might be: We are here to help those citizens who need help through provision of social support. However, and commercial organisation should have a purpose of making profit so as to sustain its operations, employment and resources for future activities. As discussed in chapter seven, multiple purposes need to be balanced to reduce conflicts occurring in practice. But the key point is that profit is an outcome, rather than an objective. Second, the purposes need to be motivating for all the workforce. The intrinsic motivation193 of the people throughout an organisation needs to be fired up though a purpose that chimes with their own ethical values, to be relevant to them and achievable by each of them given their role and capabilities. They all need to perceive that they are involved in the enterprise and adequately consulted,194 and that the enterprise is worthwhile and ethical. Third, the focus should be on achieving clear desired outcomes that accord with the stated purposes. These can range from the general to the specific, but bear in mind that too heavy a focus on outputs (especially quantitative ones) can reduce quality of outcomes. Fourth, the organisation should be governed in a way that provides transparency and openness and delivers the desired outcomes in accordance with the purposes. Many UK Ministries may have a high-level board that includes senior external figures, and might publish annual reports that list some objectives and achievements, but is there anything like enough public involvement, voice, advocacy and feedback? It is interesting to note the co-creation approach of the Swiss 188 For example, G20/OECD Principles of Corporate Governance. OECD Report to G20 Finance Ministers and Central Bank Governors (OECD, 2015); Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015). In UK see The UK Corporate Governance Code (Financial Reporting Council, 2018). 189 In a large literature, see P Hampton, Reducing Administrative Burdens: Effective Inspection and Enforcement (HM Treasury, 2005); Better Regulation Framework. Interim Guidance (Department for Business, Energy & Industrial Strategy, 2020). 190 The Regulators’ Code (HM Government, 2014). This was introduced as the Regulators’ Compliance Code: Statutory Code of Practice for Regulators (Department for Business Enterprise and Regulatory Reform, 2007), and is made under the Legislative and Regulatory Reform Act 2006, s 22(1). 191 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 192 See C Mayer, Prosperity (Oxford University Press, 2019); Principles for Purposeful Business. How to Deliver the Framework for the Future of the Corporation (The British Academy, 2019). 193 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017). 194 A classic error was made by the sacking of 800 workers without notice by P&O in March 2022, admitted to be illegal, provoking widespread adverse reactions towards the company and its management.

Conclusions  291 Guidelines for Institutional Investors Governing the Exercising of Participation Rights in Public Limited Companies, which were agreed as a joint effort involving the government pension body, various trade and finance bodies and the Swiss Foundation for Sustainable development.195 Fifth, the culture of an organisation has to be consistent and ethical throughout. Authoritarian, controlling, blaming or abusive behaviour at any level, together with imposition of too many targets and competing requirements, will dimmish achievement of desired outcomes.196 Building on research involving psychology, sociology and business management,197 Steinholtz and Hodges have set out two organisational frameworks – one for culture and leadership, and the other for ethics and compliance – that will form the basis of building sustainable ‘Ethical Business Practice’.198 Finally, and of direct relevance to systemic structural design, is the finding from studies of business organisations that flat structures are notably more effective than ones that have multiple layers of management and bureaucracy.199 Against that challenging background, it is not difficult to see why it can be familiar to hear complaints about public administration being too slow, resistant to change, unable to predict or avoid unintended consequences, or to act swiftly in putting things right. A system that understandably follows rules, procedures and familiar bureaucratic ways of working will always be prone to such problems. However, the learning and experience from the private sector, and some parts of the public sector that have opened up to the concerns of their business users, is that focusing on principles such as achieving fair outcomes is empowering and drives high and improving performance. Further, there may be suspicion that political objectives might ‘crowd out’ objective administration. An example might be a narrative that most people who apply for immigration approval or social security benefits are undeserving. It is, for example, salutary to compare the industry-wide ‘open and just culture’ that has been nurtured between regulators and operators in the aviation safety sector200 with the recurrent problems in achieving an open culture of fair interpersonal relations (as opposed to what might be technically accurate but impersonal medical treatment) in the NHS.201 One lesson is that systemic structural design affects the behaviour 195 D Daeniker and G Hertig, ‘Capitalist Stakeholders: Shareholder Stewardship in Switzerland’ in D Katelouzou and D Puchniak (eds), Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Cambridge University Press, 2021). 196 EH Schein, ‘Coming to a New Awareness of Organizational Culture’ (1984) 25(2) Sloan Management Review 3; EH Schein, Organisational Culture and Leadership (Jossey-Bass Publishers, 1985); S Dekker, Just Culture (Ashgate Publishing, 2007). 197 A highly readable and informative summary is J Reason, A Life in Error: From Little Slips to Big Disasters (Routledge, 2013). 198 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017). 199 T Peters and RH Waterman Jr, In Search of Excellence: Lessons from America’s Best-Run Companies (Harper & Row, 1982); M Parker, Organizational Culture and Identity (SAGE Publications, 2000). 200 See Enhancing Industrial Safety Management (Civil Aviation Authority) at www.caa.co.uk/Safety-initiativesand-resources/How-we-regulate/Safety-Plan/Enhancing-industry-safety-management/Industry-safety-managementsystems/. 201 See a succession of disasters in which a failure of culture plays a significant role: Learning from Bristol: The Department of Health’s Response to the Report of the Public Inquiry into Children’s Heart Surgery at the Bristol Royal Infirmary 1984–1995, (2002) Cm 5363; Independent Inquiry into Care Provided by Mid Staffordshire NHS Foundation Trust January 2005–March 2009. Volume I. Chaired by Robert Francis QC, HC375-I (2010); Dr B Kirkup CBE, The Report of the Morecambe Bay Investigation (Department of Health, 2015); Learning Not Blaming: The Government Response to the Freedom to Speak Up Consultation, the Public Administration Select Committee Report ‘Investigating Clinical Incidents in the NHS’, and the Morecambe Bay Investigation (Department of Health, 2015), Cm 9113; Learning, Candour and Accountability. A Review of the Way NHS Trusts Review and Investigate the Deaths of Patients in England (Care Quality Commission, 2016); Better Births: Improving Outcomes of Maternity Services in England: A Five Year Forward View for Maternity Care (National Maternity Review, 2016); Gosport War Memorial Hospital: The Report of

292  Cooperation in Capitalism and Businesses and culture of how people operate. Public organisations are in general some way behind leading business practice here. The neoliberal capitalism model of a corporation based on the idea that those who own shares in it, and therefore have residual rights to be paid (last) in the event of a winding up, are those who have the right of ultimate control over the organisation has been significantly demolished, even if it may remain technically legal. Today, people expect publicly and privately-owned companies to behave in ways that both respect and achieve public as well as private goals. this pluralism of purposes and outcomes goes hand in hand with ideas on stakeholder involvement, stakeholder management and stakeholder capitalism. What might a model of ‘stakeholder capitalism’ look like? It would start with agreement that the legitimate interests and outcomes of all stakeholders should be valued, taken into account, balanced in practice and achieved. The idea of legitimate interests would be measured against the ethical values, purposes, outcomes and harms of the different groups. We aspire to be a cohesive society that acts in accordance with ethical values and achieves ethically valid outcomes. Accordingly, the governance and performance of individuals, groups and interests involved should satisfy appropriate ethical values and be subject to suitable governance, transparency and culture. These requirements should be applied to our institutions – public and private – and markets. Following Polanyi and Mazzucato, markets should be embedded in social and political values and institutions, public policy in relation to markets should be ‘part of the social process which co-shapes and co-creates competitive markets’,202 and markets and business practice should deliver the human and social outcomes that we wish for. Stakeholder capitalism ought to be, by definition, a cooperative endeavour. Various models might deliver stakeholder capitalism. Two key elements are governance and sharing of rewards. One obvious model involves cooperative ownership of all stakeholders, or permanent staff. Another mode would be replacement of paying residual profits solely to investors by distribution more widely amongst stakeholders, starting with staff and suppliers. This logic highlights a model developed from the Economy of Mutuality ideas about ensuring that all stakeholders benefit from outcomes in their own ‘currency’. On the governance plane, the logic goes through employee directors to councils of all stakeholders who agree an organisation’s purposes and provide accountability through overseeing the achievement of desired and undesired outcomes. Full stakeholder involvement would involve not just staff, suppliers, managers, shareholders, financiers and customers but affected communities and local and national states. On that basis, commercial purposes could be integrated with social, environmental and economic ones. At the current time, it may be that mandating a single model would be too limiting and unrealistic, and that a pluralist universe should emerge, in which models chosen for organisations are clearly identifiable so that achievements can be compared. The key issue is: can an organisation demonstrate that it can be trusted – by all stakeholders? An organisation that can demonstrate this should succeed. Answering that issue satisfactorily involves producing evidence of trustworthiness in motivation, purpose, governance, processes, management style and systems, observance of standards, verifications, ethical behaviours and culture and outcomes.

the Gosport Independent Panel (Department of Health, 2018); Emerging Findings and Recommendations from the Independent Review of Maternity Services at the Shrewsbury and Telford Hospital NHS Trust (NHS Improvement, 2020) (Ockenden Report); First Do No Harm. The Report of the Independent Medicines and Medical Devices Safety Review (2020). 202 M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018) 275.

Conclusions  293

Cooperative Business and Capitalism We are now able to summarise the elements of a cooperative model for business organisations. The purposes, strategic objectives and outcomes of an organisation should be established, prioritised and evaluated by all of its stakeholders. On a day-to-day operational basis, directors, management and staff should operate and control the activities. They should be subject to a duty to further the organisation’s purposes, strategic objectives and to achieve the desired outcomes. If an organisation’s aim is simply to make profit for shareholders, for as long as that remains a legally authorised model, it should face considerable scepticism and a significant challenge in convincing its stakeholders that it can be trusted. On the other hand, an organisation that is structured and operated on the basis that all stakeholders cooperate in setting and balancing the basic purposes and periodic strategic objectives, and in evaluating the evidence on whether the right outcomes have or have not been achieved, assuming that all these functions and evidence are available and transparent, should face a easier task in maintaining a reputation that it is trustworthy.

11 Motivation, Reward and Remuneration of People A central proposition of this book is that it is far preferable to activate individuals’ intrinsic motivation than to try to control them through various means of externally-driven motivation and control. This is especially so where one enlists the inherent commitment to shared ethical values, purposes and outcomes, and the enthusiastic energy of those who work in organisations. As examined in chapter four, the ‘intrinsic motivation’ model ‘manages’ staff through engaging their commitment, for example through self-autonomy, self-work, trust and psychological safety and ethical culture. However, the ‘intrinsic motivation’ model is wholly opposed to the ‘motivation by financial reward’ model that has underpinned the theory and a great deal of practice in the corporate world. An obvious example – and rational policy – of applying intrinsic motivation to employees is for them to have – and/or feel that they have – a stake in the enterprise, such as through ownership or effective (stakeholder) involvement. FairShares and employee ownership models have been referred to in the previous chapter, and public or non-profit organisations could benefit from examining their governance and involvement models and practices. There is a striking difference here between the means of incentivising and remunerating those who work in public and private institutions – the difference being money and how it is used. There are differentials in the quantity of remuneration and in the type of targets and incentives that are used. The mode of ‘managing’ staff through concentrating on intrinsic motivation has received increasing and strong recognition in the business world in recent decades, and can be charted through publications and research emerging from business schools. Yet the implications of the ‘intrinsic motivation’ model have not yet been adequately recognised or adopted in business. This chapter aims to analyse the nature of these external incentives and the mechanisms by which they produced certain undesirable – and highly harmful – behaviours. We start by describing the essence of the model that has dominated recent decades (the financial motivation model) and its objectives and justifications for seeking to affect the behaviour of corporate staff through targets and remuneration. We note the serious and now systemic risks that have occurred under this model. We examine attempts to control remuneration through a range of interventions in corporate practices, corporate governance and regulatory techniques, noting inadequacies with various techniques. We then consider the arguments for adopting incentives for workers, noting that many people and jobs do not use financial incentivisation techniques to deliver motivation. We then draw conclusions and ask what a cooperative model might look like that recognises the need for fairness, solidarity and sustainability. A key issue that arises is that the mechanisms that are used in commercial businesses to incentivise and remunerate directors and staff have been identified as major causes of risk, to individual organisations and to markets and states systemically. The response to serious risk should be to identify its root causes and address them. This is the essence of the problem-solving model set out

The Financial Motivation Model  295 in chapter 12. It is true that various attempts have been made to change the way of incentivising and remunerating staff in large organisations, as we see in this chapter, but the issue is whether these actions have been adequate in going to the root of the problem and hence significantly reducing the risk. The evidence below is that this has not been done.

The Financial Motivation Model The justification for the financial motivation model (FMM) in Anglo-American corporations runs like this. The world economic system is based on capitalism. In a pure capitalist system, the sole purpose of corporations is to make money, in other words to maximise shareholder value. By doing this, businesses will generate wealth and employment that are good for society, ‘advancing social welfare’.1 A society that has more wealth (even if it is concentrated in only a small number of people) will lift people out of poverty and increase general health and standards of living. Shareholders own companies, and contribute capital to them in return for, and in the expectation of, benefiting from their profits. They have the power and right to exercise sole ultimate control over the company. Their objective is to maximise the value of their investment and their returns.2 Investors need to appoint agents (managers) to run the organisations. Managers who are hired need to be incentivised to work hard and focus exclusively on the profit maximisation goal so that the business does not underperform or even fail. It is, therefore, in the interests of shareholders to align the interests of their agents (the directors and staff of the corporations that they own) by incentivising them (known as ‘agency theory’). That means paying remuneration and bonuses based on the achievement of profit. The maximisation of profit is achieved ex ante through setting targets, especially sales, financial and profit targets, and ex post by basing advancement, basic levels of remuneration and significant elements of the total remuneration package, on achievement of profit and specifically on achievement of those targets. Such incentivisation is also necessary to guard against various risks, such as that of noncompliance with relevant laws. Shareholders may fear that non-compliance may lead to shareholder value being reduced by payment of fines and damages, and have an adverse effect on reputation, stock price and cost of doing future business. Three important risk-reduction techniques here are external audit, internal compliance functions and paying agents on the basis of achievement of performance targets. Where managers’ actions result in breaches of law that lead to diminution of shareholder value, managers should be made to repay their remuneration (claw back or ‘malus’ where bad faith arises). There is a third systemic risk. Bad behaviour can be so significant and systemic as to threaten the viability of an entire market and the financial system as a whole, such as occurred in the global financial crisis (GFC) in 2008–09. That is a matter of concern that goes far wider than the owners of individual businesses but affects investors generally, especially institutional investors who have wide portfolios and also society and the state, represented by governments and financial regulators. Systemic risk is particularly relevant for companies involved in the financial services sector. That risk was of major concern to those responsible for financial stability. This factor explains why banks were a particular focus of attempts by governments and financial regulators to control remuneration since the GFC. 1 R Kraakman et al, The Anatomy of Corporate Law (Oxford University Press, 2004); H Hansman and R Kraakman, ‘The End of History for Corporate Law’ (2000–01) 89 Georgetown Law Journal 441. 2 W Lazonick and M O’Sullivan, ‘Maximising Shareholder Value: A New Ideology for Corporate Governance’ (2000) 29 Economy and Society 1, 15–16; K Williams, ‘From Shareholder Value to Present-day Capitalism’ (2000) 29 Economy and Society 1.

296  Motivation, Reward and Remuneration of People The global Financial Stability Forum (FSF) identified compensation practices at large financial institutions as a major factor that contributed to the GFC that began in 2008.3 The FSF said: High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms. These perverse incentives amplified the excessive risktaking that severely threatened the global financial system and left firms with fewer resources to absorb losses as risks materialised. The lack of attention to risk also contributed to the large, in some cases extreme absolute level of compensation in the industry.

What went wrong? The FSF identified remuneration packages (their structure and quantum) as creating incentives that led to disaster because of ‘excessive risk-taking’.

Incentives, Problems and Attempts to Control Remuneration Remuneration is at the heart of the bargain and exchange between organisations and staff. Remuneration may positively or adversely affect the desire of a worker to work for a particular employer and their motivation, commitment and effort once employed. It is clear that incentives can play a role in behaviour.4 Central findings of behavioural research are that we perceive fairness in rewards and respond to perceived injustices, responding in dynamic and not fixed ways, influenced by a range of cognitive biases including cognitive dissonance (the ability to rationalise something as wrong by mentally reframing the evidence rather than our belief).5 It is also clear that incentives can be of different kinds, such as financial and non-financial, instant or deferred, and individual or group. Remuneration systems can combine all of these elements, often giving rise to highly complex dynamics, for example by combining base pay, scales, variable and deferred elements, pensions, healthcare, cars or gym benefits and performance elements. There is also intrinsic motivation to achieve or complete a task. But there are deeper questions that have received limited thought. What goals should be incentivised? How do we incentivise achieving goals that at first (and second) glance conflict with profit maximisation, such as sustainability (of businesses, banks, the financial system, the environment and the planet), human rights, equality, avoidance of bribery, eradication of poverty and disease and so on? Assuming incentives are used in remuneration, what good and bad effects can particular incentives have on behaviour? What incentives are needed to produce the desired outcomes and to avoid undesired outcomes? G30 accepts that:6 Whenever there is misconduct, there are almost always issues with incentive design. However, one must ask whether the incentives drove the undesirable behaviour or the incentives are an indication of the wrong mindset, which is ultimately responsible for the behaviour.

3 FSF Principles for Sound Compensation Practices (Financial Stability Forum, 2009). 4 A summary is B Lupton, A Rowe and R Whittle, Show Me the Money! The Behavioural Science of Reward (Chartered Institute of Personnel and Development, 2015). 5 L Festinger, A Theory of Cognitive Dissonance (Stanford University Press, 1957); E Aronson, ‘The Rationalizing Animal’ in B Staw (ed), Psychological Dimensions of Organizational Behavior 2nd edn (Prentice Hall, 1973); E Aronson, The Social Animal (Worth Publishers, 2007) [1972]; C Tavaris and E Aronson, Mistakes Were Made (But Not By Me) (Houghton Mifflan Harcourt, 2007). 6 Banking Conduct and Culture. A Permanent Mindset Change (Group of Thirty, 2019).

Incentives, Problems and Attempts to Control Remuneration  297 The following summarises some of the main points on particular incentives: incentivising sales, paying bonuses, delaying vesting, and clawback. Attempts to control remuneration in the past decade include: (i) Strengthening the ability of investors to exert influence against excess. Techniques deployed here have required a company to have a policy on remuneration, to report on certain aspects periodically, to enable shareholders to exert pressure, especially through the ability to approve the remuneration policy and maybe have an indicative or even binding vote to approve the level of remuneration. (ii) Requiring longer timescales for evaluation of performance and of bonuses and delaying payment of remuneration. (iii) Lengthening time periods over which performance is assessed and remunerated, or delay vesting of some benefits. (iv) Altering the basis on which performance is assessed. (v) Ex post controls such as clawback where individuals are shown to have behaved badly (malus) or where infringements come to light later, or even where longer-term performance turns out not have been as expected. (vi) Imposition of specific regulation in the financial services sector. Although this is not a complete list or history, it will be seen that attitudes, recommendations and requirements have changed in the past decade on almost every aspect. The prevailing liberal position of two decades ago, whose justification was based on the theories of incentivisation and agency noted above, has increasingly been restricted through organisations’ risk management controls and external regulatory controls, even to the extent in some cases of reaching bans of incentivisation mechanisms. But questions arise as to whether these mechanisms, individually or collectively, have been successful? Have they treated the symptoms rather than the disease? What unintended consequences have occurred? Have things changed enough?

Incentivising Sales Incentivising sales staff is an obvious way of trying to maximise sales. Historically, this stretched as far as paying sales staff only (100%) on commission. Yet the practice has now been disapproved widely. In 2015, GSK dropped individual sales targets from its remuneration scheme for all sales employees selling medicines to doctors, and switched remuneration to evaluation of technical knowledge, the quality of the service they deliver to support improved patient care and the overall performance of GSK’s business.7 The CEO said that in providing doctors with information about medicines ‘this must be done clearly, transparently and without any perception of conflict of interest’.8 This step was taken after GSK was found guilty of bribery to increase sales in China and fined $490 million in September 2014. In UK banks, attempts were made to control sales remuneration as a matter of risk regulation through internal compliance controls. Despite stating that ‘We know that the way sales staff are paid influences how and what they sell to consumers and can encourage a culture of mis-selling’, a

7 Press release, 17 December 2013, available at http://us.gsk.com/en-us/media/press-releases/2013/gsk-announceschanges-to-its-global-sales-and-marketing-practices-to-further-ensure-patient-interests-come-first/. 8 Sir Andrew Whitty, ibid.

298  Motivation, Reward and Remuneration of People review by the Financial Services Authority (FSA) in 2013 also stated ‘[w]e do not have a problem with incentive schemes’. However, it uncovered ‘a range of serious failings’ and found that ‘most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed’.9 Enforcement action followed. For example, in December 2013 the FCA fined two prominent banks for serious failings in the systems and controls governing the financial incentives that they gave to sales staff in branches in selling more than one million protection and investment products to over 692,000 customers on an advised basis.10 A review in 2014 found significant change in practices but roughly one in ten firms with sales teams had higher-risk incentive scheme features where it appeared they were not managing risk properly.11 From January 2014 the EU stipulated that bonuses of ‘material risk takers’ in banks would be restricted to 100% of their salaries. This could be increased to 200% if shareholders agreed, either by a 66% majority of a quorum representing 50% of shares, or 75% of shareholders present.12 The UK challenged this in the Court of Justice, while implementing it,13 and withdrew its challenge in November 2014.14 By 2019, the attempt at risk management was abandoned and the G30 recommended bluntly that banks should ‘remove the link between quantitative sales targets and compensation for sales staff to minimise pressure that can lead to misconduct and help staff prioritise meeting customer/client needs’.15

Bonus A bonus might be paid to someone involved in any activity within an organisation, not just selling. A change has occurred in how the bonus is assessed. We focus here on reward against output targets that are set for individuals or teams, such as periodic profit figures. We look below at a shift in assessment based on other aspects of performance. The incentive value of a bonus is not necessarily the individual sum involved, that is, straightforward greed. The size of the bonus compared to that paid to others can carry a status reward between competitive personalities. The point is illustrated in the comment that a red Ferrari is a status symbol.16 Pikulina and colleagues researched bonuses, reporting in 2014. They accepted that little was known about how different bonus schemes affected traders’ propensity to trade and which bonus schemes improved traders’ performance. They therefore compared the effects of linear versus threshold (convex) bonus schemes on traders’ behaviour, and found, first, that they traded more intensively under the latter than the former and, second, they made significantly poorer

9 Final Guidance. Risks to Customers from Financial Incentives (Financial Services Authority, 2013). See earlier Guidance Consultation. Risks to Customers from Financial Incentives (Financial Services Authority, 2012). 10 Notice to Lloyds TSB Bank plc and Bank of Scotland plc, 10 December 2013 (Financial Conduct Authority), www.fca. org.uk/static/documents/final-notices/lloyds-tsb-bank-and-bank-of-scotland.pdf. 11 Risks to Customers from Financial Incentives – An Update (Financial Conduct Authority, 2014), TR14/4. 12 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC; Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRD IV). 13 Legal Challenge Launched into New Rules on Bankers’ Pay, HM Treasury, 25 September 2013. 14 After an adverse Opinion from Advocate General Jääskinen in Case C-507/13 United Kingdom of Great Britain and Northern Ireland v European Parliament, Council of the European Union. 15 Banking Conduct and Culture. A Permanent Mindset Change (Group of Thirty, 2019), Recommendation 4. 16 J Kay, Obliquity (London, Profile Books, 2010) 17: ‘Happiness is not a red Ferrari’.

Incentives, Problems and Attempts to Control Remuneration  299 investment decisions under the threshold than under the linear bonus scheme.17 One apparent reason for the second finding was that the traders seem to collect more information about the relationships between the share price and the market returns, earnings, and earnings forecasts, apply more effort to understand those relationships, and finally perform better under the linear bonus scheme, whereas under the threshold bonus scheme they seem to focus merely on reaching and maintaining threshold returns. Thus, we show that bonuses may be detrimental for performance at least when threshold and linear compensation schemes are compared.

Thus, if you set a threshold target, people may focus on achieving it, and once they have done so may lose concentration. Focusing on one important metric (the target) may increase the risk of reduced focus on other issues, such as long-term sustainability, compliance with rules, or the ethics of what is being done. That risk may increase if the target is not a threshold but continuous (linear).

Time of Vesting It has been argued that (part of) the problem is one of timing. A firm’s business is often subject to future risk and uncertainty. Financial services products, for example, involve long time frames, and customers may have asymmetric sophistication and knowledge. The focus of intermediaries may be on short-term maximisation of rents rather than customers’ long-term interests.18 If variable remuneration is paid out without any link to future performance, employees have less incentive to take future risk into account, and firms are exposed to the risk of paying out variable remuneration which proves not to be justified by results.19 Another phenomenon was that by the time undesirable consequences or the taking of unacceptable risk come to light, individual managers responsible will have left the firm’s employment.20 Thus, the ‘problem is not that bankers earn too much money, but that they may take their money and run before the bank goes bankrupt [or] bailed out’.21 Hence, it would be rational to focus managers’ attention on the longrun and discourage them from investing in high-risk, value-destroying projects, and to defer performance pay until well after the end of their term.22 Exactly what element of remuneration is deferred may be relevant. A group of scholars recommended in 2014 that recommended compensation structure for bank executives should include an incentive element consisting only of restricted stock and restricted stock options that could not

17 E Pikulina, L Renneboog, J Ter Horst and P Tobler, ‘Bonus Schemes and Trading Activity’ (2014) 29 Journal of Corporate Finance 369. 18 S Jaffer, N Morris, E Sawbridge and D Vines, ‘How Changes to the Financial Services Industry Eroded Trust’ in N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in Financial Services (Oxford, Oxford University Press, 2014). 19 A Clark and T Edmonds, Banking Executives’ Remuneration in the UK (House of Commons Library note, 4 June 2013). 20 The average duration of cartels in the US was nine years and the individuals who instigated them had typically moved firms twice before the cartel was discovered: DA Crane, The Institutional Structure of Antitrust Enforcement (Oxford University Press, 2011). 21 AM Pacces, ‘The Future in Law and Finance’ Erasmus Law Lectures 32 (Eleven International Publishing and Erasmus Universiteit Rotterdam, 2013); citing LA Bebchuk and H Spamann, ‘Regulating Bankers’ Pay’ (2010) 98(2) Georgetown Law Journal 247–87. 22 S Bhagat and R Romano, ‘Reforming Executive Compensation: Focusing and Committing to the Long-term’ (2009) 26 Yale Journal on Regulation 359; S Bhagat and R Romano, ‘Reforming Executive Compensation: Simplicity, Transparency and Committing to the Longterm’ (2010) 7 EuR Co & FIN L Rev 273.

300  Motivation, Reward and Remuneration of People be sold or exercised for two to four years after the individual’s last day in office.23 In response to criticism that that approach would motivate managers to enhance shareholder value as a bank’s equity value approaches zero, a revised proposal was to retain equity-based incentive pay and to reform bank capital structure.24 In 2015 the UK amended its remuneration rules as follows.25 At least 60% of awards for directors and other high-earners (with total variable remuneration of £500,000 or more) firms must be deferred for a minimum of seven years (previously five years), with first vesting of deferred remuneration no earlier than the third anniversary of the award, and vesting no faster than pro rata in years three to seven. For other senior staff, at least 40% should be deferred; the deferral period would be five years (previously three), first vesting no earlier than the first anniversary of the award, and vesting no faster than pro rata. Previous rules were continued that a minimum of 50% of the deferred remuneration must be paid in the form of shares or other instruments, such as bail-in debt, the value of which will reflect the firm’s performance. In 2015, it was reported that there had been an increase in the number of companies where longer time horizons had been incorporated in remuneration packages: 51% of FTSE 100 plans in 2015 included a further holding period for at least part of the award compared to 37% in 2015 and around 20% in 2013.26 Arrangements enabling companies to recover or withhold variable pay, and to consider appropriate vesting and holding periods for deferred remuneration, were in place in 2015 in relation to both annual and long-term incentive plans in around 90% of FTSE 100 companies and 85% of FTSE 250. Companies outlined that long-term share awards may be clawed back in over 70% of FTSE 100 companies and malus may be applied in 84% of companies.27 The binding shareholder vote on directors’ remuneration is thought to have increased the number of interactions between companies and their investors.28

Clawback The idea of clawing back remuneration after directors have engaged in major misconduct (malus) has been justified on grounds of retribution, deterrence and retrieval of losses to shareholders. The view on these mechanisms around 2010, from the Walker Review, was:29 Deferral of incentive payments should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and ‘high end’ employees in a BOFI included within the scope of the FSA Remuneration Code. Incentives should be balanced so that at least one-half of variable remuneration offered in respect of a financial year is in the form of a long-term incentive scheme with vesting subject to a performance condition with half of the award vesting after not less than three years and of the remainder after five years. Short-term bonus awards should be paid over a three-year period with not more than one-third in the first year. Clawback should be used as the means to reclaim amounts in circumstances of misstatement and misconduct.

23 S Bhagat, BJ Bolton and R Romano, ‘Getting Incentives Right: Is Deferred Bank Executive Compensation Sufficient?’ (2014) 31(3) Yale Journal on Regulation 523. 24 ibid. 25 Strengthening the Alignment of Risk and Reward: New Remuneration Rules (Bank of England Prudential Regulation Authority and Financial Conduct Authority, 2014), PRA CP15/14/FCA CP14/14. 26 Your Guide – Directors’ Remuneration in FTSE 100 and 250 Companies (Deloitte, 2015). 27 ibid. 28 Directors’ Remuneration Reporting Guidance 2016 (GC100 and Investor Group, 2016). 29 Final Report of Review Team Led by Sir David Walker: A Review of Corporate Governance in UK Banks and other Financial Industry Entities, November 2009, Recommendation 33.

Incentives, Problems and Attempts to Control Remuneration  301 The approach and benchmark was initially set by using the Corporate Governance Code,30 and later through amendment from 2015 of the Remuneration Code to require the inclusion in employment contracts for all PRA-authorised firms to include clawback of vested variable remuneration.31 Calls for annual binding shareholder votes on executive pay, and mandatory shareholder committees, attended by an employee representative,32 although proposed in 2016 by Theresa May’s government,33 were lost in subsequent political events. Clawback powers may, of course, be difficult to exercise, and may only affect rare – albeit important – cases.34 Given ongoing concern, UK Government proposed in March 2021 to strengthen malus and clawback provisions within executive directors’ remuneration arrangements and to give the audit regulator investigation and enforcement powers in relation to wrongdoing by directors of Public Interest Entities relating to corporate reporting and audit.35 The Government also said that it was considering requiring directors to meet certain behavioural standards in fulfilling these duties. The strengthened malus and clawback arrangements involved the identification of minimum clawback conditions which would apply in all cases and have a minimum two-year application period. These conditions could include clawback for serious misconduct, a material misstatement of results or an error in performance calculations and failures of internal controls and risk management. Subject to consultation responses, the Government proposed to invite the FRC to implement these stronger arrangements through changes to the UK Corporate Governance Code. In any event, any mechanism that is known to be rarely used36 and might only apply some years after both the relevant conduct and its consequences have occurred can be expected to have limited effect on the initial conduct and culture – a classic attempt to rely on deterrence that has little effect in practice.

Transparency Governments’ most simplistic response to high levels of remuneration has been to increase the transparency of practices by companies so that shareholders and others could exercise informal control through adverse commentary, or shareholders exercising some measure of formal control through voting. For example, a revised Code was published in UK in December 2010 to

30 See Guidance on Board Effectiveness (Financial Reporting Council, 2018): ‘142. Schemes should also include malus and clawback provisions in certain specified circumstances. Such circumstances might include payments based on erroneous or misleading data, misconduct, misstatement of accounts, serious reputational damage and corporate failure.’ See earlier Directors’ Remuneration: Consultation Document (FRC, October 2013); see Executive Remuneration (House of Commons, January 2012). 31 Consultation Paper CP6/14. Clawback (Prudential Regulatory Authority, 2014). 32 C Philp, Restoring Responsible Ownership: Ending the Ownerless Corporation and Controlling Executive Pay (High Pay Centre, 2016). 33 Corporate Governance Reform: Green Paper (Department for Business, Energy and Industrial Strategy, 2016). 34 ‘Red in Tooth and Clawback’ The Economist 20 February 2021. In June 2021 a settlement was agreed between the CEO (who paid €11.2 million) and other senior executives at Volkswagen (the total claimed being €281 million) arising out of the emissions scandal that came to light in 2015: R Lea, ‘Former Boss of VW Pays €11m over Dieselgate’ The Times 10 June 2021. In contrast, the cumulative costs to Volkswagen were reportedly $35 billion by late 2020. In March 2022 the leader of the USA’s vaccine development programme was subject to clawback after being accused of sexual harassment and inappropriate conduct towards an employee: H Kuchler, ‘GSK Claws Back %3.9mn from Ex-R&D Chief ’ Financial Times 5 March 2022, 20. 35 Restoring Trust in Audit and Corporate Governance Consultation on the Government’s Proposals (BEIS, March 2021) ch 5. 36 A Swiss example: O Walker, ‘Credit Suisse Fires Managers over Greensill Funds Collapse’ Financial Times 22 December 2021.

302  Motivation, Reward and Remuneration of People include changes required by the EU in the Third Capital Requirements Directive (CRD3).37 From 1 October 2013, a quoted companies’ directors’ remuneration report38 had to contain:39 i. A statement by the chair of the remuneration committee. ii. The company’s policy on directors’ remuneration (the ‘remuneration policy’).40 The remuneration policy must set out how the company proposes to pay directors, including every element of remuneration that a director will be entitled to and how it supports the company’s long-term strategy and performance. The policy must also include details of the company’s proposed approach to recruitment and loss of office payments. iii. Information on how the remuneration policy was implemented in the financial year being reported on (the ‘implementation report’), including a single figure for the total pay directors received that year. This is to allow shareholders to make comparisons year-on year and between companies.

The EU Shareholders Rights Directive II introduced shareholder rights to vote on the remuneration report and requirements on the information to be provided in, and right to vote on, the remuneration report.41 The new requirements were: Directors’ remuneration policy • If a company loses a shareholder vote on a proposed remuneration policy, it must put a new remuneration policy to a shareholder vote at the next accounts meeting or other general meeting. • The remuneration policy must provide details on vesting periods, and any deferral and holding periods in respect of share-based remuneration to directors. • The remuneration policy must specify the duration of directors’ service contacts. • The remuneration policy must set out the decision-making process for its determination, review and implementation, and must explain all significant changes compared to the previous policy. • The date and results of the shareholder vote on the remuneration policy must be posted on the company’s website as soon as reasonably practicable and remain there for the life of the policy. Directors’ remuneration report A. The remuneration report must be available free of charge on the company’s website for ten years. B. The remuneration report must include the split of fixed and variable remuneration awarded to each director each year. C. The remuneration report must specify any changes to the exercise price and date for the exercise of shares or share options by directors. D. The remuneration report must compare the annual change in directors’ remuneration to the annual change in pay of the company’s employees and of the company’s performance (measured in terms of total shareholder return) over a five year rolling period. E. The report must include the remuneration of the CEO and deputy CEO even if they are not directors of the company. Directors’ remuneration payments • Remuneration or loss of office payments to directors that are not consistent with the approved directors’ remuneration policy may only be made if an amendment to the policy authorising the company to make the payment has been approved by shareholders. 37 Directive 2010/76/EU. See Consultation Paper 10/19, Revising the Remuneration Code (FSA, 2010). 38 Required by the Companies Act 2006, s 421, as amended by the Financial Services Act 2010, ss 4 and 5, and implemented in the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008/410. 39 See Directors’ Remuneration Reforms – Frequently Asked Questions (Department for Business, Innovation and Skills, October 2013). 40 Enterprise and Regulatory Reform Act 2012, s 79, amending the Companies Act 2006, ss 421 and 422. 41 Directive 2017/828 implemented in the UK by The Companies (Directors’ Remuneration Policy and Directors’ Remuneration Report) Regulations 2019, amending the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008. The regulations came into force on 10 June 2019.

Incentives, Problems and Attempts to Control Remuneration  303 Some of the reforms introduced on shareholder oversight of directors’ remuneration in UK included the following. A quoted company must give shareholders the opportunity to approve its directors’ remuneration report once a year in an ordinary resolution at its annual general meeting and give advance notice to shareholders of its intention to move such a resolution.42 The company must also notify shareholders of an intention to move an ordinary resolution approving the directors’ remuneration policy at least every three years.43 Companies are prohibited from making a payment for remuneration or loss of office unless it is consistent with the approved remuneration policy.44 Long-term incentive plans and employee share schemes for listed companies generally require shareholder approval.45 The Financial Reporting Council (FRC) amended the Corporate Governance Code in 2018, although it only stated the following general principles in relation to remuneration:46 P. Remuneration policies and practices should be designed to support strategy and promote long-term sustainable success. Executive remuneration should be aligned to company purpose and values, and be clearly linked to the successful delivery of the company’s long-term strategy. Q. A formal and transparent procedure for developing policy on executive remuneration and determining director and senior management remuneration should be established. No director should be involved in deciding their own remuneration outcome. R. Directors should exercise independent judgement and discretion when authorising remuneration outcomes, taking account of company and individual performance, and wider circumstances.

Principles on remuneration were also issued on behalf of various major institutional investors, including insurers47 and pension funds.48 The Investment Association49 argued in 2016 that shareholder engagement should focus on the strategic rationale for remuneration structures and involve both investment and governance perspectives. Attempts to enlist the activism of investors in moderating remuneration have been packaged under the concept of ‘stewardship’ of assets within ideas on corporate and environmental sustainability.50 A verdict by UK Parliamentarians in 2019 was that stewardship and ‘say on pay’ resolutions were not working as well as they should, but there was evidence that increased activity was having some impact,51 although only two pay-related resolutions were defeated in 2018. They

42 Companies Act 2006, s 439(1) and (4). 43 Companies Act 2006, s 439A(1). 44 Companies Act 2006, s 227B and 227C. 45 Listing Rules 9.4.1R. 46 The UK Corporate Governance Code (Financial Reporting Council, 2018). 47 ABI Principles of Remuneration: November 2012 available at: www.ivis.co.uk/ExecutiveRemuneration.aspx; this expressed a clear preference for simple remuneration structures (ie one annual bonus incentive and one long-term incentive), whilst not seeking to prescribe or recommend any particular type of scheme. ABI Remuneration Principles (ABI, November 2013). 48 Remuneration Principles for Building and Reinforcing Long-term Business Success (National Association of Pension Funds and Hermes Equity Ownership Services, February 2013), available at: www.napf.co.uk/PressCentre/NAPFbuzz/~/ media/Policy/Documents/0290-Hermes-EOS-NAPF-Pay-Principles.ashx; this stated that pay should be aligned to long-term success and the desired corporate culture throughout the organisation; pay schemes should be simple, understandable for both investors and executives, and ensure that rewards reflect long-term returns to shareholders; and remuneration committees should fully explain and justify how their decisions operate to deliver long-term business success. This was revised in Remuneration Principles for Building and Reinforcing Long-term Business Success (Hermes / EOS / NAPF and others, November 2013). 49 Executive Remuneration Working Group. Final Report (Investment Association, 2016). See The Investment Association Principles of Remuneration (Investment Association, 2016). 50 eg UN Global Compact, see www.unglobalcompact.org/what-is-gc/mission/principles. 51 House of Commons Business, Energy and Industrial Strategy Committee. Executive Rewards: Paying for Success Eighteenth Report of Session 2017–19, para 47.

304  Motivation, Reward and Remuneration of People concluded that ‘much more than engagement will be required to drive a more enlightened and acceptable approach on executive pay’. In evidence, The Purposeful Company argued that 75% of companies receiving a dissenting vote of over 20% in a given year took action the following year and achieved an average vote of 94% in favour of pay reports.52 Some greater activism did appear subsequently.53 Mandatory reporting of the ratio between CEO pay and the pay of their average worker and a supporting table and methodology explaining the reasons for their executive pay ratios, and reporting on the impact of share price growth on executive pay, was introduced from 2019 for UK listed companies with more than 250 employees.54 The information was only disclosable in annual reports published in 2020. By 6 January 2020, pay for the typical FTSE 100 CEO in 2020 had already surpassed the amount the average UK worker earns in that entire year.55 Initial effects of the new disclosure regime ere, however, are disappointing. Analysis of disclosures at December 2020 showed that for FTSE 100 companies the median CEO/lower quartile ratio was 109 to 1, and for FTSE 350 companies was 53 to 1.56 Metrics on investment in employees were only taken into account in performance-related pay in 34% of FTSE 100 companies, and only allocated an average weighting of 2%, whereas 100% of such companies had some financial performance metric.57 Investors took steps to curb pension contributions to directors over 15% of their base salary.58 Some investor revolts occurred at shareholder meetings.59 The FRC reported at the end of 2021 that listed companies continued to use ‘boilerplate’ statements, seldom substantiated by actions or examples, and therefore did not offer insight into company governance.60 Very few companies explained how remuneration aligned with company purpose and values. There continued to be minimal information on how diversity and inclusion policies and objectives link to company strategy.

Accountability, Targets, Regulation of Individuals and Roles and Performance To recap, the financial maximisation model is that intermediaries should be incentivised to perform well so as to maximise profits, and that is done by setting individuals’ output targets and rewarding them against the achievement of those targets. The other side of the coin is that they will be held accountable if things go wrong. Major changes have taken place in corporate governance and regulation in relation to accountability.

52 ibid. 53 L Clarence-Smith, ‘Foxtons Chairman Quits after Revolt over Executive Pay’ The Times 8 July 2021: 40% of shareholders voted against remuneration report that awarded CEO cash bonus of £389,000 and shares worth £590,000 despite Foxtons taking £6.9 million in government support. 54 Companies (Miscellaneous Reporting) Regulations 2018 (SI 2018/860), amending Companies Act 2006, Sch 8, para 19A–19G. 55 Post at the High Pay Centre, 5 January 2020, http://highpaycentre.org/blog/high-pay-day-2020-scope-for-fairer-payand-lower-inequality-remains-conside. 56 R Kay and L Hillyard, Pay Ratios and The FTSE 350. An Analysis of the First Disclosures (High Pay Centre and Standard Life Foundation, 2020). 57 CEO Pay and The Workforce. How Employee Matters Impact Performance-related Pay in the FTSE 100 (CIPL and the High Pay Centre, 2020). 58 B Martin, ‘Investors Crack Down on Executive Pension Perks’ The Times 17 November 2020. 59 A Ralph, E Gosden and D Walsh, ‘Investors Revolt over Executive Pay Awards’ The Times 7 May 2021; A Armstrong, ‘Morrisons Shareholders Stage Revolt over Bonuses’ The Times 11 June 2021. 60 Review of Corporate Governance Reporting (Financial Reporting Council, 2021).

Incentives, Problems and Attempts to Control Remuneration  305 When financial regulators investigated banks in relation to extensive failures and misconduct that emerged around the global financial crisis, they were astounded to encounter huge difficulties in identifying which directors and senior managers were responsible for what. This led to the imposition of regulatory regimes under which financial institutions were required to assign all principal responsibilities to specific, senior individuals.61 New ‘Conduct Rules’ set the minimum standards of good personal conduct against which the regulator could hold people accountable. One set of conduct rules applies to individuals and a set with enhanced requirements applies to Senior Managers. The Senior Manager and Certification Regime (SM&CR), in Australia the Banking Executives Accountability Regime (BEAR) expanded with the Financial Advisers Register (FAR) raise questions of the extent to which leaders can, or should, be either incentivised ex ante through targets or punished ex post through failures of their organisations or staff who are their responsibility. The potential consequences might range from clawback of remuneration or pension rights to dismissal, regulatory fines or bans and criminal punishments. There is some evidence that firms have been ‘holding individual managers to account’ through adjustments in variable pay, but the data does not confirm an additive effect of the SM&CR on remuneration practices.62 It is clear, however, that the essential purpose of the SM&CR regimes is to enable individuals to be held accountable for major disasters.63 Underlying this was a popular discourse in which accountability meant imposing penalties on individuals as a matter of blame, and ultimately revenge. This is partly an exercise in politics. The popular thought-process would be: Someone should be blamed: it is obviously the managers responsible, not the system or those who design or supervise the system. As discussed in chapter 14, the concept of ‘accountability’ has a number of possible meanings, ranging from having responsibility for performance of a particular role, to honestly, completely and in a timely fashion giving an account of what has happened, to being blamed for the occurrence of adverse events. For the purposes of the current analysis, the issue is whether remuneration practices tend to incentivise and deliver appropriate or inappropriate behaviour. The focus for that issue rests on assessment of performance, and hence how performance is assessed, such as against what definitions of roles, what targets and what other criteria. One of the problems of schemes being imposed on a sector through regulation is that this can create resistance because it sends the signal that individuals, organisations and the sector are not trusted. That was certainly factually accurate in relation to the financial sector after the GFC, but the signal does little to improve individuals’ internal motivation and sense of self-worth. The mechanism here is not a self-generated move toward a just culture but is a traditional authoritarian ‘command and control’ imposition. It is clear that the logic of the financial maximisation model is to focus incentives and remuneration exclusively on commercial and financial targets, excluding consideration of any other societal goals. But that has produced some spectacularly unacceptable behaviour, sometimes on 61 FSMA ss 59 (functions for which approval is required), 59ZA (senior management functions), 60 (statements of responsibilities) and 60A (vetting of relevant authorised persons), introduced by the Financial Services (Banking Reform) Act 2013. New ‘threshold conditions’ for persons: The Financial Services and Markets Act (Threshold Conditions) Order 2013/555. See Regulatory Reform: the PRA and FCA regimes for Approved Persons (FSA, October 2012), CP12/2. 62 See Evaluation of the Senior Managers and Certification Regime (Prudential Regulation Authority, December 2020), 16. 63 Changing Banking for Good: Report of the Parliamentary Commission on Banking Standards: Volume I: Summary, and Conclusions and Recommendations HC Paper No.27-I, II Parliamentary Commission on Banking Standards June 2013: ‘Top bankers dodged accountability for failings on their watch by claiming ignorance or hiding behind collective decision-making. They then faced little realistic prospect of financial penalties or more serious sanctions commensurate with the severity of the failures with which they were associated. Individual incentives have not been consistent with high collective standards, often the opposite.’

306  Motivation, Reward and Remuneration of People an industrial scale, and without being internally questioned or checked (‘it’s the norm, everyone is doing it’). Celebrated examples include mis-selling products that are unnecessary, inappropriate, over-priced, excessively risky (swaps, PPI, hedging schemes), opening mythical accounts (Wells Fargo) or lying to regulators (Volkswagen). It is useful here to differentiate between outputs, outcomes and impacts. These are terms increasingly adopted by regulatory authorities in considering how they are achieving their missions and objectives.64 It is relatively easy to measure many outputs, such as achievement of sales or profit targets. It is more difficult to measure outcomes (intended and unintended results and consequences of activities) and impacts (strategic, long-term, permanent and hopefully positive, consequences), but they are far more important than outputs. Achieving outputs does not necessarily achieve strategic goals. Sophisticated regulatory authorities now focus not on compliance or outputs (inspections or prosecutions) but on outcomes and impacts.65 The commercial equivalent is to ask to what extent the company is achieving its mission of promoting ‘the longterm sustainable success of the company, generating value for shareholders and contributing to wider society’66 and its specific purpose and associated strategic objectives, as set by its board. That is what needs to be incentivised.

Adding ‘How’ to ‘What’ In recent years, performance targets have changed from what is achieved to include how it is achieved. In 2019, the G30 encouraged this transition but banks are at different stages in making it:67 Recent years have seen cases of conflicted remuneration models that incentivize overly aggressive sales behaviors that resulted in harmful outcomes for customers. A number of individual firms have removed sales-focused incentives for frontline staff, opting instead for alternative measures such as those based on team goals and customer satisfaction outcomes. One bank shifted compensation away from paying based on profitability metrics to paying commission based on a service provided to the customer. For the commission to be paid, the client must be aware of and happy with the service (a third party is employed to collect client satisfaction key performance indicators [KPIs]). Another bank shifted to a three-pronged performance evaluation for all staff: (a) performance in job, (b) effectiveness of behavior, and (c) results on personal stretch goals. …. Another challenge of transitioning from purely results-based compensation to a balanced-scorecard compensation structure is that it requires insight into how employees perform their role. This means that managers must have enough time and management acumen to understand what actions and decisions are required in different circumstances and whether the employee did in fact exhibit these behaviors. Also, because compensation is such a blunt (and limited) instrument for influencing behavior, organizations that value the “how” as much as the “what” need to minimize reliance on compensation as a management tool. Compensation has a role to play, but more important is the role of leadership. One institution we interviewed trains managers to look for real-time coachable moments to drive employee behaviors rather than only ex-post compensation measures.

64 G Russell and C Hodges, Regulatory Delivery (Hart, 2019). 65 The goal of achieving outcomes is specified in Regulatory Futures Review (Cabinet Office 2017); Sir Michael Butler, Delivering Better Outcomes for Citizens: Practical Steps for Unlocking Public Value (HM Government, 2017); Primary Authority: Statutory Guidance (Department for Business Energy and Industrial Strategy 2017) para 1.27. 66 The UK Corporate Governance Code (Financial Reporting Council, 2018) Principle A. 67 Banking Conduct and Culture: A Permanent Mindset Change (Group of Thirty, 2019).

Underlying Concerns  307 A number of leaders we interviewed, while agreeing about the need to change compensation structures, also pointed to the limited impact on culture this change will have if done in isolation. In fact, compensation is often a by-product of its environment rather than a driver.

The Monetary Authority of Singapore (MAS) published in March 2019 a survey of changes to the remuneration structures of various banks.68 It included an expectation that performance evaluation should include both ‘what’ people do and ‘how’ they do it. MAS noted that various remuneration practices could inappropriately incentivise front office staff [such as by meeting] financial targets at the expense of ethical and prudent risk-taking considerations. … Banks should ensure that remuneration frameworks are not overly focused on financial targets. Instead, the ‘how’ assessment (i.e. ethical ways to achieve financial targets) needs to be emphasised, and non-financial factors should have a strong influence on remuneration decisions.

This illustrates major change, but it remains unclear what the right balance might be between the two factors of what and how, and whether it is possible to balance them at all. Why should any particular ratio between financial achievement and behavioural performance be correct? Recent research by Woike and Hafenbrädl found that the type of performance feedback affects whether people in groups subsequently act competitively, cooperatively or individualistically.69 The study found that receiving performance feedback that includes a relative ranking among peers prompted people to favour outcomes that made them better off relative to others and thus to engage in competitive behaviours with group members (even willing to forgo guaranteed financial gains to pursue a – financially irrelevant – better rank). Conversely, in dilemma situations, feedback based on the joint group outcome led to more cooperation than ranking feedback, aimed at outcomes that have benefits for all parties.

Underlying Concerns There are three reasons why high levels of remuneration matter. First, a high level may be unfair from a number of perspectives. Second, it may be a clear cause of unintended consequences. A significant differential between earners in an organisation has been shown to produce powerful adverse effects internally on motivation and behaviour. A strong focus on maximising profit and profit-related targets can ‘crowd out’ other balancing valid objectives. The sad truth is that profit maximisation through financial incentivisation is simply unnecessary for success. All that being so, the practice of high pay is revealed to be simply rent extraction in a power game amongst different actors.

Level of Total Remuneration Large businesses have been increasingly criticised over recent decades, and especially since the global financial crisis (GFC), over the level of remuneration paid to senior executives.70 68 Incentives Structures in the Banking Industry – Fostering Sound Behaviour and Conduct (Monetary Authority of Singapore, 2019). 69 JK Woike and S Hafenbrädl, ‘Rivals Without a Cause? Relative Performance Feedback Creates Destructive Competition Despite Aligned Incentives’ (2020) Journal of Behavioural Decision Making 1. 70 J Kay, Obliquity (Profile Books, 2010); C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); N Morris and D Vines (eds), Capital Failure; Rebuilding Trust in

308  Motivation, Reward and Remuneration of People In a famous statement in 1998, the Secretary of State for Trade and Industry, Lord Mandelson, said that he was ‘intensely relaxed about people getting filthy rich as long as they pay their taxes’.71 However, he later resiled from the statement, expressing concern about rising inequality and stagnating middle-class incomes brought about by the damaging downsides of globalisation. In 2009 the FSA said that it was concerned with the structure of remuneration, rather than its level:72 We are not concerned with the levels of remuneration, which we regard as a matter for firms’ boards and shareholders. None of the principles in our Code will prevent firms providing large remuneration packages to employees if such packages can be justified by their contribution to the success of the firm, adjusted appropriately for risk.

Research by Ariely and colleagues challenged the assumption that increases in remuneration would necessarily lead to improvements in performance.73 They found that large rewards could result in a decline in performance, and very high rewards had a detrimental effect on performance. As austerity continued during 2010, popular dissatisfaction with social inequality also intensified.74 Unsurprisingly, by 2016 reports of shareholder revolts against excessive executive remuneration were appearing regularly: in April 2017, the top managers of Credit Suisse ‘agreed’ a 40% bonus cut after planned awards totalling SFr 78 million.75 From 2017 to 2018, FTSE 200 CEO median pay fell by 13% to £3.46 million, but was 117 times that of the average (median) UK full-time worker, who earned £29,574.76 By the end of the decade, the ‘City fat cat’ characterisation was widely familiar, and ‘excessive’ remuneration was criticised as being bad for social solidarity and building a cohesive, caring society.77 In 2019, the Royal Commission on Banking in Australia certainly thought that the causes of an extensive range of misconduct by banks were money and greed: [In] almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business. Providing a service to customers was relegated to second place. Sales became all important.78

The Royal Commission did not, in fact, make a finding on actual causation in relation to the range of individual examples of misbehaviour that it found, or explain clearly how money had caused misconduct. The issue of how much is ‘excessive’, however, leads on to a deeper question of how differentials in remuneration can create resentment and adversely affect corporate culture within an organisation as well as externally.

Financial Services (Oxford University Press, 2014); F Vibert, The New Regulatory Space (Edward Elgar, 2014); J Welby, Reimagining Britain. Foundations for Hope (Bloomsbury, 2018). 71 S Malik, ‘Peter Mandelson Gets Nervous about People Getting “Filthy Rich”’ The Guardian 26 January 2012. The statement was also criticised by a successor: V Cable, ‘Responsible Capitalism’ speech to National Association of Pension Funds, November 2012. 72 Reforming Remuneration Practices in Financial Services, Consultation Paper 09/10, FSA, 18 March 2009, p 6. This was also supported in the Turner Review: A Regulatory Response to the Global Banking Crisis, 18 March 2009. 73 D Ariely, U Gneezy, G Loewenstein and N Mazar, ‘Large Stakes and Big Mistakes’ (2009) 76 Review of Economic Studies 451. 74 How the Shareholder First Business Model Contributes to Poverty, Inequality and Climate Change. A Briefing Note from High Pay Centre and the TUC (High Pay Centre and the TUC, 2019). 75 L Noonan, ‘Credit Suisse Executives Agree 40% Cut to Bonuses’ Financial Times 15 April 2017. 76 Executive Pay in the FTSE 100. Is Everyone Getting a Fair Slice of the Cake? (High Pay Centre, 2019). 77 J Welby, Reimagining Britain. Foundations for Hope (Bloomsbury, 2018); P Collier, The Future of Capitalism (Allen Lane, 2018). 78 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Final Report, Volume 1 (Government of Australia, 2019) section 1.

Underlying Concerns  309

To What Extent are Intermediaries Motivated by Financial Incentives when they Cause Harm? Although the idea that people who break the rules in financial institutions are driven primarily or exclusively by greed and money is easy to postulate,79 scientific findings from psychology of individuals’ and groups’ motivations offer many other explanations of why things go wrong.80 Maintaining an operation that is both safe and ethical raises conflict between those goals, and can expose employees to irreconcilable stresses, often under intense time pressure.81 Investigations into the motivation of those involved in some major scandals reveal that – perhaps surprisingly in many circumstances – something other than a direct motivation of individual greed was the fundamental motive and that more fundamental drivers were preoccupation with the success of their business organisation or team, especially in the context of stresses produced by the market trading system and conditions at a particular time. Some examples are these. The ‘rogue trader’ in UBS’ global synthetic equities division, Kweku Adoboli, who lost £1.4 billion in booking fictitious trades in order to hide the fact that he was exceeding his risk limits said that he ‘believed he was working to a higher imperative: to make his bosses as much money as possible and lessen the wider pressure on the bank’s traders’.82 He ‘sought community’ as ‘the go-to guy when there was a screw up’, and said that a factor was being tired so that you ‘don’t recognise warning signs when they’re all around you’. In a later interview he said that traders were pushed to make profits ‘no matter what’.83 ‘And this goes back to the structure of the industry. People are required to take risk to generate profit, because yields in the industry are consistently compressed.’ He referred to the inherently conflicted goals in investment banking between pursuing the same level of profitability through assuming more risk and the desire to limit risk-taking. Eugene Soltes interviewed numerous white-collar criminals, from Jérôme Kerviel to Bernie Madoff, delving into their motivations, and found their overwhelming feeling pride that their actions were sustaining their firms during difficult or challenging circumstances.84 ‘None of the former executives I spoke with saw himself as a fraud … the person they saw in the mirror was successful, entrepreneurial and ambitious.’ The role of money in their actions was to sustain their firms, rather than to maximise their personal remuneration. They were victims of their own self-deception. The absence of a challenging social environment was a consistent feature. These businessmen were not ‘operating within a single small community surrounded by family and friends’ where misconduct would be identified and disapproved of. Soltes suggested that what is needed is ‘uncomfortable dissonance’ to stimulate a re-evaluation of people’s initial intuitive judgments. He cited psychological research indicating that the effect of time and the process of defending a viewpoint ‘can often lead us to re-evaluate and improve our judgments’. Hence, he concluded that the need is to address ever-widening psychological distance. 79 ibid: ‘in almost every case, the conduct in issue was driven not only by the relevant entity’s pursuit of profit but also by individuals’ pursuit of gain, whether in the form of remuneration for the individual or profit for the individual’s business’. 80 A huge volume of literature is available, including accessible summaries eg D Kahneman, Thinking, Fast and Slow (Allen Lane, 2011); R Fairman and YC Yapp, Making an Impact on SME Compliance Behaviour: An Evaluation of the Effect of Interventions upon Compliance with Health and Safety Legislation in Small and Medium Sized Enterprises (Health and Safety Executive, 2005); MH Banaji and AG Greenwald, Blindspot: Hidden Biases of Good People (Bantam Books, 2016). 81 D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011) 143. 82 L Fortado, ‘Kweku Adoboli: A rogue trader’s tale’ FT Weekend Magazine, 22 October 2015. 83 K Ahmed, ‘UBS Rogue Trader: “It Could Happen Again”’ BBC 1 August 2016. 84 E Soltes, Why Do They Do It: Inside the Mind of the White-Collar Criminal (PublicAffairs, 2016).

310  Motivation, Reward and Remuneration of People There is evidence that the behaviour of senior managers affects the behaviour of lower ranked managers, such as through a coercive ‘profit-making at all costs’ approach.85 Ashton and Pressey describe this phenomenon: Senior managers may focus on quick profits, maximum growth and high levels of managerial remuneration, creating organizational strains leading to criminal outcomes such as cartels. Financial and socioeconomic benefits may also be accrued by the employee for illegal corporate behaviours including bonuses, promotions and the goodwill of colleagues. Alternatively, not participating in cartel activity could lead to lack of promotion, demotion, ostracism or even dismissal.86 The best predictor of whether a person or firm indulges in cartel behaviour may be past cartel behaviour.87

Pay Differentials The top line level of remuneration paid catches headlines, but it fuels a fundamentally powerful adverse psychological effect on workers in an organisation. It was noted above that pay differentials have risen dramatically in recent decades. In 2017, the House of Commons’ Business, Energy and Industrial Strategy (BEIS) Committee criticised the fact that two thirds of FTSE 100 CEOs were paid over 100 times the average national salary, and reported that many considered the current system to be broken.88 It concluded that ‘overall pay levels have now been ratcheted up to levels so high that it is impossible to observe a credible link between pay and performance’.89 The Investment Management Association’s 2016 policy included a requirement that pay ratios between the CEO and median employee should be disclosed.90 In 2019, the G30 said that Banks should ‘consider the potential impact of outsized incentives on their compensation mechanisms’.91 Public dissatisfaction continues. The view of the BEIS Committee in 2019 was:92 [T]here continue to be regular examples of excessive payments, which are reputationally damaging and serve to fuel a perception of institutional unfairness that, if not addressed, is liable to foment hostility and undermine social cohesion and support for the current economic model. Over the last decade chief executives’ earnings in the FTSE 100 have increased four times as much as national average earnings. FTSE 100 chief executives earn around £4 million per annum while average pay is under £30,000. These huge differentials have been baked into the pay system, in part by a heavy reliance on over-generous, incentive-based pay and partly by the weakness of remuneration committees which design ever more complicated and opaque pay packages for their peers. The acceptance of a £75 million payment by the chief executive of Persimmon, based more on a Government initiative to encourage house-ownership rather than his own performance, was only the most egregious of a number of shaming decisions.

85 SS Simpson and CS Koper, ‘The Changing of the Guard: Top Management Characteristics, Organizational Strain and Antitrust Offending’ (1997) 13 Journal of Quantitative Criminology 373–404. 86 WE Baker and RR Faulkner, ‘The Social Organization of Conspiracy: Illegal Networks in the Heavy Electrical Equipment Industry’ (1993) 58 American Sociological Review 837–60. 87 SS Simpson and CS Koper, ‘The Changing of the Guard: Top Management Characteristics, Organizational Strain and Antitrust Offending’ (1997) 13 Journal of Quantitative Criminology 373–404. 88 House of Commons’ Business, Energy and Industrial Strategy Committee, Corporate Governance. Third Report of Session 2016–17, HC 702, para 75. 89 ibid, para 99. 90 The Investment Association Principles of Remuneration (Investment Association, 2016); see also Open letter to Remuneration Committee Chairmen (Investment Association, 2016). 91 Banking Conduct and Culture. A Permanent Mindset Change (Group of Thirty, 2019) Recommendation 3. 92 House of Commons Business, Energy and Industrial Strategy Committee. Executive Rewards: Paying for Success Eighteenth Report of Session 2017–19.

Underlying Concerns  311 We conclude that the structure of executive pay has become too dominated by incentive-based elements that do not effectively drive decision making in the long-term interests of the company. Whilst welcoming evidence of a shift to extended terms for Long-Term Incentive Plans (LTIPs) we advocate a simpler structure based on fixed term salary plus deferred shares, vesting over a long period, and a muchreduced element of variable pay, which should be more aligned to the wider social responsibilities of companies. We also argue for a much stronger link between executive and employee pay, for example by the greater use of profit-sharing schemes. We recommend an employee representative on the remuneration committee to strengthen this link.

The BEIS Committee highlighted that the structure of remuneration has changed in the previous few years in response to criticism of certain practices:93 [W]hilst base salaries have stayed fairly flat, other elements of pay packages, notably Long-Term Incentive Plans (LTIPs), have gradually been increasing as a proportion of the overall figure. … the Single Total Figure (STF) … has been rising over the last decade. … target remuneration (pay awarded) has increased by only 9% since 2009, but realised pay (the Single Total Figure) for median remuneration has increased by 66% over this period … The corresponding increase in average weekly earnings is only 17%. The widening of the gap over this period is clear. This increase in realised pay for executives is primarily due to performance-related elements delivering more than originally estimated, an issue with the structure of pay.

Behavioural evidence discussed below explains why the sheer size of a remuneration package of senior management compared with the level of remuneration paid to other levels of workers in an organisation undermines trust in the leadership and in the culture of the organisation. The attitude can be summed up as: ‘they may say that this is an ethical company, but they say one thing and do another – ripping it off. So what respect do we owe them? Why should we work hard and not help ourselves to things that go past?’ Similarly, the perception of the general population that corporate bosses are ‘fat cats’ who are lining their own pockets (coupled with stories of executives helping themselves to corporate pension pots)94 does not support trust by the general public in companies. Both the quantum and the differential effects matter in terms of morale and can affect non-compliance within a company, based on rationalisation of deviancy and moral disengagement (illustrated by the feeling ‘Everyone is doing this, aren’t they?’).95 Frances O’Grady, General Secretary of the TUC, expressed a widely felt feeling of anger in 2016:96 Many workers and the public remain angry about the level of top pay and the lack of accountability. There is clear evidence that inequality in pay leads to poor decision-making. Management is incentivised to produce short-term results … there is a dwindling sense of ownership.

By 2019, commentators said that ‘the jury [was] still out’ on attempts to control pay through reforming corporate governance and increasing transparency.97 Although there had been a fall 93 ibid. 94 The classic example was Robert Maxwell, see Mirror Group Newspapers plc: Report (Department of Trade and Industry, 2001), at https://webarchive.nationalarchives.gov.uk/20060214053645/http://www.dti.gov.uk/cld/mirrorgroup/ full.pdf. A further example related to BHS, see G Ruddick and S Butler, ‘Philip Green Agrees to Pay £363m into BHS Pension Fund’ The Guardian 28 February 2017; and BHS: First Report of the Work and Pensions Committee and Fourth Report of the Business, Innovation and Skills Committee of Session 2016–17, House of Commons Work and Pensions and Business, Innovation and Skills Committees, (2016), HC 54. A developing example relates to Norton Motorcycles, see Norton Motorcycles: Notice of oral hearing (The Pensions Ombudsman, 23 January 2020). 95 D Ariely, The (Honest) Truth about Dishonesty. How We Lie to Everyone – Especially Ourselves (HarperCollins, 2012) ch 2; D Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions (HarperCollins, 2008), 203; A Bandura, ‘Moral Disengagement in The Perpetration of Inhumanities’ (1999) 3(3) Personality and Social Psychology Review (Special Issue on Evil and Violence) 193. 96 Quoted in P Montagnon, Stakeholder Engagement Values, Business Culture and Society (The Institute of Business Ethics, 2016). 97 Executive Pay in the FTSE 100. Is Everyone Getting a Fair Slice of the Cake? (CIPD and High Pay Centre, 2019).

312  Motivation, Reward and Remuneration of People in mean and median CEO pay in the previous year, there had been fluctuations every year since 2010, 43 companies had increased CEO pay in 2018, and a number of CEOs’ multi-million pound reward packages had more than doubled.98 Across 10 selected sectors in 2018, median CEO pay was £2.3 million in technology companies and highest at £14 million in oil and gas companies.99 Shareholder objections were rare: most remuneration packages in 2018 were voted through with levels of support of 90% or more, and between 2014 and 2018, shareholders approved every single FTSE 100 company pay policy put to AGMs. Although the gap between the highest paid executives and the rest of the workforce had shrunk, the median FTSE 100 CEO reward package was still 117 times bigger than that of a UK full-time worker on a median salary of £29,574. The highest ratio was 956.1 at Persimmon, whose CEO was paid £38.9 million. While women made up 6% of the FTSE 100 CEOs, they earned just 4.2% of the total pay. The long-term incentive plans that formed the largest component of executive pay were typically tied to shareholder returns, driven largely by changes to the company share price, over the preceding three years. Remuneration differentials and perceptions of disproportionality remain controversial. The staff-owned business John Lewis, which abolished an annual bonus in 1953, expressed anger at ‘special contribution’ awards for exceptional service to almost 4,000 staff in 2021.100 However, a strenuous attempt to reject payment of a £100 million bonus to a high profile CEO proved to be unsuccessful.101 The Chartered Institute of Personnel and Development CIPD recommended in 2021 that the remit of remuneration committees should be broadened so as to cover review of workforce pay, people matters and culture, rather than solely executive pay.102 Indeed, CIPD said that people and culture matters should be covered in all committees, not just at the main board. They also urged that company performance should be measured in terms of non-financial as well as financial metrics, and that the workforce should be substantively involved in the pay-setting process through a collective voice at board level on both executive and workforce pay. A major lesson of the 2010–20 decade of austerity was that societies deeply resent i­mbalances of wealth and turn inwards. A consequence of the Covid-19 crisis is that many people revalued life, employment and rewards. An extended period of economic austerity may now ensue as a consequence of the virus’ impact on trade and the need to fund the government bail-outs. The pandemic has also produced a number of structural changes in companies. Many FTSE 350 companies have spent three years resetting their remuneration policies, but are now selfimposing pre-emptive pay cuts to head off criticism from institutional investors and from staff who have been laid off.103 Many surviving companies ran down their equity, have high debt, and will need years of lower dividend payments in order to rebuild their working capital104 – bringing challenges for remuneration at all levels but especially at the top.

Disproportionality is Relatively Recent From 1940 to the mid-1970s, executive pay was modest even though business was generally thriving. That was the conclusion of a 2016 academic study into US businesses covering that period, 98 ibid. 99 ibid, Figure 5. 100 J Eley, ‘John Lewis Faces Anger over Director Bonuses’ Financial Times 24 September 2021. 101 J Hurley, ‘Frasers Group Heads Off Shareholder Revolt Over New Boss’s Bonus’ The Times 30 September 2021. 102 Role of the RemCo. How to Achieve Good Governance of Pay, People and Culture (Chartered Institute of Personnel and Development, 2021). 103 B Martin and A Ralph, ‘Top Pay Threatens to Be Latest Flash Point’ The Times 4 April 2020, 44–45. 104 I Goldin, Rescue. From Global Crisis to a Better World (Oxford University Press, 2020) 115.

Underlying Concerns  313 which also found that neither boards nor shareholders played a significant role in constraining executive pay, but that more powerful controls were pressure from trade unions and egalitarian norms.105 The authors noted the relevance of ‘corporate culture’ expressed after World War II as a fear of outrage until a relaxation of social strictures from the 1990s,106 heralding a period of unrestrained self-indulgence.107 The later twentieth century was affected by a sequence of changes in the pattern of ownership and a strengthening of the ideology of individualism affected the corporate world.108 Corporate control shifted from owners to non-owning professional managers in the early twentieth century (the managerial revolution) but the dominance of professional managers was challenged around mid-1980s.109 Shareholding shifted from a large number of small shareholders to institutional investors.110 An ideology of neo-liberalism emerged during the mid-1980s, which viewed individual freedom as both the mark and aim of human progress. This coincided with deregulation, technological change and globalisation.111 The contractarian perspective became the model, viewing an organisation not as a social institution, but as a nexus of contracts.112 A modified version emerged of utilitarianism, and normative economic theory drawing on consequentialism and welfarism, with the argument that all choices must be evaluated by their outcomes, and outcomes must enhance individual utilities or personal well-being.113 Governance arrangements were changed so as more closely to align managerial incentives with investor interests.114 In particular, it is widely agreed that business behaviour became narrowly focused on maximising shareholder value from the 1980s,115 linked with the widening of citizens’ shareholding in equities (and so a dilution of external control by individual shareholders) and a political ideology that influenced individualism,116 and individual liberty.117 105 SA Bank, BR Cheffins and H Wells, ‘Executive Pay: What Worked?’ Journal of Corporation Law, UCLA School of Law, Law-Econ Research Paper No 16-11, University of Cambridge Faculty of Law Research Paper No 38/2016. 106 P Krugman, ‘For Richer’ New York Times 20 October 2002, E62. 107 AJ Mayo and N Nohria, In Their Time: The Greatest Business Leaders of the Twentieth Century (Harvard Business School Press, 2005) 258. 108 V Nilakant and M Lips-Wiersma, ‘The Duty of Corporate Management: From the Perspective of Dharma’ in J Buckingham and V Nilakant (eds), Managing Responsibly. Alternative Approaches to Corporate Management and Governance (Gower, 2012). 109 M Useem, Investor Capitalism (Basic Books, 1996). 110 C Brown, ‘Rise of the Institutional Equity Funds: Implications for Managerialism’ (1998) 32(3) Journal of Economic Issues 803. 111 A Smith, The Roaring ‘80s’ (Viking Press, 1988); M Chen, ‘Post-crisis Trends in Asian Management’ (2002) 1 Asian Business & Management 39. 112 S Baiman, ‘Agency Research in Managerial Accounting: A Survey’ (1982) 1 Journal of Accounting Literature 154; JL Bradach and R Eccles, ‘Price, Authority, and Trust’ (1989) 15 Annual Review of Sociology 97; L Donaldson, ‘The Ethereal Hand: Organizational Economics and Management Theory’ (1990) 15(3) Academy of Management Review 369; L Donaldson, American Anti-management Theories of Organization: A Critique of Paradigm Proliferation (Cambridge University Press, 1995); KM Eisenhardt, ‘Agency Theory: An Assessment and Review’ (1989) 14(1) Academy of Management Review 57; EF Fama and MC Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 Journal of Law and Economics 327; M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305; F Lafontaine, ‘Agency Theory and Franchising: Some Empirical Results’ (1992) 23(2) RAND Journal of Economics 263; D Levinthal, ‘A Survey of Agency Models of Organizations’ (1998) 9 Journal of Economic Behaviour and Organization 153; J Pfeffer, New Directions for Organization Theory: Problems and Prospects (Oxford University Press, 1997) 113 A Sen, Development as Freedom (Alfred A Knopf, 1999) 114 M Useem, Investor Capitalism (Basic Books, 1996). 115 W Werner, ‘Management, Stock Market and Corporate Reform: Berle and Means Reconsidered’ (1977) 77(3) Columbia Law Review 388; A Kaufman, L Zacharias and M Karson, Managers vs Owners: The Struggle for Corporate Control in American Democracy (Oxford University Press, 1995); WW Bratton, ‘Berle and Means Reconsidered at the Century’s Turn’ (2001) 26 Journal of Corporation Law 737. 116 FA von Hayek, The Constitution of Liberty (Routledge & Kegan Paul, 1960). 117 J Rawls, A Theory of Justice (Harvard University Press, 1971).

314  Motivation, Reward and Remuneration of People In the City of London, bonuses tripled between 2002/03 and 2007/08, from £3.3 billion to £11.6 billion.118 In 2014, the High Pay Centre questioned whether ‘performance-related pay’ accurately reflected good performance, since it found that increases in executive pay between 2000 and 2013 were far greater than the increase in company profits or market value.119 Simon Walker, Director General of the Institute of Directors, wrote that performance-related pay must be sufficiently long-term to encourage [directors] to plan five, ten or twenty years ahead, but [I]n some corners of corporate Britain pay for top executives has become so divided from performance that it cannot be justified. Runaway pay packages, golden hellos, and inflammatory bonuses are running the reputation of business into the ground. … The respondents [to the survey] have a very different, customer-orientated view of business success, with healthy profits, a positive reputation and a motivated, committed workforce also more important indicators of success than returns to shareholders.120

In 2015, it was reported that ‘the use of financial incentives shows no sign of abating’.121 It was suggested in 2020 that 82% of FTSE 100 CEOs have performance-related pay linked to profitability, dividend payments, buybacks and share price gains.122 The Trade Union Congress also challenged the idea that maintaining dividends from UK companies is critical for maintaining pensions, for various reasons.123 First, UK pension funds had diversified away from equities and into private equity, venture capital and infrastructure. Second, the proportion of UK shares directly held by UK pension funds fell from almost one in three (32.4%) in 1990 to less than one in 25 (2.4%) by 2018, a decline of over 90%. Most UK shares are now held by overseas investors (55% in 2018, up from 12% in 1990). The proportion of UK shares owned by overseas investors rose from 12% in 1990 to 55% in 2018. Survey that 76% of workers favoured businesses being legally obliged to give as much weight to the interests of their staff and other stakeholders (eg local communities) as they give to the interests of their owners or shareholders. Of course, there would still be an argument to maintain the attractiveness of UK for foreign investment. It would thus appear that it is not inevitable that levels of remuneration should be comparatively ‘high’ or disproportionate with remuneration levels of general staff, or the general public. Whether remuneration is controllable, and how, are more complicated questions. Typical responses to high prices are to encourage competition and to introduce economic regulation. What has been done since the GFC? Has a monster been tamed?

Assessing Performance Based on Values An increasing number of organisations now look at the means of achieving results and carefully link these to their core values, expecting employees to be able to produce evidence of how

118 V Cable, ‘Responsible Capitalism’ speech to National Association of Pension Funds, November 2012. 119 Performance-Related Pay: What Does Business Think? (High Pay Centre, 2014). 120 ibid, Foreword. A survey in the report calculated that both profitability and customer satisfaction were regarded by 97% as ‘important or very important’, shareholder value scored 85% behind reputation (93%) and employee engagement (93%). 121 B Lupton, A Rowe and R Whittle, Show Me the Money! The Behavioural Science of Reward (Chartered Institute of Personnel and Development, 2015). 122 CEO Pay and the Workforce: How Employee Matters Impact Performance Related Pay in the FTSE 200 (High Pay Centre, 2020). 123 Do Dividends Pay Pensions? (TUC, Common Wealth and High Pay Centre, 2022).

Underlying Concerns  315 their behaviour is aligned with those values.124 The IBE Good Practice Guide on Performance Management concluded:125 The annual performance appraisal has a strong impact on subsequent (un)ethical behaviour, and needs careful handling.126 The way that people are assessed, compensated and rewarded has ramifications for what an organisation achieves and how it achieves it. The purpose of businesses paying staff or suppliers – or of customers paying businesses – is as a fair reward for services or goods rendered or exchanged. Focusing on the words ‘fair’ and ‘reward’ pays dividends.

The IBE advocates incorporating the assessment of ethical behaviours and competencies into performance management systems and sets out various approaches taken by companies to ensure that results are achieved in accordance with their values. Some companies have identified specific values-driven competencies and behaviours and require employees to provide evidence of having exhibited these behaviours during the relevant review period in their work. Examples of such competencies are: • • • • •

Take time to really understand the values, discuss what they mean with your team and peers Role model the values Build trust with others though real relationships Deal honestly with difficult issues Be accountable for failure, do not blame others

Having identified whether an employee has performed with integrity or not, a company has a choice of how to respond. In some, the identification of a deficit in this area may preclude the receipt of any discretionary remuneration. In others, it may result in a diminution.127 Other sanctions may be applied depending on the seriousness of the issues. Wherever possible, good practice is to understand the root cause of the employee’s failure and develop a plan to address it. Was the employee lacking the knowledge or skill to live the value? Is their attitude the problem? Until the reasons for the failure to live the values is understood, any action taken may be ineffective. Models of appraisal of ethical conduct are being developed. One such model of appraisal of ethical performance of salespersons examines performance dimensions (such as sales ability, product knowledge, customer orientation, innovativeness) are carried forward in terms of moral and legal values (including deception, falsification, padding expense account, bribery, etc).128 The pandemic led to companies suspending payment of dividends and buybacks on ordinary shares in 2020 since the funds were needed to pay staff and suppliers.129 Will this lead to an ongoing readjustment? In 2022, the Institute of Directors said that pay and rewards structures should be

124 R Steinholtz with N Dando, IBE Good Practice Guide to Performance Management for an Ethical Culture (Institute of Business Ethics, 2015) 125 R Steinholtz with N Dando, Performance Management for an Ethical Culture, Good Practice Guide (Institute of Business Ethics, 2014). 126 G Jacobs, FD Belshak and DN Den Hartog, ‘(Un)Ethical Behavior and Performance Appraisal: The Role of Affect, Support, and Organizational Justice’ (2014) 121 Journal of Business Ethics 63. 127 Jes Staley, the CEO of Barclays, received a cut to his £1.3 million bonus in 2017 because he broke the rules in trying to identify a whistle-blower. 128 TT Selvarajan and R Sardessai, ‘Appraisal of Ethical Performance: A Theoretical Model’ (2010) 26(3) Journal of Applied Business Research 1. 129 See Letter from S Woods, CEO of the Prudential Regulatory Authority, to CEOs of major banks, 31 March 2020, at www. bankofengland.co.uk/prudential-regulation/letter/2020/letter-from-sam-woods-to-uk-deposit-takers-on-dividendpayments-share-buybacks-and-cash-bonuses.

316  Motivation, Reward and Remuneration of People designed to align the interests of stakeholders and management, and should avoid short-term perspectives.130 Mark Carney is clear that compensation levels need to be aligned with values.131

Reconsidering the Arguments for Incentivising Why do we need to incentivise people to do a job? If so, what sorts of incentives are needed and appropriate? What is the purpose of businesses and how can and should it be achieved? In this section we start by examining some of the problems with the arguments for maintaining a status quo of levels of remuneration. We then look at the underlying issue of the Profit Model, and the scientific evidence on what motivates people in their endeavours, and what the research evidence is on why people committed major breaches of the rules.

Assessing Arguments for High Remuneration The Capture and Control Arguments Paying large levels of remuneration opens the risk of capture by the intermediaries, who remove excessive rents, through industry-wide culture that claims that the best talent will not work for the organisation unless the remuneration package is ‘competitive’, that is, large. Investors may face difficulties in controlling the decisions and activities of corporate directors and managers, let alone all staff. First, the larger an organisation is the more complex and untransparent it will become. There is significant asymmetry of information, and in the ability to influence internal decisions. Second, the smaller the shareholding or shareholder, the greater the imbalance of power with the agents. A focus on financial incentivisation may override, or create significant conflict with, other motivations why people come to work or exert themselves.132 The evidence suggests that systemic capture has occurred by the herd of managerial intermediaries, resulting in significant rent-extraction. The classic tools of external regulation and strengthening a market in remuneration in which employees or firms bid for lower levels of remuneration both seem unrealistic. There seems to be mounting evidence that high profits are due significantly to economic and market forces rather than to the efforts of individual managers. Firms that are well run will succeed financially in favourable conditions; those that are not well run will under-perform or fail. Have incentivised targets and remuneration much to do with affecting outcomes?

The Competitive Attraction Argument It has been argued that remuneration in line with market norms is needed to attract or retain the best leaders. However, a major study found that ‘Only 1% of CEOs are poached from rival firms; promotion from within is far more common. There is little evidence of a cut-throat international

130 ESG Priorities for UK Companies (Institute of Directors, 2022) 7. 131 M Carney, Value(s) (William Collins, 2021). 132 S Bowles, ‘Policies Designed for Self-Interested Citizens May Undermine “The Moral Sentiments”: Evidence from Economic Experiments’ (2008) 320(5883) Science 1605.

Reconsidering the Arguments for Incentivising  317 transfer market in top jobs driving up pay.’133 There are many sectors in which high pay does not apply, in which high performing staff and leaders can be found. The argument for high pay in a market hides the reality that market forces produce inequity and harm.

The Internal Morale and External Credibility Arguments Paying large remuneration to senior staff may lead to a number of unattractive and risky character traits, such as lack of humility and willingness to listen and think and objectivity. Viewing an organisation as a nexus of contracts fails to see how it operates as a social institution.134 The demotivating effect of a large pay differential on junior staff has been noted above. A differential in remuneration can cause resentment in those paid less, whether junior or those who consider themselves equal; can chill morale and motivation to behave positively; and can increase ability to rationalise behaving badly. Exclusive focus on shareholder wealth creates organisations typically characterised by a culture of compliance and control.135 Employees, particularly those with high aspirations, are likely to find the culture constraining, and the culture itself tends to stifle innovative thinking from the lower ranks.136

The Short-term Argument A short-term focus means that share prices can go up but also down. Risks will be taken in the hope of gains, despite extensive evidence that humans tend to underestimate the incidence of many risks.137 Rewards based on quarter or monthly results will incentivise a permanent focus on immediate success, overwhelmingly based on financial metrics. Staff may move or be moved on. Weak share price results can cost CEOs their jobs.138 In firms whose shares are held in significant proportion by transient institutional investors, managers tend to focus on short-term performance at the expense of long-term values.139 Further, companies that prioritise short-term results tend to attract higher percentages of transient shareholder ownership than do those that pursue

133 SA Bank, BR Cheffins and H Wells, ‘Executive Pay: What Worked?’ Journal of Corporation Law, UCLA School of Law, Law-Econ Research Paper No 16-11, University of Cambridge Faculty of Law Research Paper No 38/2016. 134 S Baiman, ‘Agency Research in Managerial Accounting: A Survey’ (1982) 1 Journal of Accounting Literature 154; JL Bradach and R Eccles, ‘Price, Authority, and Trust’ (1989) 15 Annual Review of Sociology 97; L Donaldson, ‘The Ethereal Hand: Organizational Economics and Management Theory’ (1990) 15(3) Academy of Management Review 369; L Donaldson, American Anti-management Theories of Organization: A Critique of Paradigm Proliferation (Cambridge, Cambridge University Press, 1995); KM Eisenhardt, ‘Agency Theory: An Assessment and Review’ (1989) 14(1) Academy of Management Review 57; EF Fama and MC Jensen, ‘Agency Problems and Residual Claims’ (1983) 26 Journal of Law and Economics 327; M Jensen and W Meckling, ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ (1976) 3 Journal of Financial Economics 305; F Lafontaine, ‘Agency Theory and Franchising: Some Empirical Results’ (1992) 23(2) RAND Journal of Economics 263; D Levinthal, ‘A Survey of Agency Models of Organizations’ (1998) 9 Journal of Economic Behaviour and Organization 153; J Pfeffer, New Directions for Organization Theory: Problems and Prospects (Oxford University Press, 1997) 135 J Buckingham and V Nilakant, ‘Introduction: Globalizing Corporate Social Responsibility – Challenging Western neo-Liberal Management Theory’ in J Buckingham and V Nilakant (eds), Managing Responsibly. Alternative Approaches to Corporate Management and Governance (Gower, 2012). 136 CC Manz and HP Simms, Business Without Bosses (John Wiley, 1993). 137 See See A Tversky and D Kahneman, ‘Availability: A Heuristic for Judging Frequency and Probability’ (1973) 5 Cog Psych 207, 221; EU Weber, ‘Experience-Based and Description-Based Perceptions of Long-Term Risk: Why Global Warming Does Not Scare Us (Yet)’ (2006) 77 Climatic Change 103, 107–08; See GF Loewenstein, et al, ‘Risk as Feelings’ (2001) 127 Psych Bull 267, 280. 138 SN Kaplan and BA Minton, ‘How Has CEO Turnover Changed?’ (2012) 12(1) International Review of Finance 57. 139 BJ Bushee, ‘Do Institutional Investors Prefer Near-term Earnings over Long-run Value?’ (2001) 18(2) Contemporary Accounting Research 207.

318  Motivation, Reward and Remuneration of People longer-term strategies.140 Colin Mayer noted in the period before the GFC that banks that tied executive remuneration closely to their corporate earnings performed worse and took greater risks during the financial crisis than other banks.141 McKinsey’s 2017 study of 600 firms showed that those focused on the long term-clearly performed better than those chasing short-term profit, with average economic profit 81% better.142 If the goal is to maintain and grow profit levels, it applies constantly. Staff have an incentive to focus perpetually on making short-term gains at the expense of long-term sustainability. Where staff can move firms, or be dismissed easily, they may have little interest in sustainability of the business or the risk of causing harm in the longer-term.143 The reporting of corporate results on a periodic basis, such as quarterly, and the reporting of intra-team results daily,144 exacerbate shortterm focus. Indeed, Armour, Gordon and Min found that that stock-based pay creates systematic incentives to short-change compliance.145 They pointed to the disparity between managers’ time-horizon of the date they expect to liquidate stock and the firm’s long-term investment on compliance, which tended to produce myopia in both managers and markets. They proposed more assertive directors’ liability for compliance failures, limited in quantum to a proportionate clawback of stock-based pay. The European Commission noted in 2010146 that aligning directors’ interests with those of the wide range of shareholders ‘has amplified risk-taking and, in many cases, contributed to excessive remuneration for directors, based on the short-term share value of the company/financial institution as the only performance criterion’. However, an interesting theory proposes that where shareholders have holdings in competing firms, competition is weaker (even without collusion) and the sensitivity of top managers’ remuneration is weaker.147 This raises an issue about whether success through staff motivation and focus on the broadest goals of stakeholders may bring success.

Human Motivation and Self-Fulfilled Reward At a general level, the promise of reward translates into neurological changes in the brain.148 A reward of money seems to carry an ‘emotional charge’ over and above its economic value.149 140 F Brochet, M Loumioti and G Serafin, Short-Termism, Investor Clientele, and Firm Risk HBS Working Paper Number: 12-072 (HBS, February 2012). 141 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013); citing R Fahlenbrach and R Stulz, ‘Bank CEO Incentives and the Credit Crisis’ (2010) 99 Journal of Financial Economics 11; I-H Cheng, H Hong and J Scheinkman, ‘Yesterday’s Heroes: Compensation and Creative Risk-Taking’ (2010) ECGI – Finance Working Paper No 285/2010. 142 D Barton, J Manyika, T Koller, R Palter, J Godsall and J Zoffer, Measuring the Economic Impact of Short-Termism (McKinsey & Company, 2017). 143 As noted above, the average duration of cartels in the US was nine years and the individuals who instigated them had typically moved firms twice before the cartel was discovered: DA Crane, The Institutional Structure of Antitrust Enforcement (Oxford University Press, 2011). 144 J Luyendijk, Swimming with Sharks. Inside the World of the Bankers (Guardian Books, 2015). 145 J Armour, JN Gordon and G Min, ‘Taking Compliance Seriously’ (2020) 37 Yale Journal on Regulation 1. 146 Green Paper. Corporate Governance in Financial Institutions and Remuneration Policies COM(2010) 284, 2.6.2010, at http://ec.europa.eu/internal_market/company/docs/modern/com2010_284_en.pdf. 147 See eg M Antón, F Ederer, M Giné and M Schmalz, ‘Common Ownership, Competition, and Top Management Incentives’ at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2802332. 148 M Pessiglione, L Sschmidt, B Draganski, R Lakish, H Lau, R Dolan and C Frith, ‘How the Brain Translates Money into Force: A Neuroimaging Study of Subliminal Motivation’ (2007) 316 Science 904; E Bijleveld, R Custers and H AAarts, ‘Adaptive Reward Pursuit: How Effort Requirements Affect Unconscious Reward Responses and Conscious Reward Decisions’ (2012) 141(4) Journal of Experimental Psychology 728. 149 S Lea and P Webley, ‘Money As a Tool, Money As a Drug: The Biological Psychology of a Strong Incentive’ (2006) 29 Behavioural and Brain Sciences 161.

Human Motivation and Self-Fulfilled Reward  319 However, a strong finding of psychological research is that intrinsic motivation (pursuing a task for its own enjoyment or reward) is strong in humans. Bruno Frey concluded: ‘Intrinsic motivation is of great importance for all economic activities. It is inconceivable that people are motivated solely or even mainly by external incentives.’150 Psychological research suggests that incentivisation is entirely unnecessary beyond payment of a predictable and fair wage. Magda Osman summarised the evidence thus:151 The common position is that self-set goals are the most likely to be achieved, because people have intrinsic (internally valued) motivations for achieving them, rather than extrinsic (external values) motivations. There is good evidence that there is a general preference for intrinsically motivating activities, and that rewards such as money and other tokens work less well; we do things because we enjoy them and they are rewarding in and of themselves. Simply, this means we prefer the journey over the destination.

Meta-reviews of research on incentivisation and reward can find that financial incentives increase performance.152 However, closer inspection indicates that the effects are differentiated depending on amount, type or reward, type of task and context.153 Teresa Amabile summarised this: ‘Intrinsic motivation is conducive to creativity; controlling extrinsic motivation is detrimental to creativity.’154 In other words, extrinsic rewards can provide ‘a small motivational boost’155 for algorithmic, right-brain tasks, such as repetitive working on a production line, where there is little or no intrinsic motivation.156 But extrinsic rewards cause confusion and an inability to see a complete picture if applied where the left brain is trying to work creatively in flexible problem-solving, being inventive or conceptual.157 Another study found that the promise of reward may provide motivation where people have little intrinsic motivation, such as in repetitive tasks, but that in creative tasks a financial incentive (or target) risks ‘crowding out’ other influences, not least intrinsic motivation.158 Other research finds that rewards are addictive once expected,159 and decrease the breadth and depth of thinking.160 In a sequence of studies, Dan Ariely and colleagues found that large rewards could result in a decline in performance, and very high rewards had a detrimental effect on performance.161 They explained the recognised phenomenon in which increased motivation and effort can result in a decrease in performance as ‘choking under pressure’. They repeated the earlier finding that tasks that involve only physical effort are likely to benefit from increased incentives, while for tasks that 150 BS Frey, Not Just for the Money: Theory of Personal Motivation (Edward Elgar, 1997) 118–19, ix. See also BS Frey and A Stutzer, Happiness and Economics: How the Economy and Institutions Affect Well-being (Princeton University Press, 2002). 151 M Osman, Future-Minded. The Psychology of Agency & Control (Palgrave Macmillan, 2014) 4 and 7. 152 Y Garbers and U Konradt, ‘The Effects of Financial Incentives on Performance: A Quantitative Review of Individual and Team-based Financial Incentives’ (2014) 87 Journal of Occupational and Organizational Psychology 102; B Gerhart and M Fang, ‘Pay for (Individual) Performance: Issues, Claims, Evidence and the Role of Sorting Effects’ (2014) 24 Human Resource Management Review 41. 153 B Lupton, A Rowe and R Whittle, Show Me the Money! The Behavioural Science of Reward (Chartered Institute of Personnel and Development, 2015). 154 TM Amabile, Creativity in Context (Westview Press, 1996) 119. 155 DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009) ch 2A. 156 E Deci, R Ryan and R Koestner, ‘Extrinsic Rewards and Intrinsic Motivation in Education: Reconsidered Once Again’ (2001) 71(1) Review of Educational Research 14; D Ariely, ‘What’s the Value of a Big Bonus?’ New York Times 20 November 2008. 157 TM Amabile, Creativity in Context (Westview Press, 1996) 119; JC Kaufman and RJ Sternberg (eds), The International Handbook of Creativity (Cambridge University Press, 2006) 18. 158 A Weibl, K Rost and M Osterloh, ‘Pay for Performance in the Public Sector – Benefits and (Hidden) Costs’ (2010) 20(2) Journal of Public Administration Research and Theory 387. 159 A Suvorov, ‘Addiction to Rewards’, presentation at the Econometric Society, 25 October 2003. 160 DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009) ch 2. 161 D Ariely, U Gneezy, G Loewenstein and N Mazar, ‘Large Stakes and Big Mistakes’ (2009) 76 Review of Economic Studies 451. See also ‘LSE: When Performance-Related Pay Backfires’ Financial Times 25 June 2009.

320  Motivation, Reward and Remuneration of People include a cognitive component, such as adding numbers, there seems to be a level of incentive beyond which further increases can have detrimental effects on performance. Similarly, Daniel Pink found that people need a level of ‘baseline rewards’ that are adequate and equitable, otherwise they will focus on unfairness and anxiety.162 His conclusion was: ‘Goals may cause systematic problems for organizations due to narrowed focus, unethical behaviour, increased risk taking, decreased cooperation, and decreased intrinsic motivation. Use care when applying goals in your organization.’163 His view was that financial rewards over a certain basic level for skilled work raises risk and reduces performance. His list of ‘seven deadly flaws’ in relation to adopting approaches based on ‘carrots and sticks’ was that they can extinguish intrinsic motivation; diminish performance; crush creativity; crowd out good behaviour; encourage cheating, shortcuts and unethical behaviour; become addictive; and foster short-term thinking.164 Behavioural research finds that humans have a strong internal sense of fairness.165 In evaluating rewards, we therefore respond to perceived injustices, responding in dynamic and not fixed ways, influenced by a range of cognitive biases including cognitive dissonance (the ability to rationalise something as wrong by mentally reframing the evidence rather than our belief).166 Further, individuals have a subjective view of their own worth (overconfidence bias),167 which varies over time and can be affected by numerous factors, such as mood, how they compare their own skills and reward to their peers and the wider economic environment. People have a tendency to overvalue their own skills in relation to others (endowment bias). Perceived injustice and loss in relation to comparative reward can trigger resentment and significant behaviour, including general non-compliance. Jonathan Haidt considers that humans are naturally influenced by both self-interest and the interest to be obtained by supporting community.168 An example of this was panic buying of toilet paper and food as fear of Covid-19 spread in 2020, followed by calls for moderation since there was enough for all if people exercised self-restraint. Experiments found that169 [P]eople’s moral judgment of an allocation rule depends on their role in the game. People not only prefer the rule that most benefits them but also judge it to be more fair and moral. Second, we find that participants’ views about equality and equity change in a matter of minutes as they learn where their interests lie. Finally, we find limits to self-interest: when the justification for equity is removed, participants no longer show strategic advocacy of the unequal division.

This helps explain why highly paid individuals will continue to justify their level of remuneration, and why perceptions of unfairness in pay differentials is an important demotivator. Kay observed that the most profitable businesses are not the most profit-oriented and argues that happiness is not achieved through the pursuit of happiness (‘Happiness is not a red Ferrari’).170 162 DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009) 35. 163 ibid, 51. 164 ibid, ch 2. 165 J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 166 L Festinger, A Theory of Cognitive Dissonance (Stanford University Press, 1957); E Aronson, ‘The Rationalizing Animal’ in B Staw (ed), Psychological Dimensions of Organizational Behavior 2nd edn (Prentice Hall, 1973); E Aronson, The Social Animal (Worth Publishers, 2007) [1972]; C Tavaris and E Aronson, Mistakes Were Made (But Not By Me) (Houghton Mifflan Harcourt, 2007). 167 I Larkin, P Lamar and F Gino, ‘The Psychological Costs of Pay-for-Performance: Implications for the Strategic Compensation of Employees’ (2012) 33 Strategic Management Journal 1194. 168 J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). 169 P DeScioli, M Massenkoff, A Shaw, M Bang Petersen, and R Kurzban, ‘Equity or Equality? Moral Judgments Follow the Money’ (2014) 281(1797) Proc Biol Sciv 4240999. 170 J Kay, Obliquity (London, Profile Books, 2010). See ‘Unilever: In Search of the Good Business’ The Economist 9 August 2014, 69.

Self-Determination Theory on Rewards, Feedback and Sanctions  321 Similarly, Mayer points out that shareholder value is an outcome, not an objective.171 An analysis of 57 US and 15 non-US companies found that those that operate as ‘firms of endearment’ by adopting a comprehensive approach to delivering the needs of all their stakeholders had financial results far better than the S&P rate over 15 years.172 McKinsey’s 2017 study of 600 firms showed that those who focused on the long-term clearly performed better than those chasing short-term profit, with average economic profit 81% better.173 Sisodia and colleagues’ concept of ‘firms of endearment’ included operating on the basis of modest executive salaries, above average remuneration and benefits for employees, generally flat structures with few levels of management and fair prices for suppliers and customers.

Self-Determination Theory on Rewards, Feedback and Sanctions As discussed at chapter four, Deci and Ryan’s Self-Determination Theory (SDT), based on the extent to which three psychological needs – competence, autonomy and relatedness – are enhanced or thwarted, has produced clear conclusions on the positive and negative effects of targets, rewards, feedback and sanctions. Some external controls, such as pay, targets, feedback and even praise, despite being intended to incentivise, can produce negative effects on motivation and performance. A great deal depends on context and manner, and whether people experience a sense of volition and choice.174 A distinction depends on the nature of a task. Although internal motivation has been found to be a strong predictor of performance of heuristic tasks in which quality of performance is critical, extrinsic rewards tended to be a better predictor of performance on algorithmic tasks in which it is quantity rather than quality that is the focal outcome.175 A meta-study in public sector employees found that pay-for-performance compensation systems led to improved performance on simple tasks but impaired performance on more complex tasks.176 In general, the evidence shows that tangible rewards undermine intrinsic motivation, consistent with the theory that they undermine autonomy,177 although noncontingent,178 unexpected179 or non-salient180 tangible rewards can be supportive of internal motivation. 171 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013) 167. 172 R Sisodia, J Sheth and D Wolfe, Firms of Endearment. How World-Class Companies Profit from Passion and Purpose 2nd edn (Pearson Education, 2014). 173 D Barton, J Manyika, T Koller, R Palter, J Godsall and J Zoffer, Measuring the Economic Impact of Short-Termism (McKinsey & Company, 2017). 174 See meta-analysis of 41 studies: EA Patall, H Cooper and JC Robinson, ‘The Effects of Choice on Intrinsic Motivation and Related Outcomes: A Meta-analysis of Research Findings’ (2008) 134(2) Psychological Bulletin 270–300. 175 CP Cerasoli, JM Nicklin and MT Ford, ‘Intrinsic Motivation and Extrinsic Incentives Jointly Predict Performance: A 40-year Meta-analysis’ (2014) 149(4) Psychological Bulletin 980–1008. 176 A Weible, K Rost and M Osterloh, ‘Pay for Performance in the Public Sector – Benefits and (Hidden) Costs’ (2010) 20(2) Journal of Public Administration Research and Theory 387–412. 177 EL Deci, R Koestner and RM Ryan, ‘A Meta-analytic Review of Experiments Examining the Effects of Extrinsic Rewards on Intrinsic Motivation’ (1999) 125(6) Psychological Bulletin 627–68; RM Ryan, V Mims and R Koestner, ‘Relation of Reward Contingency and Interpersonal Context to Intrinsic Motivation: A Review and Test Using Cognitive Evaluation Theory’ (1983) 45(4) Journal of Personality and Social Psychology 736–50. 178 EL Deci, ‘The effects of Contingent and Non-contingent Rewards and Controls on Intrinsic Motivation’ (1972) 8(2) Organizational Behavior and Human Performance 217–29. 179 MR Lepper, D Greene and RE Nisbett, ‘Undermining Children’s Intrinsic Interest with Extrinsic Reward: A Test of the “Overjustification” Hypothesis’ (1973) 28(1) Journal of Personality and Social Psychology 129–37. 180 M Ross, ‘Salience of Reward and Intrinsic Motivation’ (1975) 32(2) Journal of Personality and Social Psychology 245–54.

322  Motivation, Reward and Remuneration of People Rewarding outcomes can be highly effective, as this often makes people achieve the outcome by the easiest possible means, but this can prevent building competences or suspend ethical evaluation, especially through ‘crowding out’ of relevant reflections.181 Thus, if behaviour is to be effective, rewards must be linked to the behaviour rather than to the outcome.182 Various forms of external attempts to influence behaviour through motivation or incentivisation – such as threats of punishment,183 evaluations, surveillance, deadlines and imposed goals and imposing competition – can be salient and powerful stimuli. However, they can leave people feeling controlled rather than intrinsically motivated.184 The imposition of competition can lower intrinsic motivation and hence performance,185 but only where there is pressure to win or a controlling context.186 Competition can also be highly informational if people are afforded optimal challenges and valuable feedback about performance as they exert effort. Deci and Ryan consider that providing a basic level of pay is necessary to satisfy essential needs for existence. However, contrary to economic theory, offering more pay does not inevitably produce more effort, performance, increased sales or organisational profit. Indeed, it may undermine these outcomes. Various studies have found that performance-contingent bonuses did not improve performance.187 Pay needs to be equitable188 or perceived to be high in distributive and procedural justice.189 The phenomenon of performance-based pay undermining intrinsic motivation, also referred to as a ‘crowding out effect’,190 has been demonstrated in laboratory studies and workplace studies, ranging from gas stations to financial organisations.191 In a study at an industrial laundry plant that had some employees whose attendance was unreliable,192 introduction of an attendance award had a direct, positive effect on the attendance of employees who had previously had punctuality problems. Yet it was then strategically gamed by workers. The positive effects were only temporary, explained as resulting from a lack of internalisation of motivation.193 181 ibid, 143. ST Gurland and WS Grolnick, ‘Children’s Expectations and Perceptions of Adults: Effects of Rapport’ (2003) 74(4) Child Development 1212–24; G Kenney-Benson and E Pomerantz, ‘The Role of Mothers’ Use of Control in Children’s Perfectionism: Implications for the Development of Children’s Depressive Symptoms’ (2005) 73(1) Journal of Personality 23–46. 182 RM Ryan and AC Moller, ‘Competence As a Necessary But Not Sufficient Condition for High Quality Motivation: A Self-determination Theory Perspective’ in A Elliot, C Dweck and D Yeager (eds), Handbook of Competence and Motivation 2nd edn (Guilford Press, 2016). 183 EL Deci and WF Cascio, Changes in Intrinsic Motivation As a Function of Negative Feedback and Threats. Paper presented at the meeting of the Eastern Psychological Association, Boston, MA (1972). 184 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 150. 185 EL Deci, G Betley, J Kahle, L Abrams and J Porac, ‘When Trying to Win: Competition and Intrinsic Motivation’ (1981) 7(1) Personality and Social Psychology Bulletin 79–83. In this study, the group that tried to win (and did) showed lower subsequent intrinsic motivation than the group that simply tried to do their best. 186 EL Deci and RM Ryan, Intrinsic Motivation and self-determination in human behaviour (Plenum Press, 1985); M Standage and RM Ryan, ‘Self-determination Theory and Exercise Motivation: Facilitating Self-regulatory Process to Support and Maintain Health and Well-being’ in GC Roberts and DC Treasure (eds), Advances in Motivation in Sport and Exercise (Human Kinetics, 2012). 187 B Kuvaas, ‘Work Performance, Affective Commitment, and Work Motivation’ (2006) 27(3) Journal of Organizational Behavior 365–85. 188 JS Adams, ‘Toward an Understanding of Inequality’ (1963) 67(5) Journal of Abnormal and Social Psychology 422–36. 189 JA Colquitt and J Greenberg, ‘Organizational Justice: A Fair Assessment of the State of the Literature’ in J Greenberg (ed), Organizational Behaviour: The State of the Science (Erlbaum, 2003). 190 D Ariely, U Gneezy, G Loewenstein and N Mazar, ‘Large Stakes and Big Mistakes’ (2009) 76(2) Review of Economic Studies 451–69. 191 B Kuvaas, A Dysvik and R Buch, The Relative Impact of Extrinsic and Intrinsic Motivation on Employee Outcomes. Paper presented at the annual meeting of the Academy of Management, Philadelphia, PA (2014). 192 T Gubler, I Larkin and L Pierce, ‘Motivational Spillovers from Awards: Crowding Out in a Multi-tasking Environment’ (2016) 1(3) Social Psychology of Education 211–33. 193 RM Ryan and EL Deci, Self-Determination Theory. Basic Psychological Needs in Motivation, Development, and Wellness (Guilford Press, 2017) 545.

Simplification in Remuneration  323

Simplification in Remuneration Transparency International has urged companies to avoid paying staff for performance based purely on output measures, and instead encourage the pursuit of intrinsic reward.194 They based their recommendation on academic research that found that, with the exception of repetitive and routine work, it is better not to pay for performance, and that:195 • • • • •

Contingent pay only works for routine tasks. Extrinsic motivation crowds out intrinsic motivation. Contingent pay leads to cooking the books. All measurement systems are flawed. Fixating on performance can weaken it.

Transparency International conclude: The evidence suggests that it is better to pay people fixed amounts instead of variable pay. Once the rate for a job has been agreed, staff should be left to pursue the intrinsic rewards which accrue from doing a job well, working with others, pleasing customers, etc. It may not be realistic for many companies to abolish variable pay altogether, but it is worth bearing in mind that the risks may outweigh the rewards. Companies should take care that they – and their employees – are not too heavily reliant on financial incentives that fixed pay is sufficient and that consideration is given to intrinsic rewards.

Corporations that are certified as B Corp members have accepted the need to balance purpose and profit, and are legally required to consider the impact of their decisions on their workers, customers, suppliers, community and the environment.196 There is significant evidence that flat management structures (with few hierarchical layers of management) are notably successful.197 The Taylor Review made a strong case for ‘fair and decent’ work,198 and was supported by the government.199 Its report included the following story of change in attitude towards work and remuneration: Brewing company Adnams used zero-hour contracts to accommodate the seasonal nature of the business. However, through involvement in the Beyond Pay inquiry, they recognised how this contributed to employees experiencing in-work poverty. They moved all their existing staff onto contracts that guaranteed a minimum number of hours a week. To tackle low pay, they reduced and redistributed bonuses paid to their senior team.

A highly significant empirical observation is that many workers, such as public servants, teachers, medical and care workers, academics, charity workers, trade association officials, drivers,

194 Incentivising Ethics, Managing Incentives to Encourage Good and Deter Bad Behaviour (Transparency International, 2016). 195 D Cable and V Freek, ‘Stop Paying Executives for Performance’ (2016) Harvard Business Review 23. See also a 2011 blog by Knowledge at the Wharton Business School: http://knowledge.wharton.upenn.edu/article/ the-problem-with-financial-incentives-and-what-to-do-about-it. 196 See www.bcorporation.net/. At April 2020, there were 3,274 member corporations. For the origins see J Elkington and J Zeitz, The Breakthrough Challenge. 10 Ways to Connect Today’s Profits with Tomorrow’s Bottom Line (Jossey-Bass, 2014). 197 T Peters and RH Waterman Jr, In Search of Excellence: Lessons from America’s Best-Run Companies (Harper & Row, 1982); M Parker, Organizational Culture and Identity (SAGE Publications, 2000). 198 Good Work. The Taylor Review of Modern Working Practices (HM Government, 2017). 199 Good Work. A Response to the Taylor Review of Modern Working Practices (HM Government, 2018); Good Work Plan. Consultation on Measures to Address One-sided Flexibility (BEIS, 2019); Good Work Plan: Establishing a New Single Enforcement Body for Employment Rights. Consultation (BEIS, July 2019).

324  Motivation, Reward and Remuneration of People cleaners and many others, have no financial incentives other than a fixed salary. Their motivations, outputs, outcomes and impacts are influenced by factors other than money, beyond a level that sustains their needs and expectations.200 That simple fact drives a perception by such people that variable remuneration systems are simply sham and a smokescreen for daylight robbery (rent extraction by agents). Admittedly, many of the above categories of workers are employed in the public sector (although not all), and the conflict between public/social and commercial objectives may be relevant (but may not be for a significant number of jobs or people working in businesses). Pink suggested ways in which workers’ intrinsic motivation can be enlisted and strengthened, avoiding the dangers of extrinsic rewards, by proposing the development of the autonomy, mastery and purpose of individuals.201 Humans resent giving something up, so it was unsurprising that staff at the FCA were reported as objecting at the replacement of bonuses with revised pay scales, which was interestingly defended on the basis of being not only unclear in incentivising staff, but was also ‘out of sync with practices at firms’, would address gender and ethnicity pay gaps, and enhance diversity.202 At the same time, it was reported that there was set to be a ‘bumper year’ for bonuses because of high profits generated during emergence from the pandemic.203 Some confusing messages occurred.204 It was reported in 2022 that all board members at Allianz agreed to significant cuts in bonuses in 2022 in the light of making a $3.7 billion provision for fines and damages arising out of misconduct at its US asset management subsidiary, despite otherwise ‘stunning operational performance’.205 However, the Allianz CEO’s pay for 2021 was then increased by 24% to $7.9 million.206 Stephen Schwarzman, the founder of Blackstone Group, received a record $1.1 billion income in 2021.207 It is difficult to see direct causation between the actions and performance of managers in achieving high profitability, as opposed to the fortuitous state of the economy and particular markets. On the other hand, positively bad practice, and presiding over it, can clearly affect outcomes.

Conclusions Incentivisation and Attempts to Control its Consequences The traditional approach to remuneration of at least senior corporate executives has involved setting and responding to targets linked to achievement of profit and share value, especially focused on the short-term. That system was seen to be strongly implicated in both the GFC and 200 C Foster-Gilbert (ed), The Moral Heart of Public Service (Jessica Kingsley Publishers, 2017); FM Horwitz, ‘Human Resource Management: An Ideological Perspective’ (1991) 12(6) International Journal of Management 4. 201 DH Pink, Drive. The Surprising Truth About What Motivates Us (Riverhead Books, 2009) chs 3–6. He built on RM Ryan and EL Deci, ‘Self-Determination Theory and the Facilitation of Intrinsic Motivation, Social Development, and Well-being’ (2000) 55 American Psychologist 68. 202 K Griffiths, ‘Ending Bonus Scheme Would Lift FCA’s Performance, Claims Boss’ The Times 15 January 2022. 203 C Barrett, ‘Bonus Season 2022: Will You Invest, Save or Spend Yours?’ Financial Times, Money 19 February 2022, 6. See also B Martin, ‘NatWest to Resume Bonus Payments to Senior Bosses’ The Times 19 February 2022, 47; E Gosden, ‘Centrica Braced for Criticism over Bumper Profits’ The Times 19 February 2022, 48; E Gosden ‘BP Chief Gets £2.4m Boost As Oil Surges’ The Times 19 February 2022, 49. 204 P Hosking and B Martin, ‘Bonus for Calamitous Chief Keeping Reins of LV=’ The Times 30 March 2022. 205 O Storbek and I Smith, ‘Allianz Chief Faces Bonus Cut After US Scandal Hits Net Profits’ Financial Times 19 February 2022, 1. 206 O Storbek, ‘Allianz Boss Given Bumper Award Despite US Scandal’ Financial Times 5 March 2022. 207 A Gara, ‘Blackstone Founder’s Income tops $1bn’ Financial Times 28 February 2022.

Conclusions  325 the climate crisis. It also creates cultures within organisations that destabilise the motivation and commitment of the workforce. It is not a system that applies to many who do not work in large corporations. In the past decade, governments and some institutional investors have introduced a series of reforms aimed at controlling remuneration. Several methods have been deployed. A risky link between pay and sales targets has been identified and some change instituted. It is less clear how much change has occurred in relation to awards of bonuses, either in their methods of incentivisation or assessment, or their composition or quantum. Some moves have been made to promote longer-term periods of assessment. Pressure from shareholders has been encouraged through increased transparency of information. The vesting of some benefits has been spread over a longer time period, and companies have introduced the possibility of clawing back benefits paid. Senior managers in banks have been subject to increased regulatory control. Firms appear to be changing how they assess employees’ performance, and what is incentivised and rewarded, but practices are very unclear. Shifts are also occurring in performance targets and their assessment. Output targets may be easy to measure but are crude and incentivise multiple unintended consequences and inequalities. A wide shift is occurring from outputs to outcomes and impacts (mirroring the shift to emphasis purpose, sustainability and values), even if outcomes and impacts are more difficult to evaluate in terms of metrics. In evaluating performance, ‘how’ people behave is being included in remuneration structures formerly based exclusively on ‘what’ they achieved (or did). However, little is transparent about the way new remuneration systems are being changed, or how the balance between ‘what’ and ‘how’ is being incentivised, measured or assessed. There is no common best practice, and seemingly little attempt at systematic research. Nevertheless, advances are being made in the sophistication of evaluating and assessing value, including the value of human performance. None of these changes has been introduced after scientific studies on how behaviour will be changed as a result. The sole political motivation has been to control how much remuneration is paid. Empirical evidence on the results is so far limited. But the evidence mainly relates to the effects on remuneration levels rather than on what changes may have occurred in the behaviour of managers – particularly on the incidence of risk taking and non-compliance – and of their staff. This does not give the impression of sound evidence-based policy-making. However, there is evidence that the underlying social context is changing: there is increased concern about behaviour and the perceived disconnect between levels of remuneration on prevailing levels in the general population. Trust in individuals and our system is fundamentally important. But trust in companies and markets and the financial system is low. If companies, institutions such as the City, banks and the financial system, wish to attract the trust of customers and investors, they have to respond to perceptions of disproportionality of outcomes (levels of pay) and the systems that give rise to such outcomes.

Reducing Conflicts and Risks We should not be surprised that serious and sometimes systemic adverse behaviour occurs, given that we impose unavoidable conflicts and stresses on the people who work in certain situations. We expect bankers, for example, to treat customers fairly and observe a code of professional ethics, yet to work in organisations whose essential purpose has been to make money, and to be incentivised, evaluated and rewarded on the basis of their achieving imposed financial targets.

326  Motivation, Reward and Remuneration of People There is a fundamental inconsistency here between the purposes of capitalist markets, commercial companies, remuneration of staff and expectations of behaviour. If we are serious about avoiding systemic risk and constant instances of behaviour that undermines trust and cooperation, then we should address these conflicts and risky incentives and practices. Paying people by achieving just financial targets, and remunerating at levels where there are perceptions of unfairness, carry inherent risk. Things will continue to go wrong. Undesired outcomes will occur. These are not aspects of a trustworthy system, market or organisation. Things need to change.

The Challenge of Effecting Change: Meanwhile Risk Continues The area of remuneration is obviously politically charged, involving power struggles between owners, popular opinion, low-paid workers and highly paid managers. Analytically, the position of the last group of intermediaries gives rise to conflicts of interest (between duty to run the business successfully and self-interest) and to retain rent-extraction. Despite changes, the FRC accepted in 2016 that:208 Pay is a sensitive issue in the UK and affects the standing of business in society. Unfortunately, the continuing inconsistent alignment between executive remuneration and company performance and between the remuneration of senior executives and employees has led to a lack of public confidence. This has taken place despite increasing regulation to improve transparency and accountability. Remuneration practices are often cited as a driver of poor behaviour. The incentives created by performance related pay, and the corresponding impact on employee behaviours, is something that should be of utmost concern to boards and remuneration committees, which could do more to apply a cultural and values lens to the design of remuneration policies and individual remuneration decisions.

Hence, there is difficulty in any businesses reducing levels of remuneration unless either they are forced to and/or everyone does the same at the same time. But can people not feel rewarded in other ways? Are the expectations of society, especially of millennials, whether as staff or otherwise, now different in relation to fair remuneration? The issue is, at bottom, one of systemic capture by rent-seeking intermediaries. Is it likely that shareholders, individually or through proxies, institutional intermediaries or advisers, will be motivated to require significant rebalancing? Are they all essentially conflicted? Is the typical governmental tool of imposing regulation likely to be effective? We have examined the power of organisational culture on outcomes and behaviour in chapter eight. The FRC has recently said that ‘To fully embed culture there should … be alignment between values and incentives.’209 If values are based in fairness, justice, prosperity and addressing risk, then the practice on incentives and differentials in remuneration is a nettle that needs to be grasped. We need to pay ourselves more equally and fairly. The logic of the evidence in this book is that that the problems of behaviour in corporations where excessive financial and commercial incentives and targets exist will continue to occur until the essential business model is restated and the implications are implemented. It is now predictable that certain incentives will cause harm, either in terms of repeated serious breaches in society’s requirements that are intended to be protected by regulation of consumers or the environment, or even of the system (financial system, plant) itself. Existing regulatory controls seem unable to provide adequate protection. The incentives and remuneration of senior managers pose a major source of systemic hazard that is resistant to control. That means that consumers, society

208 Corporate 209 Creating

Culture and the Role of Boards. Report of Observations (Financial Reporting Council, 2016). Positive Culture. Opportunities and Challenges (Financial Reporting Council, 2021).

A Fair and Cooperative Stakeholder System  327 and the environment will continuously suffer from major adverse outcomes, often experienced in cycles, and prompting retributive and punitive reactions by societies (represented by government, courts and regulators) against businesses and those who lead them. The cycle of short-term risk, success, but then major failure followed by retributive responses and then forgetfulness of lessons learned, will continue. One option would be for the pool of those who exercise power over corporate strategies to be widened so as to give voice to civil society, customers, suppliers, communities, commentators. The Economics of Mutuality concept outlined in chapter nine can provide inspiration here in relation to valuing the contributions and rewards of different stakeholders in their own ‘currencies’.

A Fair and Cooperative Stakeholder System What are the purposes of a cooperative capitalist democratic social system?210 Hence, what are the objectives and justification of remuneration mechanisms in such a system? If the purpose of the system is to maximise profit, then certain arrangements in corporate structures, governance, behaviour and internal practices follow. On the other hand, if the ultimate purpose is cooperation and/or maximisation of stakeholder value, different arrangements must apply. If we move from one mode to another, as we are doing, what needs to change? How do we maximise the interests of all stakeholders? How do we incentivise staff and all other stakeholders to achieve that? Which approaches support intrinsic motivation or undermine it by heavy-handed attempts at external motivation? If culture is important, what changes are needed? Do staff need to be incentivised through more than remuneration, or through remuneration alone? Can success be rewarded in other ways? Does maximisation of stakeholder value produce better outcomes? These are questions that deserve profound debate. The starting point is that, in a fair system, everyone who has contributed to, or is a stakeholder in, the enterprise should be involved in strategic decisions and should receive a fair outcome. Any company that claims to be run in accordance with ethical values cannot substantiate that claim without fundamentally rethinking its approach to how it shares the fruits of its financial successes. What would such a resetting look like? The fruits of success should be shared fairly, not just between all employees but also between all stakeholders. Roche and Jakub’s Economics of Mutuality model (see chapter 10) is highly pertinent here. The contributors of capital (shareholders) are, on this view, only one of the stakeholders. Between contributors of capital (shareholders, holders of bonds or other instruments, lenders, guarantors, workers of all types, suppliers, local communities, non-executive directors, auditors) what level and type of reward for success is fair? Distributions should be avoided that generate feelings of unfairness, resentment, demotivation or lack of engaged cooperation. No argument is advanced here for state monopoly ownership, although that would need its own distribution of fair outcomes. The logic is merely that the manifestation of fairness needs to be reassessed and demonstrated. It is logical to reward people for effort and skill, and for long-term success. Wide employee cooperative and share-ownership schemes are attractive, but no form of ownership is necessarily implicated by this analysis.211

210 Use of the word social there does not imply any political connotations. It merely recognises that markets are composed of humans and hence fundamentally social. 211 C Liao, ‘Limits to Corporate Reform and Alternative Legal Structures’ in B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability. Legal Barriers and Opportunities (Cambridge University Press, 2015).

328  Motivation, Reward and Remuneration of People Remuneration at all levels of an organisation should demonstrate to those inside and out a commitment to fair practice in rewarding skill, effort and achievement. This includes distribution between all stakeholders in a fair manner. If those aspects are not demonstrated, internal and external stakeholders will not trust the people who walk away with too much, and will not believe in any official statement that the organisation lives by an ethical code. Rewards for staff would be developed from working in jobs that are satisfying socially and because of their purpose and achievements. Individual successes and exceptional performance would be celebrated.212 The attainment of desired impacts would be rewarded. Absent these arrangements, trust will not be strong enough within commercial organisations or amongst their stakeholders, and hence neither cooperation nor successful outcomes will be adequately achieved. More change is needed.

212 It is relevant that the Covid-19 crisis revealed the (critical) importance of many low paid workers in providing essential healthcare, social care, rubbish collection, manufacturing and civil service jobs.

part b.iii Cooperation in Regulation This Part contains four chapters. We first set out in chapter 12 the OBC model in its specific form of OBCR. Chapter 13 then shows that elements of the OBCR model already exist in a number of different contexts. Since ‘enforcement’ and sanctions are the traditional heart and outcome of most regulatory systems, chapter 14 examines the traditional core approaches, especially the theory of deterrence and the idea of achieving compliance, and then the arguments that show that the traditional approach is misguided and largely ineffective. It continues by noting some major changes in ‘enforcement policies and practices’ that indicate approaches that are moving towards an outcome-based cooperative model. Chapter 15 continues the argument by examining the scientific evidence that underpins an OBCR approach, involving concepts like support, intervention, responsibility and accountability. It also sets out the rational for taking strenuous traditional enforcement action in situations where society needs to be protected from serious threats.

Other Applications: Implications for Global Cooperation Ian Goldin, former head of the Oxford Martin School, has argued for some time that new global means of cooperation are needed. His 2013 analysis of five global risks – climate change, cybersecurity, pandemics, migration and finance – concluded that a new form of global governance is required.1 The existing international institutions were inadequately supported to achieve effective cooperation and outcomes. He supported a ‘coalition of the willing’ organised in new trans-governmental issue networks2 with consensus on shared ethical values3 and increased consultation with civil society groups.4 Goldin’s ideas were obviously reinforced as a result of the experience of responses to the Covid-19 pandemic, and he noted that institutions like WHO, the UN, IMF and World Bank were already overloaded before the pandemic. Others have highlighted the inadequacies in the international public health system.5 Goldin emphasised the need to reduce inequality,6 improve solidarity between young and old, organising to support volunteers 1 I Goldin, Divided Nations. Why Global Governance is Failing, and What We Can Do About It (Oxford University Press, 2013). 2 A-M Slaughter, A New World Order (Princeton University Press, 2005); JF Rischard, High Noon: 20 Global Problems, 20 Years to Solve Them (Basic Books, 2020). 3 P Lamy, ‘Global Governance Local Governments’, Distinguished Public Lecture, 8 March 2012, Oxford Martin School. 4 JA Scholte, Democratizing the Global Economy: The Role of Civil Society (CSGR, 2004). 5 eg J-P Gauci, R Mackenzie-Gray Scott, C Yiallourides, I Pietropaoli and J van Zyl Smit, Roadmap for Reform of International Legal Frameworks to Strengthen Cooperation in responses to Public Health Emergencies (Bingham, Centre for the Rule of Law, 2021). 6 One of the issues Goldin identified was the ability of global companies to pay little tax in most jurisdictions by taking account of tax haven and organisational opportunities. G30 subsequently agreed to a coordinated new arrangement: ‘A New Architecture. A Less Loophole-riddled System for Taxing Multinationals is Within Reach’ The Economist 12 June 2021, 12.

330  Cooperation in Regulation and the social sector, examining different models of capitalism and systemically supporting cooperation in general.7 An example of international cooperation was agreement in 2021 by 136 countries on a framework that would reduce the ability of multinational enterprises to game tax regimes, through an agreed minimum 15% tax rate.8 This took many years to achieve – the challenge is to be able to build trust so as to be able to achieve such agreed solutions more quickly. Issues of corruption, money laundering, serious and organised crime and modern slavery are serious challenges in their own right and are also inter-linked. Strengthening cooperation is an essential ingredient in defeating them.

Corruption Although corruption is not generally considered to be widespread in the UK, the estimated annual cost of fraud and corruption in local government procurement is £275 million.9 It remains a serious threat and the response has to be both ‘whole-of-government’ nationally and coordinated internationally.10 The OECD issued a Convention on Combatting Bribery of Foreign Officials in International Business in 1999,11 which established legally binding standards for its signatories to criminalise bribery of foreign public officials in international business transactions, and provides for a host of related measures to make this effective. The OECD issued a 2021 Recommendation with a view to further strengthening and supporting the Convention’s implementation.12 7 I Goldin, Rescue. From Global Crisis to a Better World (Sceptre, 2021). 8 OECD press release, ‘International Community Strikes a Ground-breaking Tax Deal for the Digital Age’, 8 October 2021. 9 Review into the Risks of Fraud and Corruption in Local Government Procurement (Ministry of Housing, Communities & Local Government, 2020). 10 UK Anti-Corruption Plan (HM Government, 2014). 11 See Convention on Combatting Bribery of Foreign Officials in International Business 1997, Recommendation of the Council for Further Combating Bribery 2009, Recommendation on the Tax Deductibility of Bribes to Foreign Public Officials 2009. The Convention has been signed by 38 OECD countries and six non-OECD countries. From 15  February 1999 through 31 December 2019, the Parties to the Convention reported having taken the following enforcement actions: •• •• •• ••

convicted or sanctioned at least 651 natural and 230 legal persons for foreign bribery through criminal proceedings. sanctioned at least 87 natural and 115 legal persons for foreign bribery through administrative or civil proceedings. convicted or sanctioned at least 81 natural and 103 legal persons for related offences (eg false accounting, money laundering, tax evasion) through criminal proceedings. sanctioned at least 73 natural and 179 legal persons for related offences (eg false accounting, money laundering, tax evasion) through administrative or civil proceedings.

12 Recommendation of the Council for Further Combating Bribery of Foreign Public Officials in International Business Transactions (OECD, 2021). Key elements of the Recommendation were stated to be: •• •• •• •• •• ••

Promote a holistic approach to fighting foreign bribery through new measures to enhance awareness-raising and training of, as well as detection by, key government agencies, including foreign representations, financial intelligence units, tax authorities and official development assistance agencies. Strengthen enforcement of foreign bribery laws, including through proactive detection and investigation of foreign bribery, more effective international co-operation among law enforcement authorities and cooperation in multi-jurisdictional cases. Address the demand side of foreign bribery cases by calling on countries to address the solicitation and acceptance of bribes and better support companies facing bribe solicitation risks. Introduce provisions on the key principles and features of non-trial resolutions. Include extensive provisions to ensure comprehensive and effective protection of whistleblowers in the public and private sectors. Encourage countries to incentivise enterprises to develop internal controls, ethics and compliance programmes or measures to prevent and detect foreign bribery.

Other Applications: Implications for Global Cooperation  331 The UK’s strategy of ‘Pursue, Prevent, Protect and Prepare’ has been adopted elsewhere, such as by Brazil after its extensive corruption issues such as the ‘car wash’ scandal.13 One of the findings of a comparative review of national research was that decision-makers and service providers must be held accountable.14

Money Laundering Serious and organised crime is estimated to cost the UK economy £37 billion per year.15 The Government’s 2019 Economic Crime Plan recounted estimates that the social and economic cost of fraud  to individuals in England and Wales was £4.7 billion per year16   and the social and economic cost of organised fraud against businesses and the public sector in the UK was £5.9 billion.17 In 2018, UK Finance estimated that £1.2 billion was stolen by criminals committing authorised and unauthorised fraud, with the banking sector estimated to have prevented a further £1.7 billion in unauthorised fraud.18 It was estimated in 2019 that the Banking Protocol, a rapid scam-response scheme between bank branches and law enforcement, prevented almost £50 million of fraud and led to over 400 arrests in the previous two years.19 The strategic priorities set out in the 2019 Economic Crime Plan emphasised the sharing of information and international cooperation: • Develop a better understanding of the threat posed by economic crime and our performance in combatting economic crime. • Pursue better sharing and usage of information to combat economic crime within and between the public and private sectors across all participants. • Ensure the powers, procedures and tools of law enforcement, the justice system and the private sector are as effective as possible. • Strengthen the capabilities of law enforcement, the justice system and private sector to detect, deter and disrupt economic crime. • Build greater resilience to economic crime by enhancing the management of economic crime risk in the private sector and the risk-based approach to supervision. • Improve our systems for transparency of ownership of legal entities and legal arrangements. • Deliver an ambitious international strategy to enhance security, prosperity and the UK’s global influence.

13 MF Mohallem and CEJ Ragazzo, Institutional Review: First Steps towards a National Anti-Corruption Plan (FGV Direito Rio, 2018). 14 R Hanna, S Bishop, A Nadel, G Scheffler and K Durlacher, The Effectiveness of Anti-corruption Policy. What Has Worked, What Hasn’t, and What We Don’t Know (EPPI-Centre, Social Science Research Unit, Institute of Education, University of London, 2011). 15 UK National Risk Assessment of Money Laundering and Terrorist Financing (HM Treasury and Home Office, 2020). 16 M Heeks, S Reed, M Tafsiri and S Prince, The Economic and Social Costs of Crime. Second edition. Research Report 99, at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/954485/theeconomic-and-social-costs-of-crime-horr99.pdf. 17 E Fell, O James, H Dienes, N Shah and J Grimshaw, Understanding Organised Crime 2015/16 – Estimating the Scale and the Social and Economic Costs Second Edition. Research Report 103 (Home Office, 2019). 18 Fraud The Facts 2019. The Definitive Overview of Payment Industry Fraud (UK Finance, 2019). 19 Economic Crime Plan, 2019 to 2022 (HM Treasury and Home Office, 2019).

332  Cooperation in Regulation A core problem for governments is that the cooperation of institutions that launder money is in practice essential but they are frequently alienated by imposition of significant fines for operating poor systems.20 Hence, criticisms of the global AML regime include causing ‘tremendous collateral damage to many innocent’ politically exposed persons’ and significant compliance costs.21 UK financial institutions spend an average of £374,000 every year in financial crime prevention, £53 for each customer.22 Closer attention and cooperation seems to be necessary between governmental security agencies and commercial banks.23

Serious and Organised Crime The UK adopts a coordinated approach to serious and organised crime involving multiple agencies targeting at least 69,281 individuals engaged in this type of crime, with risks of sexual abuse to up to 850,000 children.24 A major project commenced in spring 2020 led within a year to arrest of 1,500 suspects, seizure of over £56 million in criminal cash, 115 firearms, 2,800 rounds of ammunition, 5.8 tonnes of Class A and B drugs and successful mitigation over 200 threats to people’s lives.25 Continued cooperation between the UK and EU partners is regarded as necessary to share intelligence, develop investigations and pursue high risk offenders.26 HMRC estimated that up to £3.5 billion of the Coronavirus Job Retention Scheme would be lost due to fraud and error.27 In responding to international risks such as cybersecurity of financial institutions, co-development of risk forecasting is regarded as essential.28

Modern Slavery Modern slavery – human trafficking, slavery, servitude and forced or compulsory labour – was thought to involve 6,000 to 8,000 offenders in the UK in 2020.29 The number of potential victims identified through the National Referral Mechanism has risen alarmingly from 3266 in 2015 to 10,613 in 2020.30 In June 2020, there were 1,845 active law enforcement investigations, increased from 1,479 a year earlier, and prosecutions increased to 349 in 2019.31 The government intends to extend reporting requirements to public bodies (with a budget of £36 million), mandate reporting topics, and introduce penalties for failing to meet reporting obligations.32 A 2019 report

20 eg K Griffiths, ‘NatWest Guilty of Failure to Stop Money Laundering. Bank Faces £300m Fine after Admitting Criminal Charges’ The Times 8 October 2021. 21 S Kang, ‘Rethinking the Global Anti-Money Laundering regulations to Deter Corruption’ (2018) 67(3) International & Comparative Law Quarterly 695. 22 Financial Crime … and the Cost to Your Business (DWF, 2021). 23 ‘Combating Money-laundering: Losing the War’ The Economist 17 April 2021, 62–63. 24 The National Crime Agency, Regional Organised Crime Units, Police Authorities, Border Force, HM Revenue & Customs, the Crown Prosecution Service and others. 25 National Strategic Assessment of Serious and Organised Crime (National Crime Agency, 2021). The operation was codenamed Operation Venetic. 26 ibid, para 15. 27 ibid, para 135. 28 A Marshall, U Ojiako, V Wang, F Lin and M Chipulu, ‘Forecasting Unknown-unknowns by Boosting the Risk Radar within the Risk Intelligent Organisation’ (2019) 35 International Journal of Forecasting 644. 29 ibid, para 56. 30 ibid, para 56. 2015 figure from Independent Review of the Modern Slavery Act 2015: Final Report (2019), CP 100. 31 2020 UK Annual Report on Modern Slavery (HM Government, 2020). 32 Modern Slavery (Amendments) Bill, amending the Modern Slavery Act 2015.

Other Applications: Implications for Global Cooperation  333 by Parliamentarians criticised annual reporting by companies as ‘a mere box-ticking exercise’, with 40% of them not complying at all, and called for much greater engagement and cooperation across private and public bodies.33 A 2021 report involving the Independent Anti-Slavery Commissioner found that 43% of bankers and other finance staff were unaware of the scale of the problem or how their business was involved in the abuse, and 30% of financial services employees polled did not believe that modern slavery happened in the UK.34 The report recommended that senior leaders should take a stand against modern slavery and human trafficking in the following ways: • Setting the Tone at the Top • • • •

Detect and Disrupt Monitor and Report Invest and Engage Support, Collaborate and Educate

The last recommendation called for working with others across the financial industry, in the public and NGO sectors, nationally and worldwide, describing this as ‘vital’. The government announced proposals for enhanced reporting requirements by companies in 2020.35 It launched a registry in March 2021 as a platform for organisations to share positive steps they have taken to tackle and prevent modern slavery.36

Existing Control Regimes Need More Cooperation The UK anti-money laundering (AML) and counter-terrorist financing (CTF) regimes rely on strong enforcement powers informed by intelligence and a notification regime of suspicious activity reports (SARs). The Modern Slavery regime also relies on a reporting requirement to incentivise action by UK organisations to engage down their supply chains. Cooperation and coordinated reliable data sources are at the heart of whether responses to all these threats are effective. It is essential to coordinate purposes, data and responses by a plethora of public and private agencies. The challenge is even greater in the global context. The international coordination mechanism involves the Financial Action Task Force (FATF), which sets benchmarks and inspects national regimes. The FATF’s recent evaluation of the UK regime noted as a strong point the involvement of all entities in the supervision regime.37 AML and bribery are all areas where there is a clear distinction between the originators and those who become involved as intermediaries. There is typically a clear distinction in motivations, such as criminal or unethical intent, and lack of knowledge of involvement or involvement through coercion. This is a classic situation in which strong enforcement action is needed against those with unethical intent for the protection of society but enlisting the cooperation of others is

33 Independent Review of the Modern Slavery Act 2015: Final Report (2019), CP 100, para 15. 34 Preventing Modern Slavery and Human Trafficking. An Agenda for Action across the Financial Services Sector (Independent Anti-Slavery Commissioner, Tribe and Themis, 2021). 35 Transparency in Supply Chains Consultation. Government Response (Home Office, 2020). 36 https://modern-slavery-statement-registry-service.gov.uk. 37 See eg Anti-money Laundering and Counter-terrorist Financing Measures. United Kingdom. Mutual Evaluation Report (FATF, 2018).

334  Cooperation in Regulation needed (and that is not facilitated by treating them as criminals). The human misery of victims of Modern Slavery is particularly concerning. The legal regimes covering all these areas impose reporting requirements on institutions and others. However, the emphasis is on requirements and sanctions, rather than on building principled support and action aimed at identification and eradication.

12 Cooperation in Regulation This chapter examines how a regulatory system could be designed, structured and operated in order to maximise its purposes, objectives and desired outcomes based on a model of cooperation. The rationale for such a model, and the implications for business and other regulated organisations and individuals of adopting an approach based on cooperation, are discussed in chapters 10 and 11. Identifying the viewpoint is fundamental. One traditional stance has been to view markets as collections of personal expression and with a market as an autonomous and independent source of power and correctness – the market is always right and should not be interfered with, as long as there is free competition and no serious externalities. Further, Colin Mayer has argued that regulation – at least as it was practised before 2008 – promotes immoral conduct, since it leads to gaming against rules so as to circumvent or minimise their effects, diverts attention from the moral substance to details of rules, is pro-cyclical, confuses rules with standards, compliance with compassion and obedience with integrity.1 This all provides good reason for changing the system. It is an attack on a rules- and compliance-based regulatory system, and not one that is based on ethical values, cooperation and performance in achieving outcomes. A counter view is that markets are outcomes of the behaviour of humans, especially operating through their institutions, and that both behaviour and outcomes should be controlled where necessary. Further, markets and market behaviour can be viewed as part of wider social purpose, and that a wide view of the desired social outcomes – wider than just of outcomes within the confines of a market – needs to be taken.2 The goals of the regulated and regulators are often seen to be in conflict. Business can perceive regulation to be pointlessly constricting, red tape, holding business back. Regulators can see businesses as driven only to make money and cut corners, blind to the risks of harm that their activities raise. Yet no serious business wants to risk self-harm or suicide by creating avoidable harm: its systems and culture should be able to produce outcomes that deliver prosperity and protection. Unless it has adequate control and risk reduction systems in place, it may do considerable harm to itself, let alone to others. Hence, a major purpose of regulation is to protect businesses from themselves as well as to protect third parties. If the purposes of both businesses (and other regulatees) and regulators are held in common, and they work together to achieve both, then this should be more effective and efficient than the traditional model of opposition and conflict.

1 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford University Press, 2013) ch 4. 2 See M Mazzucato, The Value of Everything. Making and Taking in the Global Economy (Allen Lane, 2018) ch 9.

336  Cooperation in Regulation

The Outcome-Based Cooperative Regulation Model The objective is to create structures and approaches that support effective cooperation between the necessary actors so as to achieve the desired purposes and outcomes of all. This is to as to expand the objectives of prosperity and protection. The essence of an Outcome-Based Cooperative Regulation (OBCR) model involves the following basic elements: (a) Establishing the purpose(s) of the regulatory system and all stakeholders, and the outcomes that are desired (and not desired). There may be multiple purposes, but two basic purposes are always present, namely facilitation of activities, for commercial or public purposes, and protection against harms. Those two purposes can fundamentally conflict, so need to be balanced and prioritised in practice, otherwise the activities of the regulator and those subject to regulation will give rise to constant dispute and uncertainty. The balance between different purposes and outcomes may also change over time, so intermediate strategic or periodic objectives may well be useful. (b) Specification of outcomes typically enables KPIs to be identified, so that performance over time can be measured, giving rise to a clear evaluation of the extent to which the system and its various actors are achieving the purposes and outcomes or not. (c) Engagement between all stakeholders: ensuring that the mode of operation and performance of the system involves the collective engagement of all stakeholders, at all stages from discussing the ethical principles and their prioritisation to supporting interventions to solve problems and protect society. The mode of engagement should be one of cooperation and co-creation by all relevant stakeholders. This should be done at two broad levels: first, at systemic level in agreement on the purposes, objectives and outcomes (and establishing relevant KPIs) and, second, at operational level in relation to evaluation of performance and the KPIs in achievement of the purposes and outcomes. This co-creational mode would involve some modification to the traditional (vertical) model of imposition of regulatory purposes and duties on a regulator and then enforcement of rules (and sometimes making some rules) by the regulator on the regulated entities. Co-creation involves more of a horizontal engagement between all stakeholders based on equality of interest, and hence a broader role for consumers or those who benefit from both the commercial and regulatory activities. In day-to-day practice, however, operation of a regulatory system would involve little change from familiar methods. (d) Trust between stakeholders: producing evidence of trustworthiness. The ideal mode of engagement is based on trust between all parties. Trust is based on evidence that a person or entity can be trusted. The relevant evidence should be built up over time, and should cover the intentions, systems, behaviours and cultures of the parties. The most effective approach is for an entity to produce all relevant evidence that it can be trusted, rather than the traditional regulatory position that a regulator has to monitor such evidence as can be identified on whether individual actors can or connect be trusted and have or have not broken legal rules. The self-identification approach provides the advantage that entities take full responsibility for their own actions, can improve how they do things, and thereby take up less public regulatory resource. Evaluation of the evidence is based on common principles and values, which in a democracy are ethical values that are shared by members of the relevant community, nation or international community. This affirmation of ethical values ensures that all agree on the applicable principles and values that govern the

Purposes  337 detailed subsidiary rules and guidance, and the evaluation of the outcomes delivered, that these are morally valid. (e) Agreement on the functions, structures and bodies: designing the landscapes and institutional structures that will support the required engagement, based on trustworthiness, respect, ensuring that the system operates well, and solves problems that arise. This approach is akin to Coordination Theory that has long been used in designing cooperative work systems involving computers. It analyses group action in terms of actors performing interdependent tasks.3 We will now examine the concepts and elements in greater detail.

Purposes What Are We Trying to Achieve? The starting point is to consider the purposes and objectives of regulation, and then to identify the functions needed to maintain (regulate) a successful market economy and deliver effective protections. The central idea is that the objectives are to enable the members of the society covered by the operational and regulatory regimes to thrive and to constantly maintain and improve ethical practice, performance, innovation and growth. This statement might be broken down into the following three basic goals in the sphere of commercial markets and regulation: a. Deliver prosperity – traditionally the business objective. b. Deliver protection against unacceptable risk and harms – traditionally the public objective. c. Ensure good behaviour in markets and interactions. The fundamental objective of regulation is to optimise good outcomes for human society – and avoid or reduce bad outcomes – by maximising decisions that conform to ethical values and minimising the converse. The desired good outcomes are those shared by all those living and working in the particular society. The collective sum of outcomes will be the overall strategic impact of the regime, by which its success or lack of it should be evaluated. Good outcomes can only be those considered to conform to the ethical principles of the society’s members. Thus, the ethical principles and outcomes should be shared by all, or at least identified and agreed by the majority of members through a fair process that respects their individual rights and freedoms. Hence, outcomes that favour the interests of some members, but disadvantage others, should be subject to suitably wide scrutiny and relevant modification, so that the guiding principle is achievement of the common good, provided it, and the means of achievement, are in compliance with ethical principles. A social economy needs to deliver income, employment, goods and services to its people. Important outcomes need to include safety, fair behaviour, fulfilling activities, successful enterprises, innovation and improvement. We use here the term ‘prosperity’ in preference to the economists’ term ‘growth’ that is sometimes seen. We draw strongly on the concept of delivering the purposes and outcomes. The recent concept of regulatory delivery has had a powerful effect in shifting the focus of regulatory discussions 3 TW Malone and K Crowston, ‘What Is Coordination Theory and How Can It Help Design Cooperative Work Systems?’ in D Tataer (ed), Proceeding of the Third Conference on Computer-supported Cooperative Work (ACM Press, 1990); K Crowston, J Rubleske and J Howison, ‘Coordination Theory: A Ten-year Retrospective’ in P Zhang and D Galetta (eds), Human-Computer Interaction in Management Information Systems: Foundations (Routledge, 2015).

338  Cooperation in Regulation from the design of rules in a traditional model (make rules-inspect-identify breaches-enforce) towards the critical issue of whether the purposes of the regulatory regime are delivered – through being understandable, implementable and achievable, and especially achieved in practice, by the relevant private and public actors.4 A simple question is: are the rules clear and simple enough or do they give rise to ambiguities that will raise problems in practice?5 Here, we apply the concept of delivery holistically to the activities of all involved, including the politicians whose roles are traditionally to make the system and the rules and then to provide oversight of a system’s operation. In a traditional model, the first two goals – delivering prosperity and protection – are those of separate actors. Business should make money, and state authorities aim to support commercial success but to ensure that citizens and markets are protected from abuse and harm. We examine in chapter 10 that the overriding theory and policy was that the objectives of corporations were solely to make money – irrespective of other consequences. This individualistic theory inevitably produced a cleavage between businesses and their staff and customers, and between state regulators and businesses, and drove conflict between the groups.

Defining Shared Purposes The convergence and sharing of common goals in this way between public regulators and private enterprises – representing society and business – opens the possibility for deeper and more productive cooperation in their achievement. It enables a shift from a polarised culture, based on contested achievement of different and unharmonised objectives, to joint achievement of shared goals. Such cooperation has to be built on trust, which is based on evidence that one can trust the other. If we then add requirements that goals be ethical, this provides an extra and powerful tool in achieving the shared goals. The motivation of actors should be increased by knowledge that they are engaged, individually and collectively, in achieving something good, for the benefit of all. This should drive internal motivation, effective cooperation and fair behaviour. A conscious focus on delivering safe products, fair and accurate marketing, identifying and responding properly to problems when they arise, deliver good outcomes, the visibility of which builds confidence in the interactions of the various actors, and in their markets and societies. The essential objective of the system of interactions is to optimise ‘good’ outcomes and impacts, that is, decisions, actions and outcomes that conform to the prevailing ethical values and minimise the converse. This involves: 1. Consensus on the fundamental ethical principles and values. 2. A system that values decisions being made in accordance with those ethical principles and values: they are applied and observed in practice. 3. Wide perception that such a situation is operated, thus giving confidence and vibrancy to social and economic interactions. It is, therefore, necessary to debate, determine and keep under review the above three elements. It is also necessary to agree and align the purposes of different actors. Some decades ago, many commercial organisations recognised that a critical element of their success was to have clear 4 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 5 BE Ashforth and V Anand, ‘The Normalization of Corruption in Organizations’ in RM Kramer and BM Staw (eds), Research in Organizational Behavior (Jai Press, 2003) Vol 25, 1; E Haisley and RA Weber, ‘Self-serving Interpretations of Ambiguity in Other-regarding Behavior’ (2010) 68(2) Games and Economic Behavior 634.

Purposes  339 purposes, so that the activities of all staff can be motivated and aligned.6 The point here is simply to apply that logic to enable increased coordination between what have been considered to be disparate and opposed actors in the regulatory space. This development accords with the movement by businesses to adopt not just clear purposes as a key element of their corporate governance (see chapter 10) but also the recognition that regulators’ objectives include business growth.7 These two developments provide fertile ground for both business and regulators not only to share the same purposes but also for potential conflicts to be recognised and reconciled from the start. For example, the system should enable discussion and agreement on the relative balance or priorities between conflicts between prosperity and protection – at the crudest case, between profit/employment and safety – rather than leave the actors to try to reconcile conflicts operationally when difficult cases arise possibly in non-ideal conditions of stress. Thus, the requirements in respect of the purposes of individuals and organisations are: (a) To ensure that every organisation and person has a clear and ethical purpose and (intrinsic) motivation, and can be trusted to achieve the common purposes and generally behave ethically. (b) To align and integrate the purposes of the different bodies that need to interact (especially regulators and businesses): success means achieving both prosperity and protection. This fuses the traditional goal of business in achieving prosperity and the social/regulatory goal of achieving protection: they are both shared. (c) To ensure that the objectives of multiple stakeholders are taken into account and balanced: human, social, environmental, commercial.

Purposes, Strategic Objectives and Prioritisation The implications of the OBCR model mean that the purposes and outcomes of the system as a whole are fundamental. Current regulatory models tend to miss this point, by establishing purposes or considerations for a regulatory authority, without taking into account the wider viewpoint of the system and of all who act within it. Hitherto, the Regulators’ Code has been an effective mechanism for adding a ‘growth duty’ to the statutory purposes of regulators. But there is a trend towards adding fresh purposes, considerations and priorities, such as periodic instruction letters from ministers to regulators.8 The implications of this proliferation have not been thought through. The discussion above centres on the idea that the core purpose of regulation and regulators is that of protecting consumers, less powerful customers and suppliers, markets, investors, the environment and the planet from unacceptable harm that those involved in generating that harm can avoid. The protection purpose applies whether the nature of the regulation is safety, economic, social or environmental. However, regulatory systems, regulators and regulatees also have to achieve other objectives. This is illustrated in the example below from the debate on financial services. Such 6 J Mackey and R Sisodia, Conscious Capitalism. Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2014); R Sisodia, J Sheth and D Wolfe, Firms of Endearment. How World-Class Companies Profit from Passion and Purpose 2nd edn (Pearson Education, 2014). 7 Regulators’ Code, 2014. 8 This occurs in many sectors, such as the Strategic Policy Statement The Government’s Strategic Priorities and Objectives for Ofwat (Department for Food, Environment and Rural Affairs, 2017), made under the Water Act 2014. The SPS for Ofgem is made under the Energy Act 2013. The Statement of Strategic Priorities for Telecommunications, the Management of Radio Spectrum, and Postal Services (Department for Digital, Culture, Media & Sport, 2019) is made under the Communications Act 2003.

340  Cooperation in Regulation objectives include maintaining the sustainability of employment, businesses and markets, achieving net zero, supporting economic growth, international competitiveness and so on. The existence of multiple purposes and objectives inherently gives rise to conflicts between them. This is obvious in that a significant level of protection (such as delivering net zero) could be achieved swiftly, yet this might cost investors, customers and businesses huge sums and push some into insolvency, cutting employment. It follows that competing purposes and objectives have to be prioritised and balanced. If this is not done ‘upstream’ impossible decisions may be faced by regulators and businesses in ‘downstream’ day-to-day practice. Hence, the initial agreement on purposes and objectives should encompass both identification and prioritisation. The process should be co-creative involving all stakeholders. Some objectives may be more important than others at particular times. For example, ensuring the continuation of life on the planet is currently important but will hopefully be less so if a secure steady state can be reached. This implies a need for ranking. Thus, the current financial services regime involves ranking between primary purposes and secondary objectives for regulators. In this book, we adopt that binary distinction for the purposes of general analysis, although ranking and prioritisation may in practice involve more levels. All stakeholders may have valid purposes – society, consumers/citizens, businesses (profits and prosperity), organisations of any kind that use data (public, private, charitable, NGO) and governments (national economic success, level playing fields). Many of the individual purposes of these different stakeholders may differ and conflict. The core role of regulators is to provide protection. But if other purposes and strategic priorities are imposed on them, they may also conflict. Examples would be how to balance protection with international attractiveness, proportionate actions, growth, innovation and so on. This may place a regulator in an impossible position of constant multiple balancing of competing purposes and exposure to expensive judicial reviews. Having overarching purposes and also strategic priorities (amended over time) are relevant concepts. The problem is how to facilitate effective operation of business, government and regulation given an increasing number of such considerations, and the trend to increasingly impose these on regulators for them to try to sort them out. The OBCR model tries to do this balancing through moving from a top-down model in which purposes and priorities are imposed on regulators to one in which they are agreed periodically between all stakeholders – including government, business, NGOs and so on. One has to avoid a situation in which a regulator is given an impossible balancing act to perform, and is exposed to constant criticism (and legal expense) for having got the balance allegedly wrong. This merely undermines trust in the regulator and the system. If the balancing is done ‘upstream’ and involves all stakeholders, then all stakeholders have responsibility for and own the result, which tends to support confidence, trust and compliance.

Outcomes and Impacts The purposes of the system, we have said, are to deliver the outcomes of prosperity, protection and good behaviour.9 Achievement of those outcomes should be the overriding objective of all actors in markets and regulation, whether they are categorised as public, private or some other type of

9 The goal of achieving outcomes was specified in Regulatory Futures Review (Cabinet Office 2017); Sir Michael Barber, Delivering Better Outcomes for Citizens: Practical Steps for Unlocking Public Value (HM Government, 2017); Primary Authority: Statutory Guidance (Department for Business Energy and Industrial Strategy 2017) para 1.27.

Outcomes and Impacts  341 bodies. Both individual organisations and the system as a whole should be able to demonstrate whether it is achieving those outcomes, and whether it is improving or deteriorating in doing so. Sophisticated regulators focus not on compliance or outputs but on outcomes and impacts.10 These terms have been defined as:11 • Outputs are the direct product of an activity and typically are tangible and countable. Outputs generally refer to what is being done or what is being produced. • Outcomes are the intended and unintended results and consequences of your activities, and tend to be categorised into short-, medium- and longer-term results. In this context, impacts are considered to be long-term outcomes with a wider impact on the community or environment. They include changes in economic and financial conditions, in social conditions (eg reduced violence or increased cooperation) or in environmental and political conditions (eg participation and equal opportunities). • Impacts are the strategic, long-term, permanent, and hopefully positive, consequences that a regulatory regime has delivered. Impact is the fundamental criterion by which the regime should be judged. Those responsible for the regulatory scheme should periodically evaluate it to determine what has changed, for the better or worse, as a result of the regime, and see whether it needs to be revised (regulatory evaluation). Focusing on rules, breaches and outputs misses the wider picture of the purposes of the regulatory regime, of what the desired objectives are, and whether they are being achieved. A simple but widely quoted example comes from a US Chief of Police: it is easy for officers to hand out more tickets for traffic violations but fail to achieve safe streets. Impact Assessments are typically carried out on the anticipated costs and benefits to a market or society at the general level. But that is only part of the picture. Are the desired outcomes delivered, are undesired outcomes experienced, and in each case to what extent? Would it not be relevant to undertake Delivery Assessments that examine how those subject to the rules will be able to comply with them, what changes will be needed, how successful compliance will be in terms of compliance in terms of behaviour and culture, and ultimately, how successful the delivery of the rules will be? What will people, systems and cultures have to do, or change, to observe the rules, and how successful will the regime be? This analysis involves more than an economic cost-benefit calculation but rather a behavioural and systems analysis. An approach to regulatory intervention aimed at maximising understanding and compliance should be based on the findings of science. The issue is not a theoretical one of how an organisation might behave on the assumption that its decisions are all based on rational self-interest and maximisation of profit. The issue is how humans behave and take decisions, whether individually or in groups, such as a group with a commercial purpose. In this context, it is necessary to base an approach firmly on the findings of scientific research into behavioural and organisational science. It can be challenging to measure what outcomes, impacts and improvements one achieves. But it is vital. Measuring attainment of regulatory objectives and impacts through regulators’ outputs (such as numbers of inspections, or fines imposed) may be relatively simple but is ultimately irrelevant. Achievement of the shared goals and sensible strategic objectives as set periodically is what matters.

10 The goal of achieving outcomes is specified in Regulatory Futures Review (Cabinet Office 2017); Sir Michael Butler, Delivering Better Outcomes for Citizens: Practical Steps for Unlocking Public Value (HM Government, 2017); Primary Authority: Statutory Guidance (Department for Business Energy and Industrial Strategy 2017) para 1.27. 11 Impacts and Outcomes Toolkit: Summary (Local Better Regulation Office, 2010).

342  Cooperation in Regulation

Mode of Engagement Co-Creation The approach involves the integrated, coordinated and sophisticated engagement of all stakeholders in achieving shared purposes, objectives and outcomes. All stakeholders have responsibility for and are engaged to the extent of their expertise in the creation, governance, operation and ongoing scrutiny over the system that encompasses the primary (business or other regulated) activities and their regulation. This goes beyond outsourcing the design of regulatory policies by government,12 or self-regulation. Every stakeholder performs a function and is valued and responsible as such, contributing to the combined enterprise. The model involves effective engagement in identifying problems and solving them together. The mode of operation between the stakeholders is one of co-creation rather than authoritarian imposition. It is fundamentally horizontal, as between equal, trusting and respectful partners, rather than vertical, based on authoritarianism and lack of trust in either direction. It evolves beyond use or abuse of power, for example of businesses over consumers, of employers over staff, of regulators over providers. In all of these examples, the balance of power is shifted from a vertical and intrinsically unbalanced relationship to one based on equality. It is an adult–adult model rather than an adult–child one. However, actors need to deserve their involvement in the stakeholder model, and they do this by demonstrating that they can be trusted to act according to the ethical values of society in achieving the common goals, producing convincing evidence of their trustworthiness. The model and the evidence will distinguish between those who wish to contribute and cooperate and those who do not, and thus enable relationships to be differentiated, incentivising the actors who are trustworthy. The underlying rationale of this cooperative model of a market and regulatory system is to support cooperative interaction between humans and their organisations that is mutually respectful by facilitating open cooperation and fair competition rather than being hierarchical or distrustful.13 All actors are given the opportunity and responsibility of playing their own unique role and making their own unique contribution to the system. By this means, the objectives of both society and its market actors are maximised.

Stakeholders The idea of full involvement of all stakeholders, whilst maintaining individual responsibilities and expertise, starts from an understanding of the functions and roles of different groups of participants. This may differ in particular circumstances, and should be reviewed accordingly, but a general approach might be: 1.

Society, by which we mean citizens. Whether or not the general populace comes under the following heading of users, its involvement in the governance and scrutiny of the system, to establish and verify the extent to which it is operating ethically and effectively and delivering desired outcomes.

12 This has been suggested recently for regulation of digital activities: WA Kaal and EPM Vermeulen, ‘How to Regulate Disruptive Innovation: From Facts to Data’ (2017) 57 Jurimetrics: The Journal of Law, Science, and Technology 169–209; D Malan, ‘The Law Can’t Keep Up With New Tech. Here’s How to Close the Gap’ World Economic Forum (2018). 13 A Page Fiske, ‘The Four Elementary Forms of Sociality: Framework for a Unified Theory of Social Relations’ (1992) 99(4) Psychological Review 689.

Mode of Engagement  343 2.

3.

4. 5.

Users are consumers or business customers who purchase or benefit from the activities involved. They have an interest in the availability of useful products and services, marketed in fair ways not least in price, and in the existence of a satisfactory level of protection in terms of physical safety and fair practice. Government represents society and users in overseeing both protection and the maintenance of thriving business. Its principal role is to set policy on the design of the system and the applicable rules, and to provide oversight through scrutinising operation and performance. However, our model may afford new ways of greater engagement between providers and citizens/users. Regulatory authorities or enforcers represent the public in overseeing implementation and operation of the system and rules. Providers deliver services and goods.

The landscape may also involve other useful bodies, such as consumer or business advocates, trade unions, trade associations, standards, accreditation and inspection bodies, dispute resolution bodies such as courts, tribunals, Ombuds or other bodies. These will be referred to in greater detail below. The relevance of shared involvement is illustrated in Figure 12.1.14 Figure 12.1  Public Risk Management: Multi-Stakeholder Context

Public Risk Source(s)

NG Os

Directly Responsible

Others

Indirectly Responsible & Influencers

In te rn at io nal Obligatio ns

Level of Influence Influence greater with larger arrow

& es rds d Co nda a St

Impacted by Risk

su3478

NGOs = Nongovernment Organizations

14 CAN/UL2984:2019 National Standard of Canada: Standard for Management of Public Risks – Principles and Guidelines (Standards Council of Canada, 2019), Figure 2, p 18.

344  Cooperation in Regulation This model recognises that multiple stakeholders influence risk – and hence actions and outcomes – and that all of them have responsibilities for achieving desired outcomes or avoiding risk. The source of the risk – at the centre of the circle – can and should be affected and as far as possible controlled by the activities of different groups, including consumers, users, workers, the public sector, and various types of associations and intermediaries. The actions and involvement of all of them will be relevant, whether it be in design and changing things or in providing timely information on observed risk so that action can be taken. The actors have different levels of influence and intensity, illustrated by different shades of grey, but the system as a whole will not work well in identifying and reducing risk and achieving outcomes – but all of them will be relevant and may be critical. The model therefore requires and ensures that all stakeholders are to be involved in an integrated communal system of relationships.

Stakeholders in a Cooperative System In a historical model, the main stakeholders – society, consumers and users, producers and business, the state, regulators and other intermediaries – have tended to act individually, with their own competing purposes and objectives. Whilst some actors have achieved success, it has sometimes been on their own terms and at the expense of others, without delivering collective outcomes and goals. The typical mode of formal regulation is for the state to intervene in business activities based on a linear model involving the following stages: setting rules to be complied with, identifying breaches of those rules, taking enforcement action against perpetrators of breaches, and assuming that enforcement of rules will lead to compliance with the rules in future. Contemporary activities of nations, communities, markets, institutions and people involve many actors, each playing different roles. Analysis of regulation typically looks at the interaction between a regulator and regulatee(s). But this misses two wider viewpoints that apply in reality. First, a regulatory system involves also those who create the system, policy and primary rules (governments and legislators) and those who are affected by the system (consumer and business users, citizens and participants in a market). Second, businesses and third parties are affected by multiple activities and regulatory systems, rather than just one. We are all affected by the supply of water, food, energy, transport, workplaces, environment and so on, in terms of protection from harm such as safety, quality, price, reliability and environment. So we need to look more widely. The OBCR model starts from recognition of the different roles of all stakeholders, and their involvement in the processes of supervision and monitoring of market activities, leading to the goals of both prosperity and protection. All of the roles are relevant to the success or otherwise of endeavours. It is important that all roles and contributions are recognised and that stakeholders are adequately involved in playing their roles. However, the vision of wider involvement has consequences in relation to a re-focusing of the roles of the actors. This not only involves the cooperative relationship between regulator and regulatees. It also needs refreshing the relationship between the state and its civil and economic operators, and the involvement of all the full range of stakeholders, especially users, citizens, consumers and other market participants. Traditionally, government and regulators represent the public (not just the public interest) but do not replace the public, who need to remain involved. New forms of involvement of individuals is made possible by the wide adoption of digital communications technology, such as platforms, smart products and apps, which open channels of communication in both ways not previously available. The representative function of MPs and regulators would, therefore, logically change if consumers can directly feed in their views and preferences.

Evidence of Trustworthiness in Regulation  345 Consumers, for example, are not economic users to be exploited by business or excluded from regulatory decisions but are included as essential sources involved in policy-setting, rule-setting, providers of feedback on market behaviour and conditions, and intervention consequences. In this context, I have described the idea of ‘consumers as regulators’15 and others have talked of ‘armchair auditors’ and ‘citizens as inspectors’,16 fuelling citizen empowerment through the stages of awareness, information, understanding, engagement and action.17 One example of a different form of involvement would be to engage consumer views on setting prices for, say, water services over coming years, so as to deliver net zero emissions and other goals: since consumers will be funding the work, enlisting their support for achievement of the objectives as well as for the financial implications is a wise strategy.18 Such involvement might take various forms, including through various means of communication and feedback between local communities and the companies and regulators. Another example of the value of feedback from users is on behavioural, quality and safety issues, which can be fed back through complaint schemes, especially independent Ombuds. Existing examples of this have driven informed discussions between companies and regulators on what is happening in markets, what behaviour consumers see, what new issues are arising, and what steps need to be taken. Consumers providing useful data feedback makes them a critical part of the delivery of a regulatory function.19 Hence, systems need to be designed to facilitate this ‘gift’20 and make it as simple as possible for consumers to raise issues. The point is to ensure involvement and engagement of all relevant stakeholders in debates and decisions on policy and rules, not necessarily replacing the representative and decision-making function of certain political or expert bodies, but by ensuring sufficient governance and transparency in relation to the core functions.

Evidence of Trustworthiness in Regulation The traditional approach is that regulators treat all regulated persons and firms equally, and respond when they identify breaches of legal rules. However, we have said above that the essence of a cooperative system is to maximise trust, confidence and respect between the actors. Trust is not a concept that arises directly or as an essential element in the traditional regulatory system. As discussed in chapter five, confidence and trust are strengthened where they are built on evidence that others can be relied on. Conceptually, the aim is to reduce reliance on ‘pure trust’ 15 C Hodges, ‘The Consumer as Regulator’ in D Leczykiewicz and S Weatherill (eds), The Images of the Consumer in EU Law: Legislation, Free Movement and Competition Law (Hart Publishing, 2016). 16 G Russell and H Kirkman, ‘Intervention Choices’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 17 P Sanderson, The Citizen in Regulation. A Report on the Evidence Base for the Local Better Regulation Office (Centre for Housing and Planning Research, 2011). 18 See Innovation and Collaboration. Future Proofing the Water Industry for Customers (Water Industry Commission for Scotland, 2017); Final Determination. Strategic Review of Charges 2021–27 (Water Industry Commission for Scotland, 2020). Citing the concept of Ethical Business Regulation, Alan Sutherland, the CEO of the Water Industry Commission for Scotland, described the process as one in which ‘WICS shifted to an open discussion and gave Scottish Water more responsibility plus high transparency. … Scottish Water is no longer a price-taker, but a price setter and justifier.’: OECD NER [Network of Economic Regulators] webinar: Beyond the short-term pressures created by Covid-19 on regulated markets, 24 June 2020. OECD commented that WICS shifted to an open discussion and gave SW more responsibility plus high transparency. ‘SW is no longer a price-taker, but a price setter and justifier.’ 19 C Hodges, ‘The Consumer as Regulator’ in D Leczykiewicz and S Weatherill (eds), The Images of the Consumer in EU Law: Legislation, Free Movement and Competition Law (Hart Publishing, 2016). 20 K Evans, ‘Using the Gift of Complaints’: A Review of Concerns (Complaints) Handling in NHS Wales (Welsh Government, 2014).

346  Cooperation in Regulation by producing evidence that will support greater confidence that the other can be relied on. In the context of our society, such evidence should also demonstrate adherence to ethical values. There are three contexts: an organisation itself (operating in the market and typically subject to various forms of regulation), the regulatory authority itself and the relationship between the two bodies or their groups. In the OBCR model, the objective is for all individuals and organisations to take responsibility for producing evidence that they can be trusted, in response to which they will deserve to be treated as a respected partner in achieving the purposes and outcomes of the society, market and economy. This is a reversal of a question that might be asked in practice by regulators or regulatees currently, which might be ‘do I trust them, bearing in mind the evidence I currently have?’ In contrast, the question that needs to be asked and answered by every party that wishes to be trusted, and thereby to participate in the cooperative system, is: ‘What evidence should I produce if I wish to be trusted/trustworthy?’ Why should one’s staff, customers, suppliers, investors, regulators, society and so on trust an entity and its staff – whether it be regulator or regulatee – if it does not have adequate evidence? Asking the question of ourselves in a transparent and mature fashion is itself a major indicator of whether we can be trusted. The relevant evidence of the extent to which someone is trustworthy will comprise multiple pieces of evidence. It is based on a mixture of evidence of intention (commitment to purpose and achieving desired outcomes), competence, capacity and resources, behaviours, culture and outcomes. Individual evidence relevant to these elements must be produced and evaluated fairly. It will build over time. This process applies as much to regulatory authorities (and governments) as to regulatees. As noted in chapter 13, the regulators’ Regulatory Delivery Model effectively includes the requirement that regulators should be trusted by all stakeholders. The object is for either side to produce evidence that it can be trusted to do the right thing, by building trust in relation to its competence, resources, structural/institutional governance, disposition and cultural attitude, espousal of ethical values and benevolent integrity, past history of behaviour, and hence the predictability and trustworthiness that it is likely to do the right thing in future. Many regulatees produce much of the evidence now. It will relate to intentions, culture, activities and outcomes. For example, they may have evidence from statements of purpose or mission, commitments to achieving particular goals, governance systems, quality and safety management systems, compliance with standards, third party verification certificates of accredited assurance, staff satisfaction surveys, customer satisfaction, feedback and complaint mechanisms and information, compliance with the rules of equality, remuneration, anti-money laundering, social responsibility and so on. We discuss in chapter seven various ways in which regulated entities can produce evidence that they can be trusted,21 and that their purposes, culture and outcomes are ethical.22 Certain elements of this body of evidence are relatively recent and practice on production and evaluation will continue to evolve. It would be relevant to see increasing performance in evidenceproduction as well as in the substance of evidence produced. The nature of evidence that can and should be produced on organisational culture, for example, is a relatively recent and developing area. Evidence of the operation of an Ethical Business Practice (EBP) model is relevant here.23 21 The OECD said in 2019 that ‘Trust underwrites every one of our economic relationships’: OECD Business and Finance Outlook 2019. Strengthening Trust in Business (OECD, 2019). 22 See Strengthening Trust in Business. OECD Business and Finance Outlook 2019 (OECD, September 2019). 23 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017).

A Code of Ethical Engagement  347 Ethical Regulatory Practice (ERP) and Ethical Business Practice (EBP) were proposed by Ruth Steinholtz and me to provide the foundation for a relationship of trust that is strong enough to be characterised as Ethical Business Regulation (EBR).24 The nature of such evidence will differ from sector to sector and as organisations mature. The type and extent of relevant evidence will vary depending on the size and maturity of an organisation, and the particular field and regulatory system within which it operates. A small business is unlikely to have the extent of resource or sophistication of an established multinational company. The existing extent and intensity of regulatory requirements will clearly be relevant. We can suggest some examples of possible types of evidence that may be relevant, but it is not possible to be generic or prescriptive. The best way forward will be for continuous discussions to take place involving stakeholders on what type and extent of information can and should be produced given the circumstances and level of maturity of relevant organisations. The discussion should also review the available evidence and discuss the extent to which it supports or diminishes trust in the actors.

A Code of Ethical Engagement It is inherent in this model that the mode of engagement expected of every stakeholder participant should be one of respectful and objective engagement and contribution. That mode of engagement gives individuals the right to participate in the common cooperative exercise. The paramount principle for markets and behaviour is fairness. The idea that businesses should treat customers fairly has found its way into European law since the 1960s and has recently been spreading to relations between suppliers in the commercial chain. The idea now is to apply the criterion of fairness holistically to all activity, including design, use of natural resources, manufacturing, marketing, trading, employment relations and conditions, competition, on-time payment, protection and safety, avoidance of risks, responses to adverse events and crises, transparency, remuneration and so on. The basic shared ethical principles of this mode of engagement should be set out in a Code of Ethical Conduct and Practice. This sets expectations of behaviour, based on the society’s ethical values, including those of fair engagement, fair competition and of supporting good behaviour, beneficial activity and protection. The requirement of ethical practice should apply to all aspects of an organisation’s activities, not just to particular relations. The spread of codes of practice can currently be seen in at least these two dimensions: in moving from standard or best practice to ethical practice, and in moving from individual aspects (eg marketing, recall, customer complaints) to an holistic approach. We are at the threshold of this holistic approach, and it offers considerable opportunities for improvement in standards and confidence. Strong examples of Codes are those operated by the Advertising Standards Authority (ASA), an independent self-regulatory body, that govern the UK Code of Non-broadcast Advertising and Direct & Promotional Marketing (CAP Code) and the UK Code of Broadcast Advertising (BCAP Code), created respectively by the separate bodies the Committee of Advertising Practice (CAP) and the Broadcast Committee of Advertising Practice (BCAP). The self-governing

24 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017).

348  Cooperation in Regulation structure might not succeed in some other contexts, but there is widespread confidence in the independence of the rules and decision-making by the ASA. One factor is that there is a fall-back legal mechanism in the existence of legal rules backed by the possibility of sanctions as a result of action by a public authority, the Competition and Markets Authority (CMA). The ASA refers rare egregious cases to the CMA that breach the legal rules and enforcement action is taken, but the overwhelming majority of complaints over breaches of the advertising Codes are dealt with administratively by the ASA, and the system reacts to its determinations so as to implement its decisions on banning advertisements, wording or practices. The professionals and bodies involved know that if the self-regulatory system were to fail to command respect and effectiveness, formal public regulation would be imposed. One advantage of having a Code is to overcome the problems that arise with just using rules. People can forget the wording of rules. Some people never understand the nuances of legally drafted rules. People’s attention to certain issues, especially detailed requirements, can be crowded out where they concentrate on certain objectives and lose sight of others. People can resent the implication that they cannot be trusted that is associated with externally imposed rules and are more likely to follow principles that are internally motivated. People can ‘game’ rules and defeat the principled purpose by trying to justify emptions or reasons to ‘get round’ specific wording. For all these reasons, the objective is to work from high-level ethical principles that people agree are worthy of applying, thereby supporting internal motivation and assisting memory. The use of ethical principles should help people go beyond mere compliance with a standard and encourage them to aim at achieving high standards and improved performance. One objective and consequence of a cooperative approach is that actors should be able to ask others whom they trust to check if they are doing the right thing, and knowing that a supportive response will be given. The relationships between the actors – whether workers, consumers, businesses, regulators or others – should have been established on the basis of the required level of trust. Those outside this trust circle are, by definition, excluded. Of course, levels of trust can take time to build, and can fluctuate and be subject to different levels of maturity. However, it should be possible to identify those who are inside and outside the circle, even if there is something of a grey area between those categories. The cooperative approach mandates that the principles and detailed rules of a code of ethical practice should be co-created and owned by all stakeholders rather than imposed by public authorities. The relationship should not be that of an adult–child but of a group of equal adults working together. A key insight is that this approach is based on ‘regulation through ethical culture’. The adoption of this approach should have a profoundly powerful effect on the effectiveness and efficiency of achieving the set of functions and outcomes. The idea is based on scientific research underpinning the recognition that humans working in organisations can be heavily influenced by the behaviour of those around them and by the culture of the group and organisation (and society). This has led to the idea of aiming to affect the culture of organisations as a profoundly powerful means of regulating behaviour. However, the culture of an organisation is created within the organisation itself and owned by the people who work in it. Attempts to regulate the culture of organisations from outside must be more subtle and indirect. It is ultimately not possible to ‘regulate culture’ externally. This idea is the same as that of aiming to motivate individuals internally rather than trying to control them through external means. Thus, the idea is to regulate organisations and the individuals that work in them through the culture of their organisation and society. The means of doing this is by facilitating open collaboration based on ethical principles involving all the relevant actors and bodies, not only between business(es) and regulator(s) but also between different regulators, also involving relevant third parties.

Functions, Roles and Responsibilities  349

Functions, Roles and Responsibilities At System Level In examining the functions of different stakeholders, we need to look at both systemic and operational levels. At the level of the regulatory and market ‘system’, the following functions arise: 1. 2. 3.

Design of the system. Setting the ethical values and principles for engagement. Oversight of operation and effectiveness of the system, and of the extent to which it delivers its purposes and objectives.

Once the basic elements of the system are established, the various actors should be left to get on and be accountable for achieving the outcomes. It is counter-productive automatically to criticise individual actors if individual instances of harm arise. This is especially so where innovations and risk arise. It has to be accepted that risk necessarily involves failure, and that learning and improvement therefore necessarily involve harm. What ultimately matters is whether known risks have been controlled and whether arrangements are in place for identifying harm swiftly and repairing it.

At Operational Level: A Continuous Model of Problem-Solving and Improving Performance The essence of a cooperative approach is to work together to achieve shared goals. In practice, this involves operating the systems, rules, approaches, behaviour and cultures that achieve those aims, and identifying barriers and problems and resolving them. This is a constant process, akin to how a manufacturer would operate a quality system to ensure that it designs, produces and markets safe products of good and consistent quality. The idea is simply to expand that approach to engage all relevant actors and all relevant functions and activities. A more relevant model is a system operating to constantly improve performance (see the aviation case study in chapter 13). The objective is also to enable all problems to be resolved swiftly, efficiently and at the same time, rather than requiring different procedures in different fora. For example, the systems for identifying problems should be integrated so that data from, for example, manufacturers, customers, accreditation, inspection and regulators is integrated into a single system (even if different people oversee different data) rather than conclusions not being drawn because different silos of data are not integrated. Another example would be that action to correct and rectify behaviour and harm are taken in a coordinated way, rather than requiring multiple actions by regulators, criminal courts, businesses, lawyers, civil courts and so on. Key elements of this model are: engagement, transparency, communication, shared ethical values, evidence supporting trust, cooperation, collection and analysis of data and responsiveness to emerging information. The model is built on scientific evidence on the conditions for organisations to be productive, in terms of both compliance with regulatory goals and achievement of business success.25 25 R Sisodia, J Sheth and D Wolfe, Firms of Endearment. How World-Class Companies Profit from Passion and Purpose 2nd edn (Pearson Education, 2014); J Mackey and R Sisodia, Conscious Capitalism. Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2014); Governing Culture: Practical Considerations for the Board and Its Committees (EY, 2016); D Barton, J Manyika, T Koller, R Palter, J Godsall and J Zoffer, Measuring the Economic Impact of Short-Termism (McKinsey & Company, 2017).

350  Cooperation in Regulation We now turn to start to fill in some of the detail in relation to the operation of a cooperative system. We have said above that it is necessary to recognise the distinct functions and objectives of different actors, for example businesses or other regulatees, regulators, users, commentators, various possible kinds of intermediaries and civil society in general. Each function needs to be designed in the context of enabling ethical cooperation, to deliver the right outcomes as part of the functioning of the whole system. The core functions in a cooperative regulatory model are illustrated in Figure 12.2 below.26 Versions of this list have been quoted with approval by the Irish Law Reform Commission27 and the Australian Law Reform Commission.28 The elements are: 1. Agree primary purposes, periodic strategic objectives and outcomes in accordance with ethical principles and norms. 2. Establish and support systems and cultures to operate well in accordance with the ethical values so as to achieve the purposes, objectives and outcomes. 3. Problem-identification. 4. Problem-solving: using root cause analysis. 5. Problem-fixing: steps to prevent prospective recurrence and reduce risk; steps to repair retrospective harm. 6. Monitor and adjust as necessary. Figure 12.2  The Continuous Performance Improvement and Problem-Solving Model Establish purposes, norms, outcomes Monitor to decide if further change is needed

Take action to prevent recurrence and repair damage

Support systems & culture to work well

Identify problems Identify the root cause of each problem

26 C Hodges, ‘Mass Collective Redress: Consumer ADR and Regulatory Techniques’ (2015) 23 European Review of Private Law 829–74; C Hodges, ‘Consumer Ombudsmen: Better Regulation and Dispute Resolution’ (2015) 15(4) ERA Forum 593. 27 Report on Regulatory Powers and Corporate Offences. Volume 1: Regulatory Powers (Law Reform Commission, 2018) 51. 28 Integrity, Fairness and Efficiency – An Inquiry into Class Action Proceedings and Third-Party Litigation Funders. Final Report (Australian Law Reform Commission, 2018) para 8.30.

Functions, Roles and Responsibilities  351 This cooperative continuous model contrasts with a traditional regulation model that typically involves a linear model of imposing rules, identifying breaches, and enforcement ultimately through imposing sanctions. It is assumed that this sequence of steps, especially the last, will result in full compliance on the basis of the assumed theory of deterrence. We examine in ­chapter 14 the fallacies of that theory. Let us summarise the core operational functions at slightly greater depth. 1. Establishing clear ethical rules.   We have discussed above the prerequisite that a society must first agree and state what its values and principles are. The values and principles should be seen to be ethical, that is in accordance with the consensus of individuals’ prevailing understanding of what is right and proper.   The issue at the operational level is that the specific detailed rules that apply to conduct should be made so that they accord with the primary ethical values and principles and give specificity to what is required in particular concrete situations. This does not necessarily require the rules to be set out in primary legislation. Indeed, in many regulatory situations, having too much in primary – or even secondary – legislation can impede adaptability and modernisation, and can confuse people.   A powerful approach is to work from a co-created Code of Ethical Practice, that sets out the principles, below which can be detailed guidance that has either mandatory legal force or persuasive application in the absence of other rational grounds (such as the ‘comply or explain’ model).29 Thus, the detailed technical rules can be made at subsidiary levels, such as by regulatory or standards bodies, involving suitable consultation with all stakeholders. The rules of the Code and any relevant guidance may be amended, updated and extended relatively quickly. Breach of the rules may trigger oversight or enforcement powers.   Irrespective of how the principles and rules are made, they should be subject to open consultation between all relevant parties, allowing all stakeholders to have a voice in their consideration, and for all practical issues over delivery of the rules to be taken into account. consensus is the goal but there should usually be a mechanism for reaching a solution that is supported by an adequate majority. 2. Methods and systems to achieve effective economic performance and compliance with principles and rules.   All actors (public and private) should put in place and consistently operate relevant systems and culture to succeed in their legitimate endeavours. This will involve systems for operating (management, operations, feedback, evaluation and other systems) and controlling (regulation and ethical performance and compliance systems).   In the case of regulatory bodies, the core model is the Regulatory Delivery Model (RDM)30 that is discussed further below. In the case of commercial businesses, management and operational systems will be required. In both cases, it is fundamental to aim to observe the ethical principles rather than (just) the rules, and this is done by having frameworks that aim at achieving an ethical culture rather than just compliance with rules.   All organisations should focus on recruiting and developing leaders at all levels in the organisation with the character and skills required to nurture ethical cultures and open, learning and questioning cultures. 29 As applied under eg The UK Corporate Governance Code (Financial Reporting Council, 2018). See A Faure-Grimaud, S Arcot and V Bruno, ‘Corporate Governance in the UK: Is the Comply or Explain Approach Working?’ (2005) at http:// eprints.lse.ac.uk/24673/1/dp581_Corporate_Governance_at_LSE_001.pdf; I MacNeil and X Li, ‘“Comply or Explain”: Market Discipline and Non-Compliance with the Combined Code’ (2006) 14 Corporate Governance 286. 30 Set out in detail in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019).

352  Cooperation in Regulation 3. Identifying problems.   Both commercial and regulatory bodies should strive to identify problems, rather than just focusing on breaches of rules. A problem might or might not be identified as a breach, and a breach might be considered to be serious enough to enable a real problem to be identified, so the risk-based aim is to take a wide focus and identify actual or potential problems.   Various means of identifying problems should be in place, from internal and external evidence, and a culture of psychological safety31 that facilitates the raising of issues, monitoring activities, tests, inspections and audits. A key advance is to adopt frameworks and practices that support and maintain an ethical culture in organisations and hence trust between them and the people involved. The use of data from all relevant sources will be essential, and systems should be designed to produce relevant and coherent data.32 4. Analysing problems so as to identify their root cause.   This ‘root cause’ approach is now widely adopted in technical contexts. It aims to identify the real – and often multiple and systemic – causes of a problem, rather than just the individual who was closest to ‘causing’ an incident or breaching a rule. The deeper question might be what circumstances surrounded certain behaviour: why would any human in that position have behaved in that way? The objective is to be as effective as possible in addressing the problem, rather than to sanction breach of a rule and hence fail to take more effective or widespread action. 5. Taking action to prevent recurrence of the problem.   Many possible actions may be relevant. Action might be taken at ‘ground level’ by immediate actors, or more systemically at organisational level, or externally by a regulator. Whenever appropriate, relevant information and action should be notified to, and discussed and agreed between, responsible people at relevant levels, whether internal or external. 6. Taking action to repair any damages caused.   The previous function is prospective, aimed at reducing future risk, whilst this function is retrospective, aimed at restoring things back into balance and repairing harm. It may involve making repairs, recalling dangerous products, restoring the environment, paying compensation for loss or similar actions. Efficient systems should be in place to achieve these outcomes swiftly and economically. 7. Monitoring the situation and action taken to see if any further or corrective action is needed.   Such corrective action might involve changes to rules (number 1 above) or to systems and approaches (number 2). It might involve cultural measurement over time to determine if cultural transformation efforts are succeeding. Thus, the model is circular, representing continuous activity (rather than activity just based on individual activities, such as inspections, identifying breaches and imposing sanctions).

Mechanisms and Institutions for Implementing and Performing the Functions Given the above functions, the next question that arises is: what mechanisms, institutions and intermediaries are needed to deliver the functions? This is a question that may give rise to different 31 AC Edmondson, The Fearless Organization (John Wiley & Sons, Inc, 2019). 32 Use of New Technologies in Regulatory Delivery – Summary Note and Case Studies Organization (PRISM Institute, Deutsche Gesellschaft für Internationale Zusammenarbeit and World Bank Group, 2019); Data-Driven, Information-Enabled Regulatory delivery (OECD, 2021).

Functions, Roles and Responsibilities  353 answers in each country and regulatory regime. The answers to the question may indicate the need for significant change in existing arrangements. For example, many historical systems may have regulatory and legal systems that impose requirements, inspect operators’ compliance, prosecute breaches and (separately) provide for private claims for redress. In contrast, some modern systems have a small number of bodies that deliver all of the above functions as part of an integrated holistic system that operates more effectively and efficiently than historical models. The traditional model involves private businesses being overseen by public legislators and regulators, plus courts, and in some sectors independent auditors, standard-setting bodies, accreditation and compliance bodies. Some groups are represented by trade associations or consumer associations. Some changes have occurred that revise and blur these categories, such as that private bodies might be empowered with regulatory functions (such as self-regulatory33 or private bodies34) or with dispute resolution functions (such as arbitrators or ombudsmen). The agreements necessary between stakeholders at various stages may benefit from involvement of a facilitator, as occurred in the Ontario engineers case study. An interesting model in the Netherlands is that of periodic meetings between business and consumer representatives under the aegis of the Council of State, albeit with detailed discussions sometimes being chaired by an independent expert or academic, thereby signifying the official collaborative nature of the discussions. It is noteworthy that a number of new intermediaries are appearing in markets to provide more effective and efficient solutions for consumers and small businesses.35 Where markets have too many gaps in the circular system, or too many bodies (eg too many regulatory authorities, or ADR/Ombuds) then the system will not work well. In the digital sector, the Internet Commission is providing a mixture of public debate, setting benchmarking requirements and private conformity functions.36 How can the involvement and scrutiny of citizens, customers and users be delivered? Does this go beyond Consumer Committees in regulatory authorities? In most regulated sectors, there is a Consumer Advocacy role, usually held in UK by Citizens Advice. Similar advocacy and oversight roles could be held by the Small Business Commissioner (drawing together national and local authorities, and bodies such as the Groceries Code Adjudicator and the Pubs Code Adjudicator). Should lines of communication with local communities be strengthened, say with regional assemblies, local councils or regional Commissioners?37 Communications between government, regulators, businesses and trade associations are facilitated by a forum such as the Business Reference Panel. The Primary Authority structure provides a framework for communications between local authorities, some national regulators and national businesses. All of these structures could be firmed up and extended. How are problems identified? This is a wider question than asking how breaches of rules are identified. Traditional tools may be inspection regimes, reporting requirements, and monitoring complaints. But in a digital age, there are other approaches that may be more effective and reveal more issues more quickly, so contribute to reducing the risk of harm and the implementation of 33 eg the Advertising Standards Authority or the Prescription Medicines Code of Practice Authority. 34 An interesting example is the Delegated Administrative Authority model in Canada where private not-for-profit organisations are invested with regulatory functions and powers: see S Mangalam, ‘The Delegated Administrative Authority Model, a Radical Alternative Governance Framework from Ontario, Canada’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 35 C Hodges, Delivering Dispute Resolution: A Holistic Review of Models in England & Wales (Hart, 2019). 36 Accountability Report 1.0: Online Content, Contact and Conduct: Advancing Digital Responsibility (The Internet Commission, 2021). 37 Note posts such as the Children’s Commissioner, and Patients Commissioner.

354  Cooperation in Regulation improved performance. What systems and requirements will produce the required data that will provide evidence of whether behaviour and cultures are ethical and what particular problems need to be addressed? Data is critical in identifying both adherence to ethical requirements (what has traditionally been called compliance but is now too limiting a concept) and the existence of problems. Data could be derived from multiple sources, for example self-monitoring, remote monitoring (Internet of Things), inspections, complaints (platforms and Ombuds). Significant amounts of data might be held by publicly approved bodies (avoiding data exploitation), such as conformity assessment bodies or Ombuds, who feed back aggregated information on issues and trends, including identifying criminal activity. Review of the data would be undertaken by relevant public and private groups, followed by implementation of relevant action to reduce risk, improve performance, or enforce law. In complex networks of organisations, such as supply chains, it may be appropriate that different data sets are collated and monitored by different entities – since it may be impossible for a single ‘top down’ authority, whether public or private, to control or have access to all data. The holistic resolution of all issues of behaviour/culture and of redress simultaneously is highly efficient, delivers rectification of markets and redress to consumers speedily and provides an incentive for businesses to behave ethically.38 These techniques have been approved by UNCTAD.39

Implementing the OBCR Model Essence of the Approach The key elements to support cooperative behaviour and engagement, and hence better achieve our objectives and outcomes, are: A. A trust-based system that differentiates those who can be trusted to behave according to ethical values in the achievement of agreed purposes and outcomes from those who do not, with appropriate accountability and consequences. B. A system in which all stakeholders work together to achieve the common purposes and outcomes, avoid undesired outcomes, and identify and resolve problems and reduce risk C. Co-creation involving all stakeholders, such as government, industry, users, workers, and civil society. All stakeholders are treated as responsible actors and encouraged to act through self-motivation with competence, autonomy and relatedness.

Options for Regulatees Transition to a fully trust-based system in some circumstances may not be possible and may certainly take time. Some actors and systems may be more amenable to making this transition than others. A practical solution would be to offer regulatees to select different modes or tracks,

38 C Hodges and S Voet, Delivering Collective Redress: New Technologies (Hart, 2018); C Hodges, ‘Collective Redress: The Need for New Technologies’ (2019) 42 Journal of Consumer Policy 59–90. 39 Manual on Consumer Protection (UNCTAD, 2018) chs 6 and 11.

Conclusions  355 that suit their circumstances and provide proportionate regulation. One track would be the ‘trust track’; another might be ‘regulation as now’; and a third might involve modules around competence, resource and support that would be appropriate for smaller businesses, perhaps as a pathway towards the trust track. This would form a framework for a risk-based proportionate system. (a) Trust Track: Individual operators can choose to produce evidence that they can be trusted, based on evidence of trust and evidence of performance, KPIs and outcomes. This would be a light-touch regulatory regime, even in highly complex areas, as the regulatee would accept responsibility for performing its control functions effectively on a delegated basis, performing its own control operations and producing acceptable evidence, whilst applying (if appropriate on a ‘comply or explain’ basis) normal control mechanisms such as core rules, standards, guidance, quality and safety management systems, audits and so on. The principles of mutual engagement would apply, under licence conditions or an agreement/ covenant (like Primary Authority). Admission to this track would depend on performance and achieving the desired controls, evidence and outcomes. (b) Intermediate Track: This system would allow for regulation-light regime on a modular basis, subject to their evidencing competence, resource, operational and outcome requirements. This would be relevant for SMEs and for organisations building up to the trust track. (c) Basic Track: Operators could choose a system such as the present, with a non-trust base, and be regulated as a potentially higher risk in the normal way, involving traditional inspections, surveillance and enforcement. This would be relevant for foreign companies who are unwilling to assimilate the trust track. These tracks are in fact all trust tracks, responding to different levels of trust evidence, and segmenting regulatees on a proportionate risk basis linked to the degree of confidence that they will achieve desired outcomes. Companies would be incentivised to deliver the right outcomes, and to improve their performance in doing this. Regulators would retain the right at any appropriate stage to inspect, require detailed proof and intervene, on a risk-based basis.

Conclusions The OBCR approach offers attractions for companies using the host state as a trusted base for their data and operations. The general feeling amongst companies with international operations in most sectors is that they do not want ‘deregulation’40 but to base themselves in jurisdictions that offer high trust environments. There are numerous advantages of trust relationships. One is that proof of trustworthiness, based on proved competence, resources, data and outcomes and open communication on relevant issues, such as mistakes and unexpected problems, justifies a partnership arrangement that might also be characterised as involving ‘delegation’ of responsibility to trusted companies to operate in a self-regulatory manner. The result allows regulators to focus their resources elsewhere on higher risks. Another consequence in surveillance and intervention/enforcement is the incentivisation of companies to raise problems and errors swiftly and spontaneously and be involved in 40 An example of this in data protection was cited in Data: A New Direction. Consultation (Department for Culture, Media and Sport, 2021) ch 2.

356  Cooperation in Regulation open discussions about taking appropriate steps to rectify harm and change future behaviour and culture so as to reduce future risk. Many UK regulators have achieved notable successes in the past decade by adopting this approach. The incentives are usually stated in Enforcement Policies, which contain lists of aggravating and mitigating factors that control the use of differentiated approaches and regulatory discretion. Regulators need a set of powers to give ‘assured advice’ in answer to questions, to accept undertakings, to order redress to be paid, to order specific changes to be made to reduce risk, to impose penalties, and so on. The result gives the ability to resolve all aspects of a problem holistically, including cessation of harm/risk, delivery of redress, implementation of change and risk reduction, and imposition of guarantees and sanctions where relevant. It gives efficient and timely cooperative problem-solving relationships that are aimed at fair outcomes. Expectations of good, trustworthy practice are typically contained in codes of ethical practice rather than legal requirements. It is these codes that reinforce fairness in behaviours, which is a central objective,41 rather than the existence of legal rules. Legal rules tend to provide a safety net of minimum standards, and a means of triggering formal enforcement action. However, expectations of ethical behaviour are increasingly set out in codes – and ideally codes that are co-created (rather than imposed) by all stakeholders. Codes and guidance have significant advantages over legal rules in being able to be amended quickly and being more flexible in covering different situations. The most effective regulators have (controlled) flexibility in their ability to respond to issues. Thus, formal enforcement action is appropriate to provide swift and effective protection from harm and serious or persistent breaches of the rules. However, that approach is often ineffective and unnecessary in relation to the actions, behaviours and mistakes of many well-intentioned organisations and people. For them, the regulator should have recourse to a range of interventions and supportive actions that achieve tangible change in behaviour, outcomes, systems and cultures – which are consequences that are rarely directly achieve by formal enforcement, such as fines or banning orders. Overall, the regulator should have a toolbox containing a broad range of tools (including civil sanctions and the ability to agree undertakings) and the (formalised) flexibility to deploy the right tools in appropriate circumstances.



41 See

ibid, para 1.5: AI and Machine Learning.

13 Cooperative Regulatory Models This chapter examines some examples of the core elements of an Outcome-Based Cooperative Regulation (OBCR) model, illustrating approaches that do – or do not – work. From these examples, one can see precedents or building blocks that can be developed into elements of an effective and comprehensive OBCR system. As set out in chapter 12, the basic elements that are needed comprise: (a) Establishing the purpose(s) of the regulatory system and all stakeholders. (b) Specification of desired and harmful outcomes. (c) Establishing an ethical mode of engagement between all stakeholders. (d) Establishing the means of sustaining trust by and between stakeholders: evidence and its evaluation, including conformity with ethical values. (e) Agreement on functions, structures and bodies, so as to establish responsibilities for actions and achieving outcomes. This chapter is in two parts: the development of policy and analysis on regulatory delivery, and case studies on a series of contexts where core elements of the OBCR model have been applied. We start by charting the evolution of the policy and practice of regulation from an authoritarian ‘command-and-control’ style to a more engaged and cooperative style, through the development of policy on Better Regulation accompanied by the Regulators’ Code. Since the purposes of business and of regulators – respectively, prosperity and protection – can be viewed as being inherently opposed, we then note a broadening in the purposes of both those groups that leads to increasing convergence and overlap around shared common purposes of public and private goals. That broad convergence is important, as it can provide a firm foundation for cooperative engagement on all sides around the achievement of common purposes and outcomes. Of course, further changes may be indicated, but this is a good start. In the past two years, the content of Brexit has heightened a focus on innovation, growth and outcomes in the UK, and led to refreshments in policy that have adopted the fundamental elements of OBCR in policy on regulatory reform. Individual regulators can be seen to be pushing the boundaries of using concepts of trust, cooperation, changing behaviour and achieving outcomes. A few examples are cited briefly from regulators for financial services, environmental protection and product safety. The economic regulatory regime for water uses language about increasing collaboration and beginning to require boards to deliver greater consultation with stakeholders. Petroleum extractors are required to cooperate with others in the sector and the regulator. We then turn to the Regulatory Delivery Model (RDM) for regulatory authorities described by Graham Russell and colleagues, based on their extensive experiences of operating r­ egulatory regimes in the UK and of advising many foreign governments and regulators on the ­essential elements for a successful regulatory authority. The RDM specifies three pre-requisites – governance

358  Cooperative Regulatory Models frameworks, accountability and culture – and three practices – outcome measurement, risk-based prioritisation and intervention choices. Particularly significant elements here are accountability to stakeholders (rather than just to political masters) and the wider concepts of achieving outcomes (rather than measuring outputs, such as numbers of inspections or fines) and of doing this through intervention (rather than just enforcement). Part B sets out a series of interesting case studies where elements of a cooperative approach have been successful. The fact that a stakeholder-created system of regulation is possible is illustrated by the story of recasting the regulation of heating systems and engineers from Ontario. Government allowed the engineering experts to sit down and reconceptualise and rewrite the system, assisted by an independent facilitator. It worked well. The system allows for both transition and proportionality for regulatees by giving them options that they can choose depending on their circumstances, such as resources, competence and situation. Exactly the same differentiated choice approach is being introduced for the regulation of small water and energy businesses in South Australia. The regulator (ESCOSA) has established two categories of ‘trusted’ and ‘not fully trusted’, which should incentivise small providers to produce more evidence that they can be trusted to deliver long-term sustainable services – for the benefit of the consumers and communities they serve. Systems that are fundamentally based on trust between all operators and regulators exist in high-risk safety areas, such as nuclear and energy safety. The aviation safety system is particularly impressive, being based on cooperative and ethical culture and leading to what is called ‘performance-based regulation’, in which the focus is not on compliance with rules but on constant monitoring of behaviour, the system and outcomes, so as to provide constant learning and improvement. The concept of ‘open culture’ and ‘just culture’ are modern restatements that transcend former models of ‘controlling’ behaviour by incentivisation, authoritarianism, sanctions and deterrence. The outcomes – that flying is overwhelmingly safe – speak for the success of this approach. Three examples of trust-based approaches are the regulation of public statistics by the UK Office for Statistics Regulation, involving a shared vision and Code with public engagement; adoption of the Ethical Business Regulation (EBR) model as the means of engagement in discussions on settling water prices in Scotland; and the catalyst role played by the Scottish Environmental Protection Agency in bringing multiple community stakeholders together to create a common purpose for redeveloping The Leven area. We then turn to note that public regulatory authorities need not necessarily be statutory public bodies. The Canadian Delegated Administrative Authority (DAA) model has proved successful, delegating public functions and powers to private not-for-profit bodies. The success rests significantly on adequate focus on governance, transparency and accountability, as well as on engagement with all stakeholders and delivery of the right outcomes. It is noteworthy that various UK Ombudsmen who are private not-for-profit entities operate along entirely similar lines and can be swifter to self-reform and innovate than more clunky statutory Ombudsmen models. A number of structures are examined that support cooperation and trusted engagement and relationships between businesses and regulators. The Primary Authority scheme has proved to provide a forum for communication and problem-solving between multiple Local Authorities, some national regulatory authorities and national businesses with outlets across the country. This has proved to be highly effective, where individuals engage on a trusted basis. The communication channel between a primary authority and the head office of a business (which is in effect the regulator of all the stores across the country) works when the trust is reciprocal (and based on the regulator providing ‘assured advice’ that can be relied on by the business). However, the system also supports communication between the multiple local authorities, supported by the relevant Department of central government, and that channel has proved to be equally productive in

Evolution in Better Regulation Policy and Practices of UK Regulators  359 identifying and solving problems. This sort of trust-based communication structure provides a model that can be adapted to many other regulatory situations. It needs to be complemented by local hubs providing support to businesses, and one example of this is the Better Business for All structure. The growth in use of regulatory sandboxes is also, it is often overlooked, predicated on the existence of trust-relationships between innovating business and regulator – or at any rate, the model can be expanded where such trust exists. We also note the importance for trust of systems for feeding in, collecting, aggregating and feeding back data on behaviours and outcomes. The existence of an easily-identified platform and a trusted data controller are required. Two examples are given. First, the UK Drinking Water Inspectorate’s innovative data-analysis programme has been outstandingly successful. Second, UK’s consumer Ombudsmen go some way to delivering these functions in many regulated sectors, and the system can be developed further. We complete this chapter by summarising the conclusions about some ideal elements of a fully cooperative model. Finally, we contrast examples of establishing purposes or regulatory systems by hierarchical models with more engaged cooperative models. A hierarchical model of Parliament and Government imposing purposes and goals on a regulatory authority – which is almost universal – can be illustrated by the currently topical context of reforming the UK’s regulatory regimes after its exit from the EU. The specific example of this set out here relates to financial services, where there has been a stimulating debate in the public documents. The model seems so obviously applicable, one hardly even considers the possibility of any other model. However, if it is important to follow a truly cooperative approach, it is worth considering a different approach, in which purposes and strategic objectives (and outcomes) are debated and agreed by all stakeholders. This raises the challenge of what such a system might look like, and whether politicians would have the courage to surrender some of their perceived power so as to make the system work better.

Evolution in Better Regulation Policy and Practices of UK Regulators The UK has been a leader in international understanding on the way that regulatory authorities operate.1 In simple terms, this evolution might be characterised as moving from an authoritarian approach to an approach that differentiates between actors based on their intentions and outcomes. I have mapped the evolution previously2 and summarise the main points here. The core objective of regulation is protection from harm of people, organisations, markets and the environment. The means by which adequate protection is achieved is ultimately through focussing on modifying behaviour3 so as to reduce risk.4 Regulatory tools can be applied before 1 OECD, Government Capacity to Assure High Quality Regulation: Regulatory Reform in the United Kingdom (2002), 6; Better Regulation in Europe: United Kingdom (OECD, 2010), 14; Better Regulation in the United Kingdom (OECD, 2009). UK was ranked No1 in the OECD’s Market Regulation Indicator and Regulatory Policy Outlook 2018. 2 See C Hodges, Law and Corporate Behaviour (Hart, 2015) ch 9. 3 K Yeung, Securing Compliance. A Principled Approach (Hart Publishing, 2004), drawing on AI Ogus, Regulation: Legal Form and Economic Theory (Oxford University Press, 1994), P Selznick, ‘Focusing Organizational Research on Regulation’ in R Noll (ed), Regulatory Policy and the Social Sciences (Berkeley, 1985), P Vincent-Jones, ‘Values and Purposes in Government: Central-local Relations in Regulatory Perspective’ (2002) 29 Journal of Law and Society 27 (emphasising ‘systematic control’), J Black, ‘Enrolling Actors in Regulatory Systems: Examples from the UK Financial Services Regulation’ (2003) Public Law 63. 4 See A Giddens, The Consequences of Modernity (Cambridge University Press, 1990); A Giddens, ‘Risk and Responsibility’ (1999) 60(1) Modern Law Review 1–10; U Beck, Risk Society: Towards a New Modernity (Sage, 1992); C Hood, H Rothstein and R Baldwin, The Government of Risk (Oxford University Press, 2001); BM Hutter, Regulation

360  Cooperative Regulatory Models and/or after harm has occurred. In the ex ante situation, familiar tools include requirements that actors test products, comply with standards, operate a quality management system covering design, production, marketing, distribution and post-marketing vigilance, obtain certification from an accredited body and obtain a licence from a public authority. In the ex post situation, tools may include recall and rectification, instituting corrective actions, cessation of activities, and imposition of sanctions by a public authority or court. In both the ex ante and ex post situations, the selection and use of relevant tools may often involve a number of different actors. The actors may be the primary business or regulate and a public regulatory authority, but may also include other actors in the chain of design, distribution and use, as well as third parties such as certification bodies, trade unions and insurers. Crucial information may be relevant, contributed by multiple consumers or users, competitors, and through ombudsmen or other data platforms. In short, the contributions of multiple stakeholders may typically be required in order for the system to deliver timely and effective protection (and prosperity). However, the traditional model of regulation has not been one based on cooperation but on mistrust, especially one that places regulatees and regulators in opposition and conflicts with each other. The classical model of regulation is an authoritarian one known as command-andcontrol, familiar from military organisations. In this model, all decisions are taken by the person in command, and juniors are required simply to obey all orders, and are subjected to punishment if they disobey. A command-and-control model essentially requires constant monitoring and oversight of inferior actors, and hence requires potentially huge resources and total, constant surveillance and sanctioning.5 So it is unsurprising that studies find limited success in achieving compliance.6 The model raises difficulty if it is applied to actors in a free democratic society. It is unacceptable in a democratic society that people are ruled by fear. A perception by regulatees than a regulator is behaving in an authoritarian manner often causes resentment and resistance,7 leading to a reduction in motivation to comply with society’s rules.

The Evolving Focus on Regulatory Delivery Since around 2000 the UK has been undergoing a transformation in how regulation is ‘delivered’, that can be described as having top-down policy elements and bottom-up practice elements. The bottom-up approach occurred in various sectors where regulatory officials operated in practice by relying on education and persuasion of individual staff and managers to behave differently, on the basis that this was often the more effective strategy in affecting behaviour than threats and sanctions (and cost less).8 A classic story involved an environmental health officer saying: ‘Why and Risk: Occupational Health and Safety on the Railways (Oxford University Press, 2001); J Steele, Risks and Legal Theory (Hart Publishing, 2004); and many others. 5 D Langvoort, ‘Monitoring: The Behavioural Economics of Corporate Compliance with Law’ (2002) Columbia Business Law Review 71–118. 6 R MacCoun, ‘Drugs and the Law: A Psychological Analysis of Drug Prohibition’ (1993) 113 Psychological Bulletin 497–512 (a 5% variance in drug use was explained by deterrence factors); TR Tyler and SL Blader, Cooperation in Groups: Procedural Justice, Social Identity, and Behavioral Engagement (Psychology Press, 2000) (10% variance in employee behaviour was shaped by incentives): TR Tyler, Why People Obey the Law: Procedural Justice, Legitimacy, and Compliance (Princeton University Press, 2006); P Podsakoff, W Bommer, N Podsakoff and S MacKenzie, ‘Relationships Among Leader Reward and Punishment Behaviour and Subordinate Attitudes, Perceptions, and Behaviours: A Meta-analytic Review of Existing and New Research’ (2006) 99 Organizational Behaviour and Human Decision Processes 113–42. 7 This is predicted by Self-Determination Theory, as undermining feelings of competence, autonomy and relatedness, see ch 5 above, and confirmed in numerous studies. 8 K Hawkins, Environment and Enforcement (Oxford University Press, 1984); K Hawkins, The Uses of Discretion (Clarendon Press, 1995); K Hawkins, Law as a Last Resort: Prosecution Decision-Making in a Regulatory Agency (Oxford University Press, 2002).

Evolution in Better Regulation Policy and Practices of UK Regulators  361 don’t you buy a new pump – now’. This fitted the rhetoric that most people come to work to do the right thing rather than to harm others: they can be helped to improve by more positive means than threats and sanctions.9 This more engaged approach also received global scholarly attention from the ideas of John Braithwaite and others that regulation should be ‘responsive’ to the context of individual regulatees.10 Thus, a hierarchy of interventions and sanctions would be appropriate, and the right response should be selected depending on the regulatee’s motivation. Studies that described good regulatory outcomes from an engaged approach between authorities and businesses included those on water pollution,11 occupational health and safety and environmental control in railways,12 environmental protection,13 in the Australian mining industry,14 manufacturing in Thailand,15 food businesses,16 contrasting general styles in America,17 and across 96 Australian regulatory agencies,18 fisheries,19 food businesses,20 Danish farmers.21 The top-down policy approach was labelled Better Regulation.22 Much of this stream of thinking has been about trying to control the costs of regulation, through tools such as costbenefit Impact Assessments23 and arbitrary One-In-One-Out or similar rules. however, there has been a deeper transformation towards increased cooperation between regulators and regulatees. 9 M Aalders and T Wilthagen, ‘Moving Beyond Command-and-control: Reflexivity in the Regulation of Occupational Safety and Health and the Environment’ (1997) 19 Law & Policy 415–43; N Gunningham and J Rees, ‘Industry Self-regulation: An Institutional Perspective’ (1997) 19 Law & Policy 363–414; A King and M Lenox, ‘Industry Self-regulation Without Sanctions: The Chemical Industry’s Responsible Care Program’ (2000) 43 Academy of Management Journal 698–716; C Rechtschaffen, ‘Deterrence vs. Cooperation and the Evolving Theory of Environmental Enforcement’ (1998) 71 Southern California Law Review 1181–272. 10 I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (Oxford, 1992); J Braithwaite, Restorative Justice and Responsive Regulation (Oxford, 2002); CJS Hodges, ‘Encouraging Enterprise and Rebalancing Risk: Implications of Economic Policy for Regulation, Enforcement and Compensation’ [2007] EBLR 1231. 11 K Hawkins, Environment and Enforcement: Regulation and the Social Definition of Pollution (Clarendon Press, 1984). 12 BM Hutter, Compliance: Regulation and Environment (Clarendon Press, 1997). 13 P Grabosky, ‘Beyond the Regulatory State’ (1994) 27(2) Australian and New Zealand J of Criminology 192–97; P Grabosky, ‘Green Markets: Environmental Regulation by the Private Sector’ (1994) 16(4) Law and Policy 419–48; N Gunningham and P Grabosky, Smart Regulation. Designing Environmental Policy (Oxford University Press, 1998). 14 F Haines, Corporate Regulation. Beyond ‘Punish or Persuade’ (Clarendon Press Oxford, 1997). 15 F Haines, ‘Regulatory Reform in Light of Regulatory Character: Assessing Industrial Safety Change in the Aftermath of the Kader Toy Factory Fire in Bangkok, Thailand’ (2003) 12 Social and Legal Studies 461–87; reprinted in F Haines (ed), Crime and Regulation (Ashgate, 2007). 16 BM Hutter and C Jones, ‘From Government to Governance: External Influences on Business Risk Management’ (2007) 1 Regulation & Governance 27–45. 17 DJ Black, The Behaviour of Law (Academic Press, 1976); DJ Black, The Manners and Customs of the Police (Academic Press, 1980); DJ Black, Sociological Justice (Oxford University Press, 1989). 18 P Grabosky and J Braithwaite, Of Manners Gentle. Enforcement Strategies of Australian Business Regulatory Agencies (Oxford University Press, 1986). 19 J Black and R Baldwin, ‘Really Responsive Regulation’ (2008) 71(1) Modern Law Review 59. 20 R Fairman and C Yapp, ‘Compliance with Food Safety Legislation in Small and Micro-businesses: Enforcement As an External Motivator’ (2004) 3(2) Journal of Environmental Health Research 44. 21 PJ May and S Winter, ‘Regulatory Enforcement and Compliance: Examining Danish Agro-Environmental Policy’ (1999) 18(4) Journal of Policy Analysis and Management 625–51. 22 See Lifting the Burden (HMSO, 1985) Cmnd 9571; Building Businesses … Not Barriers (HMSO, 1986), Cmnd 9794; Releasing Enterprise (HMSO, 1988), Cmnd 512; Checking the Cost to Business: A Guide to Compliance Cost Assessment (Department of Trade and Industry, 1992); Principles of Good Regulation (Better Regulation Task Force, 1998); the Regulatory Reform Act 2001; Imaginative Thinking for Better Regulation (Better Regulation Task Force, 2003); Better Regulation: Draft Simplification Plan (DTI, 2005); P Hampton, Reducing Administrative Burdens: Effective Inspection and Enforcement (HM Treasury, 2005); Moving Towards The Local Better Regulation Office: The Way Ahead (Department for Trade and Industry, 2005); Less is More: Reducing Burdens, Improving Outcomes (Better Regulation Task Force, 2006); The Tools to Deliver Better Regulation: Revising the Regulatory Impact Assessment: A Consultation (Cabinet Office, Better Regulation Executive, July 2006); Implementing Hampton: From Enforcement to Compliance (HM Treasury, Better Regulation Executive, and Cabinet Office, 2006); Risk, Responsibility, Regulation: Whose Risk Is It Anyway? (Better Regulation Commission, 2006); Better Regulation, Better Benefits: Getting the Balance Right (Department for Business Innovation & Skills, 2009); Better Regulation Executive, Better Regulation Made Simple (HMSO, 2010); Reducing Regulation Made Simple: Less Regulation, Better Regulation and Regulation As a Last Resort (HM Government, 2010). 23 Better Policy Making: A Guide to Regulatory Impact Assessment (Cabinet Office, 2003).

362  Cooperative Regulatory Models A significant milestone was the 2005 Hampton Report.24 Although Hampton’s mission was to examine ways of ‘reducing administrative burdens by promoting more efficient approaches to regulatory inspection and enforcement, without compromising regulatory standards or outcomes’,25 the means adopted created closer alignment between authorities and those businesses that could show they were well controlled and low risk.26 Principles of Enforcement and Inspection set out by Hampton were: • Regulators, and the regulatory system as a whole, should use comprehensive risk assessment to concentrate resources on the areas that need them most; • Regulators should be accountable for the efficiency and effectiveness of their activities, while remaining independent in the decisions they take; • All regulations should be written so that they are easily understood, easily implemented and easily enforced, and all interested parties should be consulted when they are being drafted; • No inspection should take place without a reason; • Businesses should not have to give unnecessary information, nor give the same piece of information twice; • The few businesses that persistently break regulations should be identified quickly, and face proportionate and meaningful sanctions; • Regulators should provide authoritative, accessible advice easily and cheaply; • When new policies are being developed, explicit consideration should be given to how they can be enforced using existing systems and data to minimise the administrative burden imposed; • Regulators should be of the right size and scope, and no new regulator should be created where an existing one can do the work; and • Regulators should recognise that a key element of their activity will be to allow, or even encourage, economic progress and only to intervene when there is a clear case for protection. Principles of Better Regulation were stated by the Better Regulation Task Force in 1997: proportionality; accountability; consistency; targeting; and transparency.27 The Regulatory Enforcement and Sanctions Act 2008 (RESA) subsequently created a duty on specified bodies not to impose or maintain unnecessary burdens in the exercise of regulatory functions.28 A Code of Practice for the exercise of regulatory functions,29 was also applied to specified regulatory bodies,30 expanding on statutory principles of good regulation. This was issued as the Regulators’ Compliance Code in 200731 and revised as the Regulators’ Code, in force from 6 April 2014. 24 P Hampton, Reducing Administrative Burdens: Effective Inspection and Enforcement (HM Treasury, 2005). 25 ibid, Executive Summary. At that stage, regulatory inspection and enforcement was divided between 63 national regulators, 203 trading standards offices and 408 environmental health offices in 468 local authorities. 26 HM Treasury, Better Regulation Executive, and Cabinet Office Implementing Hampton: From Enforcement to Compliance, November 2006, p 32. 27 See Better Regulation – From Design to Delivery (Better Regulation Task Force, 2005) 26–27. 28 RESA s 72. Under s 73(3)–(6). 29 ‘Regulatory function’ means (a) a function under any enactment of imposing requirements, restrictions or conditions, or setting standards or giving guidance, in relation to any activity; or (b) a function which relates to the securing of compliance with, or the enforcement of, requirements, restrictions, conditions, standards or guidance which under or by virtue of any enactment relate to any activity: Legislative and Regulatory Reform Act 2006, s 32(2). 30 Legislative and Regulatory Reform Act 2006, s 22 (2) and (3). The Code is issued by a Minister. Any business that believes that a regulator is failing to have regard to the Code is able to seek redress by complaining to the relevant regulator or the Parliamentary Ombudsman. It may also be possible to apply for judicial review of the regulator’s actions. 31 Regulators’ Compliance Code: Statutory Code of Practice for Regulators (BERR, 2007). The Code is made under the LRRA 2006, s 22(1).

Evolution in Better Regulation Policy and Practices of UK Regulators  363 An associated shift in enforcement policy was enshrined in new Penalty Principles created by Richard Macrory, which were:32 1. Aim to change the behaviour of the offender; 2. Aim to eliminate any financial gain or benefit from non-compliance; 3. Be responsive and consider what is appropriate for the particular offender and regulatory issue, which can include punishment and the public stigma that should be associated with a criminal conviction; 4. Be proportionate to the nature of the offence and the harm caused; 5. Aim to restore the harm caused by regulatory non-compliance, where appropriate; and 6. Aim to deter future non-compliance. Macrory also defined seven ‘characteristics’ that regulators should adopt: 1. Publish an enforcement policy; 2. Measure outcomes not just outputs; 3. Justify their choice of enforcement actions year on year to stakeholders, Ministers and Parliament; 4. Follow-up enforcement actions where appropriate; 5. Enforce in a transparent manner; 6. Be transparent in the way in which they apply and determine administrative penalties; and 7. Avoid perverse incentives that might influence the choice of sanctioning response. The requirement that a regulator publish an enforcement policy has provided its own ‘regulatory framework’ within which an authority may exercise its discretion in a flexible but principled manner, specifying the processes and considerations that it will take into account in reaching its decisions. Hodges subsequently showed that published policies tend to contain lists of aggravating and mitigating factors that will be taken into account in decisions on selecting which responsive tools to use, or the severity of sanctions imposed, in given situations.33 The same approach is used in Sentencing Guidelines produced for courts that decide criminal sanctions.34 Hence, these published policies can incentivise responsive ethical behaviour by those who have broken the rules, by indicating that lower sanctions will be appropriate for those who respond quickly, repair harm, make redress, and impose changes in systems or behaviour so as to reduce risk of reoccurrence. This is all focused on achieving good outcomes, rather than on enforcement of laws. Regulators were generally given wider powers to order – and also importantly to agree – a range of civil sanctions, including fixed and variable money penalties, compliance and enforcement notices specifying actions to be taken, and notices to restore harm.35 The shift to including restoration and repair are important outcome-focused aspects of responding to harm, in accordance with the concept of ‘restorative justice’.36 A similar wide shift has occurred in concluding cases by agreement, such as under deferred prosecution agreements (‘DPAs’) for cases of major economic crime, governed by a Code of Practice.37 32 R Macrory, Regulatory Justice: Making Sanctions Effective (HM Treasury, 2006); reprinted in R Macrory, Regulation, Enforcement and Governance in Environmental Law (Hart Publishing, 2010). 33 C Hodges, Law and Corporate Behaviour (Hart, 2015) chs 19 and 20. 34 Coroners and Justice Act 2009, s 120. See A Ashworth and JV Roberts (eds), Sentencing Guidelines: Exploring the English Model (Oxford, Oxford University Press, 2013). 35 Regulatory Enforcement and Sanctions Act 2008, ss 42, 63, 67, 68 and Sch 5. 36 Crime and Courts Act 2013, s 45 and Sch 17. See Restorative Justice Action Plan for the Criminal Justice System (Ministry of Justice, 2012); JM Anderson and I Waggoner, The Changing Role of Criminal Law in Controlling Corporate Behaviour (RAND Corporation, 2014). 37 Deferred Prosecution Agreements Government Response to the Consultation on a New Enforcement Tool to Deal with Economic Crime Committed by Commercial Organisations (Cm 8463: Ministry of Justice, 2012).

364  Cooperative Regulatory Models Examples of core actions are agreement to changes in behaviour, to payment of redress, and maybe to imposition of a minimal penalty. This reflected the growing realisation that sanctions do not necessarily deliver the outcomes of changes in behaviour and culture, or redress, and often do not deter. The thinking behind the policy reflected the practice of many regulators in differentiating those who try to observe society’s norms from those who do not, such as rogues from whom society needs protection through strong interventions and control. An example of this segmented approach was the distinction made by the Scottish Environmental Protection Agency between motivations of individual humans that should be responded to by different intervention strategies and tools. We would now adopt a wider approach than assumed motivations that ‘caused’ particular instances of breach of law, and look at a range of evidence on purposes, outcomes, behaviours and cultures. A further step change occurred with the revision of the 2007 Regulators’ Compliance Code as the Regulators’ Code in 2014.38 The background expectation was that businesses would be empowered to shape regulators through mutual engagement, feedback and challenge. An important substantive change was the introduction of a ‘growth duty’ on regulators. The following were the core requirements (emphases added): 1. Regulators should carry out their activities in a way that supports those they regulate to comply and grow. 2. Regulators should provide simple and straightforward ways to engage with those they regulate and hear their views. 3. Regulators should base their regulatory activities on risk. 4. Regulators should share information about compliance and risk. 5. Regulators should ensure clear information, guidance and advice is available to help those they regulate meet their responsibilities to comply. 6. Regulators should ensure that their approach to their regulatory activities is transparent. An obligation on those exercising a regulatory function to ‘have regard to the desirability of promoting economic growth’ was also included in statute from 2015.39 Guidance on the ‘growth duty’ specifies that regulators need to ensure that they:40 [H]ave a level of understanding of the business environment, their business community, individual businesses, and the impact of regulator activities on them that is appropriate to their duties and responsibilities, enabling them to deliver a risk-based, proportionate approach in their day-to-day activities.

Achieving the best compliance outcomes and highest regulatory quality were emphasised by the OECD in its important 2014 Best Practice Principles for Regulatory Policy: Regulatory Enforcement

38 Regulators’ Code (Department for Business Innovation & Skills, 2013), made under The Legislative and Regulatory Reform Code of Practice (Appointed Day) Order 2014 No 929. The following Orders, made under section 24(2) of the Legislative and Regulatory Reform Act 2006, specify the scope of the Code: Legislative and Regulatory Reform (Regulatory Functions) Order 2007; Legislative and Regulatory Reform (Regulatory Functions) (Amendment) Order 2009; Legislative and Regulatory Reform (Regulatory Functions) (Amendment) Order 2010; Legislative and Regulatory Reform (Regulatory Functions) (Amendment) Order 2014. Various other private bodies or persons are also subject to the Code: see Regulators’ Code: Summary of Regulators and Regulatory Functions Covered (Department for Business Innovation & Skills, Better Regulation Delivery Office, 2014). 39 Deregulation Act 2015, s 108. 40 Growth Duty: Statutory Guidance. Statutory Guidance under Section 110(6) of the Deregulation Act 2015 (Department for Business, Energy & Industrial Strategy 2017) para 2.2.

Evolution in Better Regulation Policy and Practices of UK Regulators  365 and Inspections,41 which presented a range of core principles on which effective and efficient regulatory enforcement and inspections should be based.42 Conceptually, the shifts charted here are towards more risk-based, outcome-focused and cooperative engagement between regulators and regulatees. By 2010, scholars considered that the Environment Agency already engaged in some forms of trust-based environmental regulation that emphasise cooperation rather than conflict with regulated businesses and communities.43 As Graham Russell and Helen Kirkman have noted:44 Numerous local authority-led projects in the UK over the past 20 years have demonstrated the potential benefits of a supportive approach. In an early example, a 2004 collaboration between Bolton Metropolitan Borough Council and Salford University aimed at improving food hygiene standards in ethnic catering businesses demonstrated that directed training support to businesses that had not previously responded well to a traditional inspection regime was very effective in raising compliance levels: 65 per cent of the premises targeted in the first phase of the project showed significant improvement.45

Developments continue to occur. A 2017 review of the future direction of regulation involving leasing regulators concluded that the best organisations achieve compliance partly through ‘effective self-assurance’ and that a general shift towards ‘earned recognition’ and ‘regulated selfassurance’ would be productive and efficient.46 It commented on untapped scope to improve intelligence and data sharing between regulators. Overall, in the past 40 years, parallel developments have occurred in the theoretical, political and ‘front line’ worlds. Braithwaite’s idea mentioned above that regulation – or rather enforcement – should be ‘responsive’ chimed with two similar developments. First, there was the growing practice of some regulators of differentiating in their responses to non-compliance between those who were basically well-intentioned and those who were not. Second, as regulation grew, covering more areas and in greater depth, business and governments pushed back on ‘regulatory creep’ and ‘red tape’. In 2015, Hodges published evidence that the dominant theory of deterrence had little effect in many situations and could sometimes be counter-productive, whereas behavioural and social psychology was more convincing in explaining why non-compliances occurred and how they might be prevented.47 He also found that there had been evolution in approaches to regulation and enforcement across a range of different authorities, traceable back to the Hampton/ Macrory ideas, but still incomplete and inconsistent overall. There had been a notable emphasis on the importance of organisational culture in affecting both business success and serious noncompliance, which had transformed an increasing number of businesses’ practices and attracted great attention from governments and authorities in financial services after the 2008 financial

41 OECD Best Practice Principles for Regulatory Policy: Regulatory Enforcement and Inspections (OECD, 2014). See earlier Consultation on Public Consultation Best Practice Principles for Improving on Enforcement and Inspections (OECD, June). 42 See supporting studies J Monk, Reform of Regulatory Enforcement and Inspections in OECD Countries (OECD, 2013); F Blanc, Inspections Reforms: Why, How and With What Results (OECD, 2013). 43 B Lange and A Gouldson, ‘Trust-based Environmental Regulation’ (2010) 408 Sci Total Environ 5235; B Lange, ‘The Emotional Dimension in Legal Regulation’ (2002) 29 Journal of Law and Society 197. 44 G Russell and H Kirkman, ‘Intervention Choices’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019) Fig 20.3. 45 Improving the Public Image and Risk Assessment of Ethnic Minority Food Retail Businesses – the ‘Bolt Project’. Presentation to Food Standards Agency workshop, 2004 (unpublished). 46 Regulatory Futures Review (Cabinet Office, 2017). This drew on C Hodges, Ethical Business Regulation: Understanding the Evidence (Better Regulation Delivery Office, 2016). 47 C Hodges, Law and Corporate Behaviour (Hart, 2015) chs 13 to 16.

366  Cooperative Regulatory Models crisis. It was notable that the outstanding success of safety in aviation was centred on culture, but an open and just culture in which blame and deterrence played no part – indeed, were positively dangerous. Building on those ideas, Hodges and Steinholtz proposed a generic approach for organisations of Ethical Business Practice (EBP), which would lead to a relationship between regulatees and regulators of Ethical Business Regulation (EBR).48 The importance of culture and of thinking of intervention rather than enforcement, was also identified by Graham Russell and colleagues from their extensive practical work on designing and operating regulatory systems, as elements of their Regulatory Delivery Model (discussed below).49 Meanwhile, the regulatory debate shifted to talk about ‘agile’ regulation, in order to be able to respond to new technologies and get them to market swiftly, and this chimed with the general ‘deregulation’ calls from business. In healthcare, the concept of ‘regulatory science’ emerged to try to provide effective evidence of efficacy and safety swiftly.50 However, no overarching concept has emerged that provides a convincing framework for regulatory and business success that would deliver the twin purposes of prosperity and protection. It is the claim of this book that OBCR is such a concept. Hodges circulated two papers on OBCR in 2021.51

The BREXIT Focus on Innovation, Growth and Outcomes Meanwhile, a Taskforce of senior politicians appointed by the Prime Minister produced a Report in 2021 aimed at refreshing the UK’s approach to regulation to stimulate business, economic growth and international attractiveness in the light of the UK leaving the EU.52 The focus was on boosting productivity, encouraging competition and stimulating innovation. To achieve these goals, it was proposed that UK regulation should be ‘proportionate, forwardlooking, outcome-focussed, collaborative, experimental, and responsive’. From the perspective of this book, the emphasis on outcome-focus and collaboration are particularly relevant, and welcome, although the Taskforce suggested no detail on how those goals should be implemented or achieved. In relation to the discussion above over the acceptability of risk, the Taskforce did say that ‘Regulators should make space for businesses to test and trial new business models, products and approaches’ and that the proportionality principle included the concept of risk and of ‘reaching the right outcome’.53 The Taskforce proposed that regulators should report publicly on how they have promoted competition and innovation in their markets54 – raising other proliferation and balancing issues. The Government subsequently consulted on the idea of delegating more power and discretion to the UK’s regulatory bodies, removing many of the detailed rules in the existing statutory frameworks to make them less prescriptive (replacing them with outcomes to be achieved), and

48 C Hodges and R Steinholtz, Ethical Business Practice and Regulation (Hart, 2017). 49 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 50 See Advancing Regulatory Science at FDA: Focus Areas of Regulatory Science (FARS) (FDA Administration, 2021). 51 In February 2022, they were published at www.indr.org.uk: C Hodges, ‘Supporting Cooperative Regulation’ and C Hodges, ‘An Introduction to OBCR’. 52 I Duncan Smith, T Villers and G Freeman, Taskforce on Innovation, Growth and Regulatory Reform (2021). 53 ibid, paras 61 and 68. 54 ibid, paras 103–09.

Evolution in Better Regulation Policy and Practices of UK Regulators  367 allowing the regulatory regime to be shaped more by case law.55 In relation to risk and outcomes it suggested that the proportionality principle could be designed to operate in two key ways: 1. 2.

Risk: ensuring the design, appraisal and implementation of regulations, including their cost, is proportionate with the level of risk being addressed. Reaching the right outcome: regulation should be based on outcomes rather than assessing mechanistic ‘tick-box’ compliance with rules. Remediation and penalties where a bad outcome (such as a harmful data breach) occurs should be proportionate to the harm caused as well as the size and ability to pay of the business involved.

These references to risk are more about cost-proportionality of regulation than of accepting the cost of inevitable harm, that all stakeholders need to accept risk, not least those who may be harmed, and whose voices should be involved in scrutinising the system and its arrangements for protection and redress. The Consultation took a step forward in contemplating that scrutiny of regulatory proposals could be carried out by an independent body, as an alternative to internal Government mechanisms,56 but this stopped short of formal wider involvement. Respondents to the Consultation supported an objectives-based framework, adoption of the proportionality principle, increased sandboxing and earlier scrutiny of regulatory proposals, whilst not supporting ideas on ‘a common law approach to regulation’, a ‘one in one out’ approach or proposals on streamlining impact assessments.57 In early 2022, the Government published a report on the UK’s post-Brexit policies that included language on regulation drawn from the OBCR concept papers.58 It referred to co-creating better regulation with business, cooperation based on trust to achieve outcomes through proportionate regulation, with modernised approaches to enforcement, and reduced compliance costs. Statements included:59 … we need to make sure that our regulatory system is set up in the right way for future changes … There are two core ways we will do this: A renewed regulatory framework, based on our principles for regulation. We will deliver an improved regulatory system, nesting the reforms that we are introducing under the Government’s five regulatory principles. Poorly designed regulations can stifle economic growth and innovation, limit market competition and disproportionately harm small businesses. But when done well and in collaboration with business, regulation can catalyse economic growth and the co-creation of new markets. The steps we are taking, including through improved regulatory scrutiny and evaluation of impacts, will help ensure that where regulation is used it is a force for good for the UK economy. Our Retained EU Law Reviews. We are taking steps to ensure that any retained EU law on the UK statute book meets the UK’s priorities for unlocking growth and is tailored for the UK market. Our intent is to amend, replace, or repeal all the retained EU law that is not right for the UK. We are also setting an ambitious target to benefit businesses by cutting EU red tape. … Better regulations, co-created with businesses, will also benefit the future industries where we can build new competitive advantages and set our economy apart. We will provide flexible frameworks and rules 55 Reforming the Framework for Better Regulation A Consultation (BEIS, 2021), para 3.1.2. This idea of regulating ex post by judges reveals some lack of understanding of how businesses, regulators and courts operate, and are capable of operating to provide ex ante clarity. 56 ibid, para 3.4.10. 57 Reforming the Framework for Better Regulation. Summary of Responses to the Consultation (HM Government, 2022). 58 The Benefits of Brexit. How the UK is Taking Advantage of Leaving the EU (HM Government, 2022). 59 ibid, pp 20, 21, 22, 24, 26, 27.

368  Cooperative Regulatory Models created in collaboration with these sectors, bear down on compliance costs and ensure enforcement is modernised and joined up. The rules we set will be outcomes-focused and proportionate with the clear objective of delivering growth and innovation. Our regulation will be built for new entrants and incumbents alike and ensure SMEs are protected from the most burdensome obligations. Rules will be proportionate to the real or likely harms, not precautionary and risk averse, except in areas where it is justified, like protecting the environment. … Our principles for regulation … 1. 2. 3.

4. 5. …

A sovereign approach. We will use our new freedoms to follow a distinctive approach based on UK law, protected by independent UK regulators and designed to strengthen UK markets. Leading from the front. We will focus on the future, shaping and supporting the development of new technologies and creating new markets. We will use our new freedom to act quickly and nimbly and we will pursue high-quality regulation because it leads to better markets. Proportionality. Where markets achieve the best outcomes, we will let them move freely and dynamically. We will pursue non-regulatory options where we can. When strong rules are required to achieve the best outcomes, we will act decisively to put them in place and enforce them vigorously. Recognising what works. We will thoroughly analyse our interventions based on the outcomes they produce in the real world and where regulation does not achieve its objectives or does so at unacceptable cost, we will ensure it is revised or removed. Setting high standards at home and globally. We will set high standards at home and engage in robust regulatory diplomacy across the world, leading in multilateral settings, influencing the decisions of others and helping to solve problems that require a global approach.

A more holistic and efficient approach. We will take a more holistic and efficient approach to the conditions under which we scrutinise regulation, ensuring that any regulation that passes through the system aligns with UK interests. This will include, for example, basing our assessments of regulation and our scrutiny decisions on criteria and metrics that underpin the UK economy: the impacts of regulation on consumers, businesses, barriers to entry and international trade, innovation and delivering on our net zero ambitions. We also recognise that poorly designed regulation can be burdensome to the small and entrepreneurial businesses that are the foundation of our economy. The improvements that we are making to the rigour with which we scrutinise regulation will help ensure that businesses do not have to struggle through a thicket of burdensome and restrictive regulations. … Regulators should work collaboratively with businesses to ensure there is a clear feedback loop between the regulated and the regulators. This collaborative approach will also help in ensuring that any costs to business are minimised. We need to make sure regulators have the right powers and duties to enable this. … Outcome-focussed, experimental regulators. We will encourage bold, outcome-focused and experimental activity from regulators, who will work collaboratively with businesses, for example using test-beds and sandboxes to support innovation and the co-creation of future industries. … Regulation to support businesses, not burden them. We will keep the administrative costs of complying with regulation as low as possible. We recognise the particular importance of this for the small and innovative businesses that underpin our economy. … Regulators will work collaboratively with industry to identify issues and target measures to address them. Compliance and enforcement approaches must be similarly proportionate, with open communication channels to support a culture of information sharing between industry and regulator. We want to drive a culture of constant improvement, through collaboration between regulators, regulated businesses and other stakeholders. Trust between the regulator and business will be underpinned by data and information sharing.

The Regulatory Delivery Model for Regulatory Authorities  369

The Regulatory Delivery Model for Regulatory Authorities The Regulatory Delivery Model (RDM) is a framework for regulatory authorities.60 It was developed by officials in the UK Office for Product Safety and Standards (OPSS), part of the Department for Business, Energy & Industrial Strategy, and captures ideas from working with governments and regulators across the world. The RDM comprises three pre-requisites for regulatory agencies to be able to operate effectively (governance framework, accountability and culture) and three practices that agencies need in order to deliver societal outcomes (outcome measurement, risk-based prioritisation and intervention choices). It is not the function of this document to into the RDM in detail but acknowledge it as a foundational framework for EBP and EBR. Instead, this section focuses on providing a broad overview of the RDM and the opportunities within it to create an integrated regulatory framework that is designed to primarily regulating through culture. These are summarised below.

Pre-Requisites Pre-requisites for regulatory agencies to be able to operate effectively: 1. 2. 3.

Governance Framework covers the basis on which a regulatory authority is formed, its powers, purpose, structures, the landscape within which it operates, and its powers and responsibilities. Accountability covers the relationships and responsibilities of an authority towards its different audiences, what it is accountable for and to whom. It involves transparency and accountability mechanisms. Culture covers the culture of the authority, emphasising the shaping features of leadership, values and competency.

Element 1: Governance Framework Governance can be defined as the manner in which control is exercised; the influences over a person or organisation; or the ways in which policies are delivered. In the RDM, Governance Frameworks are considered in terms of a regulatory agency’s purpose, its structure, its operating landscape and its powers and responsibilities. The model (Figure 13.1) recognises that all stakeholders are involved in the governance and operation of the entire system, rather than compliance just being the responsibility of ‘regulatees’ and enforced by regulators. That shared involvement is illustrated by the figure below, which shows this communal involvement, albeit at differing levels of intensity, illustrated by different shades of blue.61 The model enables all stakeholders to be involved. Any governance framework set out under this model should be built with this in mind.

60 G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 61 CAN/UL2984:2019 National Standard of Canada: Standard for Management of Public Risks–Principles and Guidelines (Standards Council of Canada, 2019), Figure 2, p 18.

370  Cooperative Regulatory Models Figure 13.1  Public Risk Management: Multi-Stakeholder Context

Public Risk Source(s)

Os NG

Directly Responsible

Others

Indirectly Responsible & Influencers

Intern at io nal Obligatio ns

Level of Influence Influence greater with larger arrow

s& s de ard o C nd a St

Impacted by Risk

su3478

NGOs = Nongovernment Organizations

Some key lines of enquiry that should be addressed when building a governance framework would include: • Clarity and alignment between the regulatory objectives, the purpose of regulatory requirements and of the regulatory agency – the agency should understand and should be able to communicate its purpose as not merely being a compliance seeker but a trusted partner and influencer of ethical business practices • The design and operational structure of the agency – the agency should have decision-making capabilities that are not limited to just inspections and enforcement but include broad range of toolkits that would allow it to become a facilitator of ethical business practices • Governance landscape – as illustrated in the figure above, the agency should consider the entire system and have a clear understanding of the individual and collective responsibilities of the various actors within the system and especially other regulators • Powers and responsibilities – the agency should have and be able to use a wide ranging toolkit of regulatory and non-regulatory powers and instruments to primarily facilitate an enabling environment for ethical business practices and with a goal of meeting the set objectives.

Element 2: Accountability Accountability is understood within the RDM in terms of the empowerment of stakeholders to participate in the regulatory process and to challenge the regulatory agency. It is seen both as

The Regulatory Delivery Model for Regulatory Authorities  371 a constraint on the behaviour of the regulatory agency and as an enabler by strengthening the authorising environment through creation of confidence and utilisation of trust. While defining accountability, it is important to consider both what the regulatory agency should be accountable for and to whom they should be accountable. With respect to the latter, the RDM presents a simple representation of the accountability relationships between the key stakeholders of the system as shown in Figure 13.2. Figure 13.2  Accountability Relationships of a Regulatory Authority Regulated Entity

Consultation

Cost recovery

Supply

Beneficiary

Regulatory Agency

Consultation

Public money

Government

Key lines of inquiry that need to be considered by a regulatory agency while building accountability frameworks in our proposed model include: • Appropriate measures that demonstrate transparency of its functions and processes and that builds confidence and trust amongst its stakeholders • Effective mechanisms that enable the regulated entities, governments and other stakeholders of the system to hold the agency accountable.

Element 3: Culture Culture is considered within the RDM as a collective understanding and purpose that manifests itself in the visible behaviour of the regulatory agency. It will determine how the regulatory agency will respond to the forces of governance and accountability and support improvement. The regulatory agency should, at a minimum, be able to establish, implement and demonstrate all the applicable ethical principles and standards described in the previous section as they pertain to ethical business practices and address the following key lines of inquiry: • The agency’s leadership should demonstrate the competence and capability of not only implementing EBP internally but in administering similar expectations of its regulated entities

372  Cooperative Regulatory Models • The agency’s values are aligned externally with the regulatory objectives and internally with its pre-established principles and standards • The agency’s learning and development strategies are proportional to its purpose and that promotes a culture that focuses on the desired outcomes.

RDM Practices Practices that agencies need in order to deliver societal outcomes: 1. 2. 3.

Outcome Measurement covers the need to identify the outcomes on which the agency is focused and to monitor and report against them. Risk-based Prioritisation is the mechanism for allocating (scarce) resources to priority areas at strategic, operational, tactical and targeting levels, using risk as the ‘currency of regulation’. Intervention Choices involves the ability to select and implement appropriate means to mitigate risks including through understanding of the awareness, capability and motivation of the regulated and of the beneficiaries.

Element 4: Outcome Measurement The concept of outcomes has been discussed earlier in the section on ‘Regulatory Objectives’. Measures such as the number of inspectors; inspection levels or frequencies; the numbers of prosecutions or other sanctions; when taken as proxies for outcomes, have a perverse effect. They encourage a focus on quantity over quality and incentivise poor choices.62 The OECD, in its best practice principles for regulatory enforcement,63 suggests that ‘improvements in the number of businesses that are “broadly compliant” with the requirements should be used only as a complement to outcome indicators’. The UK Office of Product Safety and Standards provides an example of a logic modelling approach for measuring outcomes and impacts as shown in Table 13.1. Table 13.1  Model for Measuring Regulatory Outcomes and Impacts Inputs

Activities

Outputs

Outcomes

Impacts

Legal mandate: Powers to enforce

Advice and guidance activities

Information and guidance documents

Improved compliance

Stronger market for ‘sustainable’ timber

Competent staff

Developing compliance tools for businesses

Tailored advice delivered

Confidence and certainty in business community

Reduced illegal logging and deforestation

Technical expertise

Training businesses

Businesses trained

A level playing field for UK businesses importing timber

Improved governance in timber supplying countries (continued)

62 G Russell and H Kirkman, ‘Outcome Measurement’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 63 ‘Regulatory Enforcement and Inspections, OECD Best Practice Principles for Regulatory Policy’ (OECD, 2014).

The Regulatory Delivery Model for Regulatory Authorities  373 Table 13.1  (Continued) Inputs

Activities

Outputs

Funding

Verifying licences for timber imports

Licensed timber enters the country

More responsible business practices in sourcing timber

Outcomes

Conservation and safeguarding of biodiversity

Impacts

Data and intelligence

Inspections and other checks on compliance measures

Sanctions for non-compliance

Consumer confidence in UK timber products

Reductions in CO2 emissions

Receiving allegations of non-compliance

Regulatory reports

The following are Australian Regulator Performance Framework key performance indicators: 1. 2. 3. 4. 5. 6.

Regulators do not unnecessarily impede the efficient operation of regulated entities Communication with regulated entities is clear, targeted and effective Actions undertaken by regulators are proportionate to the regulatory risk being managed Compliance and monitoring approaches are streamlined and coordinated Regulators are open and transparent in their dealings with regulated entities Regulators actively contribute to the continuous improvement of regulatory frameworks

Whatever be the approach selected by the regulatory agency, the key lines of inquiry should consider: • • • •

Impacts and outcomes that are appropriate for the set regulatory objectives Measure the culture of the regulators and regulated entities Measure its direct and indirect impact on the performance of the regulated entities Reflect the entire regulatory systems

Element 5: Risk Based Prioritisation Risk is defined as combination of the probability of harm and severity of harm (ISO Guide 51). Regulatory agencies are generally understood to be the overseers and custodians of public risk. Public Risk – the full range of potential public harms, arising from voluntary or involuntary activities, from which the public expects protection (UL 2984). Private and public assets and/or services (public risk sources) create public good intended to provide benefits. However, they may also pose a risk of causing harm(s) to the public and/or other impacted public risk stakeholders. Public goods provide benefits that are either shared by some or many members of the public or individual organisations. Public risks pose harms to individuals or organizations who may not be the same organisations or individuals who receive the public good. Society acknowledges acceptable public risks and tolerable public risks, based on perceived or actual benefits, while fully knowing that all activities carry some risk. A level of public risk associated with a public harm may be tolerable to society in one context or

374  Cooperative Regulatory Models circumstance, but intolerable in another context or circumstance. Figure 13.3 from UL 2984 illustrates this balance. Figure 13.3  Balance of Public Benefits and Risks in Regulation

Public Good Benefits (e.g., improved health, socio-economic conditions, safety, cultural values)

Individual Risk Owner(s)

Risk Sources

(these may include organizations, or individuals)

(e.g., Public assets, products, processes, individuals, technologies, behaviour, legislation)

Harms Public Risk

(e.g., risk to health, personal safety, environment, monetary loss, property damage)

su3477

Organisations such as regulatory agencies whose primary responsibility is public risk management should demonstrate that their resources are focused on addressing identified public risks for which they are responsible. Risk Assessment should be used by regulatory agencies: (a) In determining priorities between regulatory areas. (b) In determining regulatory priorities within a regulatory area. (c) In determining, in relation to the regulatory priorities identified, the individual regulated entities, premises or activities that should be targeted at an operational level. (d) In being clear, at the level of an individual regulated entity or premises, where the focus of any checks on compliance should be. Risk Assessment is fundamentally reliant on the use of good-quality and relevant information. Within RDM, the examination of the practice of risk-based prioritisation involves a careful consideration of how regulatory agencies are gathering, accessing and analysing data, information and intelligence in order to make informed assessments of regulatory risk at all levels. Culture Risk Culture risk is the likelihood that individuals and teams in a business will behave ethically (or not) and as discussed in Element 5 can arise in many ways. This is relevant not just on a daily basis in a ‘steady state’ but especially when the circumstances give rise to pressures on the humans or

The Regulatory Delivery Model for Regulatory Authorities  375 organisation involved, such as financial distress or to obtain what is perceived to be a short-term gain at the risk of unethical action and possibly long-term damage. Several methods for risk assessment are available and are being used by regulatory agencies worldwide but when applying it to the proposed model, some of the key lines of inquiry should: • Include evidence and data that measures ‘culture risk’ and that reflects the culture and business practices of the regulated entities and their impact on both the components of risk (likelihood and consequence) • Involve analysis that represents an appropriate balance of compliance risk and culture risk • Account for the presence and effectiveness of not only its own intervention choices but also those of the regulated entities • Assess the amount and types of ‘Cultural Entropy’ or dysfunction in the organisation.

Element 6: Intervention The regulatory agency, being clear on its outcomes and having decided where to direct its resources, faces a decision on how best to use them. Intervention choices involves the ability to select and implement appropriate means to mitigate risks including through understanding of the awareness, capability and motivation of the regulated and of the beneficiaries. Used effectively this enables a new breadth of potential resolutions which empower action and multiply impact. The task of regulatory agencies, while often expressed in terms of mitigating risk or ensuring compliance with regulation, is fundamentally about changing the behaviour of regulated entities. While some agencies do have direct authority to mitigate risks themselves, even in these cases most of their impact is achieved by changing the way others act. Behaviour of regulated entities matters not just because it determines compliance and non-compliance but because it contributes to wider outcomes of reducing regulatory risks. The primary question for a regulatory agency is therefore what it can do that will be most effective in delivering the desired behaviour change amongst those it regulates. A secondary question of relevance to many regulatory agencies will be what else they can do that will contribute to risk reduction. A regulatee who practices EBP, and relates to the regulatory agency through an EBR relationship, should be motivated to work spontaneously, and with the agency, to do the right thing, so that formal intervention may be unnecessary. The most efficient intervention by an authority is where a business volunteers, or agrees, to make changes to prevent occurrence of harm and to reduce future risk. This spontaneous behaviour can be incentivised and encouraged by an agency adopting policies based on cooperation and ethical behaviour, such as making clear in a published enforcement policy that certain behaviour will be considered as mitigating factors (or conversely, aggravating factors) in considering interventions and sanctions. It can also be institutionalised in relationships and agreements, such as under the Primary Authority scheme discussed below.64 An important issue to determine is the reason for non-compliance as this will drive selection or design interventions that are appropriate to the circumstances. An example of reasons and relevant interventions is illustrated at Figure 13.4.



64 See

Guidance on Primary Authority at www.gov.uk/guidance/local-regulation-primary-authority.

376  Cooperative Regulatory Models Figure 13.4  Flowchart of Reasons and Intentions Guiding Regulatory Interventions Do businesses in the sector know about the requirement(s)?

No

Lack of awareness

Provide information

Yes Do businesses in the sector understand the requirement(s) and how to comply? Yes Are businesses in the sector generally or specifically willing to comply with the requirement(s)?

No

No

Lack of understanding

Give guidance or advice

Low intention or motivation

Use cost or benefit interventions to improve motivation

Yes Have businesses in the sector generally or specifically put in place measures to comply with the requirement(s)?

Targeted checks on compliance

No

Yes Are businesses in the sector generally or specifically achieving compliance with the requirement(s)?

No Yes

Proportionate enforcement action Monitor sector

Statements by Some Regulators on Trust and Cooperation The statements made by individual regulators continue to evolve, on an individual rather than coordinated basis, to refer to concepts of trust, cooperation, changing behaviour and achieving outcomes. The Financial Conduct Authority (FCA) issued a sequence of ‘mission statements’ from 2017. The main document recognised the limitations of a rules-based system, citing diversity in financial services and organisations as the basis for the belief that ‘it is neither possible nor desirable to specify exactly what we expect from every market participant against detailed rules’.65 The core approach would be that ‘Effective regulation relies on consent, trust and confidence from

65 Our Mission 2017. How We Regulate Financial Services (Financial Conduct Authority, 2017). Elaboration of these goals was contained in: FCA Mission: Our Future Approach to Consumers (Financial Conduct Authority, 2017); FCA Mission: Approach to Consumers (Financial Conduct Authority, 2018); FCA Mission: Approach to Authorisation (Financial Conduct Authority, 2018); FCA Mission: Approach to Competition (Financial Conduct Authority, 2018); FCA Mission: Approach to Supervision (Financial Conduct Authority, 2019); FCA Mission: Approach to Enforcement (Financial Conduct Authority, 2019).

Statements by Some Regulators on Trust and Cooperation  377 the public, including consumers and the regulated, that powers are used consistently, transparently and proportionately.’ In accordance with the overriding principle of promoting the public interest, the FCA said that it would aim at the following goals, starting with trust: 1.

Enhancing trust in markets • Set clear rules and standards • Authorise firms and individuals • Supervise, monitor and investigate • Seek to ensure and promote clean and competitive markets • Ensure effective access to redress

2.

Improving how markets operate • Promoting competition • Taking consumer behaviour into account • Adjusting provider behaviour • Directly protecting consumers • Encouraging innovation

3.

Delivering benefits through a common approach to regulation • Setting policies and standards • Authorising firms • Enforcing market discipline

4.

Working to prevent harm

5.

Helping put things right when they go wrong.

The Office of Water Regulation (Ofwat) set out a strategy in 2015 based on trust, and being focused on outcomes and relationships.66 Its 2019 revision of its principles on board leadership, transparency and governance required companies’ boards to develop and promote the company’s purpose in consultation with a wide range of stakeholders and reflecting its role as a provider of an essential public service.67 A board has to make sure that the company’s strategy, values and culture are consistent with its purpose, and to monitor and assess values and culture to satisfy itself that behaviour throughout the business is aligned with the company’s purpose. Where it finds misalignment it takes corrective action. Ofwat’s 2019 strategy paper also referred to its intention to build increased collaboration and partnerships with water companies:68 What we want to achieve To transform water companies’ performance. To drive water companies to meet long-term challenges through increased collaboration and partnerships. For water companies to provide greater public value, delivering more for customers, society and the environment.

66 Trust

in Water (Ofwat, 2015). Leadership, Transparency and Governance – Principles (Ofwat, 2019). to Act, Together: Ofwat’s Strategy (Ofwat, 2019).

67 Board 68 Time

378  Cooperative Regulatory Models How we will do it Companies will need to have a more meaningful, trusted relationship with customers and communities. Companies will need to improve the environment as a core part of their business to deliver sustainable, resilient water supplies. Companies will need to be run with a clear purpose, adding wider public value for customers and communities as well as for shareholders. Companies will need to collaborate and work with others within and beyond the sector, reflecting the needs of the places in which they operate. Ofwat will listen to customers more directly to better test our policies and guide where and how we hold companies to account.

Dissatisfaction with traditional economic regulatory incentives and tools was mirrored by some in the water industry, noting ‘a contradiction between the tools of efficiency, comparative incentives and economic regulation, and the ethical needs of regulating for the wellbeing of society’.69 The conclusion was that there was a need to build consensus with stakeholders and, accordingly, to make incentives and returns a more explicit part of consensus building. The Environment Agency’s 2019 updated policy on enforcement and sanctions clearly aimed at achieving the outcomes of ‘a change in the offender’s behaviour’ and ‘to get the environmental harm or damage put right’.70 Its 2020 strategy affirmed ‘We need to work even more effectively with businesses to improve, not just sustain, their environmental performance; and to enhance, not just protect, the environment around us.’71 In relation to product safety, the new regulator, OPSS, affirmed in 2021 its commitment to an outcome-based approach but recognised challenges in achieving a more risk-based approach:72 Outcomes-focused, risk-based approach. The UK’s system of regulation was not designed with today’s models of supply and product in mind and many respondents recognised that it is coming under significant challenge and change is needed to modernise … When it works well, our outcomes-based framework, supported by voluntary product standards, can be an enabler of innovation by allowing manufacturers flexibility in how they meet essential safety requirements. However, the system could be more explicitly based on risk, with higher requirements for tests, assessment and transparency for products presenting greater inherent hazard and, where relevant, higher levels of risk in the supply chain.

Companies who extract oil and gas under a UK licence are required, in addition to maximising the net value of the economically recoverable petroleum, not only to ‘take appropriate steps to assist the Secretary of State in meeting the net zero target’, but are also required to:73 (a) collaborate and co-operate with: (i) other relevant persons; (ii) persons seeking to acquire an interest or invest in offshore licences or infrastructure in a region; and, (iii) persons providing goods or services relating to relevant activities in order to support the delivery of such activities on time and on budget; and, (b) co-operate with the OGA.

This is a remarkable industry-wide obligation of cooperation, applying from 11 February 2021.

69 Regulating

for Consensus and Trust. Modernising Economic Regulation (Bristol Water, 2021). Agency Enforcement and Sanctions Policy (Environment Agency, 2019). 71 EA2025 Creating a Better Place (Environment Agency, 2020). 72 UK Product Safety Review. Call for Evidence Response (Office for Product Safety & Standards, 2021) 5. 73 The OGA Strategy (Oil & Gas Authority, 2021). 70 Environment

Purposes: Convergence between Businesses and Regulation  379

Purposes: Convergence between Businesses and Regulation: Prosperity and Protection At first glance, the core purposes of business (prosperity) and of regulation (protection) are in conflict. That opposition has indeed caused conflict between the institutions and people on both sides in practice. However, during the past 70 years, some convergence in the goals of businesses and regulators has occurred. As a result, both ‘sides’ could now be said to potentially overlap and share the same goals of achieving shared best outcomes encompassing the objectives of all stakeholders, namely success in social, economic and environmental goals. In other words, what used to be a polarisation in the purposes of businesses and regulators has shifted to being a move towards the achievement of common goals. This gives some room for cooperative engagement to be created. On the regulatory side, some regulators are required not only to safeguard fair markets, and fair behaviour in markets, but also to achieve their core goal of protection whilst taking into account business success (such as under a duty to achieve growth).74 We have noted above a shift from an authoritarian relationship in various sectors towards an adult, respectful relationship between regulators and businesses. On the business side, there is occurring a profound transformation away from maximising shareholder value to maximising stakeholder value, and adopting the achievement of social purpose as a guiding principle. The most dramatic development was the statement made by the US Business Roundtable in 2019 of the purposes of a corporation, which rejected a profitmaximising capitalist model to a purpose-driven stakeholder-regarding model encompassing achieving the well-being of ‘All Stakeholders’: customers, staff, suppliers, communities and longterm value for shareholders.75 While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations. • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders. Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country. 74 See Regulators’ Code (2014), provisions 1 and 5, refer to supporting businesses to comply and grow, and helping them meet their responsibilities. 75 www.opportunity.businessroundtable.org/wp-content/uploads/2019/09/BRT-Statement-on-the-Purpose-o f-a-Corporation-with-Signatures-1.pdf.

380  Cooperative Regulatory Models Since the GFC a decade ago, corporate governance requirements have also been amended to require companies to adopt a clear relationship between the concepts of purpose, values and culture. The OECD has specified:76 The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.

The UK’s 2018 revision of its Corporate Governance Code said:77 Companies do not exist in isolation. Successful and sustainable businesses underpin our economy and society by providing employment and creating prosperity. To succeed in the long-term, directors and the companies they lead need to build and maintain successful relationships with a wide range of stakeholders. These relationships will be successful and enduring if they are based on respect, trust and mutual benefit. Accordingly, a company’s culture should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.

Thus, the organisation’s purpose is achieved through the alignment of its values, strategy and culture, all of which must be confirmed by its board.

Means of Establishing Purpose Businesses. The established means by which a private corporation establishes its ‘purpose, values and strategy’ is for this to be done by its board of directors, who must satisfy themselves that ‘these and its culture are aligned’.78 These provisions of the Corporate Governance Code are discussed in chapter 10, where it is noted that the method is hardly describable as an inclusive cooperative model involving all stakeholders. Regulators. Regulators’ primary purposes are typically established by Parliament in statutes. A summary of what is specified in the governing legislation in relation to a small number of authorities, together with their own brief statements on their mission, is at Table 13.2.79 In some cases, there is no clear statement of purposes or objectives, but instead specification about various functions that are imposed on an authority, and sometimes also primarily on a Secretary of State that are delegated to an authority. There is clearly room for clarification about authorities’ basic purposes, as well as standardisation. The mission statements by authorities in their strategy documents and annual reports are frequently more focused than the purposes or functions set out in legislation. Such statements by authorities can be updated (examples are quoted here from the Environment Agency) but, although these may be helpful, relevant and assist clearer communication, they have not been agreed formally by politicians or any other stakeholders. There is recognition in several pieces of legislation that different and potentially competing purposes exist. For example, the Financial Conduct Authority has objectives relating to consumer protection, integrity of the UK financial system and maintaining competition: these are bound to produce conflicts in practice. The legislation governing the Medicines and Healthcare products Regulatory Agency includes a broad mechanism for reconciling conflicts: since the primary statutory duties are here imposed on the Secretary of State, that minister is made subject to a duty to resolve priorities between competing objectives by issuing directions. 76 G20/OECD Principles of Corporate Governance (OECD, 2015). 77 The UK Corporate Governance Code (Financial Reporting Council, 2018). 78 ibid. For similar provisions in relation to asset owners and asset managers, see The UK Stewardship Code 2020 (Financial Reporting Council, 2019). 79 Thanks to Charmaine Cole for researching these provisions.

Purposes: Convergence between Businesses and Regulation  381 As examined below, ministers may also place other, secondary or operational, objectives in regulators: legislation relating to the agencies listed in Table 13.2 frequently includes such a power.80 In addition, the UK has been one of the pioneers of a Regulators’ Code, which essentially imposes criteria on how a regulator is to behave (eg ‘base their activities on risk’ and ‘ensure their approach to their regulatory activities is transparent’) but also, since 2014, has imposed a secondary purpose of pursuing growth (known as the ‘growth duty’: to ‘carry out their activities in a way that supports those they regulate to comply and grow’). There is, however, no mechanism for discussing or agreeing how decisions or behaviours should attempt to balance the growth duty with other duties or objectives, either prospectively or retrospectively. Table 13.2  Comparison of the Statutory Purposes and Mission Statements of Selected UK Regulatory Authorities Authority Competition and Markets Authority Civil Aviation Authority

Statutory Purpose(s) Seek to promote competition, both within and outside the United Kingdom, for the benefit of consumers.81 (a) To secure that British airlines provide air transport services which satisfy all substantial categories of public demand (so far as British airlines may reasonably be expected to provide such services) at the lowest charges consistent with a high standard of safety in operating the services and an economic return to efficient operators on the sums invested in providing the services and with securing the sound development of the civil air transport industry of the United Kingdom; (b) to secure that at least one major British airline which is not controlled by the British Airways Board has opportunities to participate in providing, on charter and other terms, the air transport services mentioned in the preceding paragraph; (c) subject to the preceding paragraphs, to encourage the civil air transport industry of the United Kingdom to increase the contribution which it makes towards a favourable balance of payments for the United Kingdom and towards the prosperity of the economy of the United Kingdom; and (d) subject to the preceding paragraphs, to further the reasonable interests of users of air transport services; …83

Mission To make markets work well in the interests of consumers, businesses and the economy.82 To improve aviation and aerospace for consumers and the public.84

(continued) 80 eg

Water Act 1991, s 2A. 81 Enterprise and Regulatory Reform Act 2013, s 25(3). 82 Annual Report and Accounts 2020 to 2021 (Competition & Markets Authority, 2021). 83 Civil Aviation Act 1971, s 3(1). 84 Our Strategy at a Glance, at http://publicapps.caa.co.uk/docs/33/CAP%202182%20CAA_Horizon%20-%20Strategy% 20at%20a%20glance.pdf. This states ‘Our Purpose’ as: ‘To help deliver high standards of safety, security and consumer protection for the benefit of consumers and the public. To uphold consumer choice, value and fair treatment. To enhance

382  Cooperative Regulatory Models Table 13.2  (Continued) Authority Financial Conduct Authority

Statutory Purpose(s) (1) The FCA’s strategic objective is: ensuring that the relevant markets function well. (2) The FCA’s operational objectives are— (a) the consumer protection objective [securing an appropriate degree of protection for consumers]; (b) the integrity objective [protecting and enhancing the integrity of the UK financial system]; (c) the competition objective [promoting effective competition in the interests of consumers in the markets …].85

Mission Our aim is to regulate in a way that adds the most benefit to those who use financial services. Our Mission explains what we prioritise and why. It describes the framework we use to make decisions, the reasoning behind our work and how we choose the best tools for the job … As a public body our aim is simple: to serve the public interest by improving the way financial markets work and how firms conduct their business. By doing this, we provide benefit to individuals, businesses, the economy, and so the public.86

Gambling Commission

Duty to promote the licensing objectives—87

Information Commissioner’s Office

Protect individuals with regard to the To uphold information rights for processing of personal data, in particular by— the UK public in the digital age.89

To make gambling fairer and safer. We do that by licensing (a) preventing gambling from being a source and regulating in the public of crime or disorder, being associated interest and providing advice and with crime or disorder or being used to guidance.88 support crime, (b) ensuring that gambling is conducted in a fair and open way, and (c) protecting children and other vulnerable persons from being harmed or exploited by gambling.

(a) requiring personal data to be processed lawfully and fairly, on the basis of the data subject’s consent or another specified basis, (b) conferring rights on the data subject to obtain information about the processing of personal data and to require inaccurate personal data to be rectified, and (continued)

vibrant, competitive and innovative aviation and aerospace sectors. To share with and learn from others, working with partners to ensure our regulatory expertise is used to improve standards and innovation worldwide and build the UK’s global influence. To cultivate an agile, diverse, high-performing and values-based organisation that is greater than the sum of its parts and committed to continually improving our services. To support the sectors as they manage and reduce their negative environmental impacts, including emissions and noise.’ 85 Financial Services Markets Act 2012, ss 1B–1E. 86 Our Mission 2017. How We Regulate Financial Services (Financial Conduct Authority, 2017). 87 Gambling Act 2005, ss 1 and 22. 88 www.gamblingcommission.gov.uk/about-us/guide/page/our-strategy. 89 Information Rights Strategic Plan 2017–2021 (Information Commissioner’s Office) at http://ico.org.uk/media/201413 4/20170413icoinformationrightsstrategicplan2017to2021v10.pdf.

Purposes: Convergence between Businesses and Regulation  383 Table 13.2  (Continued) Authority

Statutory Purpose(s) (c) conferring functions on the Commissioner, giving the holder of that office responsibility for monitoring and enforcing their provisions.90

Mission

[The Act makes data processing subject to specified principles.91] Office of Communications

OFCOM shall have the functions transferred by a statement made by the Secretary of State, and under any enactment.92

To make sure communications work for everyone.93

Office of Gas and Electricity Markets

To protect the interests of consumers in relation to gas conveyed through pipes.94

To protect consumers now and in the future by working to deliver a greener, fairer energy system.96

To protect the interests of existing and future consumers in relation to electricity conveyed by distribution systems or transmission systems … (1A) Those interests of existing and future consumers are their interests taken as a whole, including— (a) their interests in the reduction of electricity-supply emissions of targeted greenhouse gases; … (b) their interests in the security of the supply of electricity to them; and (c) their interests in the fulfilment by the Authority, when carrying out its designated regulatory functions, of the designated regulatory objectives.95 Water Services Regulation Authority

The Secretary of State or, as the case may be, the Authority shall exercise and perform the powers and duties mentioned … in the manner which he or it considers is best calculated— (a) to further the consumer objective [to protect the interests of consumers, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities connected with, the provision of water and sewerage services];

Our ambition is for the water sector to provide the very best service to customers, protecting the environment and improving life through water both now and in the future. … our role is to enable, incentivise and hold companies to account for providing the very best for customers, society and the environment now and in the future. We also oversee the (continued)

90 Data Protection Act 2018, s 36. 91 The principles are at ss 35–42: Lawfulness, fairness and transparency; Purpose limitation; Data minimisation; Accuracy; Storage limitation; Integrity and confidentiality (security); and Accountability. 92 Communications Act 2003, ss 1 and 2A. 93 Ofcom’s Plan of Work 2020/21. Making communications work for everyone (Ofcom, 2021). 94 Gas Act 1986, s 4AA. 95 Electricity Act 1989, s 3A. 96 Annual Report and Accounts 2019–20 (Office of Gas and Electricity Markets, 2020).

384  Cooperative Regulatory Models Table 13.2  (Continued) Authority

Statutory Purpose(s) Mission (b) to secure that the functions of a water markets that exist in the water undertaker and of a sewerage undertaker sector to make sure they are are properly carried out as respects every working for customers.98 area of England and Wales; (c) to secure that companies holding appointments … as relevant undertakers are able (in particular, by securing reasonable returns on their capital) to finance the proper carrying out of those functions; … (d) to secure that the activities authorised by the licence of a water supply licensee or sewerage licensee and any statutory functions imposed on it in consequence of the licence are properly carried out; and (e) to further the resilience objective [(a) to secure the long-term resilience of water undertakers’ supply systems and sewerage undertakers’ sewerage systems as regards environmental pressures, population growth and changes in consumer behaviour, and (f) to secure that undertakers take steps for the purpose of enabling them to meet, in the long term, the need for the supply of water and the provision of sewerage services to consumers,

Food Standards Agency

including by promoting—

(i) appropriate long-term planning and investment by relevant undertakers, and (ii) the taking by them of a range of measures to manage water resources in sustainable ways, and to increase efficiency in the use of water and reduce demand for water so as to reduce pressure on water resources.]97 [Functions]: To use our expertise and influence so people can trust (a) developing policies (or assisting in the that the food they buy and eat development by any public authority of is safe and honest. Our strategy policies) relating to matters connected recognises that there are growing with food safety or other interests of challenges around food safety, consumers in relation to food; and affordability, security (continued)



97 Water

Industry Act 1991, s 2. Report and Accounts 2019–20 (Water Services Regulation Authority, 2020).

98 Annual

Purposes: Convergence between Businesses and Regulation  385 Table 13.2  (Continued) Authority

Statutory Purpose(s) (b) providing advice, information or assistance in respect of such matters to any public authority.99

Mission and sustainability. Our strategy outlines our purpose and responsibilities, and the roles and responsibilities of others, in meeting these challenges.100

Health & Safety Executive

[Functions]:

Our purpose to prevent work-related death, injury and ill health.102

to do such things and make such arrangements as it considers appropriate for the general purposes of this Part. (2) In connection with the general purposes of this Part, the Executive shall— (a) assist and encourage persons concerned with matters relevant to those purposes to further those purposes; (b) make such arrangements as it considers appropriate for the carrying out of research and the publication of the results of research and the provision of training and information, and encourage research and the provision of training and information by others; (c) make such arrangements as it considers appropriate to secure that the following persons are provided with an information and advisory service on matters relevant to those purposes and are kept informed of and are adequately advised on such matters—

To prevent death, injury and ill-health in Great Britain’s workplaces – by becoming part of the solution.103

    (i) government departments,   (ii) local authorities, (iii) employers,  (iv) employees,   (v) organisations representing employers or employees, and  (vi) other persons concerned with matters relevant to the general purposes of this Part.101 (continued)

99 Food Standards Act 1999, s 6. 100 Food We Can Trust 2015–2020. Food Standards Agency Strategy (Food Standards Agency, 2015). 101 Health and Safety at Work etc Act 1974, s 11. 102 HSE Business Plan 2021/22 (HSE, 2020). 103 HSE’s mission and strategy relating to food at www.hse.gov.uk/food/programme.htm#:~:text=HSE’s%20mission%20 is%20to%20prevent,becoming%20part%20of%20the%20solution. There has been no generic statement since Helping

386  Cooperative Regulatory Models Table 13.2  (Continued) Authority Statutory Purpose(s) Medicines & The Secretary of State must continue the Healthcare products promotion in England of a comprehensive Regulatory Agency health service designed to secure improvement— (a) in the physical and mental health of the people of England, and (b) in the prevention, diagnosis and treatment of physical and mental illness.

Mission To protect and improve public health by enabling the earliest access and high-quality supply of safe, effective, and innovative products through proportionate, data-driven decisions on risk and benefits.105

… In exercising functions in relation to the health service, the Secretary of State must have regard to the need to reduce inequalities between the people of England with respect to the benefits that they can obtain from the health service. In exercising functions in relation to the health service, the Secretary of State must have regard to the desirability of securing, so far as consistent with the interests of the health service— (a) that any other person exercising functions in relation to the health service or providing services for its purposes is free to exercise those functions or provide those services in the manner that it considers most appropriate, and (b) that unnecessary burdens are not imposed on any such person. (2) If, in the case of any exercise of functions, the Secretary of State considers that there is a conflict between the matters mentioned in subsection (1) and the discharge by the Secretary of State of the duties under section 1, the Secretary of State must give priority to the duties under that section.104 Environment Agency

The principal aim of the Agency (subject to and in accordance with the provisions of this Act or any other enactment and taking into account any likely costs) in discharging its functions so to protect or enhance the

A cleaner, healthier environment which benefits people and the economy; a nation better protected against natural threats and hazards with strong response (continued)

Great Britain Work Well Strategy (HSE, 2016) and that document did not contain the word mission and referred to ‘purpose’ as ‘making the energy industry world leaders in health and safety performance’. 104 Health and Social Care Act 2012, s 1. 105 Annual Report and Accounts 2020/21 (Medicines & Healthcare products Regulatory Agency, 2021).

Purposes: Convergence between Businesses and Regulation  387 Table 13.2  (Continued) Authority

Statutory Purpose(s) environment, taken as a whole, as to make the contribution towards attaining the objective of achieving sustainable development mentioned … below.106

Mission and recovery capabilities; and higher visibility, stronger partnerships and local choices.107 We create better places for people, wildlife and the environment. We put the climate emergency at the heart of everything we do and help society adapt to environmental challenges such as flooding, drought, sea level rise and coastal change. We improve and protect the quality of our air, land and water by tackling pollution. We work with businesses to help them comply with environmental regulations and believe a healthy and diverse environment enhances people’s lives and contributes to sustainable and resilient economic growth.108 We are here to make our air purer, our land greener, our water cleaner and our food more sustainable. Our mission is to restore and enhance the environment for the next generation, leaving it in a better state than we found it.109

Office for Product Safety and Standards

No express statutory purpose, as not a stand-alone authority but a Department of Government, exercising a Secretary of State’s powers across numerous areas.

Our purpose is to make regulation work, so that it protects people and enables businesses to understand their obligations. Our mission is to be a trusted product regulator for the UK. This means protecting people and places, enabling business to thrive and empowering consumers to make good choices. We will be a leader of good regulatory practice and a champion of local regulation.110



106 Environment

Act 1995, 2 Report and Accounts 2019/20 (Environment Agency, 2020). 108 EA2025. Creating a Better Place (Environment Agency, 2020). 109 Annual Report and Accounts 2020/21 (Environment Agency, 2021). 110 www.gov.uk/government/organisations/office-for-product-safety-and-standards/about. 107 Annual

388  Cooperative Regulatory Models

Case Studies A Stakeholder-Created Model of Alternative Technical Regulatory Requirements A striking experiment in the creation of regulation occurred in Ontario from 2016.111 After some years of complaints by engineers about the antiquated, cumbersome, complex and costly regime for regulation of heat and refrigeration plants, the Government invited stakeholders to form a committee to take responsibility for a bottom-up redesign. The behaviour of group members moved over time from being defensive of the interests of their personal or organisational interests to taking responsibility for achieving publicly good outcomes. The resulting system, and its enabling legislation, was enacted without change by ministers and is working well. The simple lesson is that stakeholders are capable of bringing expertise and innovative solutions if they are given responsibility and the knowledge that that will come with accountability. In November 2016, the Ontario Ministry of Government and Consumer Services, in collaboration with the Technical Standards and Safety Authority (TSSA), established a 15-member panel of OE industry stakeholders with experience related to the operating (power) engineers field to make recommendations to government on addressing challenges associated with the Operating Engineers (OE) regulation.112 The panel met on seven occasions between November 2016 and February 2017 to discuss seven key topics: 1. 2. 3. 4. 5. 6. 7.

Reducing undue burden on business Encouraging innovation Improving regulatory clarity Improving regulatory compliance Addressing inadequate labour supply Modernising the operating engineer certification system Improving public knowledge of the operating engineer profession

The panel developed 25 recommendations and reached consensus on 23 of the recommendations to maintain high-levels of public safety, while reducing undue burdens on business. The OE panel report was finalised in June 2017113 and accepted and implemented by government. The preexisting legislation, the Technical Standards and Safety Act 2000 and the Operating Engineers Regulation 219/01 (the OER), remained the core of the regulatory framework for managing plants. However, operators could also choose one of two optional Alternate Rules for certain requirements of the OER (see Box 13.1), which facilitate a risk-based approach to the regulation, and address qualifications for OEs and include two alternative and partly more permissive paths for plant staffing, certification time requirements and electronic log book requirements. The Operating Engineers Risk Task Group continued to create the Path 1 framework (including the risk formula and the methodology), working with an external expert facilitator, and presented its recommendation to TSSA’s Chief Officer in the summer of 2018. The framework was accepted and endorsed by TSSA.114 TSSA then tested the Path 1 methodology with sample plant inventory 111 Thanks to S Mangalam for details on this information, who was the facilitator for the development of Path 1 and Path 2. 112 See Operating Engineers Regulatory Review at www.ontariocanada.com/registry/view.do?postingId=24645&language=en. 113 Operating Engineers Regulatory Review. Findings and Recommendations Report 2017 www.ontariocanada.com/­ registry/showAttachment.do?postingId=24645&attachmentId=34771. 114 Operating Engineers Regulatory Review. Risk-Based Regulatory Framework for Plant Rating and Attendance – Path 1 (2018), www.tssa.org/en/operating-engineers/resources/Path-1-Risk-Based-Regulatory-Framework.pdf.

A Stakeholder-Created Model of Alternative Technical Regulatory Requirements  389 in Ontario to further refine the risk formula and various coefficients associated with different types of plant equipment. Any plant user wanting to opt in to Alternate Rules has to complete the Application for the Registration of a Plant115 and the Plant Equipment List and submit them to TSSA for approval. A self-assessment tool is available for plant owners to self-assess their plant’s risk and so make informed decisions about issues such as staffing levels in order to mitigate risk in applications under Path 1.116 Box 13.1  Ontario Operating Engineers Regulatory Alternative Paths Path 1 – Plants are regulated and rated based on a risk calculation measured by many factors, in addition to the installed power rating of a plant (kilowatts). The Path 1 approach measures the size, complexity and safety risk of many factors, in addition to a plant’s power rating, such as: • Technology type – boilers, refrigeration, steam prime movers and compression • Plant configuration – design, operating environment and process parameters • Plant occupancy and type of exposure These factors are used to calculate a risk rating for the plant, which is then used to determine appropriate staffing requirements (subject to the Chief Officer’s right to adjust the plant staffing requirements as necessary).117 Path 2 – launched on November 2, 2020. Regulated plants customise and implement their own site-specific Risk and Safety Management Plans (RSMPs), which are reviewed and accepted by TSSA. RSMPs may include additional risk management technologies and other processes developed by professional engineers and accepted by TSSA. • The plan must be signed by a professional engineer and be approved by a member of senior management of the plant who is responsible for plant safety responsible for site safety and must provide evidence to support the plant’s ability to maintain safety, based on an acceptable risk level. • If the plant’s RSMP is accepted by TSSA, the plant must maintain safety compliance records for review by TSSA. • Plants are subject to regular TSSA inspections and audits of RSMP-related documents and records. An Engineering Firm or plant owner wishing to perform a risk assessment and develop a Risk Management Safety Plan may refer to the Canadian Standards Association (CSA) Z767-17 for process safety management code requirements, as well as TSSA’s Path 2 Guidelines,118 which provide resources to support the development of the Risk and Safety Management Plan (RSMP) and also detail TSSA’s expectations regarding the contents of the RSMP. 115 See www.tssa.org/en/operating-engineers/resources/Application-for-the-Registration-of-a-Plant.pdf. 116 See https://www.tssa.org/Modules/News/index.aspx?newsId=e31a2ef3-aef1-43a5-bcba-58b846b656bb&feedId=a432 fea8-34f2-4fb2-97ec-b393c44fc0eb,4c142457-0d0f-4773-a511-7866672bbffa,ff34d029-6100-428b-87a6-89ed3918dcd4,7b 882e28-3b4f-4044-ba7f-6df58a31ce1b,5b7aff3b-3f29-440e-b6f7-f3341638e717,3b0a683e-3289-4504-a528-320a2d741fa 6,b32b6789-a2cf-4413-a8b2-cc829952ee7e,4ca86901-c2ab-453b-b95b-123f516c0c9f,f53a4329-8b60-4d38-acc2-ff ff6c74d7f1,e018aaf8-86ba-4954-902c-489db3ded3c8. 117 See Application for Path 1 Alternate Rules. Guideline. Operating Engineers Program (Technical Standards and Safety Authority, 2020) at www.tssa.org/en/operating-engineers/resources/Alternate-Rules-Path-1-Guideline-02.23.2021.pdf.  118 Operating Engineers Safety Program. Path 2 Risk & Safety Management Plan (RSMP). Implementation Guide (Technical Standards and Safety Authority, 2020), at www.tssa.org/en/operating-engineers/resources/Path-2Guideline-V0.97-Nov-2-.pdf.

390  Cooperative Regulatory Models An interesting additional outcome of the OE process was the re-inclusion of the agriculture sector. They had previously been exempted from requirements because they were primarily family run businesses. However, having seen the transparent and cooperative nature of the OE approach, they allowed themselves to be included in the process and are now regulated.

A Trust-Based Licensing Model Influenced by ideas including the EBP/EBR model, the Essential Services Commission of South Australia (the Commission) has developed a ‘verified trust and accountability’ model based on a policy of collaboration.119 The remit of the Commission covers essential services such as energy, water, ports and rail. The Commission administers a principles-based regulatory and advisory framework, that ‘focuses on outcomes and delivers a risk-based approach to regulation’.120 The expectation has been set that licensees will deliver services competently. Where problems arise, the Commission encourages behaviour change to reduce future risk. The intention is to achieve a balance of outcomes and to resolve disputes. Under the 2021 regulatory statement, ‘what’s are given; how is for discussion’.121 The focus is less on compliance than on making the system work – a joint effort. Based on trust, sharing information … less adversarial relationship, more opportunities. An interesting step in engagement between businesses and the regulator was introduced in the sister State of Victoria in 2016 for water pricing, specifically to incentivise business reputation and financial outcomes by linking to the quality of outcomes businesses deliver to their customers.122 The Victorian Commission said: Ambition will be assessed against the five elements of PREMO: Performance – have the performance outcomes to which the business committed in its price submission been met or exceeded?123 Risk – has the business sought to allocate risk to the party best positioned to manage that risk? Engagement – how effective was the business’s customer engagement? Management – is there a strong focus on efficiency? Are controllable costs increasing, staying the same, or decreasing? Outcomes – do proposed service outcomes represent an improvement, the status quo, or a withdrawal of service standards?

In South Australia, a process of engagement with undertakings has been ongoing for some years. A particular focus has been on developing a light-touch approach for engagement with small-scale networks, being less prescriptive and more targeted. Such networks comprise a limited number of connections that share a single energy or water source, for which a detailed prescriptive model 119 The approach was discussed between Adam Wilson, Chief Executive of ESCOSA, colleagues and the author over some years. The system was presented at the International Network for Delivery of Regulation conference at Wolfson College, Oxford on 24 November 2021. 120 Charter of Consultation and Regulatory Practice (Essential Services Commission of South Australia, 2019). 121 Presentation by Adam Wilson of ESCOSA at the INDR conference, Oxford, November 2021. 122 Water Pricing Framework and Approach. Implementing PREMO from 2018 (Essential Services Commission of South Australia, 2016). The model has spread: see Victoria’s Water Sector: The PREMO Model for Economic Regulation (Farrierswier, 2019). 123 The ‘P’ element of PREMO is a backward looking consideration of performance against specified outcomes during the period, and will not be assessed at the 2018 water price review, but will come into effect for a business’s second price review under the new PREMO incentive framework.

A Trust-Based Licensing Model  391 can be disproportionate. They are often not commercial networks, usually local service operations. Many small networks exist: only 5% of service providers have more than 5,000 customers. A specific link between trust and level of prescription was recognised, involving a ‘trust and verify’ approach:124 … a less prescriptive approach could place greater emphasis on trusting the small-scale network service providers to operate effectively without recourse to highly prescriptive obligations and reporting requirements. In the first instance, such an approach places greater emphasis on compliance auditing. Highly prescriptive obligations and reporting requirements would only be triggered for service providers that were not complying with obligations.

The approach, developed in consultations between 2016 and 2020, created a shared vision of success: demonstrating to both customers and the regulator that they are competent and able to deliver efficient and effective services over the long term. The basis of doing so would be the existence and successful implementation of robust long-term asset management, operations and financing plans, developed through genuine stakeholder engagement. The onus is on the service provider to demonstrate that it can be trusted, in return for which it will benefit from a lessening of the regulatory and reporting requirements:125 In the overall context, under the verified trust and accountability approach (VTA approach), those service providers that can demonstrate a continued competent operation, will be ‘trusted’. They will: ¾¾ be customer-focused, and deliver consistent and genuine engagement and consultation with customers, to deliver the price-service-quality mix valued by customers at the lowest sustainable cost ¾¾ develop, maintain and implement sound and robust long-term financing, asset management and operational plans that underpin the delivery of services in a sustained manner ¾¾ price services in a manner that takes account of efficient costs on a sustainable basis, customer willingness to pay, minimum legislative standards and affordability, noting that there may be trade-offs within these that need to be effectively and transparently managed ¾¾ appropriately account for and comply with all legislative requirements (not just those arising under the Commission’s regulatory framework), and ¾¾ have sufficient financial strength to ensure the long-term viability of the service.

In adopting its VTA approach, the Commission also identified the intended outcomes that it will use to evaluate and assess the success of the approach over time:126 ¾¾ provides for a price-service-quality offering that meets the specific needs of the customers of a smallscale network, subject to legislative requirements ¾¾ ensures incentives and accountability are with the right parties ¾¾ minimises the regulatory cost by ensuring regulation is effective, targeted, fit-for-purpose and capable of responding to external influences, and ¾¾ creates consistency across regulatory instruments where appropriate.

The Commission announced that it would work with service providers to introduce the new system from 1 July 2022, developing a data baseline, developing performance outcomes, aligning reporting guidelines and licence conditions and assessing which service providers will be ‘trusted’. Two categories of licences will be available: Category A of trusted providers, and Category B of providers with whom ESCOCA would work to resolve concerns. The differentiation is based on compliance (data on breaches, systemic issues, how they have responded) and sustainability 124 Small-scale Networks Inquiry. Framework and Approach (Essential Services Commission of South Australia, 2019) 19. 125 Inquiry into Regulatory Arrangements for Small-scale Water, Sewerage and Energy Services Final Inquiry Report (Essential Services Commission of South Australia, 2021). 126 ibid.

392  Cooperative Regulatory Models (liability, capex depreciation). The concepts of ‘competent operation’ and ‘demonstrating competent operation’ are described like this:127 Competent operation A licensee should be able to demonstrate to the Commission’s satisfaction that it is sustainably providing essential services that customers want, at the level of quality and reliability that they value, at a price that accounts for their willingness to pay, legislative requirements and affordability. This will be defined as competent operation, and will incorporate the following licensee actions: ¾¾ customer-focused, involving consistent and genuine engagement and consultation with customers to deliver the price-service-quality mix valued by customers at the lowest sustainable cost ¾¾ develop, maintain, and implement sound and robust long-term financing, asset management, and operational plans that underpin the delivery of services in a sustained manner ¾¾ price services in a manner that takes account of efficient costs on a sustainable basis, customer willingness to pay, minimum legislative standards, and affordability, noting that there may be trade-offs within these that need to be effectively and transparently managed ¾¾ appropriately account for legislative requirements (not just those arising under the Commission’s regulatory framework), and ¾¾ provide, or will provide for, sufficient financial strength to ensure the long-term viability of the services provided. Demonstrating competent operation Licensees must be accountable to their customers and the Commission, demonstrating competent operation on a continuous basis. Once licensees can demonstrate competent operation, the Commission will trust them (a trusted licensee) to operate their networks with less prescriptive reporting requirements. In order for a licensee to demonstrate competent operation, and therefore be considered a trusted licensee, it should be able to provide evidence to the Commission’s satisfaction (upon request at any time) which demonstrates, on a continuous basis, business practices that support competent operation as defined above – the verification process. Once trust is gained, licensees are presumed to be providing a competent operation and performing appropriately, unless evidence is presented to the contrary. Licensees can provide positive evidence to support trust by proactively identifying any issues early with the Commission, then actively developing and implementing remedial actions. The Commission will monitor licensees, and gather market intelligence regarding licensees and their operations. Monitoring in this manner means a licensee can gain and lose trust based on its own actions. A loss of trust would signal to the licensee’s customers that it is not providing a competent operation (and not necessarily that its operations are unsafe in any way). The Commission’s response would be directly related to the outcome of the licensee’s actions.

The reporting requirements are summarised as:

Category A Licensees Category A licensees’ annual reporting returns are required to be approved by the licensee’s CEO (or equivalent) and comprise the following: ¾¾ a list of office holders, to assure the Commission that the licensee is a fit and proper person ¾¾ connection and customer numbers, to be used primarily for calculating Commission licence fees (water) and EWOSA membership fees respectively

127 ibid,

p 27.

Performance-Based Regulation in Aviation Safety  393 ¾¾ information on hardship and affordability, at least equivalent to that required prior to the VTA approach being formally implemented at 1 July 2022 ¾¾ identification of any material changes to operations, and ¾¾ a statement of assurance that the licensee is complying with its obligations and engaging in a competent operation to the level contemplated in Box 1. Category A licensees will also be required to provide immediate (‘real time’) information regarding any material service issue arising, the response and the outcome. Importantly, Category A licensees will also be required to provide immediate (‘real time’) information regarding any material service or compliance issues arising, the response, and the outcome. This data, plus that received from the annual reports, will augment the Commission’s current database, along with information from EWOSA, other regulators, and enhanced market monitoring.128

Although not formally in the decision, the reporting obligations for Category B licensees will comprise an appropriate mix of the following, having regard to the individual circumstances of the licensee: ¾¾ the matters set out above ¾¾ any additional specific reporting obligations required to address or better understand performance concerns, ¾¾ any specific remediation plans or actions required to return the licensee to a Category A classification. This more indicative list has proved to be important in practice, particularly in serving to build trust and a collaborative relationship. ESCOSA expects licensees to volunteer their own plans, rather than for them to be imposed. The process therefore becomes something of a ‘test question’ of the maturity and ability of the licensee. A Regulatory Intelligence System is used, which is more than a database, comprising a whole-Commission system allowing the Commission to ask useful questions on licensees’ outturn performance. The collaborative approach is based on access to relevant data, and the data is viewed as prompting conversations. Around 20 categories of data previously collected have been reduced to five. The Energy and Water Ombudsman of South Australia is regarded as contributing a critical role in feedback of customer data, as it has industry-wide vision of operational concerns identified by customers, and all providers are now required to belong to the Ombudsman’s scheme.129 Market intelligence from any other source will also be used (such as media reports, constituent queries and the like). Overall, the Commission is intending that trust will be used to ensure that licensees act properly. The system aims to generate genuine engagement, building relationships and improving the chance of success from the outset.

Performance-Based Regulation in Aviation Safety Safety in civil aviation is critical. It is essential that planes do not crash. Crashes are catastrophic for all those on board, and those on whom the debris falls, and the reduced confidence affects

128 ibid, 129 ibid,

p 36. pp 45–50.

394  Cooperative Regulatory Models business. Pilots do, of course, have ‘skin in the game’, so are motivated to maintain safety, but are subject to heuristics and biases.130 But air traffic controllers (ATCs), engineers, maintenance and other staff involved in aviation safety do not risk their own lives. The outcome metrics demonstrate that the success record in civil aviation is outstandingly high when compared with many other forms of transport or other activities such as healthcare. Around the 1980s, the aviation sector confronted the reality that the existing safety regulatory system was inadequate and that more planes were crashing. The existing system was based on organisations complying with rules by operating a quality system. It involved responding to accidents with a legalistic, retributive approach, aimed at pinning total responsibility on some individual who was to blame for breaking a legal rule, and imposing proportional punishment on them to deter others. However, it was recognised that no one account of what happened (such as that of a judge) identifies objective truth of what happened and why, and how a similar situation could be prevented in future, especially when multiple systems, people, technologies and situations are involved.131 It was also accepted that people do not share information if they fear that they will be blamed, so a consistent culture of psychological safety and trust based around common learning is critical. Further, ‘reacting after an incident or near miss is not the best way to prevent it happening again’ and that a system needed to produce much more information and do so quickly, so that the real causes of risks could be identified and changes implemented to avoid them.132 ‘Simply stated, a regulatory “compliant” airline is not necessarily a safe airline.’133 Actors across the entire sector – public authorities, airlines, air traffic controllers, engineers and others – switched their whole approach134 to one based on Performance-Based Regulation (PBR). PBR was mandated by the global coordinating authority, the International Civil Aviation Organisation (ICAO).135 In contrast to a quality system, which focuses on output and continuous improvement, a process-based approach focuses on monitoring performance (quality assurance activities) to ensure that the system is capable of reliably producing an acceptable level of output136 and to constantly improve how people and the system are performing in a risk-based world. An aviation safety management system (SMS) is operated constantly by organisations to identify hazards and take action to address them,137 especially the constant checking of procedures and states, and sharing of information. It includes the documented, repeatable processes of a quality management system. It comprises four components: safety policy, safety risk management, safety assurance and safety promotion. Safety policy establishes senior management commitment to continually improve, and defined lines of responsibility and accountability. 130 S Walmsley and A Gilbey, ‘Understanding the Past: Investigating the Role of Availability, Outcome, and Hindsight Bias and Close Calls in Visual Pilots’ Weather‐related Decision Making’ (2019) 33(6) Applied Cognitive Psychology 1. 131 S Dekker, Just Culture. Restoring Trust and Accountability in Your Organization 3rd edn (Ashgate Publishing, 2017). 132 The Transformation to Performance-based Regulation (Civil Aviation Authority, 2014) 1. D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011) 138; S Dekker, Just Culture. Balancing Safety and Accountability (Ashgate Publishing, 2007) ix; Building a Culture of Candour: A Review of the Threshold for the Duty of Candour and of the Incentives for Care Organisations to be Candid (Royal College of Surgeons of London, 2014). 133 B Yantis, ‘SMS Implementation’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011). 134 JT Reason, Managing the Risks of Organizational Accidents (Ashgate, 1997). 135 ICAO Annex 19. 136 AJ Stolzer, CD Halford and JJ Goglia, ‘Introduction’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011) xlviii. 137 See definition at Communication from the Commission to the Council and the European Parliament. Setting up an Aviation Safety Management System for Europe, COM(2011) 670, 25.10.2011, p 3: ‘a pro-active system that identifies the hazards to the activity, assesses the risks those hazards present, and takes action to reduce those risks to an acceptable level. It then checks to confirm the effectiveness of the actions. The system works continuously to ensure any new hazards or risks are rapidly identified and that mitigation actions are suitable and where found ineffective are revised.’

Performance-Based Regulation in Aviation Safety  395 The safety management system also involves the classic tasks of risk management: hazard identification, analysis of data and risk and risk reduction activity. The safety management system must be capable of identifying hazards, evaluation and management of the risks, implementation of actions to mitigate the risks and to verify the effectiveness of such actions. The system should be proportionate to the size and scope of the organisation. In practice, pilots rely significantly on checklists.138 It is critical that all information, from multiple viewpoints, is shared and as swiftly as possible. This requirement has led to a fundamental change in the nature of the concepts of responsibility and accountability. It was recognised that humans simply will not share information if they fear potential adverse consequences, whether personal criticism, official investigations, criminal action, employment disciplinary action, social censure, embarrassment or simply uncertainty over what will happen.139 This was confirmed in a series of studies. One showed the risks of a workplace culture in which actions by senior pilots were not challenged (‘destructive obedience’).140 Another showed that introduction of computerised surveillance led to increased attention by ATC and flight personnel on the activities being measured and an increase in reports – but only to the voluntary system (ASAP)141 that gave safety feedback information without any disciplinary function and not to the official system that was backed by enforcement sanctions.142 Pilots did increase the number of their reports if they perceived that air traffic controllers were subject to increased surveillance that might implicate them, but through the ASAP system. Although ASAP might pass information on to the Federal Aviation Authority (FAA), the FAA was prohibited from prosecuting information received from ASAP. A third study identified that where the FAA changed its rule so as to grant immunity from prosecution for pilots who reported, there was a dramatic increase in reports, but when the immunity was withdrawn a few years later, reporting dropped dramatically and remained low.143 In Europe, it was said that ‘The sheer threat of judicial involvement is enough to make people think twice about coming forward with information about an incident that they were involved in.’144 It was recognised that it is not enough to rely on the maxim ‘if you have done nothing wrong you have nothing to fear’. Also, if there is no one objective account of a professional’s actions, relative to which account can we (and especially can a court) hold people accountable?145 Stories abound in the airline and air traffic professions that the rule-based truth believed by authoritarian regulators, prosecutors and judges is incomplete, unfair, biased and partial.146

138 A Gawande, The Checklist Manifesto. How to Get Things Right (Metropolitan Books of Henry Holt and Company LLC, 2009). 139 Report on Legal and Cultural Issues in Relation to ATM Safety Occurrence Reporting in Europe: Outcome of a Survey Conducted by the Performance Review Unit in 2005–2006 (Eurocontrol Performance Review Commission, 2006). 140 E Tarnow, ‘Self destructive Obedience in the Airplane Cockpit and the Concept of Obedience Optimization’ in T Blass (ed), Obedience to Authority: Current Perspectives on the Milgram Paradigm (Erlbaum Associates, 2000). 141 S Griffith, American Airlines ASAP. Paper presented at the Global Analysis and Information network (GAIN) Workshop, Cambridge, MA (1996). 142 M Tamuz, ‘The Impact of Computer Surveillance on Air Safety Reporting’ (1987) Columbia Journal of World Business 69. 143 U.S. FAA, Office of Aviation Safety, Near Midair Collisions in the U.S. (Unpublished statistics, 1987). See M Tamuz, ‘Learning Disabilities for Regulators. The Perils of Organizational Learning in the Air Transportation Industry’ (2001) 33(3) Administration & Society 276. 144 S Dekker, Just Culture. Balancing Safety and Accountability (Ashgate Publishing, 2007) 103. See also Proposal for a Regulation of the European Parliament and of the Council on occurrence reporting in civil aviation amending Regulation (EU) No 996/2010 and repealing Directive No 2003/42/EC, Commission Regulation (EC) No 1321/2007 and Commission Regulation (EC) No 1330/2007, COM(2012) 776, 18.12.2012, recital 35. 145 S Dekker, Just Culture. Restoring Trust and Accountability in Your Organization 3rd edn (Ashgate Publishing, 2017) 145. 146 ibid.

396  Cooperative Regulatory Models The aviation industry, therefore, operates on the basis of sharing all information freely (an ‘open culture’) supported by the knowledge that this occurs within a ‘just culture’. A just culture means that everyone will have confidence that there are always consequences in response to new information, and these are aimed at everyone making a common contribution to improving performance and safety. Standards of behaviour require professional competence, openness, sharing, and taking responsibility for one’s mistakes by correcting them and improving.147 The typical consequences that arise in a traditional legal system are almost irrelevant, on the basis that people demonstrate their commitment to the outcomes of increased safety, performance and learning. Indeed, adopting an authoritarian, legalistic and certainly punitive response after an accident, even just to how an investigation is conducted, will deter the free flow of vital information, in relation to finding out what happened, what the true contributory causes were, and how they can be avoided in future, both in relation to the particular incident and systemically.148 However, the culture draws a line between acceptable and unacceptable behaviour. ‘A wilful v­ iolation is not acceptable. An honest mistake is.’149 There is a long-stop legal protection, but one which rejects punishment:150 [A] culture in which front line operators or others are not punished for actions, omissions or decisions taken by them that are commensurate with their experience and training, but where gross negligence, wilful violations and destructive acts are not tolerated.

The culture is essentially blame-free and non-punitive151 but does rest on individual responsibility and accountability.152 Everyone takes responsibility for performing their tasks professionally and is accountable for their contributions, including contributing information on safety and performance. The regulatory system imposes personal responsibility for safety on the Chief Executive of an organisation. The leaders of all the public and private organisations involved have responsibility for ensuring that their work cultures are based on socially supportive, open and just principles. The internal culture requires not just sharing of information but also training, listening, prompts, reminders, questioning and the constant mutual support of all staff and managers.153 A just culture must operate in every context: public system regulation, professional regulation, employment discipline, legal liability for compensating harm and social and professional relationships. If there is a conflict in the approach between any of these groups, then the sharing and learning process will not work. Although the concept is universal throughout the

147 D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011) 195. 148 Numerous salutary stories are quoted in S Dekker, Just Culture. Restoring Trust and Accountability in Your Organization 3rd edn (Ashgate Publishing, 2017). 149 S Dekker, Just Culture (Ashgate Publishing, 2007) 15. 150 Commission Regulation (EU) No 691/2010 of 29 July 2010 laying down a performance scheme for air navigation services and network functions and amending Regulation (EC) No 2096/2005 laying down common requirements for the provision of air navigation services, art 2(k). 151 Regulation (EU) No 996/2010, recital 24. 152 RL Helmreich, ‘Building Safety on the Three Cultures of Aviation’ in Proceedings if the IATA Human Factors Seminar (Bankkok, 1999) 39–43; D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011). 153 The implications for organisational culture are illustrated by comments from senior airline executives: Keeping the Aviation Industry Safe: Safety Intelligence and Safety Wisdom 16 Aviation Industry Senior Executives Reflect on How They Run a Safe Business in a Commercial Environment. A Future Sky Safety White Paper (European Commission, 2016).

Performance-Based Regulation in Aviation Safety  397 industry, national or organisational variations154 can undermine this, especially when cultural,155 authoritarian or punitive tendencies remain.156 It is critical that a just culture has to apply throughout the industry, in all of the regulatory, professional accreditation, commercial and social relationships. A risk of blame in any one of those relationships risks the entire enterprise of sharing and learning through maintaining an open culture. The system is operated by each airline, and overseen by national regulatory authorities. In most cases, the relationship is one a critical friends. A regulatory authority is particularly focused on identifying and intervening to support poor performers and their culture.157 Critical signs are that a culture is under stress, produced by targets, financial concerns, time constraints or failure to take time to be objective. The CAA has classic enforcement powers, sometimes described as forming a pyramid of sanctions of escalating severity,158 but rarely uses them. However, firm consequences can sometimes be appropriate. The response to intentional wrongdoing (such as an operator lying to a regulator) should be firm and effective in delivering protection, such as losing a licence to operate.159 Failure to deal with regulators in an open and co-operative manner is a serious issue.160 In 2011, ICAO produced a significant Manual on Human Performance (HP) aimed at ensuring the integration of human performance considerations in the planning, design and implementation of new technologies, systems and processes as part of a safety management approach, and to facilitate the integration of human performance elements in competency-based training programmes throughout professionals’ careers.161 A prime purpose was ‘to make it easy for people in the aviation system to do the right thing and avoid negative safety consequences’. The approach builds on systems thinking – viewing systems in a holistic, integrated manner, rather than as isolated components or parts – and integrates human performance principles, on the basis that ‘[w]ithin a complex system, it is the human contribution that often provides the important safety barriers and sources of recovery’. ICAO set out five HP principles:162 Principle 1: People’s performance is shaped by their capabilities and limitations; Principle 2: People interpret situations differently and perform in ways that make sense to them; 154 N McDonald, S Corrigan, C Daly and S Cromie, ‘Safety Management Systems and Safety Culture in Aircraft Maintenance Organisation’ (2000) 34(1–3) Safety Science 151. 155 P O’Connor, A O’Dea, Q Kennedy and SE Buttrey, ‘Measuring Safety Climate in Aviation: A Review and Recommendations for the Future’ (2011) 49 Safety Science 128–38; M-Y Liao, ‘Safety Culture in Commercial Aviation: Differences in Perspective between Chinese and Western Pilots’ (2015) 79 Safety Science 193–205; H-B Lee and J-W Park, ‘Comparative Study on Hazardous Attitudes and Safe Operational Behaviour in Airline Pilots’ (2016) 54 Journal of Air Transport Management 70–79. 156 AJ Lawrenson and GR Braithwaite, ‘Regulation or Criminalisation: What Determines Legal Standards of Safety Culture in Commercial Aviation?’ (2018) 102 Safety Science 251–62; J Woodlock and Håkan Hydén, ‘Lex Avionica; How Soft Law Serves as an Instrumental Mediator Between Professional Norms and the Hard Law Regulation of European Civil Aviation Maintenance’ (2020) 121 Safety Science 54. 157 The Transformation to Performance-based Regulation (Civil Aviation Authority, 2014). D McCune, C Lewis and D Arendt, ‘Safety Culture in Your Safety Management System’ in AJ Stolzer, CD Halford and JJ Goglia (eds), Implementing Safety Management Systems in Aviation (Ashgate, 2011) 138; S Dekker, Just Culture. Balancing Safety and Accountability (Ashgate Publishing, 2007) ix; Building a Culture of Candour: A Review of the Threshold for the Duty of Candour and of the Incentives for Care Organisations to be Candid (Royal College of Surgeons of London, 2014). 158 Civil Aviation Authority Regulatory Enforcement Policy (Civil Aviation Authority, 2012). 159 The CAA has in various instances removed or limited the licences of airports or airlines where it is not satisfied that a safe system is operated, or that an operator is withholding relevant information. 160 An example in another context is the imposition of financial penalties by the Prudential Regulatory Authority in 2017 of £17.85m against The Bank of Tokyo-Mitsubishi UFJ Limited (BTMU) and a fine of £8.925m against MUFG Securities EMEA plc for failing to be open and co-operative with the PRA in relation to enforcement action by the New York Department of Financial Services over pressuring a consultant to water down a supposedly objective report on BTMU’s dealings with sanctioned countries. See Annual Report and Accounts. 1 March 2016–1March 2017 (Prudential Regulation Authority, 2017). 161 Manual on Human Performance (HP) for Regulators (International Civil Aviation Organization, 2021) Doc 10151. 162 ibid, para 1.4.

398  Cooperative Regulatory Models Principle 3: People adapt to meet the demands of a complex and dynamic work environment; Principle 4: People assess risks and make trade-offs; and Principle 5: People’s performance is influenced by working with other people, technology, and the environment.

A national safety regulatory system should cover the following activities:163 • • • • •

collecting and analysing data; developing regulatory material; evaluating, accepting and approving (e.g., systems and equipment, procedures, personnel); providing ongoing surveillance; and promoting safety.

Just culture in the European aviation industry was enshrined in EU legislation in 2010:164 • The sole objective of safety investigations should be the prevention of future accidents and incidents without apportioning blame or liability.165 • The civil aviation system is based on feedback and lessons learned from accidents and incidents which require the strict application of rules of confidentiality in order to ensure the future availability of valuable sources of information. In this context sensitive safety information should be protected in an appropriate way.166 • The civil aviation system should equally promote a non-punitive environment facilitating the spontaneous reporting of occurrences and thereby advancing the principle of ‘just culture’.167 • The information provided by a person in the framework of a safety investigation should not be used against that person, in full respect of constitutional principles and national law.168 The CAA’s Performance Based Regulation model enabled it to work well remotely in the Covid situation. Since the CAA was embedded in most operators’ safety risk management systems and attends operators’ meetings, knowledge of operators’ practices proved to be reliable in delivering trust on how operators were managing risk and shutting down their systems, without the need for physical inspections. One of the challenges is to maintain open and just culture universally across the world. Some national authorities or organisations can react in ways that are detrimental. This can trigger lack of trust by operators and lead to failure to pass on information. For example, some pilots turn their transponder off so that their aircraft cannot be identified as being too close. The CAA’s policy is to work with industry to raise awareness of the risks of this issue. Infringers are not fined but sent on free awareness courses. The educational technique is familiar from a related example of police offering drivers who speed the opportunity to attend a course, in preference to ‘merely’ paying a fine, which risks leaving the impression that the behaviour can merely be bought at a small price. It is instructive to contrast the performance-based operating system outlined above with a regulatory design-control system in which too much trust is delegated based on inadequate 163 ibid, para 2. 164 See J Woodlock and H Hydén, ‘(f)Lex avionica; How Soft Law Serves As an Instrument Mediator Between Professional Norms and the Hard Law Regulation of European Civil Aviation Maintenance’ (2019) 121 Safety Science 54. 165 Regulation (EU) No 996/2010, recital 4. Even in 1994, it was provided that a safety recommendation shall in no case create a presumption of blame or liability for an accident or incident: Directive 94/56/EC, art 10. 166 Regulation (EU) No 996/2010, recital 22. 167 ibid, recital 24. 168 ibid, recital 25.

Trust-Based Regulation of Public Statistics   399 evidence: illustrated by the Boeing 737 MAX story. We must be careful to avoid comparing apples and oranges: the 737 MAX story was not about an open and just culture, but one about delegated self-regulatory certification of design. The Federal Aviation Authority was permitted to delegate certification of the airworthiness of planes to manufacturers, and Boeing failed introduced certain changes to a pre-existing aircraft design without re-examining and re-certifying the complete aircraft, so did not identify the risk that proved to be fatal to 346 people in two crashes. Conditions of organisational stress affected Boeing’s cutting of corners in this respect that are familiar from other disasters, notably competitive cost and time pressures within the organisation.169 The story vividly illustrates the point that trust – in this case justifying delegated authority – has to be based on relevant evidence.

Trust-Based Regulation of Public Statistics The UK’s Office for Statistics Regulation sets standards for and regulates the production of statistics by all public sources.170 Its purposes are to ensure that statistics serve the public good. The ‘public good’ in this context means, broadly, that decision-makers and the population are accurately informed and that harms – such as the loss of confidence in Government statistics and how they are used – are minimised. It has extremely limited regulatory powers (it cannot fine, or remove licence) so it has adopted a strategy by creating a vision, a common sense of purpose, and promulgating a Code.171 It can engage in public conversations with Government departments on the principles and practice over the statistics that they have produced or quoted, and can escalate these concerns by writing to the relevant political leaders. The core philosophy of the Code rests on three principles: • Trustworthiness. Bodies should provide usable evidence that allows others to check whether they are trustworthy, in the form of public commitments. The commitments include that errors should be corrected immediately; the publication date should be pre-announced and should not be changed for short-term political expedience; and data rights of individuals should be protected. And there should be clear evidence to show that these commitments are fulfilled – for example, that statistics are published on the pre-announced date. • Quality. Statistics should be the best available estimate of what they intend to measure. This depends on clarity on the source – for example, the nature of the survey or administrative data system from which they emerge; on the methods, which should align with best practice; and most crucially, on a clear articulation of the strengths and limitations of the estimate. • Value. Statistics should help people answer their questions. Government publishes statistics not simply as an obligation towards transparency, but to enable people to understand the world and their place in it. It follows that statistics only have value to the extent that they convey insight. The approach is that good data is produced by people who uphold these values around purpose, and who adhere to a set of principles that they have the courage to voice and uphold. 169 P Robison, Flying Blind: The 737 MAX Tragedy and the Fall of Boeing (Penguin Business, 2021). 170 This summary is based with thanks on the presentation by Ed Humpherson, Office for Statistics Regulation, at the INDR conference on 24 November 2021. The Office for Statistics Regulation is the regulatory arm of the UK Statistics Authority, which is a non-ministerial department of the UK government. 171 Code of Practice for Statistics. Ensuring Official Statistics Serve the Public (Office for Statistics Regulation and UK Statistics Authority, 2018).

400  Cooperative Regulatory Models The three elements of the Code – trustworthiness, quality and value – encode a vision of what good looks like. In this way, the Code is not a set of prohibitions or rules, but instead a set of actions that lead to outcomes – of trustworthiness, quality and value. These outcomes are not only those that the producer desires, but also those that support the public interest in statistics. In this way, a visionary Code that supports appropriate behaviour aims to align the interests of producer and user of statistics – and the role of the Office for Statistics Regulation is often simply to nudge the producer behaviour so that this alignment is maintained and enhanced. One other aspect of this regime that is relevant to the theme of this book concerns user engagement. The Code of Practice, and all the Office for Statistics Regulation’s work, places emphasis on the importance of engagement with users of statistics – to understand the questions they want to ask, to improve the quality of the statistics themselves and to ensure the statistics remain relevant. This approach is consistent to the overall thesis of this book, which is that cooperation and co-creation are better than arms’ length transactional forms of relationship in securing positive outcomes.

A Cooperative Ethical Approach in Water Pricing in Scotland On 24 March 2016 the Scottish Government issued its response to a report issued by the Working Group on Consumer and Competition Policy for Scotland, which included clear political commitment to EBP.172 The remit of the working group was to consider the best arrangements for consumer protection and competition in Scotland, in light of new powers granted to the devolved Scottish government. The final report made 46 recommendations, key among them being four recommendations regarding the establishment of a credible competition policy for Scotland, including the creation of a dedicated consumer champion, and explore ways of increasing regulation engagement by Scottish stakeholders. The Scottish government accepted these recommendations, and furthermore stated that:173 We are working closely with Professor Chris Hodges whose work focuses on use of collaboration and behavioural insights to create open, ethical cultures that deliver more profound and sustainable organisational change than traditional regulatory methods. We will use this thinking to develop a regulatory approach that supports businesses to treat consumers fairly, and works with them to put matters right when they go wrong, thereby building trust between consumers, regulators and businesses. This approach aligns itself well to our drive for fairness and access to justice in Scotland and will ensure the right tools will be used under the right circumstances to benefit both consumers and business, ensuring markets work efficiently.

To this end, in June 2019 new legislation was published to create Consumer Scotland, a new body to represent the interests of consumers and the subsequent Consumer Scotland bill was passed by the Scottish Parliament on 6 May 2020. The bill reflected the principles of EBP and EBR, in its expectation that providers should be expected to do the right thing and must evidence that they can be trusted to do so, and hence the bill was deliberately high-level and avoided proscribing how the new body would carry out its functions, allowing it to function flexibly in its task of ‘building strong relationships with consumer organisations and that its work programmes and 172 Scottish Government Response to Report Issued by the Working Group on Consumer and Competition Policy for Scotland (Scottish Government, 2016). 173 ibid.

A Cooperative Ethical Approach in Water Pricing in Scotland  401 scope of activity will be developed with their input. That commitment is reflected in the bill, which makes collaboration fundamental to Consumer Scotland’.174 Against this background, realisation that current regulatory practice would not allow Scottish Water to meet the substantial long-term challenges posed by climate change targets set by the Scottish Government and the subsequent replacement of assets in an economically optimal way, led to the economic regulator, the Water Industry Commission for Scotland (WICS) to adopt the principles of EBR in its setting of prices for much of the 2020 decade. Consequently, WICS explained its intention was to implement a ‘move away from the “parent-child” relationship of traditional economic regulation … we want Scottish Water to take full ownership of its strategy and relationship with customers’,175 and it outlined how the commission ‘sought to act in a manner consistent with the principles of Ethical Business Regulation (EBR)’.176 This commitment to the implementation of EBR was expressly approved by the relevant Minister,177 and the implementation plan was explained at length in WICS’ 2020 publication, which concluded that ‘WICS has committed to EBR because it considers that if Scottish Water adopts and implements EBP, the combination of EBP and EBR should enable the water industry in Scotland to meet the challenges that lie ahead as effectively as possible and to do so in the future’.178 The outcome of adopting the principles of EBR as the core approach was hailed as a success by WICS and Scottish Water. It was recognised that there would be a need for ongoing candid discussions between all stakeholders.179 Customers’ voices were enhanced in particular through a new Customer Forum, which engaged with both the regulator and the undertakings. The trustbased approach led to early engagement on common objectives, in which achieving net zero was fundamental, followed by production of relevant evidence by each side, rather than partial and sequential disclosure in the context of a strategic argument. The chief executive of Scottish Water added that the adoption of EBR and its subsequent implementation of EBP had ‘given us a broad framework within which to assess how well we are operating and where we can improve further’. Moreover, EBR has also been embraced within our wider stakeholder environment; all our key regulators/stakeholders, as well as Scottish Water, agreed to invite regular external assessment of the extent to which we are operating in line with EBR/EBP principles … While the parties to the process are benefitting from involvement, the real beneficiaries will be the people of Scotland – our customers and communities that we serve. We are now able to engage with them on how our long term plans are aligned to their wishes. They will receive a greater certainty of long term service outcome and price consequences that would ever have been previously possible.180 174 Report re Consumer Scotland Bill, and subsequent debate in Scottish Parliament (23 January 2020). 175 Innovation and Collaboration: Future Proofing the Water Industry for Customers: Methodology for the Strategic Review of Charges 2021–2027 (Water Industry Commission for Scotland, 2017) 9. 176 ibid, 10. 177 Keynote Speech by the Scottish Government’s Cabinet Secretary for Environment, Climate Change and Land Reform at the 16th International Water Association Leading Edge Conference on Water and Wastewater Technologies, Edinburgh, 11 June 2019: ‘Scottish Water’s achievements have been made possible through the way in which they work closely with key stakeholders to develop common understandings and solutions to problems. We have put the days of adversarial regulation firmly in the past and are working towards a framework based on ethical based regulation in which Scottish Water is expected to do the right thing. It must build trust among stakeholders and customers alike. Key stakeholders are already heavily engaged in this – none more so than our environmental regulator, the Scottish Environment Protection Agency (SEPA).’ 178 Strategic Review of Charges Final Decision Paper: Prospects for Prices (Water Industry Commission for Scotland, 2020) 11–13. 179 Prospects for Prices. Strategic Review of Charges 2012–27. Final Determination (Water Industry Commission for Scotland, 2020). See also Prospects for Prices. Strategic Review of Charges 2012–27. Final Decision Paper (Water Industry Commission for Scotland, 2020). 180 Letter from the Chief Executive of Scottish Water in 2020 on file at Oxford University.

402  Cooperative Regulatory Models

A Stakeholder-Created Area Development Plan The Scottish Environmental Authority (SEPA) has had a long history of engaging with its clients, and of adopting a differentiated approach to them depending on their motivation and achievement (see the model at Figure 14.1). A Sustainable Growth Agreement partnership was signed in 2020 between multiple local public and private organisations on joint commitment to develop The Leven catchment area in Scotland.181 This transformation initiative was the result of engagement by the local manager of SEPA, in accordance with its policy of pursuing One Planet Prosperity projects. The manager went to talk to all the local organisations and instead of asking them how they were going to comply with the environmental requirements or achieve environmental objectives, she turned it round and asked them what it was they wanted to achieve. This led to SEPA playing the role of fulcrum and catalyst for discussions involving all the players, such as Diageo, the Coal Authority, the Council, oil industry and so on. They ‘forgot all the rules and laws’ and came up with objectives like decarbonising, shifting from old energy to new energy industries, jobs for young people, removing economic depression, and so on. This approach involves creating relationships, shared goals and outcomes, and the everyone working together to achieve the common goals. They worked together to create success, setting metrics on outcomes from the start.

A Delegated Administrative Authority Model The classic assumption about regulatory authorities is that they should be either divisions of government departments or, more often, public bodies created by statute operating at ‘arm’s length’ from politicians.182 However, regulators need not be in public ownership, as the Canadian Delegated Administrative Authority (DAA) model shows. As Srikanth Mangalam has described,183 the DAA model arose in a number of provinces as a broad movement to move public functions focused on consumer protection and public safety out of government into administrative authorities, based on three primary objectives: reducing red tape and burdens on businesses; improving efficiency and effectiveness in the operations of regulatory agencies; and enhancing public safety and consumer protection. The administrative authorities are established as not-for-profit corporate structures and derive their authority from government through administrative agreements.184 The relevant Ministry retains overall responsibility for setting and controlling the governing legislation and regulations, providing governance oversight of the administrative authorities with respect to the legislation, and ensuring that the authorities are accountable to the public on their performance and effectiveness. Specific arrangements differ between DAAs, reflecting particular conditions of the regulated sector and businesses, and the issues that arise. Under an administrative agreement 181 See www.sepa.org.uk/one-planet-prosperity/sustainable-growth-agreements/leven-programme-partnership/. The author is grateful for discussing this case study with Terry A’Hearn, the CEO of SEPA. SEPA was awarded a Green Swan Observatory award for this project, chosen as having game changing potential: http://volans.com/project/green-swans/. 182 T Prosser, Law and the Regulators (Clarendon Press, 1997); D Oliver, T Prosser and R Rawlings (eds), The Regulatory State: Constitutional Implications (Oxford University Press, 2010); The Governance of Regulators. OECD Best Practice Principles for Regulatory Policy (OECD, 2014). 183 S Mangalam, ‘The Delegated Administrative Authority Model, a Radical Alternative Governance Framework from Ontario, Canada’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 184 Administrative Authority Model and Governance: Presentation to UK Delegation (Ontario Ministry of Government and Consumer Services, 2017).

Structures for Cooperative Engagement  403 between the Government and the DAA, the latter has delegated responsibility to administer legislation in accordance with the law. The DAA has discretion to create by-laws and operational practices, in consultation with Government. It has typical powers, such as to require information, enter and inspect premises and records and impose requirements and enforcement measures. A DAA is managed by an independent board of directors. The board is responsible for electing a majority of board members and the board’s chair. Under typical DAA agreements, the minister may choose to appoint a minority of members to the board of directors of the DAAs. The DAA appoints persons to carry out statutory functions under the delegated legislation (eg registrar, inspectors and statutory directors). The DAA is responsible for managing its financial and operational affairs. It is financed by fees from industry members or for services rendered, and typically does not receive ongoing funding from government. It sets fees in accordance with processes and criteria approved by the minister. Oversight is provided by the ministry, which conducts reviews and may comment on a DAA’s financial arrangements. The DAAs are considered to be outside government public accounts (not a ‘controlled entity’). Srikanth Mangalam notes: The flexibility of the operating model, particularly due to the independent fee structure, provides great opportunities for innovation and smart decision-making. There are several examples of innovative practices and methods originating from the administrative authorities that have been cited in literature and have attracted the attention of other agencies and jurisdictions globally.185

This model of a private not-for-profit organisation performing delegated public functions already exists in the UK for various Ombudsmen, such as those for energy, communications, motor, retail and property. The private structure has enabled innovation in processes and practices and swift response to changing conditions.186

Structures for Cooperative Engagement Barriers to communication and cooperation between actors in markets and regulation are widespread. They occur in different dimensions: between different authorities also including government, and between local and national levels of authorities; between businesses and authorities; between both businesses, authorities and other intermediaries such as third-party accreditation, compliance, auditing, ombudsmen, courts and other dispute resolution bodies; and between all of the above and citizens/consumers and civil society representatives. All of these different actors need to be able to engage in an holistic system if the required levels of communication and cooperation are to be achieved. The exact details of systems may vary from sector to sector, but here are some examples.

185 See, eg: S Mangalam, ‘United States of America Patent No US 8,463,635 (United States Patent and Trademark Office, 2013); A Veeramany and S Mangalam, ‘Application of Disability-adjusted Life Years to Predict the Burden of Injuries and Fatalities due to Public Exposure to Engineering Technologies’ (2014) 12 Population Health Metrics; S Sridharan and S Mangalam, ‘Carbon Monoxide Risks and Implications on Maintenance-intensive Fuel-burning Appliances – A Regulatory Perspective’ 2017 Annual Reliability and Maintainability Symposium (Institute of Electrical and Electronics Engineers, 2017); S Thorne, J Moody and L Austin, Using Mental Modelling In Risk Management: Understanding Electrical Occupational Safety Behaviour (Decision Partners, 2016). 186 Ombudsman Services Limited, for example, was able to adopt IT and redesign its processes swiftly in the later 2000s, leading to fast dispute resolution times. In contrast, the Financial Ombudsman Service and Legal Ombudsman had serious ‘long tails’ of claims awaiting resolution by 2020, and suffered from low staff morale and leadership crises.

404  Cooperative Regulatory Models

The Primary Authority Model Examples of successful regulator-regulatee relationships can be seen in many sectors. Each have individual characteristics. One example of a highly successful approach is the UK Primary Authority (PA) scheme.187 This provides a structure for formal cooperation agreements between businesses, Local Authorities and some national regulatory authorities. It provides channels of communication between the contracting parties to identify and resolve issues of uncertainty over law or compliance. The PA scheme includes the following elements: 1. formal agreements between a lead authority (the Primary Authority) and a business (or trade body); 2. a mechanism for any local authority to raise an issue of compliance or breach first with the PA and then for the PA to raise this with the business, rather than every local authority starting enforcement action itself; 3. a mechanism for the business to raise any issue of interpretation or compliance with the PA, in an open and trusting relationship of psychological safety (rather than provoking an authoritarian response), and to receive clear ‘assured advice’ from the PA, with which it should comply unless there is good reason for further discussion. An illustration of the PA structure is in Figure 13.5. Figure 13.5  The Primary Authority Structure

RD = the Department for Business, which exercises overall supervision of the scheme. NRA = a national regulatory authority that is part of the scheme LA = a Local Authority PA = the Primary (local) Authority for the relevant business TA = the national headquarters of the business, or a trade association or other partner B = local outlet of the business or trade association

Structures for Cooperative Engagement  405 This model encourages responsible businesses to ‘do the right thing’ in all their activities. If they are unsure or identify a problem, they should raise it (for which they will be given credit in the Regulator’s response). It draws on evidence that supportive approaches for ethical businesses deliver behaviour change.188 This is based on a conscious shift in policy on ‘support before enforcement’ by many UK authorities:189 Numerous local authority-led projects in the UK over the past 20 years have demonstrated the potential benefits of a supportive approach. In an early example, a 2004 collaboration between Bolton Metropolitan Borough Council and Salford University aimed at improving food hygiene standards in ethnic catering businesses demonstrated that directed training support to businesses that had not previously responded well to a traditional inspection regime was very effective in raising compliance levels: 65 per cent of the premises targeted in the first phase of the project showed significant improvement.190

The objective is to encourage responsible businesses to raise problems with regulators in an environment of psychological safety, and for the regulator to respond by supporting the business to improve performance. The concept of the regulator providing ‘assured advice’ on how to interpret the law and to comply is central.191 The relationship has to be a two-way conversation of trust. The Primary Authority like approach can also be applied in other jurisdictions where a national/sub-national regulator (eg energy) can be designated as the lead contact who would coordinate other regulators (eg health and safety, revenue, environment) with whom the business has to inter-relate. However, the model needs a consistently engaged approach by individuals on both sides, and this has to be nurtured and supported by training.

Better Business for All Lord Heseltine called in 2012 for a strengthening in the UK of local hubs to support businesses, given the success of Chambers of Commerce in Germany.192 An example of a coordinated approach, in which the Primary Authority scheme has been developed in a related model for partnership working between regulatory services and local businesses, is called the ‘Better Business for All’ partnership (BBfA).193 BBfA is a principles-based programme, meaning that it can be adapted to local circumstances. Its five principles are summarised below.

187 Primary Authority Overview (Department for Business, Energy & Industrial Strategy, 2019) at www.gov.uk/government/publications/primary-authority-overview. See Unlocking the Potential of Primary Authority: Implementing the Enterprise Act 2016. Government Response to Consultation (BEIS, 2017). 188 E Kirchler, E Hoelzl and I Wahl, ‘Enforced versus Voluntary Compliance: The “Slippery Slope” Framework’ (2008) 29 Journal of Economic Psychology 210–25; T Yamagishi, Y Li, H Takagishi, Y Matsumoto and T Kiyonari, ‘In Search of Homo Economicus’ (2014) 25(9) Psychological Science 1699; E Tompa, C Kalcevich, M Foley, C McLeod, S Hogg-Johnson, K Cullen, E MacEachen, Q Mahood and E Irvin, ‘A Systematic Literature Review of the Effectiveness of Occupational Health and Safety Regulatory Enforcement’ (2016) 59 American Journal of Industrial Medicine 919–33. 189 G Russell and H Kirkman, ‘Outcome Measurement’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 190 Improving the Public Image and Risk Assessment of Ethnic Minority Food Retail Businesses – the ‘Bolt ‘Project’. Presentation to Food Standards Agency workshop, 2004 (unpublished) 191 Guidance: Primary Authority: A Guide for Businesses (BEIS) at www.gov.uk/guidance/primary-authority-a-guide-forbusinesses#primary-authority-advice: ‘Primary Authority Advice is assured, which means that provided that you abide by the advice you are given, you won’t need to follow conflicting advice from other sources. Your business should be protected against the risk of enforcement action from enforcing authorities that have different views on what you should be doing to achieve compliance.’ 192 Lord Heseltine, No Stone Unturned in Pursuit of Growth (Department for Business Innovation and Skills, 2012). 193 M Traynor and K Preece, ‘Better Business for All, an Approach to Building Local Capacity for Collaboration and Accountability’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019).

406  Cooperative Regulatory Models The 5 Principles of BBfA partnerships for local regulatory delivery Strategic BBfA partnerships consider what is needed, wanted and valued in a locality and consider how expertise and resources can be shared and allocated to ensure that demand can be met. Local BBfA partnerships seek to address how services are delivered at a local level and make changes that suit local circumstances. The programme brings together relevant stakeholders in a defined geographical area. It focuses on ‘how do we do things around here’. Collaborative BBfA partnerships bring together those services that have an impact on the way business operates. They also bring business organisations to the table, involving them as equal partners, as well as Local Enterprise Partnerships and Growth Hubs. Practical BBfA partnerships are designed to ensure any changes made benefit all those involved. They are not a talking shop but are action focused. Action plans are developed based on local evidence for change or activity to support local priorities. Growth Focused The focus of BBfA partnerships is to help support business to survive, prosper and grow. All improvements and changes made through the programme have this focus in mind. Linking the programme into the LEPs strategic priorities helps to keep the programme focused on growth. Extracted from training materials used by the Office for Product Safety and Standards A Local Enterprise Partnership (LEP) is typically the basis of governance arrangements, involving a local Board of relevant businesses, recognising the role that regulatory services are playing in supporting local growth. Local action plans provide the detail as to how the objectives will be achieved. Most local programmes have developed strands of activity around these key objectives which generally reflect the following: • Accessible advice and support • Culture and competence of officers • Coordination and communication across the local system The objectives of BBfA are: BBfA Key Objectives 1. 2. 3. 4. 5. 6. 7.

Simplifying the local regulatory system and processes Providing advice and support to business Increasing the business awareness of regulatory officers Effective coordination across the regulatory system Establishing an ongoing dialogue between regulatory services and local business Supporting national and local priorities Building trust through transparency and accountability

Extracted from training materials used by the Office for Product Safety and Standards

Structures for Cooperative Engagement  407 A LEP requires ‘the establishment of an embedded culture’ as a prerequisite to assurance that governance arrangements are fit for purpose and are being adhered to, involving ‘direct and proactive leadership from the Chair and CEO of the LEP to own the establishment of a culture of strong adherence to good governance and clarity about standards’.194 There is evidence of lack of momentum and consistency in developing LEPs that might be solved through greater accountability.195

Regulatory Sandboxes Regulatory sandboxes have spread quickly to support market entry or trials on innovative ideas.196 The first was probably introduced by the UK Financial Conduct Authority in May 2016. In 2017, it was reported to have been a success:197 Access to the regulatory expertise the sandbox offers has reduced the time and cost of getting innovative ideas to market. … Testing in the sandbox has helped facilitate access to finance for innovators. … enabling products to be tested and introduced to the market. … The sandbox has allowed us to work with innovators to build appropriate consumer protection safeguards into new products and services.

The FCA stated the following indicators of success:198 • All sandbox tests have adhered to our standard safeguards. • We have worked with firms to develop bespoke safeguards for tests. • One firm successfully triggered their exit plan due to lack of consumer uptake during the test. The favourable verdict was repeated in March 2018, by which time two cohorts had supported 50 firms, and a further 18 firms had been accepted into the third cohort:199 Evidence suggests the sandbox plays a key enabling role for fintech firms, allowing new products to be tested, reducing the time and cost of getting innovative ideas to market, improving access to finance for innovators and ensuring appropriate safeguards are built into new products and services. The success of the sandbox has led to its being replicated around the world. In 2019, the FCA was engaging other regulators in contributing to the work, and to cover Artificial Intelligence (AI) and Distributed Ledger Technology (DLT).200 The FCA’s tools included: • Restricted authorisation – to conduct a regulated activity in the UK, a firm must be authorised or registered by us, unless certain exemptions apply. We have a tailored authorisation process for firms accepted into the sandbox. Any authorisation or registration will be restricted to allow firms to test only their ideas as agreed with us.

194 Review of Local Enterprise Partnership. Governance and Transparency. Led by Mary Ney (Department for Communities and Local Government, 2017). See Local Enterprise Partnership Governance and Transparency. Best Practice Guidance (HM Government, 2018). 195 Local Enterprise Partnerships: Progress Review. One Hundred and Fifth Report of Session 2017–19. Report, together with formal minutes relating to the report. Ordered by the House of Commons to be printed 26 June 2019 HC 1754. 196 Regulatory Sandboxes for Privacy. Analytical Report (Business at OECD, 2020); The Role of Sandboxes in Promoting Flexibility and Innovation in the Digital Age (OECD Going Digital Toolkit Policy Note, 2020). 197 Regulatory Sandbox Lessons Learned Report (FCA, 2017). 198 ibid, para 2.18. 199 Fintech Sector Strategy: Securing the Future of UK Fintech (HM Treasury, 2018). 200 Call for Input: Cross-Sector Sandbox (Financial Conduct Authority, 2019). The others included: Civil Aviation Authority (CAA), Gambling Commission (GC), Information Commissioner’s Office (ICO), Ofcom, Ofgem, Ofwat, Prudential Regulation Authority (PRA).

408  Cooperative Regulatory Models • Individual guidance – we can explain how we would interpret the requirements in the context of a specific test. • Informal steers – we can provide views on the potential regulatory implications of an innovative product or business model that is at an early stage of development. • Waivers – we may be able to waive or modify an unduly burdensome rule, for a test. However, we are not able to waive national or international law. • No enforcement action letters – for cases where we cannot issue individual guidance or waivers, but believe there is justification in light of the particular circumstances and characteristics of the sandbox test, to issue ‘no enforcement action’ letters. This means that if the firm deals with us openly, keeps to the agreed testing parameters and treats customers fairly, we accept that unexpected issues may arise but would not expect to take disciplinary action. At least 31 financial services regulatory agencies then had a regulatory sandbox.201 In January 2019, 36 financial organisations launched the Global Financial Innovation Network (GFIN).202 European financial authorities also supported innovation hubs and sandboxes.203 In the energy sector, sandboxes have been adopted by UK (Ofgem)204 and Canadian (Ontario Energy Board) authorities. The model proposed by the Australian Energy Regulator includes three levels of a sandbox toolkit:205 • Innovation enquiry service – innovators receive guidance on how their new technologies or business models can be delivered under the current regulatory framework • Regulatory waiver power – trial waivers may be issued by the AER in accordance with Trial Projects Guidelines and the requirements specified in the national energy laws and rules • Trial rule change process – the [Australian Energy Market Commission] may temporarily change existing rules or introduce a new rule of limited application to allow a trial to proceed.206

Regulatory sandboxes and innovation hubs in regulators received strong support from the UK government207 and positive academic evaluation.208 At the end of 2020, the European Council promoted the use of sandboxes.209 It is salutary that the development of vaccines against the Covid virus would simply not have been possible within 2020 without close cooperation between multiple parties. Ventilators were also designed and produced within three weeks rather than the normal three years as a result of cooperation between Formula 1 manufacturers, notified bodies and MHRA as medical devices regulator.210 201 United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA) and Cambridge Centre for Alternative Finance (CCAF), ‘Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech’, www.unsgsa.org/files/2915/5016/4448/Early_Lessons_ on_Regulatory_Innovations_to_Enable_Inclusive_FinTech.pdf. 202 See www.thegfin.com/. See also Global Sandbox (FCA, 2018). 203 Report. FinTech: Regulatory Sandboxes and Innovation Hubs (ESMA, EBA and EIOPA, 2019). 204 Energy Regulation Sandbox: Guidance for Innovators (Ofgem, 20 July 2020). Updates have already been identified: Insights from Running the Regulatory Sandbox (Ofgem, 2021); Evaluation of the Innovation Link (CEPA, 17 May 2021). 205 Issues Paper. Regulatory Sandboxing (Australian Energy Regulator, 2021). 206 Regulatory Sandbox Arrangements to Support Proof-of-concept Trials, Final Report (AEMC, 26 September 2019) i. 207 Fintech Sector Strategy: Securing the Future of UK Fintech (HM Treasury, 2018); Build Back Better: Our Plan for Growth (HM Treasury, 2021) CP 401; I Duncan Smith, T Villers and G Freeman, Taskforce on Innovation, Growth and Regulatory Reform (June 2021). 208 HJ Allen, ‘Regulatory Sandboxes’ (2019) 87 George Washington Law Review 579. 209 Council Conclusions on Regulatory Sandboxes and Experimentation Clauses As Tools for an Innovation-friendly, Future-proof and Resilient Regulatory Framework that Masters Disruptive Challenges in the Digital Age, General Secretariat of the Council, 16 November 2020, 13026/20. 210 Conversation between the author and Prof Mark Gillan, 11 November 2021.

Data Feedback  409 The essence of a sandbox is that a regulator and a company cooperate to scrutinise the advantages and disadvantages of an innovative product or service. The level of cooperation is inherently close, and closer than under normal market conditions. The basis is, in fact, inevitably one of trust. The degree of close working and depth of scrutiny required in most sandbox arrangements makes this almost inevitable – although most descriptions of sandbox parameters omit references to the necessity for trust, and would be improved if it were to be included.

Data Feedback Data can be a powerful identification tool of good and bad performance and outcomes. It is the essential lubricant in the circular performance-improving and problem-solving model (see Figure 12.2). Where can the relevant data be found? Who has it? What new categories and sources of data might be contributed? Can the public sector improve the quality of the data that it has so as to deliver better outcomes?211

Risk and Culture Analysis of Performance Data The use of data to identify performance and risk by water companies has been developed spectacularly by the UK Drinking Water Inspectorate (DWI).212 Using a huge quantity of water quality measurements, the DWI produces a Compliance Risk Index and an Events Risk Index which rank companies and drive their spontaneous actions to improve their rankings. It also engages in individual discussions, especially focusing on those companies whose data indicate that they are at higher risk of things having gone wrong, or likely to go wrong in future. The system has driven greater focus by boards and companies on improving outcomes and performance in just a few years. The aim of the approach is to deliver regulation through:213 (a) Assessing risk; (b) Driving performance: especially to incentivise each company to do this for itself in a spirit of friendly competition on results; (c) Measuring success. DWI’s emphasis is on full transparency of the system for data analysis and the results, including a secondment programme between inspectorate and industry personnel, all aimed at building trust and a problem-solving, performance-based system. Companies are aware that their engagement and responsiveness with the DWI system has driven its differentiation between them in selecting enforcement responses to major issues of non-compliance: it provides clear segmentation between companies who are ethical and trying to do the right thing, and those who are not addressing problems but causing harm. That segmentation leads logically either to resolution by agreed change or by prosecution and large fines.

211 Sir Michael Butler, Delivering Better Outcomes for Citizens: Practical Steps for Unlocking Public Value (HM Government, 2017). 212 M Rink, ‘Regulating Quality Outputs, an Approach Based on Provision of Data to Drive Behaviour’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019). 213 Conversation between Marcus Rink and the author on 5 March 2021.

410  Cooperative Regulatory Models

Market Data Feedback and Monitoring A valuable source of evidence on the health of consumer markets and of individual traders comes from complaints from customers and suppliers, and even the general nature of their inquiries about such things as ethical codes or laws. Data from complaints is in many regulatory systems highly valuable and swift information about market conditions and behaviours, ranging from identification of criminal activity to emerging issues of various kinds, whether generic or relating to individual sectors or data systems. There is a broad move in the UK towards routing complaints to platforms operated by an independent Ombudsman. The Ombudsman delivers more functions than just dispute resolution and can provide advice and assistance, aggregation and feedback of data, and engagement in how to improve cultures and deliver performance so as to reduce future risk. The Ombudsman is an essential part of the regulatory system in many sectors and is being extended to other sectors, thereby clarifying and strengthening the simple point in consumers’ minds about where they should go to complain or get reliable independent information. The jurisdiction of the Ombudsman is also wider than just resolving breaches of legal rights and typically covers the fairness of behaviour and outcomes, decided by applying a code of ethical practice, thus providing significant strengthening of consumer and user confidence and trust. The existence of a single Ombudsman and portal per sector (or a more integrated system across several sectors) provides a simple and easily identifiable point of contact for all users, and hence maximises the data base that is collected. An independent Ombudsman that is invested with public authority, even if not-for-profit, provides trust that the data will not be exploited for commercial purposes. In all leading regulated sectors in UK, regular meetings can occur to consider data on market conditions, especially the aggregated data held by sectoral Ombudsmen from consumer contacts asking questions about market actors’ conduct as well as from disputes. In the energy sector, for example, there are regular meetings between the Ombudsman, the regulator (Ofgem), the Consumer Advocate for the sector (an appointment made by the relevant Minister, currently held by Citizens Advice) and suppliers. These meetings perform several of the functions in the problem-solving model discussed below: reviewing data from any source so as to identify issues and root causes, discussing who should respond to an issue and how (for example, it may be necessary to clarify the rules, or make a new rule, or to engage with businesses or consumers over changing behaviour). Subsequent meetings will monitor what effect interventions have had, as revealed by the trends in the data set, and whether any further action may be necessary.

A Traditional Hierarchical Model: Financial Services The model of regulation that is widely used is one of top-down authoritarianism, rather than, as recommended here, one of responsible co-creating cooperation of stakeholders. The former can be characterised as an adult-child model and the latter as adult-adult. Under the former, for example, rules and codes tend to be imposed on business rather than co-created and adopted by all stakeholders. This requires a shift in engagement, accountability and agreeing consequences of implementing improvements in behaviour, culture, performance and achievement of the right outcomes. We will examine further the cooperative model in a subsequent section, but here let us look at the hierarchical model in greater detail. An illustration of the current model can be seen in the debates around new regulatory models in the UK post-Brexit in the light of the ability of the UK to ‘take back control’ and adopt its own

A Traditional Hierarchical Model: Financial Services  411 approach. The same issues have arisen across numerous sectors but can be particularly illuminated by the strenuous debate in relation to financial services. The basic model remains one of top-down authoritarianism, as illustrated in Figure 13.6. Parliament establishes the purposes of a regulatory authority, Government sets further secondary and other objectives for the regulators, the regulators make rules that are binding on firms, and both Parliament and Government exercise oversight on the regulators. Figure 13.6  An Authoritarian Regulatory Model Parliament Government

Regulatory

Private Firms in the Market

The debate began with an affirmation of returning to the regulatory model established in 2000 under the Financial Services and Markets Act (FSMA). In response to perceived failings in preventing the GFC, the FSMA model delegated operational regulatory control from ministers to a reorganised group of regulators,214 comprising • The Financial Conduct Authority (FCA), responsible for the regulation of conduct. • The Prudential Regulatory Authority (PRA), responsible for the prudential regulation of firms which manage significant balance sheet risk – primarily banks, insurers and the larger, more complex investment firms. • The Bank of England’s the Financial Policy Committee (FPC), responsible for the stability of the financial system as a whole, or ‘macroprudential’ regulation. • The Payment Services Regulator (PSR) was created subsequently in 2013 as the economic regulator of the payment systems industry in the UK. The Treasury’s initial 2020 proposals allocated responsibilities by distributing power in a ­hierarchical model, described as follows:215 • Government and Parliament will be responsible for setting the policy framework for financial services regulation. This will include new policy framework legislation for specific areas

214 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) para 3 said: ‘The FSMA model was adapted to address the regulatory failings that contributed to the 2007–08 global financial crisis. The Financial Services Authority was split into the PRA and the FCA. The FCA was given the strategic objective to ensure that the relevant markets functions well. The PRA was given the general objective to promote the safety and soundness of PRA-authorised persons. In addition, there were reforms to the Bank of England, most notably the creation of the Financial Policy Committee.’ These reforms were primarily delivered through the Financial Services Act 2012, Financial Services (Banking Reform) Act 2013, and Bank of England and Financial Services Act 2016. 215 Financial Services Future Regulatory Framework Review. Phase II Consultation (HM Treasury, 2020).

412  Cooperative Regulatory Models of regulated activity which will give the government and Parliament the opportunity to set out the key public policy issues that must be considered when designing and implementing regulatory standards. • The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will be responsible for designing and implementing the regulatory standards that apply to financial services firms and markets using their existing rule-making powers in FSMA. This approach will maximise the use of expertise in the design of regulatory standards and ensure those standards can be flexed and efficiently updated to address changing conditions and emerging risks. As much as possible, this should result in one coherent source of regulatory requirements for firms – the regulators’ rulebooks. This will involve the transfer of regulatory requirements in onshored legislation to the regulators. It will also offer an opportunity to review and rationalise some areas of non-EU derived financial services legislation. • The PRA and FCA will be subject to enhanced transparency requirements obliging them to explain how they have had regard to the public policy issues set out by Parliament in activityspecific policy framework legislation. This will provide Parliament with a clearer basis on which to scrutinise the work of the regulators and will support effective engagement with regulator proposals by firms and members of the public. • The cooperation and coordination arrangements that exist between HM Treasury and the financial services regulators will include more systematic consultation between these institutions at an early stage in the policymaking process. In particular, this will allow Treasury Ministers, who have overall responsibility for financial services policy in the UK, to consider regulator rule proposals and feed in views to the regulators’ policy development process before proposals are finalised for consultation. This model is illustrated in Figure 13.7.216 Figure 13.7  Proposed Allocation of Regulatory Responsibilities in Financial Services



216 ibid,

p 23.

A Traditional Hierarchical Model: Financial Services  413 After further debate, essentially over oversight power relationships between Parliament and Government, and the extent of control by HM Treasury over regulators and the effect on the perception that regulators were independent,217 the model was clarified in a 2021 consultation.218 There was general agreement that regulators should have the responsibility for exercising operational control over the markets and market operators (the basic FSMA model), but the focus was on who establishes the purposes of the regulators and who exercises oversight. A proliferation in imposed purposes started to appear. The regulators each retains its primary strategic objectives, established in legislation, together with eight ‘regulatory principles’:







1.17 FSMA sets objectives for the PRA and the FCA and requires them to act in a way that advances their objectives when carrying out their general functions. This determines what the regulators must seek to advance when they make rules, set technical standards, and issue guidance. 1.18 The FCA’s strategic objective is to ensure that the relevant markets function well. Its operational objectives are to secure an appropriate degree of protection for consumers, protect and enhance the integrity of the UK financial system, and to promote effective competition in the interests of consumers. 1.19 The PRA’s general objective is promoting the safety and soundness of PRA authorised persons; it also has an insurance-specific objective of contributing to the securing of an appropriate degree of protection for those who are, or may become, policyholders. The PRA also has a secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities. 1.20 The FSMA regulatory principles aim to promote regulatory good practice across the range of the regulators’ policymaking. The regulators must take into account 8 regulatory principles when discharging their functions, which are: • efficiency and economy – the need to use the resources of each regulator in the most efficient and economic way • proportionality – the principle that a burden or restriction which is imposed on a person, or on the carrying on of an activity, should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction • sustainable growth – the desirability of sustainable growth in the economy of the UK in the medium or long term • consumer responsibility – the general principle that consumers should take responsibility for their decisions • senior management responsibility – the principle that a regulated firm’s senior management is responsible for ensuring that its business complies with regulatory requirements imposed by or under FSMA, including those affecting consumers • recognising differences in business – the desirability where appropriate of each regulator exercising its functions in a way that recognises differences in the nature of, and objectives of, different businesses subject to requirements imposed by or under FSMA

217 The Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021, HC 147; The Role of Parliament in the Future Regulatory Framework for Financial Services, All-Party Parliamentary Group on Financial Markets & Services, February 2021; A New Chapter for Financial Services (HM Treasury, 2021). 218 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021).

414  Cooperative Regulatory Models • openness and disclosure – the desirability in appropriate cases of each regulator publishing information relating to persons on whom requirements are imposed by or under FSMA, or requiring such persons to publish information, as a means of contributing to the advancement by each regulator of its objectives • transparency – the principle that the regulators should exercise their functions as transparently as possible. One problem with this model is that it sets what we may call primary purposes, but it omits any discussion of what outcomes are to be achieved and how they are to be set or evaluated. It can, of course, be argued that a purpose of ensuring markets function well inherently includes avoidance of an outcome that there is a major systemic crisis, or that some or all financial institutions do not engage in unethical behaviour to the detriment of consumers or commercial customers, which destabilises the market. Indeed, the Treasury said that the FCA’s ‘operational objectives are an effective way of protecting the integrity of the UK’s financial services market, safeguarding consumer protection, and promoting effective and healthy competition in consumers’ interests’.219 But there is no granularity over outcomes, and this point becomes more important if more purposes are imposed on regulators and if there are concerns over the oversight mechanisms and how they are going to deliver effective accountability. These concerns turn out to be relevant. The Government has power to issue ‘recommendation letters’ to the Prudential Regulation Committee (PRC), the governing committee of the PRA, and the FCA on issues related to matters of economic policy.220 Such recommendations to the PRA and the FCA must be made at least once a Parliament, and must be published by HM Treasury and a copy laid before Parliament. The Treasury considers that ‘The recommendations letters serve the valuable purpose of providing an opportunity for government to make recommendations related to particularly topical issues or aspects of the government’s economic policy.’221 The 2021 proposals included new requirements that the PRA and the FCA provide a response on an annual basis, covering their activity in the previous year (in general, a valuable increase in accountability, but perhaps without a clear link to specific outcomes) and a power for HM Treasury to require the regulator to conduct a rule review. In addition, the 2021 proposals included a series of new purposes being imposed on regulators (and we note that the purposes are imposed on regulators rather than on all those in the system, although that is a far more detailed inquiry into detailed licensing and regulatory requirements that is outside present scope): • New ‘secondary’ objectives for the FCA and PRA for a greater focus on growth and international competitiveness. • Incorporation of climate change into the regulatory principles thus requiring the regulators to ‘have regard’ to the objective that growth should occur in a sustainable way that is consistent with the government’s commitment to achieve a net zero economy by 2050 to meet the obligation set out in section 1 of the Climate Change Act 2008. • The ability to establish activity-specific ‘have regards’ and obligations in relation to specific aspects of public policy which are not generally applicable and so are not captured by the objectives and principles which the regulators already have,222 such as in relation to PRA implementation of the standards of the Basel Committee on Banking Supervision, or FCA making rules to introduce an Investment Firms Prudential Regime.

219 ibid,

para 3.4. section 1JA (FCA) and Bank of England Act 1998, section 30B. 221 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) para 4.8. 222 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) para 7.37. 220 FSMA,

A Traditional Hierarchical Model: Financial Services  415 The Government made clear in 2021 that its objective for the financial sector would be one that ‘delivers for businesses and consumers across the UK’ and that national economic policy included these objectives:223 1. 2. 3. 4.

An open and global financial hub. A sector at the forefront of technology and innovation. A world-leader in green finance. A competitive marketplace promoting effective use of capital.

The result is a significant and potentially expanding number of instructions to regulators on purposes, strategic objectives and ‘have regard’ obligations. This raises the risk of confusion for regulators over how the plurality of individual objectives is to be balanced or prioritised, and the related issue of how regulatory decisions and outcomes are be evaluated and scrutinised. Regulators can argue that they chose a specific balance between objectives in their individual decisions, and can defend their decisions. However, under the current climate of how public accountability is operated, they are likely to be condemned simply if significant harm occurs. Politicians inside or outside Government are free to criticise as they can deny responsibility for operational decisions. The major flaw of this system is that, in failing to involve all stakeholders in establishing purposes and achieving outcomes, it fails to generate shared responsibilities or to accept the fact that risk is involved and responsibility for risk, and the experimentation that is necessary for learning, should be shared. In this context, an interesting debate occurred over possible changes proposed for the oversight and accountability mechanisms. Although the Government decided that the system of scrutiny by select committees would remain, with Parliament having responsibility for establishing the appropriate select committee structure, different views were expressed as to whether the scope of such scrutiny should be at a strategic or granular level:224 5.3 … Parliament sets the regulatory framework in the UK through the legislation under which the financial services regulators operate. This framework includes the regulators’ objectives and the powers that they are given to pursue those objectives. As Parliament determines the roles and powers of the regulators, it has an interest in knowing how this framework operates and how the powers are being used. Parliament therefore rightly has a unique and special role in relation to the scrutiny and oversight of the financial services regulators. Effective Parliamentary scrutiny provides a valuable service for consumers, firms and the regulators. It can help to ensure that the regulators’ resources are appropriately targeted to consider appropriate democratic policy input from Parliament and bring important public policy considerations into focus. 5.4 The Future Regulatory Framework (FRF) Review will see the regulators take on increased responsibility for direct regulatory requirements which apply to firms. The government considers that Parliament’s focus should continue to be on setting the strategic framework and objectives for financial services regulation, and holding the regulators to account for their actions to further their statutory objectives. 5.5 This approach aligns with the Treasury Select Committee (TSC)’s report on The Future Framework for Regulation of Financial Services,225 in which the committee suggests that a targeted approach to scrutiny through the select committee system focused on the current framework, with some ex-ante scrutiny, is preferable to ‘line-by-line’ scrutiny of all regulator proposals. Respondents to the previous



223 A

New Chapter for Financial Services (HM Treasury, 2021). Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) paras 5.2–5.6. Future Framework for Regulation of Financial Services, House of Commons Treasury Committee, July 2021.

224 Financial 225 The

416  Cooperative Regulatory Models consultation also felt that it would not be appropriate or feasible for Parliament to seek to adopt a model of line-by-line scrutiny of regulator proposals, similar to that of the Economic and Monetary Affairs (ECON) Committee of the European Parliament. 5.6 The All-Party Parliamentary Group on Financial Markets and Services’ report on The Role of Parliament in the Future Regulatory Framework for Financial Services also suggested that Parliament’s key focus should be on setting the framework for regulating financial services and scrutinising the delivery of regulation within that framework.226

The justification for Parliament having oversight is based on its authority to define the system (rather than the rules) and the primary purposes. Similarly, the justification for the Government to maintain scrutiny is based on its power to set economic objectives. The argument was put in these terms.227 As Parliament sets the regulators’ objectives and gives them the powers to pursue those objectives, Parliament rightly has a unique and special role in relation to the scrutiny and oversight of the financial services regulators. The regulators, when exercising these powers, make regulatory decisions independently from government and Parliament. However, Parliament has the right to require the regulators to explain and justify those decisions. Looked at on their own terms, all these changes can be viewed as logical in strengthening purposes, oversight and accountability mechanisms. But looked at from the viewpoint of a cooperative co-creational model, they remain structures that distribute power hierarchically rather than amongst all stakeholders. The involvement of customers and other stakeholders is missing. This argument echoes the argument in chapter nine that shareholders have the right to control a company. Surely the best argument is that the stakeholders in a system should set its purposes and evaluate the extent to which it achieves its intended outcomes? There is, of course, an argument that Parliament and Government represent the stakeholders in a regulatory system, particularly the citizens and actors in a nation’s marketplace. The same argument applies to a regulator, in having moral authority to require firms to avoid causing harm to citizens and other traders, on the basis of representing the public good by having the power to intervene in the activities of individual firms. But in each of these cases, the authority is purely representative and is derived from others, to whom Parliament, Government and regulator and firms should account for the achievement of those outcomes. Are there, in modern societies, more direct means of accountability than through representatives? The mechanism for stakeholder engagement is through two mechanisms. First, the regulators are required to consult with the public on rule proposals – but not on the wider system and its outcomes or achievement.228 The requirements were summarised like this:229 … the PRA and the FCA must explain why the making of the proposed rules is compatible with their objectives as set by Parliament in legislation. The regulators must also explain how the proposals are compatible with their obligation to take into account the regulatory principles. Consultations on rule proposals must include a draft of the rules, an explanation of the proposed purpose of the rules, and

226 The Role of Parliament in the Future Regulatory Framework for Financial Services, All-Party Parliamentary Group on Financial Markets & Services, February 2021. 227 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) para 1.2. 228 FSMA, ss 138I (FCA) and 138J (PRA). 229 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) para 1.28. Proposals included: a requirement for regulators to notify the relevant committee of a consultation, and a requirement for the regulators to respond to questions from Parliament.

A Traditional Hierarchical Model: Financial Services  417 a cost-benefit analysis (CBA).230 Before making final rules, the regulators are required to publish, in general terms, the representations made and their response to those representations. These requirements are designed to ensure consumers, market participants, and wider stakeholders have a meaningful opportunity to scrutinise and feed into the development of regulator policy, guidance and rules. The government considers that this statutory general requirement to consult remains fit for purpose, and therefore do not propose altering the regulators’ duty to publicly consult on proposals.

Second, regulators are required to have statutory panels, described like this:231 [T]he FCA has a general duty to ‘make and maintain effective arrangements for consulting practitioners and consumers.’232 The PRA has a similar general duty to ‘make and maintain effective arrangements for consulting PRA-authorised persons or, where appropriate, persons appearing to the PRA to represent the interests of such persons’, on the extent to which the PRA’s general policies and practices are consistent with its general duties.233 1.30 As part of these duties, the regulators are required under FSMA to maintain stakeholder panels as part of their general duties to consult. These panels are intended to provide valuable insight, advice and challenge across the regulators’ functions, drawing on the experience and expertise of their respective memberships. Panel members are appointed by the regulators, and the chairs are approved by HM Treasury. The regulators consult the panels at an early stage in policy development to help ensure proposals are designed to meet their policy aims. The PRA and the FCA consult these panels on most major policy and regulatory interventions. The panels also set out their own strategic priorities and share more broadly their views on proposals, for example, through publishing responses to regulator consultations and through their annual reports,234 which collate the key risks and issues the Panels have considered over the previous year. 1.31 The FCA works with five independent panels. Four of these are required in legislation235 with a further non-statutory panel (the Listing Authority Advisory Panel) voluntarily maintained by the FCA. • the FCA Practitioner Panel represents the interests of regulated firms and provides input from the industry’s view. It also works with the FCA to carry out its annual survey of stakeholder views of the FCA’s performance as a regulator • the Smaller Business Practitioner Panel represents the interests of smaller regulated firms • the Markets Practitioner Panel provides input from the point of view of financial market participants • the Consumer Panel represents the interests of consumers • the Listing Authority Advisory Panel (LAAP) advises the FCA on policy issues that affect issuers of securities, and on policy and regulation proposals from the FCA listing function 1.32 The PRA works with one statutory panel, the PRA Practitioner Panel,236 which includes an insurance sub-committee that the PRA maintains voluntarily. The panel represents the interests of industry practitioners from areas of financial services activity that are subject to PRA regulation: deposit taking, 230 There are a small number of exemptions set out in FSMA. For example, subsections of the FSMA requirement for compensation scheme rules. 231 Financial Services Future. Regulatory Framework Review: Proposals for Reform (HM Treasury, 2021) paras 1.29–1.35. Proposals included the following: placing the FCA’s Listing Authority Advisory Panel (LAAP) and the PRA Practitioner Panel’s insurance sub-committee on a statutory footing; a statutory requirement for the regulators to publish information on their engagement with the panels; a statutory requirement for the regulators to maintain a statement on appointment processes for the panels; a statutory requirement for the regulators to publish a framework for their cost-benefit analysis (CBA) processes; establishing a statutory panel to support development of regulators’ approach to CBA. 232 FSMA, s 1M. 233 ibid, s 2L. 234 Annual Report, 2020–2021, FCA Practitioner Panel, August 2021. Annual Report, 2020–2021, FCA Markets Practitioner Panel, August 2021. Annual Report, 2020–2021, FCA Smaller Business Practitioner Panel, August 2021. Annual Report, 2020–2021, FCA Consumer Panel, August 2021. PRA Practitioner Panel and insurance sub-committee – Annual Report 2020/21, PRA Practitioner Panel, June 2021. 235 FSMA, ss 1N–Q. 236 ibid, s 2M.

418  Cooperative Regulatory Models insurance and large or complex investment firms. The panel considers the PRA’s policies and practices and provides input to help meet the PRA’s statutory and operational objectives. 1.33 The regulators have regular meetings and discussions with their panels, in which most major early policy and regulatory proposals are presented for comment. The panels’ contributions to policy development as part of this process are confidential to ensure both the regulator and panel members can share ideas and feedback openly. This confidentiality allows the regulators to engage the panels when policy is in the early stages of development ahead of public consultation. This enables the panels to act as a ‘critical friend’ to the regulator which the government considers should continue. Where panels wish to comment on regulators’ proposals publicly, they can and do publish their responses to the regulators’ public consultations.237 They also discuss their work across the year in general terms in the panels’ annual reports, raise potential issues with regulators, and conduct their own research. They also occasionally set up sub-panels to deal with specific technical issues. 1.34 The practitioner panels tend to be composed of senior executives or similar with experience and a strategic perspective on their sectors which enables the panels to offer strategic and qualitative input on the regulators’ high-level proposals. The Consumer Panel is similarly made up of experienced practitioners in the consumer sectors, such as academics, independent consultants, and consumer advocates. 1.35 The regulators are responsible for appointing members and chairs to the panels. The current appointment practices are varied and reflect the different areas of expertise of the panels. The PRA’s Practitioner Panel and its insurance sub-committee seek industry nominations. The FCA seeks input from supervisory teams, and others as appropriate, for its appointments to the practitioner panels. The Consumer Panel has the most involved process, with open recruitment for both the chair and individual members. HM Treasury is required to approve the appointment and dismissal of panel chairs (except for the LAAP and insurance sub-committee, as these are voluntarily maintained by the regulators, and not covered by similar requirements).

Thus, the statutory panels are small committees largely restricted to senior executives. How do consumers, small businesses or civil society in general become involved in establishing the strategic purposes and overseeing achievement of outcomes? Does the right to comment on a specific proposed rule or to be one member of a sophisticated high-level committee of senior executives of major institutions provide enough cooperative involvement in the operation of the system and steering its outcomes? What are the criteria for oversight? Is the interview by a select committee of the CEO of a regulator adequately informed in looking at data on outcomes or driven by public outrage over the occurrence of a disaster? Performance against achievement of specific outcomes, or undesirable outcomes, on a holistic and comprehensive basis, too often simply does not occur, and typically could not occur under this architecture. Are stakeholders in the sector and the regulatory system, especially the firms themselves and civil society, in practice absent from this scrutiny process? These points matter. History shows that the multiple voices of consumers saying that they are being mis-sold PPI or that small businesses are being treated badly can be ignored for decades. Regulators and senior executives of financial firms can have no understanding of the activities, IT or risks undertaken by their junior staff (such as derivatives and their trading), which pose systemic risk to institutions and the system. A feedback system such as an Ombudsman platform is absent from the discussion summarised above about the system and how its rules are made. An open culture in which staff have the psychological safety to speak up and are not incentivised or enabled to take significant risks is also absent.

237 For example: Financial Services Consumer Panel response to CP 21/3 – Changes to the SCARTS: Contactless Payments, FCA Consumer Panel, February 2021. SBPP Response to CP21/11: The Stronger Nudge to Pensions Guidance, FCA Smaller Business Practitioner Panel, June 2021.

Conclusions  419

Conclusions Summarising the Elements of OBCR from the Case Studies We have seen in this chapter some examples of what a fully-cooperative trust-based regulatory model might contain. The case studies show that major features of the future already exist – they just need to be developed and applied more widely. We can see policy statements at governmental and regulatory levels adopting the terminology of outcomes-based, ethical and proportionate regulation but not always with clarity about how this will be delivered. However, some of the elements of OBCR that are appearing do indicate solutions that could be widely adopted. Culture. The high-risk safety systems such as aviation safety show how striking the change has been from a rules-and-enforcement-based model of the early 1980s to a trust-cooperative, openand-just-culture-performance-based system that exists now. It shows that this can be done. The system involves all operators and regulators working together, each respecting the functions, roles, behaviours and culture of the others – provided that they demonstrate that they deserve trust. A reaction that ‘aviation is different’ is simply irrelevant. The point is to focus on the behaviour of humans in their various organisations that are universal. System Creation. The Ontario engineers showed that a regulatory model can be created by multiple expert stakeholders, and an independent facilitator can be helpful. In the Ontario discussion, government officials were present but not formal participants. A broader discussion, certainly relevant in less technical subject areas that impacted consumers to a greater and more complex extent than achieving safety through getting technical aspects right, would involve a broader coalition of all stakeholders, such as consumers, suppliers, investors, local communities, NGOs or other relevant stakeholders. SEPA’s activities in relation to pulling together multiple different stakeholders to regenerate The Leven shows the astounding success that can be achieved in a community context that then unlocks different contributions to creating the shared vision of a refreshed vibrant area, involving businesses, local services, education, infrastructure, policing, local government, and social and environmental protection. Further references to community refreshment and structures are discussed in chapter nine. Setting Purposes, Objectives and Outcomes. The cooperative approach involves stakeholders both setting and being able to evaluate the purposes, strategic objectives and outcomes of the system. Few existing systems have fully engaged with the implications of this in practice. As the discussion on a new system for regulation of financial services in UK shows, the top-down model remains the default setting, and shifting from that would mean politicians giving up power. But that is the price if the system is really to work well, on a fully cooperative basis, and deliver the desired outcomes and avoid periodic predictable but unpredicted crises. It is clearly important that some stakeholders contribute important views on relevant purposes and objectives such as on national economic, social and environmental policy. But it is possible to envisage a system that does not necessarily involve the debate and setting of purposes and objectives to take place only in Parliament or within a government, as envisaged in the financial services debate. In those fora, many stakeholders might be ‘consulted’ but feel that their voices and views are marginalised and not heard. Such a ‘process’ resorts to lobbying, public shouting, media manipulation, and civil disobedience. Other forms of democratic debate and agreement may be not only possible but preferable. Many regulators currently have independent boards and consumer or other user panels. One might extend those functions to broad oversight councils,

420  Cooperative Regulatory Models involving all stakeholders, with some similarities to the Dutch model of debate between trade sectors and consumers chaired by a respected figure under the auspices of the Council of State. Operational Management. Once the purposes and desired outcomes of a regulatory system have been established, cooperation in operating the system should draw on involvement of all stakeholders demonstrating that they are contributing and fulfilling their agreed functions and roles in achieving the purposes and outcomes. Production of agreed metrics in transparent form should demonstrate the extent to which all actors do this. Achieving undesired outcomes, such as an unacceptable level of harm (accepting however that risk is always involved) should be transparent and lead to consequences aimed at improving performance or desisting from activities, and correcting the harm caused. The types and form of relevant data will be subject to evolution. Data on behaviour and culture will be relevant in addition to traditional evidence of intention, operating systems, compliance with standards, certification and auditing. Digital systems internally and externally will be developed, such as aggregated data from consumer portals operated by Ombudsmen and by regulators like DWI. As the aviation safety, SEPA and OSR examples show, the form of intervention to problems (or, in traditional language, breaches of rules) that is typically appropriate in a trustbased system should be cooperative engagement to solving the issues, through instigating steps to reduce future risk and to restoring harm caused. Structures for Cooperation. In real life, many systems involve multiple actors, and organisations categorised as public, private and civil society forms. Multiple relationships and interactions need to be coordinated. Structures such as the Primary Authority scheme provide strong models on which to build. Key elements are agreements on common expectations through commitment to achieving the common purposes and outcomes and behaving in an ethical manner, plus commitment to producing relevant evidence that will demonstrate trustworthiness.

The Basic Elements of OBCR It follows that elements of the ideas set out in chapter 12 can be identified as existing in real life, and that a full outcome-based cooperative model should include: –– Establishing purposes, strategic objectives and outcomes through full stakeholder involvement, on the basis of cooperative respectful deliberation, rather than through a hierarchical government-imposed model. –– RDM-based elements applying to the entire system and to all actors, rather than just individual regulatory authorities. –– A preferred regulatory track in which an actor voluntarily produces evidence that it can be trusted. This justifies its respectfulness, trustworthiness and reputation as a good place for people to work and rely on. It should lead to simplified consequences in public and private preferment contracts, and success in commercial, social, environmental and other outcomes. Two key areas in particular should be developed that have not received enough attention. First, what outcomes are – and are not – desired? Second, what evidence should be produced that a person/entity is – or is not – trustworthy? Neither of these issues is one on which we should pontificate further here, because they are issues that should be discussed and developed between

Conclusions  421 relevant individuals and their stakeholders in particular contexts.238 For example, the nature and scope of evidence that an organisation has an ethical culture is a relatively new challenge. Techniques and metrics will evolve and will differ with context. A ‘market’ may develop of both techniques and trustworthiness indicators between organisations, both private and public. Equally, although the importance of outcome-based regimes is increasingly stressed in regulatory policies and strategies, little attention has been paid to specifying what the desired and undesired outcomes actually are, and what evidence will be relevant to demonstrate success or improvements in performance to deliver them. Again, it will be good to see competition in improving how to address these issues.

238 A helpful statement of metrics delivered for outcomes on empowering consumers, protecting people and places, and supporting business is Office for Product Safety and Standards Delivery Report 2019/20 (Office for Product Safety and Standards, 2020).

14 Traditional Approaches to Enforcement and Compliance This chapter examines traditional approaches to affecting behaviour through enforcement and compliance. The term enforcement is largely thought of in the context of regulation, as being the standard consequence that is applied after an authority identifies a breach of legal rules. The theory that is traditionally used to justify a sanctions-based response to ‘wrongdoing’ is that sanctions will deter people and organisations from committing future breaches of the law. The term compliance is used in one sense to describe the state of compliance – or non-compliance – with legal rules and also as a compliance management system that is operated by a regulated organisation to try to assure that it and its staff comply with the legal rules – and also to be evidence of good intention that would justify a lower penalty if breaches occur. The main argument in this chapter is that the concepts of enforcement, deterrence and compliance systems are all out of date. They assume a model of controlling future behaviour that is authoritarian and arises from controlling self-interest through calculations that costs will be adverse compared with benefits and on fear. These assumptions crumble in the face of scientific and empirical evidence about how people actually behave, what motivates them, what drives mistakes and anti-social behaviour, what mechanisms might be (and are) more effective than assumptions about fear, cost calculation and deterrence, and what the evidence shows on the best ways to affect future behaviour and to learn from mistakes.

Traditional Approaches to Enforcement Can Behaviour Be Affected through Deterrence? The traditional idea that sanctions deter future breaches of law is widely quoted. It has assumed a central place in legal-philosophical theory and in economic theory. At bottom, the assumed mechanism is that fear of adverse consequences1 prevents future wrongdoing. Under the theory of utilitarianism2 and in classical economic theory,3 people make decisions on an objective, 1 ‘A common theme in these discussions [of the UK finance industry sponsored by the FCA] was fear. Fear of the shortterm focus on profit and expectations of shareholders, elevated in importance by financial KPIs and short time horizons for reporting. Fear of regulators, and the potential for inadvertently breaching an obscure rule, making regulation a distraction. And fear of being the first mover to do the right thing and getting left behind a pack not yet willing to make a collective bold and purposeful move.’: Transforming Culture in Financial Services. Driving Purposeful Cultures. Discussion Paper (Financial Conduct Authority, March 2020), DP20/1. 2 eg J Bentham, An Introduction to the Principles of Morals and Legislation (JH Burns and HLA Hart, eds) (Methuen, 1789/1982). 3 AC Pigou, The Economics of Welfare (Macmillan, 1920) 169–71; G Becker, ‘Crime and Punishment: An Economic Approach’ (1968) 76 Journal of Political Economy 169–217; GJ Stigler, ‘The Theory of Economic Regulation’ (1971) 2

Traditional Approaches to Enforcement   423 rational (and amoral) basis4 and this calculation of the benefits and costs of an action5 can be affected where the cost of future wrongdoing are internalised through the state’s legal processes (fines or damages). That model can readily be theorised to apply to commercial organisations, all of whose decisions are assumed to be driven exclusively by the profit motive, and whose actions can therefore be controlled by internalisation of the cost of harm that would flow if particular actions were to be taken. Competition authorities across the world typically base their enforcement on the theory of deterrence and use of fines alone.6 For example, the European Commission states out in its Fining Guidelines that: Fines should have a sufficiently deterrent effect, not only in order to sanction the undertakings concerned (specific deterrence) but also in order to deter other undertakings from engaging in, or continuing, behaviour that is contrary to articles [101, then 81] and [102, then 82] of the EC Treaty (general deterrence).7

The deterrence approach in competition law is modified by a leniency programme,8 under which infringers who are first to notify the authorities of wrongdoing by their employees can obtain immunity from fines, and other companies that provide additional information that has significant additional value for the authority can seek reduced fines.9 The theory of deterrence has been subject to extensive criticism, of which the following are major points. 1. Deterrence is a theory (and only one theory) on how people behave and how one can intervene to prevent harm. It is a mechanistic theory, and not a matter of underlying policy. The underlying policy ought not to be to achieve deterrence or to increase deterrence. The policy ought to be ‘how do we affect future behaviour and culture, and reduce risk?’ If one asks those Bell Journal of Economics and Management Science 3–21; M Faure, A Ogus and N Philipsen, ‘Curbing Consumer Financial Losses: The Economics of Regulatory Enforcement’ (2009) 31 Law & Policy 161–191. In the context of compliance with international rules between states, see M Cremona (ed), Compliance and the Enforcement of EU Law (Oxford University Press, 2012) 4 R Kagan and J Scholz, ‘The “Criminology of the Corporation” and Regulatory Enforcement Styles’ in K Hawkins and J Thomas (eds), Enforcing Regulation (Kluwer-Nijhoff, 1984) 67–95. 5 M Allingham, Rational Choice (St Martin’s Press Inc, 1999); MS Archer and JQ Tritter, Rational Choice Theory: Resisting Colonization (Routledge, 2001). 6 See C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015) ch 4. The European Commission’s procedural rules on sanctions and the rules concerning the granting of immunity or reductions from fines are publicly available at https://ec.europa.eu/competition/index_en.html and in particular https://ec.europa.eu/competition/cartels/leniency/leniency.html. 7 Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulation N0 1/2003, para 4, referring to Joined Cases 100/80 to 103/80 Musique Diffusion française and others v Commission [1983] ECR 1825, para 106. Almost the same wording appears at Communication from the Commission on quantifying harm in actions for damages based on breaches of Article 101 and 102 of the Treaty on the Functioning of the European Union, OJ C 167/07, 13.6.2013, para 1. The twin aims of specific and general deterrence were underlined by the court: Case T-13/03, Nintendo [2009] ECR II-975, para 73. Analysis of the 39 cartels listed by the Commission between 1999 and 2006 revealed that once the gravity of the offence is set, the basic fine increases most as a result of the application of the ‘sufficient deterrence’ uplift an duration: C Veljanovski, ‘Cartel Fines in Europe: Law, Practice and Deterrence’ (2007) 30 World Competition 65–86; C Veljanovski, ‘European Cartel Fines Under the 2006 Penalty Guidelines – A Statistical Analysis’ (Case Associates, 2010). 8 Commission Notice on Immunity from fines and reduction of fines in cartel cases, OJ 2006 C207/4-6. Leniency programmes exist in every Member State except Malta: 1207 Lear report for EP Collective Redress in Antitrust IP/A/ ECON/ST/2001-19, June 2012. See W Wils, ‘Leniency in Antitrust Enforcement: Theory and Practice’ (2007) 30 World Competition 25. 9 Revised Leniency Policy (European Competition Network, November 2012), available at http://ec.europa.eu/competition/ecn/mlp_revised_2012_en.pdf; updating Commission Notice on Immunity from fines and reduction of fines in cartel cases, OJ C 298/17, 8.12.2008, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2008:016 5:FIN:EN:PDF.

424  Traditional Approaches to Enforcement and Compliance

2.

3.

4.

5.

fundamental questions, the right answers start to emerge – because people start to think more intelligently about outcomes and evidence. But very few people do ask the right questions. The deterrence model is based on a linear sequence of events: the existence of legal rules, the identification of breach of a rule (characterised as blameworthy, wrongdoing and misconduct), and the imposition of a sanction for such breach. It assumes that all breaches are identified and subject to the same type of sanction. It therefore assumes an effective and consistent enforcement system, such that all actors will perceive that any infringement is likely to be identified and sanctioned. It assumes universal knowledge that a certain act is wrong (or will produce harm) and that a certain level of sanction will be imposed. It assumes that the imposition of criminal or civil sanctions after committing a breach of law are supposed to affect future behaviour. The term ‘deterrence’ either carries an implication that all future wrongdoing will be prevented or fails to clarify the extent to which some future actions or events will be prevented, in other words the extent to which that future compliance will be complete or adequate. It therefore remains unclear to what extent imposition of a sanction in any particular circumstances results in the complete avoidance of future wrongdoing or only some diminution in its incidence or severity. The claim that the effect of sanctioning is comprehensive cannot be true, so at least some alternative approaches are needed. In these circumstances, continued use of the term ‘deterrence’ constitute a misleading claim on the public. Continuing to cite ‘deterrence’ as justification and policy avoids confronting the deeper question of how future behaviour is in fact influenced or controlled. The idea of affecting change through deterrence fails to clarify the mechanism by which change or compliance occurs. Given evidence on the multiple ways in which decisions and actions can occur, this is profoundly unsatisfactory. A theory that decisions will be made on the basis of a calculation that benefits will exceed costs presupposes that that is the mechanism by which humans reach decisions (whether all or some decisions), and that all actions are based on rational analysis of available evidence. Extensive behavioural science research has established that human mechanisms for acting are frequently neither rational nor involve cost-benefit analysis. Neither humans nor organisations make all, or even most, decisions on the basis of ex ante rational calculations. Many human decisions are made almost instantaneously through neurological pathways, and if any rational analysis occurs it tends to attempt to justify the rightness of an action after it has been taken, irrespective of the ethics of the action, even if they are glaringly unsatisfactory. Many decisions are also significantly influenced by social and cultural factors of the group or organisation within which individuals work. A wide range of factors influence behaviour in real life, such as lack of time, or focusing on meeting targets, or children’s illnesses, or trying to support colleagues. Studies into the causes of major wrongdoing and disasters have consistently found that individuals who were involved in major disasters paid little attention to the threat of sanctions, and that an increased perception of any such threat would appear to have had no or limited effect on their behaviour and that the threat of sanctions would not have prevented the harm/disasters.10 In assessing attempts to control workers, Gray and Silbey commented:11 The ‘punishment model’ [in health and safety] assumes workers as amoral calculators; is substantially out of touch with the reality that such workers face. Overall, the punishment of workers for

10 E Soltes, Why Do They Do It: Inside the Mind of the White-Collar Criminal (Public Affairs, 2016); D Gentilin, The Origins of Ethical Failures. Lessons for Leaders (Routledge, 2016); D Beunza, Taking the Floor. Models, Morals, and Management in a Wall Street Trading Room (Princeton University Press, 2019); S Dekker, Just Culture. Restoring Trust and Accountability in Your Organization 3rd edn (Ashgate Publishing, 2017). 11 GC Gray and SS Silbey, ‘The Other Side of the Compliance Relationship’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012).

Traditional Approaches to Enforcement   425 safety violations has no preventative effect. Not only does it fail to address the underlying social mechanisms associated with unsafe behavior, but it also assigns punishment for actions that a worker may not feel that they had the agency to control.

6. Organisations cannot be anthropomorphised as if they were people, or considered to operate as single rational actors, since they can be comprised of many people, who operate in many different groups, and actions causing harm can occur for many reasons.12 An extensive empirical study into major examples of corporate wrongdoing found that in post-1970 common law countries corporate regulation is reactive in nature, and has little role to play in moderating future corporate behaviour.13 Businesses may merely treat fines and damages as a ‘cost of business’ and take little or no internal action. 7. There is extensive academic literature on the lack of effectiveness of deterrence across a range of situations. Consistent results are found from criminal law,14 and public and private enforcement contexts.15 Recent overviews of the literature on deterrence found ‘inconclusive empirical evidence’ that it affects either compliance or affects behaviour in criminal, regulatory or tort law contexts.16 Corporations are often not ‘deterred’ by legal sanctions as rational utility models predict.17 The wrong language is being used. The language of deterrence expects that breaches of law will be ‘deterred’ and not occur again. But it fails to engage with what actual changes might occur that would reduce risk. In a large corporation, a fine is merely a ‘cost of business’ and actions to address the root causes of risk do not necessarily follow. Entirely different factors may affect whether any responses to sanctions occur, and what the nature of the response is. Differences occur, for example, between large and small businesses, and different sectors, such as farmers, homebuilders and owners of marine facilities, influenced by the strength or absence of factors such as sense of civic duty and reputation.18 Studies on the severity of sentencing decisions in criminal cases show that people’s views are based on moral judgments about deservingness rather than by instrumental judgments concerning how to deter future criminal conduct.19 8. Deterrence can have negative consequences.20 People resent being subjected to sanctions where they think they were trying to do the right thing, that the sanction is unfair, or the process was unfair. This can diminish motivation to comply or cooperate.

12 J Ladd, ‘Morality and the Ideal of Rationality in Formal Organizations’ (1970) 54 The Monist 488 (‘formal organizations are not moral persons, and have no moral responsibilities, they have no moral rights’, 508). 13 L Hail, A Tahoun and C Wang, ‘Corporate Scandals and Regulation’ (2018) 56(2) Journal of Accounting Research 617–71. 14 TC Pratt, FT Cullen, KR Blevins, LE Daigle and TD Madensen, ‘The Empirical Status of Deterrence Theory: a Meta-analysis’, in FT Cullen, JP Wright and KR Blevins (eds), Taking Stock: The Status of Criminological Theory (Transaction Publishers, 2006). 15 See summary at C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015). 16 B van Rooij and A Fine, The Behavioural Code. The Hidden Ways the Law Makes Us Better … Or Worse (Beacon Press, 2021); B van Rooij and M Brownlee, ‘Does Tort Deter? Inconclusive Empirical Evidence about the Effect of Liability in Preventing Harmful Behaviour’ in B Van Rooij and DD Sokol (eds), Cambridge Handbook on Compliance. (Cambridge University Press, 2021). 17 J Braithwaite and T Makkai, ‘Testing an Expected Utility Model of Corporate Deterrence’ (1991) 25 Law and Society Review 7; L Axelrad and RA Kagaan, Regulatory Encounters. Multinational Corporations and American Adversarial Legalism (University of California Press, 2000). 18 P May, ‘Compliance Motivations: Perspectives of Farmers, Homebuilders, and Marine Facilities’ (2005) 27 Law and Policy 317. 19 KM Carlsmith, JM Darley and PH Robinson, ‘Why Do We Punish?’ (2002) 83 Journal of Personality and Social Psychology 284. 20 N Gunningham, ‘Enforcement and Compliance Strategies’ in M Cave, R Baldwin, M Lodge (eds), The Oxford Handbook of Regulation (Oxford University Press, 2010).

426  Traditional Approaches to Enforcement and Compliance 9. Sanctions are imposed in response to a breach of a rule. However, the reason why a person committed a breach might not have involved any morally culpable motivation. Of course, the severity of a sanction might take that fact into effect (or it might not, for example under ‘strict liability’ regimes). But where people perceive that they or others have been unfairly treated, that drives resentment, diminished motivation to comply with any rules, and perceptions of a lack of legitimacy of authority. In other words, the justification for imposing the stigma of breach and the pain of punishment may be unethical and undeserved in a significant number of situations. 10. Controlling people and organisations by responding to where they do something wrong (break a rule) requires almost constant surveillance. This would be hugely costly,21 is practically unachievable, and demoralises subjects, who feel they are not trusted, so it reduces motivation, commitment, performance, outputs and compliance.22 11. The threat of sanctions or authoritarian investigations itself prevents sharing information and hence learning and improved performance. This point, clearly established through behavioural research, is at the centre of the ‘no blame’ system that was adopted as an essential element in the aviation safety regulatory system, under the concepts of ‘open culture’ and ‘just culture’. These conclusions and concepts are discussed in chapter 13. People just do not share essential information, or cooperate, if they fear authoritarian reactions form others. Blaming and punishing are inimical to cooperation. However, the ‘just culture’ model is a more advanced model of learning, identifying root causes, and implementing consequences that affect future behaviour and reduce future risk. As discussed in chapter 15, this does not prevent a society taking firm steps to protect itself from harm and from those who intend to cause harm. A just culture is firmly based on accountability (see chapter 13), but not blame. 12. There is the constitutional and cultural issue that it is unacceptable in a modern democracy to aim to rule or control citizens through fear. We now know many other means of affecting the behaviour of people than through deterrence. This is not the middle ages, when the king might have been all powerful. In an age when citizens have rights, when most citizens intend to come to work to do a good job and not to cause harm, and an age when sound science is available on how people behave and how their behaviour and social cultures can drive behaviour. This science needs to be applied, instead of relying on outdated theoretical concepts that have been intellectually demolished and so are dishonest. 13. An increasing volume of literature on regulation (policy and practice) and certainly business management – reviewed in this book – demonstrate non-fear or non-blame based approaches work well in achieving outcomes (and hence compliance and performance), and better than the threat of imposing sanctions. 14. The changing climate on how to achieve effective outcomes has led a number of governmental regulatory and enforcement policies, and associated practice and policies by regulatory authorities, to move away from an authoritarian, deterrence-based punitive approach to one of responding to different regulatees on a differentiated manner, in which most regulatees are supported to improve and comply. My 2015 study provided empirical evidence of this23 and recent examples are mentioned below.

21 TL Meares, ‘Norms, Legitimacy, and Law Enforcement’ (2000) 79 Oregon Law Review 391. 22 RM Kramer and TR Tyler (eds), Trust in Organizations (Sage, 1996); TR Gurr, Why Men Rebel (Princeton University Press, 1970); TR Tyler and HJ Smith, ‘Social Justice and Social Movements’ in DT Gilbert, ST Fiske and G Lindzey, The Handbook of Social Psychology (McGraw-Hill, 1998). 23 C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015).

Traditional Approaches to Enforcement   427 Having said all of the above, there are situations where the threat of the use of force may be the only means of attempting to affect the behaviour of someone else. The obvious example is in preventing international warfare, in situations where diplomatic relations may be ineffective. The science indicates24 that a person’s actions may be affected by a threat if they remember it before acting, which may be influenced by the severity of the threat25 but, significantly more importantly, is where the person perceives that the likelihood of being identified in their actions and of the threat being activated is high.26 Threats of imprisonment may simply be discounted by those who commit crime, whereas threats of use of nuclear weapons in response to acts of war may work if it is perceived that they will be used. This explains why threats of removal of firms’ licence to operate or disqualification of the right to act as a director are likely to be far more effective than imposition of monetary penalties on a business. What is needed for a cooperative approach is an evolution in thinking and practice about how society learns, protects itself and implements effective changes in behaviour, culture, systems and performance, so as to reduce future risk. The realignment that is required is to reconfigure thinking away from deterrence, punishment and blaming individuals and to switch to open, just and ethical cultures. Currently, many enforcement authorities responsible for laws that are expressed in generic requirements of horizontal application – such as competition law, fraud, bribery, human rights – retain deterrence as their central (and often only) theory and policy on enforcement.27 In contrast, as discussed below, some regulatory authorities have widened their approaches, and even jettisoned deterrence. However, the theory of deterrence was the background for the development of requiring corporations to create internal enforcement regimes in the form of compliance systems.

A Rules-based Model of Enforcement: The EU Example An example of the traditional rules-breach-sanction-deterrence concept of enforcement is the EU’s generic approach. The EU principles of subsidiarity and procedural autonomy mean that Member States’ arrangements and practices of enforcement have not been harmonised, or even considered on a comparative basis between different States or sectors.

24 For recognition of these points in criminal law, see R Paternoster and SS Simpson, ‘A Rational Choice Theory of Corporate Crime’ in RV Clarke and M Felson (eds), Routine Activity and Rational Choice: Advances in Criminological Theory Vol 5 (Transaction Publishers, 1993) 37–58; see SS Simpson and M Rorie, ‘Motivating Compliance: Economic and Material Motives for Compliance’ in C Parker and VL Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012). 25 LS Beres and TD Griffith, ‘Habitual Offender Statutes and Criminal Deterrence’ (2001) 34 Connecticut Law Review 55, 59; see I Ehrlich, ‘Crime, Punishment, and the Market for Offenses’ (1996) 10(1) Journal of Economic Perspectives 43, 55–63 (surveying the research on the question); PW Greenwood et al, Three Strikes and You’re Out: Estimated Benefit and Cost of California’s Mandatory New Sentencing Laws (RAND Corporation, 1994), 16 (surveying recent research supporting that increases in sentencing does not provide additional deterrence). But see D Kessler and SD Levitt, ‘Using Sentence Enhancements to Distinguish Between Deterrence and Incapacitation’ (1999) 42 Journal of Law & Economics 343, 343 (discriminating between deterrent and incapacitation effect and finding deterrent effect to be significant). 26 R MacCoun, ‘Drugs and the Law: A Psychological Analysis of Drug Prohibition’ (1993) 113 Psychological Bulletin 497– 512; PH Robinson and J Darley, Justice, Liability and Blame (Westview, 1995); PH Robinson and J Darley, ‘The Utility of Desert’ (1997) 91 Northwestern University Law Review 453–99; HL Ross, Deterring the Drinking Driver (Lexington Books, 1982); D Nagin, ‘Criminal Deterrence Research at the Outset of the Twenty-first Century’ in M Tonry (ed), Crime and Justice: A Review of Research (University of Chicago Press, 1998). 27 See K Voss, ‘Preventing the Cure: Corporate Compliance Programmes in EU Competition Law Enforcement’ (2013) 16(1) EuroparättsligTidskrift 28–43; C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015).

428  Traditional Approaches to Enforcement and Compliance Where EU legislation includes the power for imposition of penalties, for many years the only general requirement that is specified is that penalties imposed shall be ‘effective, proportionate and dissuasive’. That mantra is repeated in many EU legislative texts, but it has developed on a piecemeal basis, has never been subjected to systematic research or review, and does not amount to a principled enforcement policy or one that has been subjected to empirical evaluation. The phrase originates from case law, having been developed piecemeal by the European Court of Justice.28 However, there is no robust evidence base or even specific academic theorising that would substantiate those three words – effective, proportionate and dissuasive – as being the only, or even the appropriate, objectives or criteria. They are requoted widely yet remain a policy fiction. Empirical evidence that sanctions that are proportionate will necessarily be ‘effective’ or ‘dissuasive’ is lacking. Those two terms contain a clear inconsistency. The concept of effectiveness is binary – something is either effective or is not. Yet the concept of ‘dissuasiveness’ is relative rather than absolute – it is relevant to ask how dissuasive a sanction has to be and use of the term is wholly unclear in answering that question. The terms imply that to be dissuasive and effective a penalty must provide an absolute deterrent – the infringement will never occur again. But that is an unrealistic impossibility. In order to fully prevent future recurrence, a penalty might have to be so severe as to be wholly disproportionate. The same quality of relativity applies to the concept of ‘deterrence’ – how much effect on whose future behaviour has to be produced, and how can any such effect be evidenced? The terms ‘dissuasive’ and ‘deterrent’ carry some implication that they are absolute, but this is a political fiction – there is no guarantee that victims can be protected from harm by use of the EU’s sanctions regime. Perhaps recognising that financial penalties may have to be significantly sizeable if they are to have any effect on the mind of a large corporation, there has been a trend for the EU to specify increasing floors or caps on penalties. Penalties for breaches of several consumer protection measures could be at least 4% of the trader’s annual turnover in all Member States (on the basis of deterrence).29 The General Data Protection regulation provides that penalties for some breaches may be up to the higher of €20 million or 4% of the total worldwide annual turnover of the organisation.30 Proposed legislation regulating artificial intelligence provides for penalties up to whichever is higher of €30 million or 6% of the total worldwide annual turnover.31 No legislator or regulator would be able to explain the mechanism by which (i.e. how) imposing a large penalty on an organisation will lead to specific changes in how the organisation operates so that future risk of the same harm occurring in future is reduced. It is either assumed that a complex organisation is a single entity with a single mind (rather than a collection of multiple human brains and systems) that will react in the utilitarian way that humans are assumed to act (even more so if the theory of a corporation is that its sole purpose is to make profits and it acts economically rationally to that end) or that a penalty that is large enough will catch the attention of the board will identify and initiate changes that are effective in avoiding

28 Case 68/88, Commission v Greece [1989] ECR 2965, paras 22–27; Case C-326/88, Anklagemyndighedem v Hansen & Sons I/S [1990] I ECR 2911; Case C-36/94, Siesse v Director da Alfandega de Alcantara [1995] ECR I-3573, paras 19–21; Case C-83/94, Leifer [1995] ECR I-3231, paras 32–41; Case C-341/94, Allain [1996] ECR I-4631, para. 24; Case C-29/95, Pastoors v Belgium [1997] ECR I-285, paras 24–26; Case C-91/02 Hannl & Hofstetter [2003] ECR I-12077; Case C-472/10, Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt [2012] EUECJ C-472/10, para 37. 29 Directive (EU) 2019/2161 on better enforcement and modernisation of Union consumer protection rules, arts 1 (unfair contract terms under Directive 93/13), 3(6) (unfair commercial practices under Directive 2005/29), 4(13) (consumer rights under Directive 2011/83): see references to deterrence in recitals 7, 10, 14. 30 Regulation (EU) 2016/679 on the processing of personal data and on the free movement of such data, art 83.5. 31 Proposal for a regulation of the European Parliament and of the Council laying down harmonised rules on artificial intelligence (Artificial Intelligence Act) and amending certain Union legislative Acts COM(20201) 206 final, 21.4.2021.

Traditional Approaches to Enforcement   429 future infringements. A very much more accurate understanding of why – good and bad – things happen in large organisations is available from extensive research. For example, an experienced former General Counsel has described the complexity of such organisations, the constant tension between systems and human behaviour, the unpredictability of some major outcomes despite detailed planning, and the power of ethical culture over the disrupting aspects of external legal requirements and interventions.32

Enforcement Cooperation Programmes The United States Securities and Exchange Commission (SEC) was strongly criticised on the grounds that firms that cooperated with the SEC over resolving enforcement actions were left worse off than if they had not cooperated.33 The SEC adopted a new cooperation initiative in 2010, including a new section in its Enforcement Manual of ‘Fostering Cooperation’ that set minimum levels of ‘cooperation’ as thresholds for formal responses, including the possibility of facilitating and ‘rewarding’ cooperation through tools such as non-prosecution agreements (NPAs), deferred prosecution agreements (DPAs), cooperation letters and settlement recommendations.34 Recent research has shown that the change produced an effect.35 Between 2002–10 the researchers estimated that a one unit increase in their calculated ‘cooperation score’ increased the probability of enforcement by 4.2% and penalties by $2.04 million. In contrast, in the 2011–14 period, a one unit higher cooperation score was related to a 4.6% lower chance of enforcement and $2.55 million less in fines. For specific cooperative actions, the SEC penalised self-investigation, prominent disclosure, and replacing executives in the 2002-2010 period, whereas in the 2011–14 period it rewarded replacing executives and timely reporting. The researchers also suggested that after 2010, the SEC continued to penalise self-investigation firms only if they did not communicate their findings to the SEC. Cooperating with the authorities after one has been identified as having broken the law, or even if one self-reports to the authorities, is ethical cooperative conduct. But it is more important to cooperate in identifying the root cause of a problem and in taking steps to avoid its recurrence, or to reduce risk. The SEC’s approach in fact identifies four broad measures of a company’s cooperation:36 1. Self-policing prior to the discovery of the misconduct, including establishing effective compliance procedures and an appropriate tone at the top; 2. Self-reporting of misconduct when it is discovered, including conducting a thorough review of the nature, extent, origins and consequences of the misconduct, and promptly, completely and effectively disclosing the misconduct to the public, to regulatory agencies, and to selfregulatory organisations;

32 P Kurer, Legal and Compliance Risk: A Strategic Response to a Rising Threat for Global Business (Oxford University Press, 2015). 33 R Files, ‘SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?’ (2012) 53 Journal of Accounting and Economics 353–74; see earlier Report of Investigation and Statement (Securities and Exchange Commission, 2001) (the Seabord Report). 34 Enforcement Manual (Securities and Exchange Commission), see www.sec.gov/spotlight/enforcement-cooperationinitiative.shtml. 35 AJ Leone, EX Li and M Liu, ‘On the SEC’s 2010 Enforcement Cooperation Program’ (2021) 71 (1) Journal of Accounting and Economics 101355. 36 www.sec.gov/spotlight/enforcement-cooperation-initiative.shtml.

430  Traditional Approaches to Enforcement and Compliance 3. Remediation, including dismissing or appropriately disciplining wrongdoers, modifying and improving internal controls and procedures to prevent recurrence of the misconduct, and appropriately compensating those adversely affected; and 4. Cooperation with law enforcement authorities, including providing the Commission staff with all information relevant to the underlying violations and the company’s remedial efforts. In turn, these issues raise issues of internal compliance systems aimed at self-prevention, and actions taken to remedy the ‘misconduct’, as well as self-reporting and cooperating with investigations. Some expansions on the first two issues have developed in other enforcement regimes, and we now discuss some of these in Europe.

Mitigating and Aggravating Factors A strict approach to enforcement would impose sanctions based on the mere fact of the occurrence of harm and the attribution of (legal) causation. But sentencing by courts and regulatory sanctions has taken a more flexible approach by taking into account a range of mitigating or ­aggravating factors. Practice across jurisdictions is extraordinarily inconsistent on such fundamental aspects of justice and fairness. A study published in 2021 found a range of practice in whether authorities take into account mitigating or aggravating factors in decisions on enforcement, sanctions or fines.37 Some reported taking into account the existence of compliance frameworks or programmes38 whilst others did not take such compliance steps as mitigating factors39 or as aggravating factors.40 The EU approach to sanctions is institutionally confused. In recent legislation, the typical model is that penalties are to be imposed by national authorities of the Member States, subject to some regulatory conditions, but affording considerable discretion to national legislatures and authorities. To that significant extent, therefore, the approach to enforcement across the EU is only partial harmonisation. Further, Member States may be slow to implement EU measures,41 or may do so incorrectly. The GDPR also specifically reserves to Member States the right to decide whether, and what, penalties may be imposed on public bodies: ‘each Member State may lay down the rules on whether and to what extent administrative fines may be imposed on public authorities and bodies established in that Member State.’42 It also specifies complete discretion for Member States in relation to any national regime relating to penalties other than administrative fines: Member States shall lay down the rules on other penalties applicable to infringements of this Regulation in particular for infringements which are not subject to administrative fines pursuant to Article 83, and shall take all measures necessary to ensure that they are implemented. Such penalties shall be effective, proportionate and dissuasive.43 37 Organizational Accountability in Data Protection Enforcement. How Regulators Consider Accountability in their Enforcement Decisions (Centre for Information Policy Leadership, 2021). 38 Included Australia (ACCC and AFSA), Belgium (BIPT), Finland (TUKES), Malta (NRA), Netherlands (Education Inspectorate), Spain (CNMC), UK (OPSS, SRA & FSA). 39 Poland (UOKiK). 40 Brazil (CADE), Malta (NRA), Poland (UOKiK) and Spain (CNMC). 41 The response to the Questionnaire from the Information Commissioner of Slovenia noted that national legislation permitting use of the sanctions prescribed in the GDPR was still awaited in late 2020. 42 GDPR, art 83.7. 43 GDPR, art 84.1.

Traditional Approaches to Enforcement   431 The EU’s data protection legislation, the ‘GDPR’, specifies the following provisions regulating national administrative penalties:44 When deciding whether to impose an administrative fine and deciding on the amount of the administrative fine in each individual case due regard shall be given to the following: (a) the nature, gravity and duration of the infringement taking into account the nature scope or purpose of the processing concerned as well as the number of data subjects affected and the level of damage suffered by them; (b) the intentional or negligent character of the infringement; (c) any action taken by the controller or processor to mitigate the damage suffered by data subjects; (d) the degree of responsibility of the controller or processor taking into account technical and organisational measures implemented by them pursuant to Articles 25 and 32; (e) any relevant previous infringements by the controller or processor; (f) the degree of cooperation with the supervisory authority, in order to remedy the infringement and mitigate the possible adverse effects of the infringement; (g) the categories of personal data affected by the infringement; (h) the manner in which the infringement became known to the supervisory authority, in particular whether, and if so to what extent, the controller or processor notified the infringement; (i) where measures referred to in Article 58(2) have previously been ordered against the controller or processor concerned with regard to the same subject-matter, compliance with those measures; (j) adherence to approved codes of conduct pursuant to Article 40 or approved certification mechanisms pursuant to Article 42; and (k) any other aggravating or mitigating factor applicable to the circumstances of the case, such as financial benefits gained, or losses avoided, directly or indirectly, from the infringement.

The above list of required factors contains elements that fall into three broad categories. First, some elements relate to action by the infringer before or at the time of commission of the infringing act (eg items (e) previous infringement; (i) any previous orders; (j) adherence to approved code; (b) intention or negligence; (a) nature, gravity and duration of the infringement, purpose of processing, number of affected subjects, and level of damage suffered; (d) degree of responsibility; (g) categories of data). Second, some elements relate to the infringer’s behaviour after the infringement (eg items (c) mitigating action; (h) manner in which the authority became aware; (f) degree of cooperation with the authority). Third, the final item is of general application, namely (k) whether there are any other aggravating or mitigating factors, such as financial benefits gained, or losses avoided, from the infringement. It is clear that the last item, (k), covers any aggravating or mitigating factors, and not those of a type relating to financial benefits or losses, which are merely one possible example. It is interesting to compare the GDPR’s list of matters to be taken into account with a similar but different list of such factors that was enacted in 2019 to apply to the core EU consumer protection regimes.45 Directive (EU) 2019/2161 specifies: Member States shall ensure that the following non-exhaustive and indicative criteria are taken into account for the imposition of penalties, where appropriate: (a) the nature, gravity, scale and duration of the infringement; (b) any action taken by the seller or supplier to mitigate or remedy the damage suffered by consumers; (c) any previous infringements by the seller or supplier;

44 GDPR, art 83.2. 45 Council Directive 93/13/EEC on unfair terms; Directives 98/6/EC on price marking, 2005/29/EC on unfair commercial practices and 2011/83/EU on consumer rights.

432  Traditional Approaches to Enforcement and Compliance (d) the financial benefits gained or losses avoided by the seller or supplier due to the infringement, if the relevant data are available; (e) penalties imposed on the seller or supplier for the same infringement in other Member States in cross-border cases where information about such penalties is available through the mechanism established by Regulation (EU) 2017/2394 of the European Parliament and of the Council (*); (f) any other aggravating or mitigating factors applicable to the circumstances of the case.

This more recent consumer protection list is arguably clearer than the GDPR list, and the catchall ‘any other aggravating and mitigating factors’ produces the result, in theory, that the factors that may be taken into account under either list are identical in nature and scope. There does not appear to be any significant difference in policy between the two lists. It can be commented that the overall result is that justice should be done, by taking into account any relevant aggravating or mitigating factors. It is an interesting academic debate whether there is a difference between the fact that the stated factors are to be ‘taken into account’ under the consumer protection legislation, whereas under the GDPR ‘in each individual case due regard shall be given’ to the factors. Does the former wording permit a more deterrent, authoritarian approach in general than the latter? Or is there no difference? It would be difficult to make an argument that there should, in theory or practice, be any different approach between the regimes of data protection and consumer protection. The existence of a patchwork across the EU in enforcement legislation, policy, practices and sanctions/remedies presents a major challenge to effective and consistent enforcement. There have been few high profile examples of coordinated pan-EU enforcement actions, but in response to one major scandal, the deliberate concealment of devices in cars designed to provide fraudulent emissions data (Dieselgate), the European Consumer Organisation BEUC described the result as ‘a failure of public enforcement. The responses of public authorities have been fragmented and often uncoordinated’.46 Although transparency of rules, practices and guidelines is universally acknowledged, some authorities seem to have far more than others.47 In some countries, little more is published than laws. In some sectors, such as communications, considerations of countering espionage and sabotage mean that internal policy documents are not made public.48

Compliance Systems: Internal Control The Origins of Compliance The idea of organisations adopting ‘compliance’ systems tries to mirror inside an organisation the public regulatory systems that exist outside it. In simple terms, ‘compliance’ is internal enforcement. Hence, one origin of compliance systems was the attempt to replicate external (deterrence-based) enforcement regimes by creating a similar model inside corporations, which gradually expanded in scope to include non-punitive elements such as training and eventually came close to linking up with a separate development on ethical culture (discussed below).

46 Five Years of Dieselgate: A Bitter Anniversary (BEUC, 2020) para 2.3. 47 Banca d’Italia does not publish its internal enforcement policy. It has an internal operational guidance that contains methodological criteria to determine the appropriate amount of a financial penalty, but is subject to consideration of all the circumstances of a specific case. 48 Response from AT, Netherlands.

Compliance Systems: Internal Control   433 A second origin and guiding force was the need to apply the principle of fairness in imposing sanctions and their adverse consequences on ‘organisations’ or people in them who are either not involved in any wrongdoing or have only limited moral responsibility for the breach that has occurred. Understanding on why people do not comply with rules, and why ‘organisations do not comply’ has evolved. A 2000 OECD49 report on regulatory compliance proposed that explanations for non-compliance fall into three – in fact four – categories (emphasis added): The degree to which the target group knows of, and comprehends the rules; The degree to which the target group is willing to comply; and The degree to which the target group is able to comply with the rules.

As Graham Russell and Helen Kirkman have noted:50 ‘The OECD’s best practice principles for regulatory agencies encourage compliance promotion, including through the use of appropriate materials such as regulatory guidance and compliance toolkits.’51

Three Lines of Defence Companies are run on a series of internal management, control, risk and audit systems.52 The classic reaction of corporate management and governance to the need to comply with external laws is to create an internal compliance system. This forms part of a widely-adopted theory that Three Lines of Defence should be adopted against external risks, which were described as:53 First Line: management controls and internal control measures. Second Line: financial control, security, risk management, quality, inspection, and compliance. Third Line: internal audit.

The basic model was promulgated by the Institute of Internal Auditors (IAA) and has been amended on a number of occasions. The 2020 edition54 demonstrates a significant shift away from the idea of defence to enabling organisations to ‘better identify and structure interactions and responsibilities of key players toward achieving more effective alignment, collaboration, accountability and, ultimately, objectives’.55 This may reflect realisation that a risk is not necessarily something external to the organisation, against which it needs to defend itself, but may involve how the humans within the organisation itself behave. The ‘people’ component had earlier been

49 Reducing the Risk of Policy Failure: Challenges for Regulatory Compliance (OECD, 2000). 50 G Russell and H Kirkman, ‘Intervention Choices’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019) Fig 20.3. 51 Principle 10, ‘Regulatory Enforcement and Inspections’, OECD Best Practice Principles for Regulatory Policy (OECD, 2014). 52 See AA Gramling, MJ Maletta, A Schneider and BK Church, ‘The Role of the Internal Audit Function in Corporate Governance: A Synthesis of the Extent Internal Auditing Literature and Directions for Future Research’ (2004) 23 Journal of Accounting Literature 194–244; J Behrend and M Eulerich, ‘The Evolution of Internal Audit Research: A Bibliometric Analysis of Published Documents (1926–2016)’ (2019) 29(1) Accounting History Review 103–39. 53 IAA Position Paper: The Three Lines of Defense in Effective Risk Management and Control (The Institute of Internal Auditors, 2013). 54 The IIA’s Three Lines Model. An Update of the Three Lines of Defense (The Institute of Internal Auditors, 2020). 55 IIA Issues Important Update to Three Lines Model (IIA, 2020), at http://na.theiia.org/news/Pages/IIA-Issues-Importan t-Update-to-Three-Lines-Model.aspx.

434  Traditional Approaches to Enforcement and Compliance completely neglected56 and it had become increasingly difficult for management and supervisory boards to be aware of relevant information on risk.57 The 2020 model is restated as: First Line: Management provision of products/services to clients and managing risk. Second Line: Management expertise, support, monitoring and challenge on risk-related matters. Third Line: Internal audit: independent and objective assurance and advice on all matters related to the achievement of objectives.

The 2020 model states that it is based on a principles-based approach and identifies six principles to assist understanding in relation to all actions, which can be summarised as: governance, accountability, pursuit of the overriding goals and minimisation of corporate risks, assurance and advice, independence of internal auditing and the protection of corporate values through all roles working together in a coordinated manner. This system- and role-based model has therefore moved close to – but not fully reflecting – the idea that the ethical behaviour of front line staff is what is critical.

Internal Controls that Complement External Controls Sector-specific regulatory regimes typically include extensive requirements aimed at ensuring compliance with the relevant rules. The classic example is product manufacturing, which can comprise detailed controls on design, production, distribution, labelling, marketing and advertising, and sometimes retailing. The control mechanisms have evolved from use of quality systems, aimed at ensuring consistency of output, and involving undertaking specified actions at every stage of activity that are then recorded and monitored. In addition to delivering quality, this should produce safety and (for medicines) efficacy. The regulators responsible for such sectoral systems typically achieve detailed understanding of and, depending on the size of their markets, close engagement with, businesses and their operational activities. This level of knowledge and engagement enables more focused interventions in responding when things go wrong, so that actions aim at reducing future risk (and hence breaches of rules). In contrast, in areas that are subject to generic rules, rather than detailed regulatory requirements as noted above – such as competition law, bribery, money-laundering, breaches of human rights and modern slavery supply chains – the large number of organisations that may be subject to the rules and their generic or new nature make it difficult for enforcers to have such opportunities for close involvement in specific actions for risk reduction. The relevant legislation may typically be limited to defining breaches and giving power to enforce (certainly leading to imposing fines, possibly amongst other sanctions) but will not create the sort of regulatory regime described above that enables interventions in the operations and cultures of regulated organisations. Frustrations at the limitations of external sanctions imposed on corporations have led to requirements or incentives for companies to have internal compliance mechanisms.58 The theory

56 K Fanning and MD Piercey, ‘Internal Auditors’ Use of Interpersonal Likability, Arguments, and Accounting Information in a Corporate Governance Setting’ (2014) 39(8) Accounting, Organizations and Society 575–89. 57 M Eulerich, ‘The New Three Lines Model for Structuring Corporate Governance – A Critical Discussion of Similarities and Differences’ (2021) 18(2) Corporate Ownership & Control 180. 58 A leading example is Evaluation of Corporate Compliance Programs. Guidance Document (US Department of Justice, updated April 2019).

Compliance Systems: Internal Control   435 is that internal training, monitoring, surveillance and disciplining of staff by the company59 will prevent or reduce them from causing the corporation to commit breaches of law.60 The development of requirements that corporations should have compliance systems has occurred to a great extent as a result of the inclusion by US enforcement agencies of the policy that fines would be lowered for those companies that had compliance systems, and their development of increasingly more detailed requirements for such systems. This is an exercise in ‘reverse engineering’ of compliance and of regulation, with enforcement practices attempting to drive control requirements, resulting in many corporations operating and extending internal compliance systems as a defensive measure. Various stages of evolution can be seen in the extent and detail of requirements that have been included in penalty rules or guidelines.

Fairness and Unintended Consequences of Sanctions A second cause of, and justification for, the spread of compliance mechanisms is that of avoiding injustice. It is unfair (unjust) to impose sanctions on those organisations or individuals who are aiming to achieve the goals (compliance) and taking reasonable steps to do this. Sanctions, by definition, impose harm. Large financial sanctions impose harm on some who are innocent – workers who were not involved, customers, markets, investors. Organisations should be responsible for their operations and outcomes. But they cannot control against all risk, or all adverse events. If root cause analysis shows that directors, managers or investors are unable to prevent breaches of law then why is it fair to impose sanctions – as opposed to requiring them to take effective steps to try to reduce future risk and to repair damage caused? Hence it would be fair to segment those who are responsible for breaches of rules, taking into account their behaviour, in 59 This rational actor cost-benefit view was prevalent at the time of the publication in 2004 of the ‘Table of Eleven’ reasons for non-compliance: Aspects of spontaneous compliance 1. 2. 3. 4. 5.

Knowledge of the regulation Cost/benefit ratio Degree of acceptance of the regulation Loyalty and obedience of the regulate Informal monitoring

Aspects of monitoring 6. 7. 8. 9.

Informal report probability Monitoring probability Detection probability Selectivity of the inspector

Aspects of sanctions 10. Chance of sanctions 11. Severity of sanctions 60 See eg A Stephan, ‘See No Evil: Cartels and the Limits of Antitrust Compliance Programmes’ (2010) 31(8) The Company Lawyer 3; J Etienne, ‘Compliance Theory: A Goal Framing Approach’ (2011) 33(3) Law & Policy 305; GC Gray and SS Silbey, ‘The Other Side of the Compliance relationship’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012); S Killingsworth, ‘Modeling the Message: Communicating Compliance through Organizational Values and Culture’ (2012) 25 Georgetown Journal of Legal Ethics 961; K Voss, ‘Preventing the Cure: Corporate Compliance Programmes in EU Competition Law Enforcement’ (2013) 16(1) EuroparättsligTidskrift 28; R Steinholtz, ‘Ethics Ambassadors: Getting under the Skin of the Business’ (2014) Business Compliance 03–04, 16; GP Miller, The Law of Governance, Risk Management and Compliance (Wolters Kluwer, 2014).

436  Traditional Approaches to Enforcement and Compliance particular their reasonable attempts to control the risk (mitigating factors) or their disregard of compliance (aggravating factors). Applying the principle of fairness also raises the problem of consistency. This can arise in multiple contexts, such as between decisions by different courts or regulators in the same country, or between courts or regulators in the same sector in different countries in relation to cases that have similar facts. For example, a recent study showed that the type, magnitude and frequency of sanctions imposed by statutory bodies and the courts for insider trading vary significantly between countries, even those with similar laws.61 This finding prompts the question of what approaches might be more effective in achieving the desired outcomes.

Some Leading Compliance Requirements Influential examples of the ‘requirement’ of compliance systems by business are those of US authorities. In recent years, the US Department of Justice and other bodies have expanded their role beyond investigation and prosecution of criminal offences to explaining what actions corporations should take in prevention.62 Collectively, these provisions and Guidelines have been interpreted by businesses as an inducement to companies to undertake self-regulation in the fields of substantive legislation, as leading corporate lawyer (and later academic) Jan Eijsbouts noted.63 Eijsbouts also noted from experience that most prevailing corporate governance regimes require extensive risk management and control systems.64 It has been argued that firms that implement corporate compliance programmes beyond a certain standard should have effective immunity from enforcement,65 although that is clearly a controversial view.66 Some of the main provisions are as follows. The ‘Principles of Federal Prosecution of Business Organizations’ in the Justice Manual describe specific factors that prosecutors should consider in conducting an investigation of a corporation, determining whether to bring charges, and negotiating plea or other agreements, so as to achieve ‘proper treatment’.67 The illustrative list of factors quoted is: 1.

the nature and seriousness of the offense, including the risk of harm to the public, and applicable policies and priorities, if any, governing the prosecution of corporations for particular categories of crime (see JM 9-28.400);

61 L Bromberg, G Gilligan and I Ramsey, ‘The Extent and Intensity of Insider Trading Enforcement – An International Comparison’ (2017) 17(1) Journal of Corporate Law Studies 73–110. This studied 1400 sanctions imposed for the contravention of insider trading provisions during the seven-year period from 1 January 2009 to 31 December 2015 in Australia, Canada (Ontario), Hong Kong, Singapore, the United Kingdom and the United States. 62 D Tokar, ‘How the Justice Department Incentivizes Companies to Invest in Compliance’ The Wall Street Journal 24 December 2019, www.wsj.com/articles/how-the-justice-department-incentivizes-companies-to-invest-incompliance-11577183403. 63 J Eijsbouts, Corporate Responsibility, Beyond Voluntarism. Regulatory Options to Reinforce the Licence to Operate, Inaugural lecture, Maastricht University, 2011. 64 BJ Schoordijk, ‘Risk Management als Hoeksteen van Corporate Governance’ in SHA Dumoulin ea (ed), Tussen Themis en Mercurius, Bedrijfsjuridische bijdragen aan een Europese beleidsconcurrentie, Lustrumuitgave Nederlands Genootschap van Bedrijfsjuristen (Kluwer, 2005) 309–29; DAMHW Strik, ‘Deel II – Aansprakelijkheid voor falend risicomanagement’ in Ondernemingsbestuur en risicobeheersing op de drempel van een nieuw decennium: een ondernemingsrechtelijke analyse, Preadvies van de Vereeniging ‘Handelsrecht’ 2009 (Kluwer, 2009). 65 JA Sigler and JE Murphy, Interactive Corporate Compliance: An Alternative to Regulatory Compulsion (Quorum Books, 1988). 66 B Fisse and J Braithwaite, Corporations, Crime and Accountability (Cambridge University Press, 1993). 67 Justice Manual, JM 9-28.300.

Compliance Systems: Internal Control   437 2. 3. 4. 5. 6. 7.

8. 9. 10. 11.

the pervasiveness of wrongdoing within the corporation, including the complicity in, or the condoning of, the wrongdoing by corporate management (see JM 9-28.500); the corporation’s history of similar misconduct, including prior criminal, civil, and regulatory enforcement actions against it (see JM 9-28.600); the corporation’s willingness to cooperate, including as to potential wrongdoing by its agents (see JM 9-28.700); the adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of a charging decision (see JM 9-28.800); the corporation’s timely and voluntary disclosure of wrongdoing (see JM 9-28.900); The corporation’s remedial actions, including, but not limited to, any efforts to implement an adequate and effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, or to pay restitution (see JM 9-28.1000); collateral consequences, including whether there is disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable, as well as impact on the public arising from the prosecution (see JM 9-28.1100); the adequacy of remedies such as civil or regulatory enforcement actions, including remedies resulting from the corporation’s cooperation with relevant government agencies (see JM 9-28.1200); the adequacy of the prosecution of individuals responsible for the corporation’s malfeasance (see JM 9-28.1300); and the interests of any victims (see JM 9-28.1400).

The US Sentencing Commission’s Federal Organizational Sentencing Guidelines68 provide ­guidance for courts and prosecutors in sanctioning violations by companies of criminal laws, such as antitrust laws and the anti-bribery laws. The Guidelines describe the features of effective compliance programs, to be taken into account in the imposition of fines and jail sentences. The Guidelines prescribe that69 to have an effective compliance and ethics program … an organization shall: (1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct. The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct.

The US Department of Justice has issued Guidance on Evaluation of Corporate Compliance Programs, which provides comments under the following questions and headings:70 1.

Is the corporation’s compliance program well designed? A. B. C. D.

Risk Assessment Policies and Procedures Training and Communications Confidential Reporting Structure and Investigation Process

68 The US Federal Sentencing Guidelines Manual, Compliance Program Requirements. www.ussc.gov/guidelines/ organizational-guidelines. 69 ibid, §8B2.1. 70 Evaluation of Corporate Compliance Programs. Guidance Document (US Department of Justice, Criminal Division, Updated April 2019).

438  Traditional Approaches to Enforcement and Compliance E. F. 2.

Third Party Management Mergers and Acquisitions

Is the program being applied earnestly and in good faith? In other words, is the program being implemented effectively? A. Commitment by Senior and Middle Management B. Autonomy and Resources C. Incentives and Disciplinary Measures

3.

Does the corporation’s compliance program work in practice? A. Continuous Improvement, Periodic Testing, and Review B. Investigation of Misconduct C. Analysis and Remediation of Any Underlying Misconduct

In 2019, the US Treasury’s Office of Foreign Assets Control (OFAC) published a Framework for OFAC compliance commitments on the essential components of a sanctions compliance programme.71 Ruth Steinholtz and the current author summarised the position in 2017:72 Key elements for the success of compliance systems are widely agreed, and are mainly the result of pronouncements by US regulators in response to the Foreign Corrupt Practices Act. Some of the factors are:73 the support of senior management74 and status within the organisation,75 the existence of ‘an internal constituency advocating and working for compliance’,76 communication of the policy and practical implications to all staff, including by training and regular refreshers, auditing, and employees’ internalisation of the values and practical actions involved in carrying out daily procedures, operations, reward and performance review systems.77 An updated summary of questions that US authorities may ask was published in 2017.78

In guidance on enforcement of competition law in the EU, the European Commission said that it79 welcomes and supports all compliance efforts by companies … But the mere existence of a compliance programme will not be considered as an attenuating circumstance. Nor will the setting-up of a 71 US Department of the Treasury, ‘A Framework for OFAC Compliance Commitments’ 2 May 2019, www.treasury.gov/ resource-center/sanctions/Documents/framework_ofac_cc.pdf. 72 C Hodges and R Steinholtz, Ethical Business Practice and Regulation (Hart, 2017) 214. 73 See C Parker and S Gilad, ‘Internal Corporate Compliance Management Systems: Structure, Culture and Agency’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012) ch 8. 74 Many studies and official statements support this. J Braithwaite, To Punish or Persuade: Enforcement of Coal Mine Safety (State University of New York Press, 1985) 61; DP McCaffrey and DW Hart, Wall Street Policies Itself: How Securities Firms Manage the Legal Hazards of Competitive Pressures (Oxford University Press, 1998) 174; J Rees, Hostages of Each Other: The Transformation of Nuclear Safety Since Three Mile Island (University of Chicago Press, 1994); How Your Business Can Achieve Compliance OFT, (2005), OFT 424, 10; KS Desai, ‘Antitrust Compliance Programmes’ (2006) GCR Nov Supp (European Antitrust Review) 15–21; J Joshua, ‘Antitrust compliance programmes for multinational companies [2001] International Financial Law Review Supp (Competition and Antitrust, 2001); ABA, Antitrust Compliance, 2005, 81. 75 M Weait, ‘The Role of the Compliance Officer in Firms Carrying on Investment Business’ (1994) 9(8) Butterworth’s Journal of International Banking and Financial Law 381–83. 76 J Braithwaite, Corporate Crime in the Pharmaceutical Industry (Routledge and Kegan Paul, 1984) 359; V Braithwaite, ‘The Australian Government’s Affirmative Action Legislation: Achieving Social Change through Human Resource Management’ (1993) 15 Law & Policy 327–54; J Rees, Hostages of Each Other: The Transformation of Nuclear Safety Since Three Mile Island (University of Chicago Press, 1994) 92, 98–99, 108; S Taylor, Making Bureaucracies Think: The Environmental Impact Statement Strategy of Administrative Reform, (Stanford University Press, 1984). 77 A Newton, The Handbook of Compliance: Making Ethics Work in Financial Services (Financial Times Prentice Hall, 1998) 74. 78 US Department of Justice, Criminal Division, Fraud Section, Evaluation of Corporate Compliance Programs, 8 February 2017, at www.justice.gov/criminal-fraud/page/file/937501/download. 79 European Commission, Compliance Matters – What Companies Can Do Better to Respect EU Competition Rules (November 2011), accessible at http://ec.europa.eu/competition/antitrust/compliance/, at 19–20. In UK see How Your Business Can Achieve Compliance with Competition Law: Guidance (Office of Fair Trading, 2011).

Compliance Systems: Internal Control   439 compliance programme be considered as a valid argument justifying a reduction of the fine in the wake of investigation of an infringement.

Hence, in responding to this study, the European Commission stated: With respect to compliance programmes, please note that as a matter of policy for purposes of sanctioning infringements, we are ‘neutral’ in relation to the existence of corporate compliance programmes as such; their existence is not considered to mitigate an infringement, nor is their absence an aggravating factor.

That approach can be contrasted with the positive encouragement of compliance stated in the compliance objectives of the Australian Competition & Consumer Commission:80 To achieve our compliance objectives, we use four flexible and integrated strategies: • encouraging compliance with the law, particularly by educating and informing consumers and traders about their rights and responsibilities under the Act • enforcement of the law, including resolution of possible contraventions both administratively and by litigation and other formal enforcement outcomes • undertaking market studies, or reporting on emerging competition or consumer issues with a view to identifying any market failures and how to address them, and to support and inform our compliance and enforcement measures and identify possible areas for policy consideration • working with other agencies to implement these strategies, including through coordinated approaches. The ACCC is selective in the matters we investigate and the sectors in which we engage in education and market analysis. We use this policy to inform our decision making in this regard.

Given the firm policy of the European Commission on competition enforcement, it is notable that the Spanish authority for competition (and also, possibly significantly, a series of other types of regulation) has recently introduced guidelines on effective compliance with competition law, which advocate and encourage the implementation of effective compliance programmes (response to Q8). Also in contrast to the EU’s competition enforcement approach, numerous pieces of EU legislation refer to systems that include compliance elements, such as most CE-marking legislation for manufactured products. Another example is the EU Timber Regulation (Regulation (EU) No 995/2010) that requires a due diligence system in relation to helping timber operators avoid infringing the prohibition on placing illegally harvested timber on the market. A ‘three lines of defence’ model for risk management was widely adopted, in which the first line is management control, the second is a variety of risk control and compliance oversight functions established by management and the third is independent assurance.81

Evolving Attitudes to Compliance Programmes Although there has been a ‘revolutionary growth’ in compliance departments in the past few years,82 they and compliance programmes are still relatively recent, and it is instructive to note

80 2020 Compliance and Enforcement Policy and Priorities (ACCC, 2020). 81 IIA Position Paper: The Three Lines of Defense in Effective Risk Management and Control (Institute of Internal Auditors, 2013); The Three Lines of Defence (Chartered Institute of Internal Auditors, 2017). 82 S Gadinis and A Miazad, ‘The Hidden Power of Compliance’ (2019) 103 Minnesota Law Review 2135.

440  Traditional Approaches to Enforcement and Compliance issues that have arisen as they have developed. A 2007 study on competition enforcement in UK found that:83 5.98 The commonest compliance measure was taking external legal advice (40 per cent of companies). Other relatively common measures were a policy code (34 per cent), seminars on competition law (26 per cent), employing a dedicated competition compliance officer (20 per cent), taking economic advice (16 per cent) and requiring employees to take an online training programme (9 per cent). 5.99 Whether a firm undertakes compliance activities is strongly related to its size. The table below shows the percentage of companies which had undertaken at least one of the six compliance activities mentioned in the previous paragraph in the last year.

By 2012, a repeat survey found that only 25% of UK companies employed somebody to deal with compliance.84 In 2010, an academic study by Andreas Stephan concluded that it was ‘difficult to determine the extent to which corporations have adopted competition law compliance programmes, and the amount of time and money that is invested into compliance efforts’.85 He noted the American Bar Association (ABA)’s Antitrust Compliance: Perspectives and Resources for Corporate Counselors as a comprehensive competition law compliance sourcebook as adopted by firms in the United States, which employees would be required to read and to attend training.86 Stephan noted that the three key characteristics of an effective compliance programme at that stage were: training, auditing and the support of senior management. However, Stephan also noted evidence suggesting that competition law compliance programmes may have been ineffective in preventing cartels or protecting firms from high fines. The evidence suggested that cartels involved a small number of individuals who knew that what they were doing was illegal and took great pains to avoid being discovered through internal or external scrutiny. That suggested that the primary issue lay with the motivations of individuals (hence criminalisation was discussed) and the culture of an organisation (which was a point not then included in the debate). Indeed, Julian Etienne concluded that no consistent or comprehensive compliance theory then existed, and there was only a collection of partial and incompatible theories.87 Stephan’s article88 provoked a response from compliance professionals Boehme and Murphy that compliance programmes had avoided cartel behaviour in ‘voluminous cases’ and that the United States Justice Department’s Antitrust Division and the European Union competition enforcers not only appeared ‘not to give credit for programmes, but at times seem almost to discourage them’.89 They noted the contrast between those competition law enforcers and the behaviour of anti-corruption enforcers, who actively sought to recruit companies in the fight against corruption and to promote strong compliance programmes. They cited the antitrust authorities in Canada90 and Singapore as recognising and encouraging compliance programmes.

83 The Deterrent Effect of Competition Enforcement by the OFT. A Report Prepared for the OFT by Deloitte (Office of Fair Trading, 2007) OFT962. 84 Business Perceptions Survey 2012 (IFF Research, 2012). 85 A Stephan, ‘See No Evil: Cartels and the Limits of Antitrust Compliance Programmes’ (2010) 31(8) The Company Lawyer 3. 86 ABA Section of Antitrust Law, Antitrust Compliance: Perspectives and Resources for Corporate Counselors (ABA Publishing, 2005). 87 J Etienne, ‘Compliance Theory: A Goal Framing Approach (2011) 33(3) Law & Policy 305–33. 88 In fact his 2009 research paper. 89 D Boehme and JE Murphy, ‘Fear No Evil: A Compliance and Ethics Professional’s Response to Dr Stephan’ (2012) at http://compliancestrategists.com/csblog/wp-content/uploads/2014/03/SSRN-id1965733.pdf. 90 Corporate Compliance Programs (Competition Bureau Canada, 2010).

Compliance Systems: Internal Control   441

Is Compliance Effective? The promotion of compliance systems assumes that, if designed and operated effectively, they will be adequate to deliver the outcome of compliance. But the extent of any effect will logically depend, amongst other things, on how they operate in the context of the culture of a specific organisation and the nature of specific rules. Experts in management pointed out that large corporations operate through management structures and processes, which allocate tasks, authority and means of coordination and control within organisations.91 Introducing a formal compliance system into an organisation, as only one aspect of the management structure of an organisation,92 creates tension with the existing structure, and is only one part of a larger system. Further, the ‘external’ compliance rules and system are translated and transformed in the context of internal managerial logic, processes and norms.93 Adding more rules complicates processes and may constrict mental focus.94 Gray and Silbey show that interpretations of and responses to rules vary within the organisation, depending on an employee’s authority, expertise, and frequency of interaction with the regulator.95 Husing and Silbey’s extensive review concludes that given issues of authority, status, and expertise issues, ‘there is significant evidence that the formal compliance programs developed by techno-legal experts are resisted by managers and employees and implemented in superficial ways or to variable degrees across the organization’.96 Organisations therefore construct for themselves an internal meaning of both compliance and law.97 For whatever reasons, empirical studies show limited effectiveness of compliance programmes in improving levels of compliance.98 As a result, some commentators have said that undertakings may only implement corporate compliance programmes to improve their corporate image and that these programmes do not have any actual effect.99 Tyler and Blader’s 2003 study found that 91 H Mintzberg, Structure in Fives: Designing Effective Organizations (Prentice-Hall, 1983). 92 With multiple functions such as performance management, product planning and financial controls: JA Chatman and CA O’Reilly, ‘Paradigm Lost: Reinvigorating the Study of Organizational Culture’ (2016) 36 Research in Organizational Behavior 199–224; CA O’Reilly and JA Chatman, ‘Culture As Social Control: Corporations, Cults, and Commitment’ (1996) 18 Research in Organizational Behavior 157; CA O’Reilly and JA Chatman, ‘Culture As Social Control: Corporations, Cults, and Commitment’ in BM Staw and LL Cummings (eds), Research in Organizational Behavior: An Annual Series of Analytical Essays and Critical Reviews Vol 18 (Elsevier Science/JAI Press, 1996) 157–200. 93 C Parker and S Gilad, ‘Internal Corporate Compliance Management Systems: Structure, Culture and Agency’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012). 94 DW Lehman, B Cooil and R Ramanujam, ‘The Effects of Rule Complexity on Organizational Noncompliance and Remediation: Evidence From Restaurant Health Inspections’ (2020) 46(8) Journal of Management 1439–68. 95 GC Gray and SS Silbey, ‘Governing Inside the Organization: Interpreting Regulation and Compliance’ (2014) 120(1) American Journal of. Sociology 96–114. 96 R Huising and SS Silbey, ‘From Nudge to Culture and Back Again: Coalface Governance in the Regulated Organization’ (2018) Annual Review of Law and Social Science 14:91–114, citing KW Sandholtz, When Legitimacy Becomes a Constraint: Lessons from an Ethnographic Study of Human Resources Work, PhD Diss, Stanford University, 2013; N Gunningham and D Sinclair, ‘Integrative Regulation: A Principle-based Approach to Environmental Policy’ (1999) 24(4) Law and Society Inquiries 853. 97 LB Edelman and SA Talesh, ‘To Comply or Not to Comply – That Isn’t the Question: How Organizations Construct the Meaning of Compliance’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012) 103. 98 A Prakash and M Potoski, The Voluntary Environmentalists: Green Clubs, ISO 14001, and Voluntary Environmental regulations (Cambridge University Press, 2006); W Ge, A Koester and S McVay, ‘Benefits and Costs of Sarbanes-Oxley Section 404 (b) Exemption: Evidence from Small Firms’ Internal Control Disclosures’ (2017) 63(2–3) Journal of Accounting and Economics 358; JJ Kish-Gephart, DA Harrison and LK Trevino, ‘Bad Apples, Bad Cases, and Bad Barrels: Meta-Analytic Evidence About Sources of Unethical Decisions at Work’ (2010) 95(1) Journal of Applied Psychology 1; NM Schell-Busey, ‘The Deterrent Effects of Ethics Codes for Corporate Crime: A Meta-Analysis’ unpublished PhD dissertation, University of Maryland, 2009, http://drum.lib.umd.edu/bitstream/handle/1903/9289/SchellBusey_umd_0117E_10313. pdf?sequence=1. 99 KD Krawiec, ‘Cosmetic Compliance and the Failure of Negotiated Governance’ (2003) 81 Washington University Law Quarterly 487, 491; C Parker and S Gilad, ‘Internal Corporate Compliance Management Systems: Structure, Culture and

442  Traditional Approaches to Enforcement and Compliance over 80% of compliance decisions were driven by the credibility of the organisation’s leadership message and congruence of organisational and personal values, and less than 20% were driven by formal rewards and punishments.100 Compliance professionals see themselves as performing a ‘harmonising’ role, trying to bridge external social and regulatory movements with the internal management and culture of commercial firms.101 On the other hand, there will be imperfections in centralised monitoring, and limits to contract enforcement naturally constrain firms’ ability to regulate and direct their employees’ behaviour.102 Compliance staff may be treated by other staff with distrust, since their function is ‘a form of internalised law enforcement’.103 Business’ functions have been termed avoidance rather than compliance departments.104 Recent research found that fewer than 5% of US public corporations had created Board level compliance committees.105 A 1994 study of compliance officers in UK financial institutions found that it was essential for the compliance function to have status within the organisation and senior management support.106 Parker and Nielsen found empirical evidence that each of six central elements of formal compliance systems was associated with the organisation managing compliance better in practice: having a written compliance policy; a dedicated compliance function; a clearly defined system for handling complaints from customers/clients; a clearly defined system for handling compliance failures; induction for new employees that includes compliance training; and having had an external consultant review the compliance system.107 The logic behind the list of elements that are taken to comprise an effective compliance programme are based on ‘the set of policies and procedures that a rational, profit-maximizing firm would establish if it faced an expected sanction equal to the social costs of violations’.108 But if violations are not made on the basis of a cost-benefit analysis for or by the firm but by individual employees based on their own motivations, there is a mismatch between risk and preventative prescription. Armour, Gordon and Min’s recent study on compliance noted that compliance is a long-term investment and goal of a firm, and it is in conflict with short term incentives such as stock-based pay.109 Managers may not wish to reveal internal information on the firm’s propensity for misconduct that will affect their remuneration. Research into compliance systems shows that they do result in reduction of fines where they have been in place for a couple of years.110 There is some evidence that sanctions policies may

Agency’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012) 171. 100 T Tyler and SL Blader, ‘The Group Engagement Model: Procedural Justice, Social Identity, and Cooperative Behaviour’ (2003) 7 Personality and Social Psychology Review 349–61. 101 C Parker and S Gilad, ‘Internal Corporate Compliance Management Systems: Structure, Culture and Agency’ in C Parker and V Lehmann Nielsen (eds), Explaining Compliance. Business Responses to Regulation (Edward Elgar, 2012). 102 E Fehr, Behavioral Foundations of Corporate Culture (UBS International Center of Economics in Society, November 2018) UNS Center Public Paper 7. 103 GP Miller, ‘The Compliance Function: An Overview’, NYU Law and Economics Research Paper No 14-36 (November 18, 2014), at www.law.nyu.edu/sites/default/files/upload_documents/The%20Compliance%20Functiion%20 an%20Overview.Miller.pdf. 104 C Mayer, Firm Commitment: Why the Corporation Is Failing Us and How to Restore Trust in It (Oxford, Oxford University Press, 2013) 60. 105 J Armour, BL Garrett, JN Gordon and G Min, ‘Board Compliance’ (2020) 104 Minnesota Law Review 1191. 106 M Weait, ‘The Role of the Compliance Officer in Firms Carrying on Investment Business’ (1994) 9(8) Butterworth’s Journal of International Banking and Financial Law 381–83. 107 C Parker and VL Nielsen, ‘Corporate Compliance Systems: Could They Make Any Difference?’ (2009) 41 Administration & Society 3–37. 108 GP Miller, ‘An Economic Analysis of Effective Compliance Programs’ in J Arlen (ed), Research Handbook on Corporate Crime and Financial Misdealing (Edward Elgar, 2018) ch 10. 109 J Armour, JN Gordon and G Min, ‘Taking Compliance Seriously’ (2020) 37 Yale Journal on Regulation 1. 110 J Armour, JN Gordon and G Min, ‘Taking Compliance Seriously’ (2020) 37 Yale Journal on Regulation 1.

Compliance Systems: Internal Control   443 impact more on risk management and compliance activity than preventing occurrence or applying remedial strategies after the event.111 In the United States, the practice of holding boards to account, illustrated by decisions of Delaware fiduciary law and federal securities doctrine, has driven courts to place strong reliance on internal reports by legal and compliance personnel.112 Such personnel were at risk for failure to bring facts to the attention of the board, and boards were at risk for failure to react. What is the empirical evidence that compliance systems in fact achieve compliance? The evidence is sparse. Jenkins reviewed the literature in 2017.113 A 2007 survey found that companies with robust anti-corruption programmes and ethical codes experienced up to 50% fewer incidents of corruption than those firms without an adequate integrity infrastructure.114 A 2014 study found that firms which count integrity and risk mitigation among their top business priorities were strongly associated with more effective compliance programmes.115 A 2016 study of firms in Sub-Saharan Africa found that, relative to larger enterprises, small firms were particularly susceptible to corruption as they suffered from a lack of robust internal procedures, poor corporate governance structures and inadequate accounting standards.116 Since around 2000, an increasing academic voice has been raised that promoting ethical culture in organisations was of far greater effect than a compliance approach.117 This explains why there has been talk of the ‘Compliance Trap’: focusing on compliance is not guaranteed to lead to compliance. Research by Lee Treviño and Geoff Weaver found that ‘Values-based programs are more powerful influences on employees’ attitudes and behaviours than compliance-based programs. [The demonstration that managers care about ethics and values is an] important function cannot be delegated to an ethics/compliance officer.’118 Scott Killingsworth concluded that ‘One lesson from the research is clear: it’s not enough to educate employees about their responsibilities, provide them with written guidance, and warn them of the consequences if they stray’ and that connecting with people’s ethical value systems was essential.119 The inescapable context of authoritarianism and punishment that hangs over a compliance regime has been said to lead to ‘mindless compliance rather than quality behaviour’.120 Experienced General Counsel of multinationals have made clear points about the place of compliance and of ethics in organisations. Peter Kurer concluded that ‘Culture and behaviour is a key, if not the key’.121 Culture is a requirement that has found its way into Codes of Corporate Governance, as discussed in chapter 10.122 111 R Baldwin, ‘The New Punitive Regulation’ (2004) 67 Modern Law Review 351–83, 373. 112 S Gadinis and A Miazad, ‘The Hidden Power of Compliance’ 2019) Minnesota Law Review 2135. 113 M Jenkins, The Relationship Between Business Integrity and Commercial Success (Chr Michelsen Institute, 2017), available at www.u4.no/publications/the-relationship-between-business-integrity-and-commercial-success.pdf. 114 Economic Crime: People, Culture and Controls: The Fourth Biennial Global Economic Crime Survey (PricewaterhouseCoopers, 2007) 33. 115 The 2014 Ethics and Compliance Program Effectiveness Report (Legal Research Network, 2014). 116 R Pelizzo, E Araral, A Pak and X Wu, ‘Determinants of Bribery: Theory and Evidence from sub-Saharan Africa’ (2017) 28(2) African Development Review 229–40. 117 C Hodges and R Steinholtz, Ethical Business Practice and Regulation (Hart, 2017). 118 LK Treviño and GR Weaver, Managing Ethics in Business Organizations (Stanford Business Books, 2003) 225. 119 S Killingsworth, ‘Modeling the Message: Communicating Compliance through Organizational Values and Culture’ (2012) 25 Georgetown Journal of Legal Ethics 961. He cited in particular: T Tyler et al, ‘The Ethical Commitment to Compliance: Building Value-Based Cultures’ (2008) 50 California Management Review 31, 35; TR Tyler and SL Blader, ‘Can Business Effectively Regulate Employee Conduct? The Antecedents of Rule Following in Work Settings’ (2005) 48 Academy Management Journal 1143, 1153. 120 IBE Response to Corporate Governance Consultation (Institute of Business Ethics, 2017). 121 P Kurer, Legal and Compliance Risk: A Strategic Response to a Rising Threat for Global Business (Oxford University Press, 2015) 196. 122 See B Soltani and C Maupetit, ‘Importance of Core Values of Ethics, Integrity and Accountability in the European Corporate Governance Codes’ (2015) 19(2) Journal of Management & Governance 259–84.

444  Traditional Approaches to Enforcement and Compliance Ruth Steinholtz, an experienced General Counsel and head of ethics and compliance, and a firm proponent of the view that organisational culture based on ethical values is the principal and overriding factor in both compliance and performance, has said that ‘Compliance is an outcome rather than an approach’.123 She has pointed out that ‘certain elements of a compliance programme may cause employees to feel they are not trusted by their managers, creating estrangement and actually increasing the likelihood that they will misbehave’. She also commented that ‘Compliance programs that employ a “check-the-box” approach may be inefficient and, more importantly, ineffective’. In a different context, leading medical practitioners have emphasised that:124 A compliance-focused approach will fail. If organisations do not start from the simple recognition that candour is the right thing to do, systems and processes can only serve to structure a regulatory conversation about compliance. The commitment to candour has to be about values and it has to be rooted in genuine engagement of staff, building on their own professional duties and their personal commitment to their patients.125

Differences between compliance and integrity programmes have been analysed by Florian Beranek of the United Nations Development Organisation.126 Characteristics of compliance: –– –– –– ––

Conformity with externally applied rules Prevention of crime by limitation of options; Based on the assumption that humankind is opportunistic and egocentric Implemented by instruction, surveillance, control, threats …

Characteristic of Integrity –– –– –– ––

Self-control on ethical-moral convictions Creation of open spaces for responsible, integer decisions Based on the assumption that humankind is social, adaptive and idealistic (good) Implemented by dialogue, human resource development, role models, appreciation and long term organizational provisions [must eliminate black sheep]

Business and Values: –– Basic and sustainable economic responsibility: necessary to survive –– Legal responsibility: necessary to operate –– Ethical responsibility: necessary to succeed.

The conclusion is that in order to be effective, a compliance programme must be operated in such a way as to have the active support of staff, through legitimacy, leadership and operational ethical culture.127 123 R Steinholtz, ‘Ethics Ambassadors: Getting Under the Skin of the Business’ (2014) Business Compliance 03–04, 16–28. 124 Building a Culture of Candour: A Review of the Threshold for the Duty of Candour and of the Incentives for Care Organisations to be Candid (Royal College of Surgeons of London, 2014) para 1.32. 125 Reference from original text: For the impact of a lack of an enabling environment for candour/open disclosure, see Mazor et al (2004) ‘Communicating with patients about medical errors’, Archives of Internal Medicine 164, 1690; Vincent (2003) ‘Understanding and responding to adverse events’ New England Journal of Medicine 348 (11) 1051. 126 Presentation by Florian Beranek, UNIDO, at the ‘Regional Business Integrity Conference: Culture of Business Integrity: Pathways to Sustainability and Success’, Singapore, 6 March 2017. 127 C Parker and VL Nielsen, ‘Corporate Compliance Systems: Could They Make Any Difference?’ (2009) 41(1) Administration & Society 3–37; TL MacLean and M Benham, ‘The Dangers of Decoupling: The Relationship Between Compliance Programs, Legitimacy Perceptions, and Institutionalized Misconduct’ (2010) 53 Academy of Management Journal 1499; S Grüninger and L Schöttl, ‘Rethinking Compliance: Essential Cornerstones for More Effectiveness in Compliance Management’ (2017) 3 Compliance Elliance Journal 3–17; David Hess, ‘Chipping Away at Compliance: How Compliance Programs Lose Legitimacy and Its Impact on Unethical Behavior’ (2019) 14 Brook Journal of Corporate Finance and Commerce 5; C Coglianese and J Nash, ‘Compliance Management Systems: Do They Make a Difference?’ in DD Sokol and B van Rooij (eds), Cambridge Handbook of Compliance (Cambridge University Press, 2021).

Fresh Approaches   445

Conclusions on Compliance Systems Compliance systems and programmes are inherent, and sometimes explicit, in sophisticated regulatory and corporate management regimes. Enforcement authorities (typically not those responsible for developed regulatory regimes) have required organisations to have increasingly sophisticated compliance systems and programmes, comprising training, monitoring, surveillance and disciplining of staff. Corporations’ compliance systems and departments have, in effect, been designed reactively or ‘backwards’ as a result of corporations responding to the introduction of incentives to create them being included in the enforcement policies of (originally United States) enforcement bodies. The authorities’ assumption was that external public enforcement systems should be replicated in internal systems, both working in the same way, imposing inspection, discipline and deterrent sanctions. However, these underlying assumptions on the effectiveness of such enforcement mechanisms were incorrect and internal compliance systems did not operate in practice as expected, in many cases resulting in internal ostracism and lack of real impact. Internal compliance functions are clearly relevant. However, a range of concerns arise over whether either external or internal control systems that are based on oversight, identifying errors and non-compliance and imposing sanctions – ultimately authoritarian and punitive in their implications and function – will be effective and deliver compliance. The imposition of sanctions that do not take mitigating or aggravating factors into account (clearly including the presence and effectiveness of attempts to achieve compliance and the motivation of actors) raises serious concerns over a lack of justice. Studies have clearly shown that perceptions of injustice drive down compliance. The fairness principle requires detailed root cause analysis of the cause of non-compliance, in order to identify the correct response to both rectification and future prevention. Compliance will be an outcome and cannot be an approach.128 How an organisation approaches norms and their observation is critical. Working in the context of an ethical culture is now known to be a critical element.

Fresh Approaches Problems with a System Based on Rules and Compliance A drawback of a rules-based approach to ‘achieving compliance’ – for regulators but also certainly for many businesses – is that the operational objective is to go beyond compliance and perform at a higher standard. The level of ‘compliance’ is only a baseline requirement set externally by state rules, and focusing on it might, in some circumstances at least, impede attainment of higher levels of performance. The traditional model is to require compliance with rules, as (minimum) standards of behaviour. It necessarily follows that a compliance-based system will always fall short in failing to encourage better performance. It only requires that the standard set by particular rules be met. It does not inherently require people to aim to achieve the best possible outcomes, to improve their performance, or to behave ethically. The psychological evidence is that if someone’s attention is focused on a particular objective, such as complying with particular rules or standards, it may well impede them from focusing on wider goals, such as whether their activities and outcomes are ethical or effective.

128 R

Steinholtz, ‘Ethics Ambassadors: Getting Under the Skin of the Business’ (2014) (3–4) Business Compliance 16.

446  Traditional Approaches to Enforcement and Compliance Further, there is often a disconnect and failure of alignment between internal systems used by businesses for their internal management and the external regulatory system, which is essentially a legal construct. An example of this exists between the food safety management systems operated by food businesses, which involves them being audited by private compliance verification bodies so as to maintain accreditation against international standards, and the different matrix of legal requirements and inspections by public inspectors. The purposes of the two inspections are different, even though they may both refer to the same international food safety standards. A fundamental difference lies in how the inspections are done. The accreditation audits typically take three days and give rise to detailed discussions about changes that the operator could make to improve its performance. On the other hand, the public inspections tend to take less than a day and to be aimed at simply verifying whether the listed requirements are met, and ­providing little or no useful support for improving their performance.129 This example highlights the difference in practice between the manner in which engagements occur, their purposes, and their outcomes. The private system in this example aims at constant improvement towards ever higher performance, whereas the public system aims at verifying whether a set of rules is broken. A rules-based approach can also narrow the vision and activities of enforcers. This was well illustrated by a 2002 Report of work undertaken by the Health Development Agency and the Chartered Institute of Environmental Health in response to concerns about the capacity of the local government workforce to deliver public health.130 Significantly, the fresh vision was developed by involving multiple stakeholders. Key findings were that ‘by addressing the wider determinants of health, including food, housing standards, health and safety, air quality, noise, and environment issues generally, environmental health makes a fundamental contribution to the maintenance and improvement of public health and improving quality of life and wellbeing’. The study found that ‘the mainstream practice of environmental health has become fixed on the delivery of a narrow agenda’ and that participants expressed ‘growing concern about the fragmentation of environmental health services, and lack of clarity on the nature of future environmental health roles and their contribution to health improvement and tackling health inequalities’. It was reported that the necessity for local authorities to focus on the statutory enforcement duties placed on councils by government, and on complying with performance management and Best Value regimes, has resulted in environmental health officers having to take on predominantly technical and enforcement roles. This trend has been at the expense of effective practice of the wider principles of environmental health protection, and has had the effect of deskilling many in the profession, leading to Executive summary 2 Environmental Health 2012 both dissatisfaction among existing environmental health officers and a diminishing number of applicants for student training.

The vision that was set out basically involved more cooperation: • Environmental health practitioners, working with and alongside other public health professionals, will be key partners in local and national efforts to protect and improve the health and quality of life of individuals and communities and to reduce health inequalities • They will maintain a direct relationship with the general public, and apply their expertise in responding to the needs of individuals, while also tackling the wider determinants of the population’s health by identifying, controlling and preventing current and future risks

129 Personal conversations between the author and food business executives, 2021. 130 S Burke, I Gray, K Paterson and J Meyrick, Environmental Health 2012. A Key Partner in Delivering the Public Health Agenda (Health Development Agency, 2002).

Fresh Approaches   447 • Environmental health practitioners will play lead roles in local authority development, coordination and implementation of community health and wellbeing strategies through local strategic partnerships, and will actively contribute to the public health agenda of the NHS primary care trusts. They will also contribute to tackling public health issues at regional, national and international levels.

The fundamental question is not a legal-compliance one about why people breach rules but: on what basis are decisions made and actions instigated? The answer to that question will come from scientific study of human behaviour and actions. It will not come from theories of economics or legal philosophy. Once we know the answer (or series of answers), we can then determine how decisions and actions are influenced by particular, or competing, incentives, influences, ‘controls’ or interventions, whether these are in individuals’ minds or inside or outside their groups or organisations.

Changing Behaviour and Use of Systems: Providing Support A different approach might be based on risk management, achieving outcomes and cooperation. Two illustrations are striking. As noted in chapter 13, there has been a major change in approach to regulatory enforcement in the UK, signalled generically with the 2007 Macrory report,131 and since identified in the evolution of approaches of many UK regulators. It is striking that the first of the Macrory principles is to change the behaviour of someone who has broken the law. The idea is that it may not be necessary to intervene in any forceful way with individuals or organisations if they acknowledge the existence of a problem and can be trusted to act ethically in future and to take whatever steps may be necessary to avoid repetition or to reduce risk. The supportive approach identified here is now a requirement for UK regulatory authorities under the Regulators Code, discussed in chapter 13.132 The official UK policy is based on ‘evidence that the overwhelming majority of people who come to work, and of businesses, do not intend to cause harm to others or break the law’.133 Research showed a decade ago that people often need help and support rather than criticism to comply with regulation. Many official statements were made to that effect.134 For example, behavioural research finds that many SMEs believe that they are complying until a person they respect points out that they could improve, in response to which advice they usually follow the advice.135 Further, SMEs also often lack clarity about how to comply.136 131 R Macrory, Regulatory Justice: Making Sanctions Effective (HM Treasury, 2006); reprinted in R Macrory, Regulation, Enforcement and Governance in Environmental Law (Hart Publishing, 2010). Implementation was in the Regulatory Enforcement and Sanctions Act 2008. Subsequent codification occurred in the Consumer Rights Act 2015. 132 www.assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/300126/14705-regulators-code.pdf. 133 Drivers of Compliance and Non-compliance with Consumer Protection Law: A Report by Ipsos MORI Commissioned by the OFT (Office of Fair Trading, 2010); Business Regulation. Understanding Business’ Perceptions and Behaviour (Department for Business, Energy & Industrial Strategy, 2019) BEIS Research Paper Number 2019/024. 134 Drivers of Compliance and Non-compliance with Consumer Protection Law: A Report by Ipsos MORI Commissioned by the OFT (Office of Fair Trading, 2010) OFT1225a, para 1.34. 135 R Fairman and C Yapp, Making an Impact on SME Compliance Behaviour: An Evaluation of the Effect of Interventions upon Compliance with Health and Safety Legislation in Small and Medium-Sized Enterprises (Health and Safety Executive 2005), Research Report 366; The Anderson Review of Government Guidance on Regulation: Business Perspectives of Government Guidance. Research Study Conducted for Department for Business, Enterprise and Regulatory Reform. Final Report (Ipsos MORI 2008); The Anderson Review. Summary of Views from Meetings with Small and Medium-Sized Enterprises (SMEs) (Department for Business, Enterprise and Regulatory Reform 2009); How Your Business Can Achieve Compliance: Guidance (Office of Fair Trading 2010) OFT1278. 136 Delivering Regulatory Reform: Report by the Comptroller and Auditor General (National Audit Office 2011).

448  Traditional Approaches to Enforcement and Compliance Regulatory interventions have, therefore, been targeted to provide support in such cases, and to use less formal civil sanctions that can cover behavioural and redress elements and agreed undertakings, especially in consumer protection.137 A study of regulatory approaches by different Trading Standards bodies indicated that ‘support before compliance’ was more effective when compared with more traditional ‘compliance before support’ interventions in relation to both protection and prosperity outcomes.138 The relative level of improvement in compliance in each local authority is not dependent on the number of officers, which shows that process rather than resources drives the improvement in business compliance.

Enforcement Policies and Promoting Culture through Procedures UK regulatory authorities subject to the Regulators’ Code are required to publish Enforcement Policies (which would now be more appropriate if called Intervention Policies), and these typically contain lists of mitigating and aggravating factors that are taken into account in determining responses and sanctions. In practice, there is inconsistency in between the approaches to enforcement taken under different regulatory authorities and regimes. This can be illustrated by three examples: product safety, financial services and bribery.

SEPA’s Characterised Segmentation of Offenders An approach to breaches or causing harm that is truly responsive should take into account an offender’s motivation, ability to have prevented the problem, steps taken after it occurred, and other mitigating or aggravating factors. A well-known example of a simple segmentation approach to individuals is that of the Scottish Environmental Protection Agency, as shown in Figure 14.1. Figure 14.1  Segmentation of Offenders: Spectrum of Compliance by the Scottish Environmental Protection Agency



137 Enterprise 138 Measuring

Act 2008, s 219A, inserted by the Consumer Rights Act 2015, s 79 and Sch 7, art 8. the Impact of Regulation (Stoke-on-Trent & Staffordshire Enterprise Partnership, November 2018).

Fresh Approaches   449 This characterises the motivation or character of an ‘offender’ and each category is associated with a particular response. Two aspects are particularly important. First, only the ‘criminal’ deserves punishment. Everyone else should be encouraged to improve. The approach is still based on a rule-breach context, but differentiates between intervention and enforcement. One would now transform the approach by considering the evidence of commitment to purposes, trustworthiness, ethical culture and achievement of desired outcomes.

Product Safety: OPSS The Office for Product Safety and Standards (OPSS) places strong emphasis on prevention, and steps taken by the business to prevent and address non-compliance, and encourages cooperation by businesses through seeking advice and clarification (not mentioning deterrence). Its Enforcement Policy states:139 3.1 We are committed to dealing with non-compliance in a manner that is timely and proportionate to its nature, seriousness and circumstances, taking account of the need to act quickly to prevent or minimise risks to public safety. 3.2 Our approach is determined through a careful consideration of the circumstances of the noncompliance, the approach of the business to dealing with the non-compliance (see also 5.5), and the evidence available. The factors that we will take account of include: • the impact or potential impact of the non-compliance or product safety issue; • the willingness and ability of the business to prevent non-compliance, taking account of compliance history, business size, capacity and the stage in the business lifecycle; • the maturity of the legislation and levels of awareness of its requirements; • the steps taken by the business to prevent the non-compliance and any clear reasons for the failure; • the likely impact of the proposed action on the business, both in terms of remedying the noncompliance and in terms of economic costs; • the likely impact of the proposed action on the wider business community, both in terms of deterring non-compliance and in terms of economic benefits to legitimate businesses; and • the ability and willingness of the business to address the non-compliance or product safety issue in an effective manner – we will take account of an early, positive and co-operative approach. 3.3 Where we require the business to take action to remedy any non-compliance we will: • • • • •

clearly explain the nature of the non-compliance(s); discuss what is required to achieve compliance, taking into account the circumstances; clearly explain any advice, actions required or decisions that we have taken; set reasonable timescales in relation to any actions required; provide in writing details of how to appeal against any advice provided, actions required or decisions taken, including any statutory rights to appeal; • explain what will happen next; and • keep in touch, where required, until the matter is resolved. … 3.6 Where we receive notification from a business that it has failed to comply with regulations that we enforce, our primary concerns will be to ensure protection for people and the environment, and to ensure adequate steps are taken to address the noncompliance and its effects, and to minimise the likelihood of future non-compliance. We will take account of the willingness of the business to work with us when considering the actions that must be taken. 139 Enforcement Policy (Department for Business, Energy & Industrial Strategy, Office for Product Safety and Standards, 2021). See earlier Enforcement Policy (Department for Business, Energy & Industrial Strategy, Office for Product Safety and Standards, 2018).

450  Traditional Approaches to Enforcement and Compliance 3.7 A business that is the subject of an investigation by us into non-compliance, can, nonetheless, seek advice from us with a view to mitigating the impact of the noncompliance or preventing recurrence. Where appropriate, we will allocate responsibility for providing this advice to an officer who is not involved in the investigation.

It can be contrasted with the approach of the German BfDI that will only take into account measures that go beyond the legal requirements in relation to mitigation. One gets no credit for trying if one fails. In responding to a recent study,140 OPSS stated: In the area of product regulation in particular, the assessment of compliance systems (their existence and effective operation) is an important aspect of our enforcement activity and consideration of a non-compliance or breach will always involve consideration of what steps had been taken to deliver compliance and what factors led to the non-compliance. This is an important step in understanding what remedial actions may be required in order to address the non-compliance. It is worth noting that many of the Regulations that we enforce include statutory defence provisions e.g. ‘taking reasonable precautions and exercising due diligence’. When investigating with a view to possible enforcement action, consideration of compliance mechanisms is therefore an essential step in establishing whether there has been an offence and, if so, what the culpability is.

This policy focuses on protection, and the expectation of cooperation between companies and the authority. It does not refer to deterrence.

Financial Conduct: FCA The Financial Conduct Authority’s enforcement policy places emphasis on outcomes and encourages organisations to take voluntary initiatives in remediation and prevention of harm – but still refers to authoritarian concepts of misconduct and deterrence:141 The overriding principle in our approach to enforcement is a commitment to achieve fair and just outcomes in response to misconduct. Wrongdoers must be held to account and our rules and requirements must be obeyed. … Our approach to tackling serious misconduct is to: • be responsive and efficient in detecting it • not pre-judge the outcome of an investigation, but instead focus on gaining an understanding of the facts • investigate efficiently and fairly, including acting where there is serious misconduct and stopping investigations where it is clear there is no serious misconduct • use deterrent and remedial powers, including financial penalties, prohibitions, suspensions as well as redress, or remedial and restorative measures wherever appropriate, to put things right • encourage firms to voluntarily account for and redress misconduct (where it is reasonable for them to do so) by imposing lower sanctions on such firms • impose more severe sanctions on those who fail to address harm • communicate, through our formal statutory notices, the basis and the reasons for our actions, so they are transparent, fair, and firms and individuals can use that information to evaluate their own conduct. 140 Organizational Accountability and Enforcement – Do Data Protection Authorities Consider Organizational Accountability Measures as Mitigating Factors in their Sanctioning and Fining Decisions? (Centre for Information Policy and Leadership, 2021). 141 FCA Mission: Approach to Enforcement (Financial Conduct Authority, 2019).

Fresh Approaches   451

Bribery Act Procedures A further illustration of changes in approaches to enforcement focusing on risk and organisational behaviours and culture arises under the UK Bribery Act 2010. The Act was widely regarded as state of the art when it introduced a strict liability offence for corporations of ‘failure to prevent bribery by associated persons’ but with a defence where the company proved that it had ‘adequate procedures’ for preventing bribery by associated persons.142 The statutory guidance sets out a set of six ‘flexible and outcome focused’ principles that should guide the establishment of a company’s procedure, and be ‘proportionate to risk’:143 1.

2.

3. 4. 5.

6.

Proportionate procedures. A commercial organisation’s procedures to prevent bribery by persons associated with it are proportionate to the bribery risks it faces and to the nature, scale and complexity of the commercial organisation’s activities. They are also clear, practical, accessible, effectively implemented and enforced. Top-level commitment. The top-level management of a commercial organisation (be it a board of directors, the owners or any other equivalent body or person) are committed to preventing bribery by persons associated with it. They foster a culture within the organisation in which bribery is never acceptable. Risk Assessment. The commercial organisation assesses the nature and extent of its exposure to potential external and internal risks of bribery on its behalf by persons associated with it. The assessment is periodic, informed and documented. Due diligence. The commercial organisation applies due diligence procedures, taking a proportionate and risk based approach, in respect of persons who perform or will perform services for or on behalf of the organisation, in order to mitigate identified bribery risks. Communication (including training). The commercial organisation seeks to ensure that its bribery prevention policies and procedures are embedded and understood throughout the organisation through internal and external communication, including training, that is proportionate to the risks it faces. Monitoring and review. The commercial organisation monitors and reviews procedures designed to prevent bribery by persons associated with it and makes improvements where necessary.

Courts have taken this Guidance into account and considered the mitigating and aggravating factors in approving Deferred Prosecution Agreements (DPAs) under the Bribery Act.144 We see in the six procedural elements quoted above some constituents of an approach aimed at affecting an organisation’s culture, but not in fact a focused substantive approach aimed at supporting culture, still less a specifically ethical culture. The Bribery Act guidance remains limited to talking about procedures in the context of achieving compliance with rules. The OECD has recommended that regulators should encourage and promote business compliance, including through the use of appropriate materials such as regulatory guidance and compliance toolkits.145 In 2018 G30 issued a paper on conduct and culture in the financial sector, 142 Bribery Act 2010, s 7(2). 143 Under Bribery Act 2010, s 9. See The Bribery Act 2010. Guidance about Procedures which Relevant Commercial Organisations can put in Place to Prevent Persons Associated with them from bribing (Section 9 of the Bribery Act 2010) (Ministry of Justice, 2011). 144 eg Serious Fraud Office v Rolls-Royce PLC and Rolls-Royce Energy Systems Inc. Judgment of Sir Brian Leveson P, 17 January 2017, www.judiciary.gov.uk/wp-content/uploads/2017/01/sfo-v-rolls-royce.pdf. Statement of Facts, www.sfo.gov. uk/cases/rolls-royce-plc/. 145 Principle 10, ‘Regulatory Enforcement and Inspections’, OECD Best Practice Principles for Regulatory Policy (OECD, 2014).

452  Traditional Approaches to Enforcement and Compliance which confused culture and compliance.146 G30’s Recommendations 8 and 9 were that a climate of psychological safety should be created by enforcement and disciplinary measures. However, those approaches are simply inconsistent. A climate of enforcement for any breach – or even for some – cannot support a culture of psychological safety. G30 also notes ‘the potential for employee burnout from all of the culture and conduct initiatives and desire to get back to business’. This indicates a tendency to see culture as something detached from the organisation, rather than its inherent condition.

US Leniency Policy Whilst continuing with an enforcement policy generally based on deterrence, the Securities and Exchange Commission (SEC) changed its policy in 2010 based on giving reductions in penalties for cooperation (called ‘leniency’). Analysis comparing the outcomes between 2002–10 and 2010–14 showed differences in the behaviour of both enforcer and firms.147 In the earlier period, a one unit increase in the cooperation score increased the probability of enforcement by 4.2% and penalties by $2.04 million. In contrast, in the later period, a one unit higher cooperation score was related to a 4.6% lower chance of enforcement and $2.55 million less in fines. For specific cooperative actions, the SEC penalised self-investigation, prominent disclosure and replacing executives in the earlier period, whereas it rewarded replacing executives and timely reporting in the later period. The analysis also suggested that after 2010, the SEC continued to penalise self-investigation firms only if they did not communicate their findings to the SEC. In the later period, firms involved in misconduct were more likely to replace executives, but conducted fewer independent investigations. A decade later, signs of a sea change can be identified even in the generally punitive regulatory environment in the USA. A leading enforcer at the Commodity Futures Trading Commission described the traditional approach as a constant ‘game of whack-a-mole – as soon as we bat down one violation, others just keep popping up’.148 The US official described the fresh approach like this: CFTC are committed to working together with the companies and individuals we regulate to identify and prosecute wrongdoing that has occurred, and to stop future wrongdoing before it starts. In particular, we’re committed to giving companies and individuals the right incentives to voluntarily comply with the law in the first place – and to look for misconduct and report it to us when they see it.

In other words, a model of sanctioning breaches of rules just does not work – nothing has been learned and the behaviour and performance do not improve. But the lessons of moving away from an authoritarian and punitive approach have not yet been applied.

A Holistic Approach to Organisational Culture Many businesses and a small number of regulatory schemes have adopted performance-based and outcome-focused management, achieved through focusing expressly on organisational culture. 146 Banking Conduct and Culture: A Permanent Mindset Change (G30, 2018). 147 AJ Leone, EX Li and M Liu, ‘On the SEC’s 2010 Enforcement Cooperation Program’ (2021) 71 (1) Journal of Accounting and Economics 101355. 148 Speech of James McDonald, Director of the Division of Enforcement Commodity Futures Trading Commission regarding ‘Perspectives on Enforcement: Self-Reporting and Cooperation at the CFTC’, 25 September 2017.

Fresh Approaches   453 The performance-based approach has also been adopted as the basis of the regulatory system, for example in aviation safety. The power of organisational culture has been referred to above and is discussed in chapter 10, with the systemic approach of Ethical Business Practice (EBP). Models of rules-based regulation are beginning to be replaced with a model based on achieving desired goals (objectives and outcomes) and to base activities (of both regulatees and regulators) on having an ethical culture that is based on society’s (ethical) values. Strong endorsements of the need for ethical culture as the foundation of regulation have come from the Chair of the US Securities and Exchange Commission149 and the New York Federal Reserve.150 This approach (which might have been described as ‘principles-based regulation’ some years ago) affords a number of potential advantages, such as flexibility in dealing with new risks (which has proved valuable for those systems that have been able to use it in responding to the Covid pandemic situation). The UK Government suggested in 2018 that the future of regulation involved ‘regulated self-regulation’ and ‘earned recognition’.151 A review of evidence on designing self- and co-regulatory systems152 indicated that the involvement of business had a significant effect on effectiveness and compliance. The Central Bank of Ireland has noted that the trust-based model should produce a ‘regulatory dividend’:153 Where firms’ cultures clearly demonstrate appropriate behaviours and acceptance of responsibility, regulatory authorities can place increased reliance on these firms, enabling a more efficient and effective prioritisation of regulatory resources.

Regulators of financial services in many jurisdictions have adopted the goal of trying to regulate the culture of financial institutions. For example, The Australian Royal Commission on Banking called for regulators to supervise culture:154 • • • • •

assess the entity’s culture; identify what is wrong with the culture; ‘hold up a mirror’ to the entity,155 and educate the entity about its own culture; agree what the entity will do to change its culture; and supervise the implementation of those steps.

The problem, however, is that it is simply not possible for regulators to impose or ‘regulate’ the culture of another organisation from the outside. Culture is created within an organisation. Regulators can encourage (or discourage) organisations that they regulate to adopt an ethical culture. The most effective tool is ‘regulating through culture’ and to incentivise organisations to adopt an ethical culture themselves. The Australian Royal Commission was correct that the culture of each entity is unique, that ‘there is no single ‘best practice’ for creating or maintaining a desirable culture’ and that ‘culture

149 ‘Culture is not an Option. …. We do not Expect Perfection; We do Expect Commitment and Action’: Speech, Jay Clayton, Chair of the SEC, www.sec.gov/news/speech/speech-clayton-061818. 150 ‘We do this every year to encourage firms to actively manage their cultures, beyond maintaining traditional compliance programs’: James Hennessy, ‘We’re Only Human: Culture and Change Management’ of New York Federal Reserve, speech 2019, at www.newyorkfed.org/newsevents/speeches/2019/hen190905. 151 Regulatory Futures Review (HM Government, 2017). 152 K McEntaggart, J Etienne and J Uddin, Designing Self- and Co-regulation Initiatives: Evidence on Best Practices. A Literature Review (Department for Business, Energy & Industrial Strategy, 2019) BEIS Research Paper Number 2019/025. 153 Behaviour and Culture of the Irish Retail Banks (Central Bank of Ireland, 2018). 154 ibid, s 6. 155 Exhibit 7.152, April 2018, Refocusing Risk Culture Pilot Reviews, 3.

454  Traditional Approaches to Enforcement and Compliance cannot be prescribed or legislated’.156 Culture needs to ‘to arise from, and be embedded in, [entities’] DNA’. A clear formal link has been made between an organisation’s social purpose, its values, culture and hence its performance and outcomes. The UK Corporate Governance Code 2018 refers to a company’s culture, which it said should promote integrity and openness, value diversity and be responsive to the views of shareholders and wider stakeholders.157 It stated the following Principles: A. A successful company is led by an effective and entrepreneurial board, whose role is to promote the long-term sustainable success of the company, generating value for shareholders and contributing to wider society. B. The board should establish the company’s purpose, values and strategy, and satisfy itself that these and its culture are aligned. All directors must act with integrity, lead by example and promote the desired culture. The UK economic regulatory authority for water (OFWAT) has inserted similar requirements on purpose, strategy, values and culture into its licence conditions.158 The review of water prices in Scotland is expressly based on EBR and has been a considerable success.159 The Primary Authority scheme between Local Authorities and businesses in the UK now covers 100,000 businesses and is based on dialogue that raises issues and solves them, significantly reducing adversarialism, concealment, prosecutions and judicial reviews, whilst solving more problems and improving performance and compliance.160

Conclusions The traditional legal system operates on a model of identifying breaches of legal rules and imposing enforcement sanctions for those breaches that are identified, on the theory that enforcement will act as a deterrent to all future breaches. The theoretical assumptions underlying that model have been wholly undermined by the science of behavioural psychology and empirical evidence into the causes of errors and of the success of new approaches.161 The current legal system has been thinking backwards. We have a justice system from which the outputs are essentially orders that declare that one party is legally right and another wrong, and the most frequent remedy is an order to pay money. In philosophising the justification for that system and its outputs, one argument is that the outputs must, surely, have an effect on future behaviour, because the rational impact on a person who is ordered to pay money, or otherwise shamed by the system, would be to avoid having to do that again. It is a simple matter of

156 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Final Report, Volume 1 (Government of Australia, 2019) s 6.2. 157 The UK Corporate Governance Code (Financial Reporting Council, 2018). See also The Wates Corporate Governance Principles for Large Private Companies (Financial Reporting Council, 2018). 158 Board Leadership, Transparency and Governance – Principles (Ofwat, 2019). 159 Prospects for Prices. Strategic Review of Charges 2012–27. Final Decision Paper (Water Industry Commission for Scotland, 2020). 160 See Primary Authority Overview (Office for Product Standards and Safety, 2019) and www.gov.uk/guidance/ local-regulation-primary-authority. 161 C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015).

Conclusions   455 arithmetical costs and benefits, and assumed psychology. The problem is that science now tells us that when people act and make decisions they are frequently not rational, and do not make precise anticipatory calculations. If we want to understand why people act, we should start with the science rather than the philosophy and theories of law or economics. Adopting an evidence-based approach establishes the following propositions: (a) There is little evidence to suggest that the theory of deterrence has much effect on behaviour – and certainly not the detailed effects that are desired. A strategy of imposing more or higher fines on companies will not be a necessary and sufficient cause of producing greater compliance. (b) Many humans do not make decisions or take actions based on rational thought but act largely automatically and subsequently justify their actions to themselves. It is advantageous to provide opportunities for time to reflect on actions before taking them and for challenge to thinking. (c) Humans are exposed to multiple thoughts, drivers, and influences. Much human behaviour occurs because people are focusing on some objectives rather than others in a complex world. (d) Use of excessive force on people who think they are trying to obey the law has been shown to reduce general willingness to comply with any rules in future. (e) Adopting an evidence-based scientific approach to understanding and affecting human actions will be a more effective strategy than imposing sanctions after-the-event. Many individuals and (especially small) businesses may not be able to focus on requirements or compliance, may misunderstand or not be aware of what they need to do, or not have the resources to comply. It is often the case that well-intentioned people lose sight of ethical issues when they are crowded out by other priorities (eg meeting targets or maintaining the success of their group). (f) The culture of an organisation (especially whether it is ethical, open and transparent, listening and responsive) has a major impact on behaviour and decisions. Approaching behaviour through culture rather than through trying to ensure compliance is far more effective. The concepts of enforcement and deterrence are now outdated as mechanisms and those words should usually be avoided as they carry confusing connotations. The transformation that is needed is from thinking that the State may exert force on citizens based on breaches of law, and that such use of force is the mechanism that will achieve cessation of future wrongdoing (in other words, it will deter future breaches or risky activity, or will achieve change that will do so). The scientific and empirical evidence shows that those propositions are no longer sound. The key question is: how can future behaviour be affected? In answering that question, an understanding of the reasons why things happen (root cause analysis, motivations and impediments) will be essential, and the RDM’s concept of selecting the right intervention choices will be relevant.

15 Intervention and Accountability Applying Science Not Theoretical Assertion Our review of the science on the evolution of how humans interrelate in Part A concluded that our genetics, values, skills, groupings, institutions and cultures are all inter-related and influenced by basic conflicting needs of competition and cooperation. However, we can consciously change our values, behaviour and institutions if we wish to do so – and leading scientists say that it is imperative that we do so and consciously move away from a competitive to a cooperative mode. Nowhere is this more important than in relation to changing our approach to ‘enforcement’ of rules, whether in formal regulation or social situations. Regulation and enforcement, of course, inherently involve opposition between the competing forces of free action (such as commercial success) and protection against harm. At least, that opposing and authoritarian conception has been the traditional model. But it need not be. A cooperative model has been at least partially produced by evolution in business and regulation, and we can take steps to achieve closer harmonisation. Earlier chapters have looked at how cooperation can create norms and operate a regulatory system. A critical issue is how we approach ‘enforcement’, intervention, protection and risk. Chapters 13 and 14 demonstrated that there have been evolutions both in national policy of regulation and in practice in various regulatory systems towards a more cooperative approach between regulatees and regulators, and in ‘enforcement’. One critical shift has been in looking at achieving outcomes, and another shift has been in supporting rather than enforcing, and in selecting the right interventions rather than taking enforcement action. However, these shifts have not necessarily achieved a final stable state, neither are they universally applied. So, what would a science-based ‘enforcement policy’ look like under an outcome-focused cooperative system? We need to start by summarising the science that has been set out earlier in this book, supplemented here by science on ‘enforcement’. The urge to dominate others is a natural impulse for some but is particularly associated with stages of human development where survival and competition are powerful needs. Exercising power over others constitutes a barrier to the development of a cooperative society and hence one that learns and transforms. The authoritative approach fitted a model of human organisation involving institutions in which power is held by a political elite and exercised ‘downwards’ to dominate and control slaves, subjects or workers.1 In democratic states based on respect for others and human rights, a ‘rule of law’ approach has hopefully

1 Social Dominance Theory proposes maintaining inequalities through three behaviours: (1) institutional discrimination, or ‘dominance rules’, (2) consistent discrimination following dominance rules, and (3) pervasive asymmetrical behaviours that reinforce established discrimination and dominance rules. J Sidanius and F Pratto, Social Dominance: An Intergroup Theory of Social Hierarchy and Oppression (Cambridge University Press, 1999).

Interpreting the Science   457 moved from exercising such power arbitrarily to exercising it on those who are considered to have broken legitimate legal rules, involving principles of fair process and natural justice. But the approach still uses the authoritarian language of ‘punishment’, ‘enforcement’ and ‘deterrence’. We have seen in chapters 4, 11 and 14 evidence on human psychology. Prisoner’s Dilemma experiments show that people ‘punish’ defectors and free riders. Psychological and sociological studies show that people are more likely to behave well and ‘do the right thing’ where they are treated with respect in supporting their sense of competence, autonomy and relatedness. We will summarise some important findings from the evidence in this chapter. We have also seen in chapters 4, 11 and 14 several other critical findings. First, ruling others by fear is inconsistent with a democracy based on the values of individual freedom, fairness mutual respect and human rights. Second, people will not share vital information unless they have an environment of reliable and consistent psychological safety. Third, groups that cannot cooperate are incapable of learning, evolving or innovating. Fourth, there is also increasing evidence that cooperative approaches are more successful in identifying, balancing, reducing and preventing future risks, and in repairing harm. We have seen in chapter 13 an evolution in the enforcement policies of many regulatory authorities towards incentivising cooperative approaches on identifying and rectifying harm, but these usually remain couched in terms of an authoritarian ‘enforcement’ mode rather than a cooperative mode. Of course, a society still needs to protect itself against those who deliberately cause harm to others, and to intervene with those who cause harm unintentionally. This chapter sets out a cooperative model on how these various goals can be achieved. It examines the basis on which those responsible for protecting society should justifiably and effectively act and intervene in the activities of others so as to achieve the common purposes of protection and prosperity and outcomes to that effect. The approach involves a significant transformation from traditional approaches towards ‘enforcement’, which is limited to imposing sanctions in response to breaches of rules, and adopts the broader concepts of intervention to achieve desired outcomes, and using cooperation to achieve shared goals and outcomes. As we have seen from chapters 13 and 14, many regulators (and businesses) have made significant shifts towards the new approach in recent years. The direction of travel is clear and now needs to be continued if a fully cooperative state is to be achieved. The basic point is that all actors should refresh how they treat others. We examine the rationale for intervention by the state into the affairs of individuals and organisations. The basic rationale is protection of society, people, businesses, organisations and the environment from unacceptable harm, and delivering restoration when it occurs. Two extremes need to be recognised and provided for.

Interpreting the Science We draw together here various different strands of scientific research. First, in the context of social groups, experiments have examined the propensity of group members to ‘punish’ defectors or free riders. There is a plausible historical explanation for this tendency, which is a need to keep tribes together and unified, for protection against common enemies. The same urge appears in modern institutions and clubs, for example generating and retelling stories of ‘our’ success and of overcoming challenges. the mechanisms create common values, distinct identity and social cohesion, with ostracism or other sanctioning against non-conformity. The context is essentially horizontal, although there is a different, vertical dimension.

458  Intervention and Accountability Secondly, a similar but different motivation occurs in the vertical context of the dominance of groups by a leader or an elite of leaders, who exercise power over the inferior members. The motivations are partly to maintain the power of the leaders and partly to maintain the cohesion of the group. The membership needs to act as directed by the leaders, to maintain its cohesion as a group and to avoid it disintegrating or being taken over. Motives of power and repression are mixed with those of maintenance of a cohesive, solidified, effective society. In historical contexts, the risks would be revolt, revolution, conquest, secession. In a modern context, they might include social and economic stagnation, apathy and crime, low productivity. The historical ‘command and control’ model raises ethical and mechanistic problems in the modern context, and values and norms such as individual liberty raise problems for a state’s use of force against its citizens. A key theme of this book is that theories about the use of power in controlling and motivating people have to be completely revised in the light of evolving understanding of social politics and of science. There has to be a shift in the underlying purpose of enforcement and punishment from protecting the leadership or the group to protection of all in society from unacceptable harm.

Social Punishment A sequence of laboratory experiments examined the phenomenon of ‘peer punishment’ in Prisoner’s Dilemma games, based on cooperating or defecting. Initial studies showed that people do punish defectors and behave altruistically, accepting costs to themselves in order to help others, or (as found in the game) preserve a relationship by not defecting.2 However, in the initial games, players were isolated and unaware of others’ behaviour. Martin Nowak’s interpretation of the results when players did not know who was retaliating against them was that they fitted the evolution of situations of direct and indirect reciprocity, rather than ‘altruism’: the motivation of ‘harming or hurting others marks an escalation of conflicts, this punishment is motivated by anger, greed, and aggression. It is primarily used to hold others down, to exploit them, to weaken them, to get rid of them.’3 Subsequent research found that the best performing people do not use punishment, unlike the worst-performing: ‘winners do not punish, losers do’.4 Repeating the initial experiment but in the context of repeated encounters where it was clear who was punishing whom found that although both punishment and reward responses (unlike in the control groups) led to cooperation, cooperation and rewards led to much higher payoffs.5 If both reward and punishment were on offer, then the winning groups did not use punishment, which was both costly and ineffective. Rewards went further than punishment in both benefiting the public good and in building cooperation, despite the efforts of free riders. Nowak concluded that the ability of people to gain a reputation was powerful: ‘Cooperators in the public goods game gain a reputation, which makes them more attractive partners for other cooperators in private – one to one – dealings.’6 Interestingly, repeating these experiments with students in different countries

2 E Fehr and S Gächter, ‘Cooperation and Punishment in Public Goods Experiments’ (2000) 90 American Economic Review 980. E Fehr and S Gächter, ‘Altruistic Punishment in Humans’ (2002) 415 Nature 137. See E Fehr and I Schurtenberger, ‘Normative Foundations of Human Cooperation’ (2018) 2 Nature Human Behavior 458. 3 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, Not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 225. 4 A Dreber, DG Rand, D Fudenberg ad MA Nowak, ‘Winners Don’t Punish’ (2008) 452 Nature 348. 5 DG Rand, A Dreber, T Ellingsen, D Fudenberg and MA Nowak, ‘Positive Interactions Promote Public Cooperation’ (2009) 325 Science 1272. 6 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, Not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 231.

Interpreting the Science   459 produced striking national differences, with freeloaders responding to loss of tokens becoming more cooperative in the UK, Switzerland and USA but seeking retribution or becoming generally uncooperative in Greece and Russia.7

Authoritarian Punishment Garrett Hardin showed that where multiple individuals all act so as to preserve their own interests, common goods are inadvertently destroyed in a ‘Tragedy of the Commons’.8 The original examples were forests and other natural habitats and species, but the point is universal – and clearly illustrated by climate change. Elinor Ostrom showed that positive steps need to be taken to preserve the common good, especially through redesign of actions and incentives,9 recognising that this can be challenging to achieve.10 Publicly-organised enforcement is widely used as a tool to prevent anti-social behaviour, based on breach of legal rules. Tom Tyler has extensively researched how people observe legal rules, and react to different forms of enforcement, and he concludes:11 One of the main functions of the law is to regulate the behaviour of the citizenry by maximizing the likelihood that people will comply with normative standards of conduct, i.e. with socially shared definitions of acceptable conduct as they are enshrined in rules, norms, and laws. If the law is to be effective in fulfilling its regulatory role, most citizens must obey most laws most of the time.

Nowak accepts that there have been few game theory studies to illuminate what is going on in hierarchical ‘institutional punishment’.12 He summarises the Prisoner’s Dilemma evidence outlined above as finding that although punishment is one mechanism that can counter the selfishness of natural selection that leads to a ‘Tragedy of the Commons’ destruction of common public goods, it is very inefficient and it does not help people cooperate much. A much better mechanism for achieving the maintenance of public goods is to ‘reward fellow cooperators by establishing mutually beneficial private interactions with them’ such that ‘the public cooperators gain a reputation that makes them more attractive prospects to fellow cooperators’ and private cooperation can support public cooperation.13 Hence, transparency and ability to advertise good private cooperation is essential. It has been argued that participation in a state through voting, consultation and even enforcement (such as juries) is beneficial for cohesion.14 Indeed, one study confirmed that a majority vote to establish a sanctioning system can support lasting cooperation in a public goods dilemma.15 The results fit with findings referred to above made by Ostrom and others that 7 S Gächter, B Herrmann and C Thöni, ‘Antisocial Punishment Across Societies’ (2008) 319 Science 1362. 8 G Hardin, ‘The Tragedy of the Commons’ (1968) 162 Science 1243. 9 E Ostrom, Governing the Commons: Evolution of Institutions for Collective Action (Cambridge University Press, 1990). 10 E Ostrom, ‘A Diagnostic Approach for Going Beyond Panaceas’ (2007) 104(39) Proceedings of the National Academies of Science USA 15181–87; E Ostrom, ‘Beyond Markets and States: Polycentric Governance of Complex Economic Systems’ (2010) 100 American Economic Review 1–33. 11 TR Tyler, ‘Psychology and the Law’ in The Oxford Handbook of Law & Politics (Oxford, 2008). See TR Tyler, Why People Obey the Law (Yale University Press, 2006). 12 M Nowak with R Highfield, SuperCooperators. Beyond the Survival of the Fittest. Why Cooperation, Not Competition, is the Key to Life (Canongate Bools Ltd, 2011) 234. 13 ibid, 233–35, 218. 14 DA DeCaro, MA Janssen and A Lee, ‘Synergistic Effects of Voting and Enforcement on Internalized Motivation to Cooperate in a Resource Dilemma’ (2015) 10(6) Judgement and Decision Making 511–37. 15 C Hilbe, A Traulsen, T Röhl and M Milinski, ‘Democratic Decisions Establish Stable Authorities That Overcome the Paradox of Second-order Punishment’ (2014) 111(2) Proceeds of the National Academies of Science 752.

460  Intervention and Accountability enforcement is more effective when it has the support of a large majority of a population.16 A participatory process should support legitimisation of social responses,17 provided fair processes are observed.18 However, it is not difficult to think of the risks of group-think and bias, compared with the qualities of objectivity and disinterestedness that we associate with an independent judiciary. It might be logical to encourage actions by members of society aimed at cohesion and enforcing the group’s norms. In modern states, we do not, however, tolerate peer enforcement in the form of ‘taking the law into your own hands’, but reserve criminal and regulatory enforcement to state bodies, and enforcement of personal rights to civil court processes. Imposing severe penalties, for example on an exemplary basis, clearly turns out to have less effect than may commonly be thought. It is important to distinguish severity from likelihood, and to consider the effect from the perception of an individual offender.19 A consistent finding from behavioural research is that it is an individual’s perception of the risk of being identified in doing something wrong, and hence subject to shame, reputational damage, harm or punitive sanction, that affects the action, rather than the perception of the severity of a sanction.20

Evidence on Intention and Accidents The game theoretical research uses concepts of defectors and free riders. Social research talks of non-cooperators, selfishness or altruism. The law is typically concerned with assumed states of mind of an individual – intentional, reckless, negligent, without care – in categorising behaviour that triggers criminal or civil sanctions. But the root causes of harm and infringement of rules occur for many reasons. James Reason’s analysis of the causes of errors identifies major categories as absent-minded slips and lapses,21 failures in planning and (deliberate) violations.22 He categorises violations into types: corner-cutting or routine violations; thrill-seeking or optimising violations; necessary

16 E Ostrom, J Walker and R Gardner, ‘Covenants With and Without a Sword: Self-governance Is Possible’ (1992) 86(2) American Political Science Review 404; M Sutter, S Haigner and GM Kocher, ‘Choosing the Carrot or the Stick? Endogenous Institutional Choice in Social Dilemma Situations’ (2010) 77 Review of Economic Studies 1540; J-R Tyran and LP Feld, ‘Achieving Compliance When Legal Sanctions Are Non-deterrent’ (2006) 108(1) Scandinavian Journal of Economics 135; B Vollan, ‘Socio-ecological Explanations for Crowding Out Effects from Economic Field Experiments in Southern Africa’ (2008) 67 Ecological Economic 560; J Vyrastekova and D van Soest, ‘Centralized Common-pool Management and Local Community Participation’ (2003) 79(4) Land Economics 500. 17 G Grossman and D Baldassarri, ‘The Impact of Elections on Cooperation: Evidence from a Lab-in-the-field Experiment in Uganda’ (2012) 56(4) American Journal of Political Science 964. 18 DA DeCaro and M Stokes, ‘Social–psychological Principles of Community-based Conservation and Conservancy Motivation: Attaining Goals Within an Autonomy-supportive Environment’ (2008) 22(6) Conservation Biology 1443; DA DeCaro and M Stokes, ‘Public Participation and Institutional Fit: A Social–psychological Perspective’ (2013) 18(4) Ecology and Society 40. 19 RJ MacCoun, ‘Drugs and the Law: A Psychological Analysis of Drug Prohibition’ (1993) 113 Psychological Bulletin 497; PH Robinson and J Darley, Justice, Liability, and Blame (Westview, 1995); PH Robinson and J Darley, ‘The Utility of Desert’ (1997) 91 Northwestern University Law Review 452; HL Ross, Deterring the Drinking Driver (Lexington Books, 1982); 20 DS Nagin and R Paternoster, ‘The Preventive Effects of the Perceived Risk of Arrest’ (1991) 29 Criminology 561; R Paternoster, ‘The Deterrent Effect of the Perceived Certainty and Severity of Punishment’ (1987) 4 Justice Quarterly 173; R Paternoster and L Iovanni, ‘The Deterrent Effect of Perceived Severity’ (1986) 64 Social Forces 751; R Paternoster, LE Saltzman, GP Waldo and TG Chiricos, ‘Perceived Risk and Social Control: Do Sanctions Really Deter?’ (1983) 17 Law and Society Review 457. 21 J Reason, Human Error (Cambridge University Press, 1990); J Reason, ‘Stress and Cognitive Failure’ in S Fisher and J Reason (eds), Handbook of Life Stress, Cognition and Health (Wiley, 1989) 405–21. 22 J Reason, A Life in Error. From Little Slips to Big Disasters (Ashgate Publishing, 2013).

Interpreting the Science   461 violations (such as over-specification); and exceptional violations. He identifies the coexistence of three levels of performance: skill based, rule based (where one has to think and apply a pre-packaged solution) and knowledge based (where one has no pre-packaged solution).23 Organisational accidents, Reason notes, share the following characteristics: • Many of the contributing factors were present within the system before the actual catastrophe occurred, sometimes for many years. … • All of the systems had multiple defences, barriers and safeguards designed to prevent known hazards from coming into damaging contact with people or assets. • The disasters occurred because an unforeseen concatenation of latent conditions – human unsafe acts and local triggers – defeated the many defences, creating a trajectory of accident opportunity, causing damages and loss.24

One widely used representation is Reason’s Swiss Cheese model,25 in which holes in defences can arise from active failures and latent conditions. Proactive safety management involves regular monitoring of the system’s ‘vital signs’. Reason says that one of the key features shaping a system’s robustness is its culture.26 He agrees with Weick and colleagues that the power of a safe culture lies in instilling a ‘collective mindfulness’ of the many entities that can penetrate, disable or bypass a system’s safeguards.27 The ‘open and just culture’ approach to aviation safety described in chapter 13 focuses not on blaming an individual for causing harm, but, assuming that all actors in the industry are well-intentioned, what collection of factors have been the root causes of the outcome, and why any humans in the same position would have behaved in particular ways, so that those root causes can be addressed and changes will reduce future risk. These findings ­challenge legal systems that blame individuals for systemic harms, and that punish individuals who may not have been ‘at fault’, morally blameworthy or causative of harm.

Conflict between Behavioural and Legal Concepts? It follows from the scientific evidence that traditional legal concepts used to categorise people’s actions are inaccurate, misleading and often unfair. The concepts that action is either deliberate, reckless or negligent all assume that people’s actions are based on conscious rational choices. We know that that is not true, from the evidence on heuristics and biases, discussed in chapter 4,28 and that mental states and drivers of behaviour are far from rational or conscious. We also know, as discussed above, that harm can be caused in many ways other than from one individual actor. A categorisation of acting without due care may be intellectually valid as a legal trigger for civil liability to pay money to compensate for harm, and may possibly catch much human activity, since the mind of someone involved in some away in contributing to harm being caused might not often be directed to thinking about their action that results in harm. But is that categorisation

23 ibid. 24 ibid, 74. 25 J Reason, The Human Contribution: Unsafe Acts, Accidents and Heroic Recoveries (Ashgate Publishing, 2008). 26 J Reason, A Life in Error. From Little Slips to Big Disasters (Ashgate Publishing, 2013) 76; J Reason, ‘Achieving a Safe Culture: Theory and Practice’ (1998) 12 Work & Stress 293. 27 KE Weick, KM Sutcliffe and D Obstfeld, ‘Organising for High Reliability Processes of Collective Mindfulness’ (1999) 21 Research into Organizational Behavior 23–81. 28 T Gilovich, D Griffin, and D Kahneman (eds), Heuristics and Biases: The Psychology of Intuitive Judgment (Cambridge University Press, 2002); D Kahneman and A Tversky (eds), Choices, Values, and Frames (Cambridge University Press, 2000); D Kahneman, Thinking, Fast and Slow (Allen Lane, 2011).

462  Intervention and Accountability helpful in assisting people to overcome mental and external influences in preventing harm? The science would not be encouraging on this. Further, is that trigger helpful in fairly sharing risk and spreading the cost of harm fairly? These questions are beyond the scope of this book, but some serious doubts are raised.

Why Do People Observe Rules? Extensive research has illuminated the factors that affect whether people will obey social or legal rules. The principal factors are: (a) The rules are made through a fair process; where people feel that they have had involvement, or a possibility for voice and input. (b) The substance of the rule is perceived to be fair by the individual and most of the community, even if individuals do not agree with it. (c) The rule accords with their sense of values; namely the values of the individual, the particular community or social group or organisation. (d) The rule is applied fairly by/to all. (e) Most people are observing the rule. The concept and value of fairness applies to all elements. Those subject to the regime and its rules need to hold perceptions of fair process,29 fair substance and fair application if they are to want to observe one or more rules and regard the regime as legitimate. For example, enforcement has to be perceived to be done fairly if it is to promote respect and observance. This has been demonstrated in relation to public law30 and in private organisations.31 Indeed, many scholars regard the set of elements as adding up to the extent to which a regime and its rules are perceived as legitimate.32 Similarly, in the workplace, evaluations of the procedural justice of performance appraisals were

29 R Paternoster, R Brame, R Bachman and W Sherman, ‘Do Fair Procedures Matter? The Effect of Procedural Justice on Spouse Assault’ (1997) 31 Law and Society Review 163; DG Pruitt, RS Peirce, NB McGillicuddy, GL Welton and LM Castriano, ‘Long-term Success in Mediation’ (1993) 17 Law and Human Behavior 313; EA Lind and TR Tyler, The Social Psychology of Procedural Justice (Springer Science & Business Media, 1988); JW Thibaut and L Walker, Procedural Justice: A Psychological Analysis (Erlbaum Associates, 1975). 30 TR Tyler, JD Casper and B Fisher, ‘Maintaining Allegiance towards Political Authorities: The Role of Prior Attitudes and the Use of Fair Procedures’ (1989) 33(3) American Journal of Political Science 629; TR Tyler, ‘Citizen Discontent with Legal Procedures: A Social Science Perspective on Civil Procedure Reform’ (1997) 45(4) The American Journal of Comparative Law 871; TR Tyler, ‘Social Justice: Outcome and Procedure’ (2000) 35(2) International Journal of Psychology 117–25. 31 R Cropanzano, DE Rupp, CJ Mohler and M Schminke, ‘Three Roads to Organizational Justice’ (2001) 20 Research in Personnel and Human Resources Management 1–113; R Cropanzano, B Goldman and R Folger, ‘Deontic Justice: The Role of Moral Principles in Workplace Fairness’ (2003) 24 Journal of Organizational Behaviour 1019–24; CT Kulik and Y Li, ‘The Fork in the Road: Diversity Management and Organizational Justice’ in RS Cropanzano and ML Ambrose (eds), The Oxford Handbook of Justice in the Workplace (Oxford University Press, 2015); R Miles, Culture Audit in Financial Services (KoganPage, 2121). 32 TR Tyler, Why People Obey the Law (Yale University Press, 2006); TR Tyler, ‘Psychological Perspectives on Legitimacy and Legitimation’ (2006) 57 Annual Review of Psychology 375–400; J Sunshine and TR Tyler, ‘The Role of Procedural Justice and Legitimacy in Shaping Public Support for Policing’ (2003) 37 Law and Society Review 513; TR Tyler and YJ Huo, Trust in the Law (Russell Sage Foundation, 2002); JM Darley, TR Tyler and K Bilz, ‘Enacting Justice: The Interplay of Individual and Institutional Perspectives’ in MA Hogg and J Cooper (eds), The Sage Handbook of Social Psychology (Sage, 2003); JT Jost and B Major, ‘Emerging Perspectives on the Psychology of Legitimacy’ in JT Jost and B Major (eds), The Psychology of Legitimacy (Cambridge University Press, 2001); TR Tyler and SL Blader, ‘Can Businesses Effectively Regulate Employee Conduct? The Antecedents of Rule Following in Work Settings’ (2005) 48 Academy of Management Journal 1143; TR Tyler and SL Blader, Cooperation in Groups: Procedural Justice, Social Identity, and Behavioral Engagement (Psychology Press, 2000).

Interpreting the Science   463 found to influence judgements of overall workplace fairness, perceptions of management legitimacy, and employee rule‐adherence behaviour more strongly when employees believed fairer workplace procedures were required by law.33 Fairness can clearly dominate the motivation of self-interest.34 Authorities in the USA have been described as having tried to widen the base of their perceived legitimacy in the past two decades.35 If the quality of legitimacy exists, people will be motivated voluntarily to observe the rules, even if they think that some aspects are unfair or they otherwise disagree with them.36 The psychological basis for evaluating process, substance and application as fair and legitimate is based on individuals’ ethical values and moral principles,37 as discussed in chapter six.38 Indeed, it is well established that people do not need to know the wording of a rule in order to observe a general ethical principle or a specific behaviour or action in a concrete situation.39 People make guesses about specific content, based on their values and experience.40 The relevance of moral and emotional drivers on making decisions that can be against a person’s self-interest has long been recognised.41 People may, of course, hold differentiated and varying views on the extent to which process, substance and application of both individual rules and the system are fair and legitimate. It is possible for individuals to believe that some aspects are far from ideal, but nevertheless regard a regime and individual rules as fair, legitimate and hence for them to be subject to an internal obligation to observe them. However, factors such as corruption, bias, inequality, failure by an authority to follow the rules or to behave fairly, reduce compliance. On the other hand, perceptions that tax authorities are part of the same community as taxpayers and perform a polite (and not antagonistic) service to the community, influence the level of tax compliance42 and provide a foundation based on trust.43 The last factor – observance – is the critical point in the context of ‘enforcement’. The crucial point is not that people perceive that a rule is enforced – there may be many reasons why constant and complete enforcement does not occur – but that most people are observing it and think that it is fair and legitimate to observe it. If people think that others are not observing a rule, it can 33 Y Feldman and TR Tyler, ‘Mandated Justice: The Potential Promise and Possible Pitfalls of Mandating Procedural Justice in the Workplace’ (2012) 6(1) Regulation & Governance 46. 34 D Kahneman, JL Knetsch and RH Thaler, ‘Fairness and the Assumptions of Economics’ (1986) 59(4) Journal of Business S285–S300; E Fehr and KM Schmidt, ‘A Theory of Fairness, Competition, and Cooperation’ (1999) 114(3) Quarterly Journal of Economics 817–68; Y Feldman and TR Tyler, ‘Mandated Justice: The Potential Promise and Possible Pitfalls of Mandating Procedural Justice in the Workplace’ (2012) 6(1) Regulation & Governance 46–65. 35 T Tyler and J Jackson, ‘Popular Legitimacy and the Exercise of Legal Authority: Motivating Compliance, Cooperation and Engagement’ (2014) 20(1) in Psychology, Public Policy and Law 78. 36 HC Kelman, ‘Patterns of Personal Involvement in the National System: A Social-psychological Analysis of Political Legitimacy’ in J Rosenau (ed), International Politics and Foreign Policy (Free Press, 1969); JT Scholz and N Pinney, ‘Duty, Fear, and Tax Compliance: The Heuristic Basis of Citizenship Behavior’ (1995) American Journal of Political Science 490–512; HC Kelman, ‘The Role of National Identity in Conflict Resolution’ (2001) 3 Intergroup Conflict, and Conflict Reduction 187; DA Strauss, ‘Reply: Legitimacy and Obedience’ (2005) 118(6) Harvard Law Review 1854; TR Tyler, Why People Obey the Law (Yale University Press, 2006). 37 See PH Robinson and J Darley, Justice, Liability, and Blame (Westview, 1995); TR Tyler and JM Darley, ‘Building a Law-abiding Society: Taking Public Views About Morality and the Legitimacy of Public Authorities into Account When Formulating Substantive Law’ (2000) 28 Hofstra Law Review 707. 38 See also TR Tyler, ‘Psychology and the Law’ in The Oxford Handbook of Law & Politics (Oxford, 2008). 39 C Engel, ‘Learning the Law’ (2008) 4(3) Journal of Institutional Economics 275–97. 40 JM Darley, KM Carlsmith and PH Robinson, ‘The Ex Ante Function of the Criminal Law’ (2001) 35(1) Law and Society Review 165. 41 RH Frank, Passions with Reason: The Strategic Role of the Emotions (WW Norton, 1988). 42 E Kirchler, The Economic Psychology of Tax Behavior (Cambridge University Press, 2007). 43 E Kirchler, E Hoelzl and I Wahl, ‘Enforced versus Voluntary Compliance: The “Slippery Slope” Framework’ (2008) 29 Journal of Economic Psychology 210–25.

464  Intervention and Accountability lead to questioning why one should oneself, because the legitimacy and fairness of the regime or rule, or one’s sense of moral obligation, is called into question. It is clear that seeing others not observing a rule will undermine intrinsic motivation voluntarily to observe a rule: there are many examples of this, from Covid examples of wearing masks, social distancing and getting vaccinated, to popular protests and revolutions against states who are perceived to have lost their legitimacy. Fair outcomes can override people’s views on an unfair process and view versa (interactional justice).44 Despite the focus above on observance of others’ and one’s own observation of rules, the strength of intrinsic motivation and the sense of fairness and legitimacy of rules and regimes do clearly motivate observance even when no-one is watching.45 In other words, intrinsic motivation can play a major role, for many people and possibly for much of the time. The historical mechanism by which both social groups and authoritative powers have sought to achieve the outcome of observance by fellow group members or subjects has, of course, been enforcement in response to identification of breaches of a rule. Various factors have tended to direct attention to the supposed importance of ‘enforcement’ by both social groups and authoritarian elites. One (horizontal) factor is the psychological need to maintain the cohesion and cooperation of a social group. The related (vertical) factor is an authoritarian elite’s drive to maintain its position of power. So much historical research has used the terminology of punishment, sanctioning and deterrence in both of these situations. However, I argue that there has been a clear shift away from humans using punishment as a means of cohesion and that we need to adopt a fresh approach – conceptually and in language – if we are to support a desired state of cooperation. Various changes in attitude towards punishment can be identified that signify a shift in democratic societies towards a more sophisticated means of supporting cooperation, social cohesion and personal and commercial relationships. For example, in the twentieth century we moved away from capital punishment, blame-based divorce, beating children, killing wild animals, punitive damages. High risk safety systems such as aviation have recognised the need to completely remove blame from working environments in companies, air traffic control and regulators in order to be able to have any chance of supporting a safe system that keeps aeroplanes in the air or nuclear power sources from exploding (see chapter 13 and the concepts of open and just culture). Some hospital and healthcare46 systems have adopted the same approach, although many have yet to make the switch. Extensive research by business schools has identified the need for workplace environments to be based on trust, respect, empowerment, and psychological safety, rather than on authoritarian managerial models.47 Similarly, we have charted in chapters 13 and 14 the evolution in some regulatory enforcement regimes from an authoritarian ‘command-andcontrol’ and deterrence style approach to a more supportive approach for all well-intentioned regulatees. The shift from a vertical authoritarian command style to a more horizontal model 44 RW Hamilton, ‘When the Means Justify the Ends: Effects of Observability on the Procedural Fairness and Distributive Fairness of Resource Allocations’ (2006) 19(4) Journal of Behavioral Decision Making 303–20. 45 S Lindenberg, ‘Are There Sanctions That Work Even When Nobody Is Watching? Value Protecting versus Egoistic Sanctions’ Unpublished working Paper, University of Groningen (2018), quoted in E Fehr, Behavioral Foundations of Corporate Culture, UBS International Center of Economics and Justice, University of Zurich, Paper 7 (2018). 46 An early example was CA Heimer and L Staffen For the Sake of the Children: The Social Organization of Responsibility in the Hospital and the Home (University of Chicago Press, 1998). 47 LS Paine, Vale Shift. Why Companies Must Merge Social and Financial Imperatives to Achieve Superior Performance (McGraw-Hill, 2003); LK Treviño and GR Weaver, Managing Ethics in Business Organizations (Stanford Business Books, 2003); S Killingsworth, ‘Modeling the Message: Communicating Compliance through Organizational Values and Culture’ (2012) 25 Georgetown Journal of Legal Ethics 961; J Mackey and R Sisodia, Conscious Capitalism. Liberating the Heroic Spirit of Business (Harvard Business Review Press, 2014).

New Concepts   465 based on equality can be seen in the concepts of stakeholder capitalism and corporate governance, and the community-based structures discussed in chapters 9 and 10. Underlying all these examples is science that how we treat others matters and the political and philosophical ideas of equality and respect. Cooperation in any group – family, community, social, work, public or private body – is ultimately not otherwise sustained. Two serious problems with traditional theories of enforcement are that they assume that everyone (including organisations) behaves the same way and does so all the time, for example is motivated by selfishness, calculation and greed, and that imposing punishment will prevent that behaviour. In reality, people behave differently, with different motivations and at different times. Yuval Feldman’s extensive review of the evidence on ‘behavioural ethics’ and law48 led him to differentiate between the motivations of ‘good’ and ‘bad’ people and to call for a clear differentiation in the mechanisms used to regulate and ‘enforce’ against each.49 The scientific evidence clearly points to the conclusion that traditional authoritative punishment tools are ineffective and counter-productive against ‘good people’ but may need to be used against ‘bad people’. He follows Tyler and Trinker’s view that it is possible to design interventions based on people’s intrinsic motivation, using those that target morality, fairness and social values for most people, and adopting a harsher approach to the minority who are more calculated wrongdoers.50 Feldman proposes that the best way to maximise compliance with law is to identify both the situational and the personality characteristics of individuals that will increase the likelihood that people will recognise the moral flaw in their behaviour.

New Concepts The Concepts of Open and Just Culture We have explained the open and just culture model in chapter 12. It may at first sight appear to be counter-intuitive not to blame or punish others who break a group’s rules, but if responses involve blame and punishment the result is likely to be that a group fails to learn, or improve performance, or innovate. If we want to learn and improve, we have to evolve beyond blaming others, into an effective cooperative culture. This change may not be as difficult as one might think. Many people who complain say their motivation is not to see people punished but to prevent the same thing happening to others. This is a desire for change that will reduce future risk, and it must be met by confidence that a system of information collection will result in expert scrutiny, root cause analysis and implementation of real change. Too many systems do not achieve that joined up model or lead to relevant change. The circular problem-solving model (Figure 12.2) specifies such a holistic model and the highrisk safety systems show that it is possible to operate this to respond to any new information that is identified. The concept of ‘just culture’ requires people to see fair responses to be taken in

48 See also MH Bazerman and AE Tenbrunsel, Blind Spots: Why We Fail to Do What’s Right and What to Do about It (Princeton University Press 2011); AE Tenbrunsel and D Chugh, ‘Behavioral Ethics: A Story of Increased Breadth and Depth’ (2015) 6 Current Opinion in Psychology 205; B van Rooij and DD Sokol (eds), The Cambridge Handbook of Compliance (Cambridge University Press, 2020). 49 Y Feldman, The Law of Good People. Challenging States’ Ability to Regulate Human Behavior (Cambridge University Press, 2018). 50 TR Tyler and R Trinker, Why Children Follow Rules: Legal Socialization and the Development of Legitimacy (Oxford University Press, 2018).

466  Intervention and Accountability response to adverse events and actions, calibrated on the basis of the extent to which the motivation of the actor was, or was not, ethical. But it would be inaccurate and misleading to describe such action nowadays as punishment. It is interesting that in talking about the motivation to ‘punish’, Christakis cites research that finds that: ‘people show a stronger desire to restore justice and compensate the wronged parties than to rebuke those who behaved badly’.51 There should be confidence that relevant actions will be taken in response to any new information on risk. This latter knowledge supports the psychological need for members of a group to have confidence that free riders will not be allowed (historically, this has been referred to as a punishment mechanism), and also that their contributions are valued and will be acted upon. Thinking on this has evolved. Although researchers identified the concept of ‘strong reciprocity’ where actors cooperate as long as others do but also punish defectors and free riders even if it costs them to do so (labelled as conditional cooperators and altruistic punishers).52 However, some concluded that the idea that sanctioning created human cooperation53 could not be correct since the tendency to form groups and act altruistically came first and is spontaneous.54 A ‘just culture’ means that people know that a root cause analysis will determine why things happened, that people will be treated fairly (and so encouraged to speak up without being unfairly blamed in an open culture), but that a ‘level playing field’ will be maintained for everyone, that will include serious sanctions on people who acted unethically/criminally and cannot be trusted. One cannot decide how to respond without knowing what the problem is. The root cause analysis approach is fundamentally different from a response that is motivated by asking who broke a rule, or who is to blame for harm that has occurred. Those approaches may inaccurately short-circuit the process of analysis of causation and fail to determine the real nature and cause of a problem and hence the right response. It is too easy, and may well be misleading, to focus on the assumed role of one individual who is closest to harm that occurs, assuming that that individual is the (proximate) cause of the harm, and to blame for its occurrence. Scientific problem-solving adopts a wider approach. The root cause analysis approach tends not to ask ‘Why did one person break a rule?’ but instead ‘Why would any individual in that situation act in that way?’ Taking a wider viewpoint leads to identifying how the risk of anyone acting in the same way in future in the same or similar situations might be prevented, so as to reduce the risk of reoccurrence. So there are always consequences under a just culture, but not necessarily the same ones as under a punitive culture. Furthermore, while altruistic punishment provides short-term justice to identifiable victims, more important, it can actually promote the emergence of cooperation at the collective level more generally. In an experiment in which some people were randomly assigned to be able to punish cheaters, cooperation levels started and stayed higher in groups that simply had such people among them, even if the punishers did not have to administer any punishments.55 The authors concluded: ‘Punishment works as an institution – changing behaviour by its very existence.’

51 S Lotz, TG Okimoto, T Schlösser and D Fetchenhauer, ‘Punitive Versus Compensatory Reactions to Injustice: Emotional Antecedents to Third-Party Interventions’ (2011) 47 Journal of Social Psychology 477. 52 S Bowles and H Gintis, A Cooperative Species: Human Reciprocity and Its Evolution (Princeton University Press, 2011) 20. 53 H Gintis, S Bowles, R Boyd and E Fehr, ‘Explaining Altruistic Behaviour in Humans’ (2003) 24 Evolution and Human Behavior 153; Ő Gürek, B Irlenbusch and B Rockenbach, ‘The Competitive Advantage of Sanctioning Institutions’ (2006) 312 Science 108. 54 FBM de Waal, ‘How Selfish an Animal?’ in PJ Zack, Moral Markets. The Critical Role of Values in the Economy (Princeton University Press, 2008); citing RL Trivers, ‘The Evolution of Reciprocal Altruism’ (2004) 46 Quarterly Review of Biology 35. 55 E Fehr and S Gächter, ‘Altruistic Punishment in Humans’ (2002) 415 Nature 137.

New Concepts   467 I suggest that this illuminates the point that the desire for fairness is the foundational value and motivator, and that people perceive a fair outcome as including restoration, repair, apology, learning and future reduction of risk as the desired outcomes, rather than the desire to hurt people by way of punishment. The conclusion is that it is time to adopt different language and an ‘open and just culture’ approach.

A Performance Model The regulatory model used in aviation safety – involving an open and just culture – is described as a performance-based model. It is not based on measuring compliance with rules – although it includes some rules and standards. It recognises that what is needed is a system that treats all actors and institutions as part of an holistic system, and that certain outcomes may not always be perfect all the time. what matters is the performance of every actor and organisation, and whether they are performing well, and improving, in their reduction of inevitable risk. Are people controlling the risks of their activities and improving over time? A comparison between rule-based and performance-based models demonstrates why the latter is clearly preferable. In a rule-based system, often backed by inspections, the focus is on whether people are complying with the particular rules. They are not focusing on whether the outcomes are achieved, possibly because outcomes such as ‘food safety’, ‘fair behaviour’ or ‘ethical culture’ may be difficult to measure. Compliance with rules is simple to measure because it is binary: comply/not comply. But a non-compliance might be of limited significance, or unintentional, or may be an indicator of a much greater systemic risk, especially if assessed with other information. Compliance with rules, or relying on an inspection system, does not mean that outcomes are achieved or that risk is reduced. Rules- and inspection- based systems are simply not designed to improve performance. A performance model accepts the reality of life that risk is constant and cannot be avoided. It aims at focusing people’s attention on constantly identifying and reducing risks. It follows that the objective of the system is to get people to focus themselves on achieving high performance, low risk and desired outcomes. This is the psychological outcome of using intrinsic motivation rather than attempting to rely on external motivation. The former will always be more effective than the controlling, interventionist, and punishing approach that typifies the latter. People should do it for themselves. Actors should take accountability. The regulator’s job is to maximise self-motivation, to encourage performance and to take action against those who fail to behave in an ethically cooperative manner.

The Concept of Intervention The critical concept for the effectiveness of a system of regulation in achieving its outcomes is that of intervention (to achieve change) rather than enforcement (of rules). A public authority (regulator, police, court) may intervene in the activities of citizens and organisations in accordance with the principles set out above. It is significant the RDM discussed in chapter 13 does not talk of ‘enforcement’ but of ‘regulatory intervention’ and regulators making intervention choices. The policy is based on the science-based insights into the reasons for non-compliance and how best to address the behaviour of individuals in regulated entities and the cultures of such entities. Thus, the rationale for the new approach rests on philosophical, political and empirical foundations. The empirical foundation is that the use of disproportionate force on humans and the

468  Intervention and Accountability use of force with the aim of deterring future behaviour are largely ineffective in affecting the root causes of behaviour that is socially unacceptable (an infringement) either historically or, more importantly, in future. The political and philosophical foundation rests on the understanding that all human beings have fundamental rights and freedoms and deserve to be treated with respect but they equally have obligations to respect others in the society in which they live. Individuals should observe the rules of the society in which they live, but only if such rules are based on ethical foundations of mutual respect and support. In return, the society, acting through its properly authorised authorities, may take action to support the observance of its ethical rules, including action against the individual freedoms and rights of its citizens to promote observance of its rules, but only where the rules and the actions are in accordance with ethical principles, are based on the best available scientific evidence as to their effectiveness and are proportionate. Organisations do not have human personality and do not ‘make’ decisions or have emotions. There is no logical sense to anthropomorphise an organisation (ie treat it as if it were human). Hence, the effectiveness imposing punishment or sanctions on an organisation needs to be unpicked into confirmation that such actions will affect the behaviour and culture of the key human actors within it. The rationale for imposing constraints on an organisation for the protection of society is, however, less problematic, as discussed below. Under the cooperative mode, all relevant stakeholders should be duty bound to support science- and risk-based interventions that are decided by the relevant actors, through the relevant processes, aimed at achieving the regulatory goals. They should commit to cooperating in the effective operation of the circular model at Figure 12.2 aimed at improving performance and solving problems. The purpose is to return the system to a safe state: to generate the desired outcomes, such as safety, protection and fair behaviour. Organisations should regulate themselves, their systems and behaviours, to achieve these outcomes, and cooperate with others in doing so. External intervention may be required to limit their capacity until a particular risk is fixed.56

Responsibility and Accountability Accountability and responsibility have a number of meanings, which generate ongoing confusion.57 They have prospective and retrospective elements. Given that the objective is to affect the policy outcomes of protection and prosperity, the following possible aspects: (a) (b) (c) (d) (e)

allocating responsibility for particular roles or achieving certain tasks; accepting responsibility for fulfilling a role or achieving certain tasks; delivery of tasks, targets, outputs, outcomes and impacts (role performance); evaluation of the achievement of role, tasks, outcomes; giving an account of the extent of such performance and delivery, including what was done or not done, and the extent to which unintended, especially adverse, outcomes occurred;58 (f) imposing consequences for the success or failure of such delivery. 56 Examples in aviation safety might include limiting or removing licences to operate particular aircraft or activities (including by airports or other support services as well as airlines) until specific risks have been addressed. 57 E Page, ‘Accountability as a Bureaucratic Minefield: Lessons from a Comparative Study’ (2010) 33(5) West European Politics 1010; B Romzek and M Dubnick, ‘Accountability in the Public Sector: Lessons from the Challenger Tragedy’ (1987) 47 Public Administration Review 227. 58 M Bovens ‘Public Accountability’ in L Ferlie, C Lynne and C Pollitt (eds), The Oxford Handbook of Public Management (Oxford University Press, 2007) 182.

Responsibility and Accountability   469 The first two aspects are prospective, requiring systems, functions, roles, tasks or outcomes to be allocated to particular individuals, so that the delivery of those objectives and outcomes is effectively overseen and more likely to be achieved. Choices must be made as to how this is done. The rationale for allocating roles – and therefore responsibilities – is clear where multiple roles and individuals need to be coordinated. One approach is to define and attribute a role, which was a central reason for introducing a Senior Managers and Certification Regime (SM&CR) in financial services.59 Although official reviews of such regimes assert their effectiveness, there are findings that there are some areas, such as the use of Conduct Rules breach notifications and regulatory references, where it is not yet clear whether the SM&CR is working as intended.60 The equivalent Australian Banking Executive Accountability Regime (BEAR) is reported to have produced greater clarity, an empowering effect, so decisions get made, problems get resolved and there is greater care and diligence.61 However, these changes were related to personality types and a ‘fear effect’ was also noted. Overall, it makes sense that people should be clear who does what, and that they explain what they have done, whether it has succeeded and why or why not. But that is a separate matter from the punitive connotation of accountability if things go wrong ‘on their watch’. A different approach is to set performance targets, on the mantra ‘what gets measured, gets done’. However, a targets regime, especially if linked to reward through remuneration, can incentivise focus solely on their achievement, at the expense of other desired achievements, such as balanced ethical outcomes. There is evidence that it helps to remind people to focus on their actions and what occurs by making clear in advance that they will have to give an account of what they have done and what has happened.62 The last three aspects listed above are retrospective. Giving an account of what happened is the literal meaning of accountability. It is a communication function, requiring honesty, accuracy and completeness. The final aspect features strongly in popular parlance after things are perceived to have gone wrong. ‘Who is accountable?’ here means ‘who is going to be blamed?’ and ‘who is going to be punished?’ The feelings underlying those responses are desires for protection and retribution, as blame and punishment of an individual. However, those responses tend to undermine, rather than support, an ethical cooperative culture. It is important to note, as discussed above, that aviation is blame-free but not accountabilityfree. Accountability comes through sharing information about failures and improvements, and a mutual desire to learn lessons and to contribute to achieving improved performance. All operators are constantly socially accountable to their peers to be open, to share information, to question and to check, all in a non-hierarchical way.63 Sidney Dekker, an expert in ‘just culture’, identifies critically contrasting viewpoints: Backward-looking accountability tries to find a scapegoat, to blame and shame an individual for messing up. Forward-looking accountability acknowledges the mistake and the harm resulting from it, should lay out the opportunities (and responsibilities!) for making changes so that the probability of such harm happening again goes down.64 59 See www.fca.org.uk/firms/senior-managers-certification-regime. 60 See Evaluation of the Senior Managers and Certification Regime (Prudential Regulation Authority, December 2020); and comment ‘PRA evaluation of the senior managers and certification regime’ DLA Piper, January 27 2021. 61 E Sheedy and D Canestrari-Soh, Regulating Accountability: An Early Look at the Banking Executive Accountability Regime (BEAR) (Macquarrie Business School, 2020). 62 A Gawande, The Checklist Manifesto. How to Get Things Right (Profile Books, 2010). 63 C Hodges and R Steinholtz, Ethical Business Practice and Regulation. A Behavioural and Values Based Approach to Compliance and Enforcement (Hart 2017). 64 S Dekker, Just Culture. Balancing Safety and Accountability (Ashgate Publishing, 2007) 9.

470  Intervention and Accountability The Financial Conduct Authority has described its SM&CR as being based on accountability and responsibility, clearly distinguishing ethical from unethical conduct, and recognising that competent people make mistakes:65 The basic principle of the SM&CR is about accountability and responsibility. A senior manager has to take responsibility for the activities under their control. Likewise, they should be accountable for that responsibility. … Lack of integrity There is no universally agreed definition of integrity, but the courts have given useful guidance about what a lack of integrity might include. While it can involve deliberate or dishonest misconduct, it can also occur if someone acts recklessly or their ‘ethical compass’ points them in the wrong direction to a significant extent. If we find dishonesty or lack of integrity this is usually sufficient for us to prohibit an individual. Lack of competence and capability Here, the position is more nuanced; competent people make mistakes. In many situations, it would be disproportionate or inappropriate for us to prohibit an individual for a mistake, unless the mistake was particularly serious, or was made repeatedly and/or over a long period of time and never corrected. Where we find no evidence of lack of honesty or integrity, we generally focus on conduct that demonstrates sufficiently serious, repeated, prolonged and/or obvious failures, and measure that conduct against the standards expected of the person at the time and in the circumstances.

Merely giving an account on its own is not enough as a regulatory or compliance technique. Giving an account of what has occurred is only an initial step in the circular problem-solving regulatory model described at chapter 12. Equally, accountability in the sense of imposing retributive sanctions as the standard response where rules have been broken is now known to be ineffective (chapter 14) and is an inaccurate use of the word ‘accountability’. The fact that the achievement of the desired outcomes, as well as maintenance of people’s confidence that the same norms are observed by others, needs to be maintained can be seen from use of the word ‘accountability’ in a context where the norms are voluntary and ‘enforcement’ mechanisms do not exist. This is the situation for the United Nations (UN)’s Sustainability Development Goals (SDGs), which were agreed voluntarily by all 193 Member States of the UN in 2015. No enforceability mechanism exists, in the sense of imposition of formal consequences or sanctions for actions or omissions. As at 2021, 102 governments had submitted voluntary national reviews and civil society organisations were organising for integrated global lobbying using transparency and public embarrassment as soft accountability levers on governments.66 The point about the open and just culture performance model is that individuals and organisations, first, accept responsibility for performing specific roles and tasks and achieving desired outcomes, second, accept that they must provide a full account of what they have done and of information that may be relevant to the achievement or non-achievement of those outcomes or of adverse outcomes, and, third, contribute fully to the achievement of understanding of causation and appropriate change so as to achieve the outcomes and reduce future risk (the various elements of the problem-solving model, including rectification of harm). The approach aligns with psychology on intrinsic motivation rather than imposed control. People should hold themselves to account. 65 Statement on the Financial Conduct Authority’s Further Investigative Steps in Relation to RBS GRG (Financial Conduct Authority, 2018). 66 See SDG Accountability Handbook (TAP Network, 2020); Global SDG Accountability Report 2021 (TAP Network, 20201).

Principles Justifying Regulatory Intervention   471 There needs, of course, to be a clear response where people deliberately break rules, internally and externally. The underlying points are not that a rule was broken but why, and whether those who were instigators have abused others’ trust. Taking action in response to a problem, especially when harm has been caused, arises as an ongoing responsibility of all those who may be involved, directly or indirectly. The responsibility will include various aspects, such as sharing information, taking steps to prevent recurrence, and taking steps to repair harm caused. Different actors may have different roles (and responsibilities) in different aspects. For example, an insurer, regulator or government might not have caused the harm, but may still have responsibility to see that the right consequences occur. As discussed in chapter 13, in a just culture, there is always a consequence to any problem, but it is rarely a traditional legal consequence of imposing a sanction – other consequences around repair and risk reduction are more relevant.

Principles Justifying Regulatory Intervention On what basis is a State justified in intervening with the freedoms of its citizens or others who come under its jurisdiction? Although much of the discussion in this book is based on science, it is right to approach this question in more philosophical terms, applying ethical values and principles. I argue that the traditional concepts of punishment, deterrence and enforcement are now no longer justified or appropriate. They are replaced, in an ethical cooperative society, by concepts on justified interventions aimed at protecting society and reducing future risk. It is useful to remind ourselves that interventions by states in private activities can occur at three different stages of activities, which define a ‘regulatory shape’ for a specific regulatory regime.67 The principal categorisation is: A. before regulated activity commences, for example, through business registration or licensing (pre-entry authorisation) – before a risk exists; B. during the undertaking of the regulated activity, for example through market surveillance or inspection (in-service supervision) – while the risk exists; C. after the regulated activity has resulted in an incident for example, through investigation (post-event investigation) – after a risk has materialised into harm. Intervention at stages A and B are aimed at reducing risk by preventing harm occurring. Intervention at stage C cannot prevent the harm from occurring but can reduce risk that it, or something similar, might occur in future, and can repair harm that has been caused. The justification for intervention starts with the principle of mutual respect between adults who behave according to the same ethical principles. As was said above, the relationship between citizens (including commercial organisations) and the society (represented by public bodies and including individuals working in them) should be one of common engagement based on shared ethical principles and goals, and relationships based on evidence that all can be trusted. The principle of protection justifies intervention by a state body where a regulatee infringes the society’s ethical principles or rules. The basic distinction, of course, is between those who aim to behave ethically and those who do not. That distinction leads to differentiation in both the type and manner of responsive intervention. The social covenant gives rise to obligations on the part of both citizens and the State. For their part, citizens should commit to respecting the ethical principles – especially the objective of

67 G

Russell and H Kirkman, ‘Intervention Choices’ in G Russell and C Hodges (eds), Regulatory Delivery (Hart, 2019).

472  Intervention and Accountability a required level of protection of people and society – and associated legitimate systems and rules agreed by the community through its due processes. What is the justification for society to intervene in the freedom of its members and use force on them? The following principles should apply to regulatory intervention by a public authority: 1.

Force can only legitimately be used by a duly constituted legitimate authority to protect the ethical values of society. 2. Force may not be legitimately used with the aim of inflicting harm on others. The purpose and effect of use of force must be to provide protection, not to punish. 3. Any measures taken must be proportionate to the need to protect society. 4. Any measures taken must be based on the best available scientific evidence of their effectiveness in reducing the incidence of future risk of unacceptable harm, and in achieving the legitimate outcomes of society. 5. Measures should also be taken to make good any harm caused. This marks an evolution from a State reserving to itself a monopoly of use of force on its citizens and justifying such use when its rules are broken. First, the State must itself be ethical and have ethical objectives, procedures and actions. It is not now ethical for a State to seek to rule its citizens through fear (which is the basis of deterrence) or playing God (which is the basis of authoritarian punishment). Second, the criterion for use of force should not be breach of a rule but protection of ethical society. That goal can justify use of considerable force when it is required, but it moves beyond a notion of a State punishing people, as use of punitive force sets one actor (the State) above all others in a situation of moral superiority that is not justified in a democracy where all citizens are to be treated equally and with respect. Justifying intervention in response to intentional harm is relatively unproblematic, but there still remains the issue of whether an intervention will be effective in reducing future risk. It is no longer acceptable to impose a sanction on the basis of retribution, punishment or ‘just desert’. Protection of society, however, may require strong intervention, such as removal of liberty or licence, and of the ability to qualify as a director or perform certain activities, or to remove illicit or unexplained assets. The principle of proportionality should also apply to the intervention selected. But the principal focus is now on protection and prevention rather than on punishing. Most of this paper concerns interventions that are not obviously intentionally unethical, but can be categorised as errors, mistakes, products of lack of full attention or over-concentration on other goals and so on. The purposive approach requires a focus reducing future incidence and risk, and hence on how change is to be achieved. The objective of reducing risk is the flip side of achieving the legitimate desired outcomes of society – in this case the regulatory outcomes but also the full range of social, economic and environmental outcomes. Both outcome achievement and risk reduction aim at creating an ethical society in which humans can flourish. It may be necessary to balance achievement of stated outcomes with reduction of particular risks. For example, overwhelmingly serious risks, such as responding to a pandemic, mean that some outcomes have to be put on hold until the risk is reduced to an acceptable level. This is, therefore, a situation in which risk-based prioritisation of response applies. Of course, there are some people and organisations (hopefully a minority) whose intention is to cause harm or who are indifferent to whether their activities cause harm to others – which we typically define as criminal intent. It is justifiable for society to respond to them in order to protect itself. The means may, in practice, be similar to traditional responses, but designation as ‘punishment’ or justification as ‘deterrence’ are no longer appropriate. Thus, proportionate sanctions should not be used in response to non-compliance that passes evidential and public

A Policy for Responsive Interventions   473 interest tests.68 However, use of ‘hard enforcement’ sanctions should be targeted on those who consciously intend to break the law, or who do not take their general responsibilities seriously enough. It is also specified above that interventions must be based on the best available scientific evidence. At the heart of this is understanding causation. For example, we discuss below that one approach many be to impose sanctions on an individual who broke a rule and that that breach caused someone harm. However, a root cause analysis and risk-based approach to harm might indicate that any individual might have acted as the hapless individual did in the circumstances, and that the real cause of the systemic risk, and the generic harm, lies elsewhere – whether with the system or other individuals, or a lack of expertise or training of the hapless individual. As discussed below, the overriding objective is to achieve outcomes and reduce risk for society and this necessarily involves an understanding of causation and of the effects of particular interventions. Another example is that there is now clear evidence that a regulator can produce an antagonistic situation between regulator and regulated, with both motivation and compliance failing. Hence, regulators need a sophisticated understanding of scientific and empirical research if they are to be effective. To summarise, the propositions are: (a) Intervention by a State to protect itself and its citizens must be justified on the basis of protecting society, and reducing future risk, rather than as punishment or deterrence. (b) The society and the intervention must be in accordance with ethical principles. (c) Intervention must be in accordance with a duly constituted process in accordance with law and be proportionate. (d) It is illegitimate as a matter of constitutional and human rights principles for a modern ethical State to rule through fear. We add to the above principled constitutional approach to the justification for intervention the findings of modern science in relation to how humans behave. This is important because it shows that traditional ideas about control by deterrence are outmoded and largely ineffective and that other approaches to affecting the behaviour of humans – individually and as members of organisations – are significantly more effective. A principal idea here is to support people’s internal motivation rather than to try to ‘control’ them through external means. We summarise here the traditional and then science-based ideas.

A Policy for Responsive Interventions Winners don’t punish, losers do. Cooperators don’t respond to punishing because they don’t need to, since they are typically cooperating to fix a problem. People they interact with who respond by cooperating, even if they have made a mistake or partly lapsed, can be encouraged to step up and reengage in the cooperative mode by a supportive, generous, cooperative response. The approach adopts the idea of supporting the intrinsic motivation of actors to behave ethically, produce convincing evidence that they do so and have purposes, commitment to ethical principles, effective systems and track record that supports this, and that they observe the ethical values and rules, rather than to try to control people and institutions through external intervention and attempted



68 Code

for Crown Prosecutors (Crown Prosecution Service, 2018).

474  Intervention and Accountability external motivation through imposition of sanctions. This is the essence of the Ethical Business regulation model.69 Actors do, however, need to perceive that most others observe the same rules. This provides us with the basis for a cooperative-based approach to responding to problems. The concepts of enforcement of rules, punishment and deterrence can all be superseded. We do not need to punish to achieve cooperation and good outcomes. There are far more powerful mechanisms, and we should align our systems and approaches so as to make full use of them. Under the cooperative model, the objectives would now be (updating Macrory): 1. To achieve the desired outcomes. 2. To affect behaviour, culture and systems so as to reduce risk to the society by responding effectively and proportionately, on the basis of the agreed ethical principles of protection, intervention, science, information and understanding, differentiating between actors who have had a role in the occurrence, based on the evidence of their commitment to the ethical regulatory principles. 3. To restore balance and repair damage caused. The primary policy should be to encourage and ensure commitment to cooperation in the cooperative problem solving mode, and reward this commitment and the achievements that it delivers – that is what the OBCR model is based on. It is based on evidence of observance of ethical values, in which compliance with technical and behavioural rules is important evidence, as is evidence of reputation as perceived by different stakeholders. This approach is strikingly close to how the most effective managers and regulators now operate, and follows a direction of travel that is increasingly based on doing the right thing, ethical engagement, and cooperation.70 In contrast, a policy of trying to control behaviour through punishment will ultimately fail, and turn cooperators into destructive, disengaged competitors. However, a group’s need to protect itself (and to protect cooperation in a market, community or nation) will require it to identify those who do not commit to or do not cooperate in this mode so as to respond with tools aimed at achieving the same functions and outcomes. If people show that they basically do not want to cooperate, they can ultimately be excluded from further engagement as a means of protection of the group. The cooperative actions required in response to a problem should be as in the problem solving cycle set out at Figure 12.2: monitor, identify problems, stop, share, analyse, act to reduce risk, repair harm, monitor. The objectives of intervention, covering the three dimensions of time (present, past and future), are: 1. 2. 3. 4.

To cease ongoing harm to society (cessation). To prevent future similar harm (prevention). To repair harm caused (restoration). To signal that relevant consequences are occurring (just culture).

It is important to remember that risk is unavoidable, and is, indeed, essential in experimentation and learning. Where harm occurs, it is counter-productive in a trust-based situation to blame an individual, but equally, the system should provide full support for those who have been harmed.

69 C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017). 70 See chs 4 and 6 above, and C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015); C Hodges and R Steinholtz, Ethical Business Practice and Regulation: A Behavioural and Values-Based Approach to Compliance and Enforcement (Hart, 2017).

Practice on Intervention   475 Preventative controls may include relevant previous trials and expert scrutiny of risk, insurance and effective swift support, redress and compensation mechanisms. The problem-solving model includes strong emphasis on changing behaviour and culture in order to reduce future risk and achieve protection. This has significant implications for how actors respond to adverse events. Rational responses to identifying that some individuals behave in undesirable and harmful ways might include providing training to certain individuals, redesigning systems or introducing better instructions or procedures, warning mechanisms, clarifying rules, or removing adverse incentives. That logic points to examining whether the purposes of businesses or individuals are too selfish (solely aimed at maximising shareholder value) or incentives produce undesirable consequences (inappropriate targets and excessive remuneration). If a person holds radical anti-social views, or demonstrates consistently abusive behaviour, the interventions should be aimed at producing verified change.71 Significant evidence has built up over some decades that the behaviour of a small business or farmer who is not complying with all the rules on tax or the safety of food, animals or work practices can be improved by a supportive intervention.72 Achieving change and risk reduction requires engagement with what changes are required to reduce future risk and how specific improvements are going to be made so as to deliver improved outcomes. In complex organisations and systems, it is inadequate to assume that an action such as imposing a notice or fine will lead to desired changes in behaviour, systems or organisational culture. The objective is to achieve outcomes and impacts – not outputs, such as number of licences revoked, inspections undertaken, prosecutions instigated (or won), total monetary value of fines imposed, number of people sent to prison and total number of years. The restoration objective is one that has traditionally been left to private action in a different part of the legal system from the other two objectives. Compensation or redress has been thought of as a function of private legal actions by harmed individuals on their own behalf, as opposed to the public or administrative action by public bodies. But it is more efficient and usually effective if the public officials involved in delivering the other two objectives also assume responsibility for delivering restoration at the same time. Since around 2000, a number of regulatory authorities in Europe, especially UK, have used redress powers with great success, delivering redress or restitution swiftly, effectively and efficiently, resolving all issues at the same time as part of a holistic approach. An important objective is to demonstrate to the public and to market actors that fairness and effective outcomes are achieved, so as to maintain confidence and legitimacy, and to support intrinsic motivation to behave in ways that support society’s ethical values.

Practice on Intervention We should operate a system that encourages cooperation based on ethical behaviour. This would differentiate between those who are cooperators and aim to do the right thing, and those who are not or are indifferent. In responding to evidence and signals of non-cooperation – such as the occurrence of harm, and lack of observance of ethical norms – we should differentiate between trusted cooperators and should aim at protection and reduction of risk. However, this is not a 71 Should the response to sexual harassment be a fine or providing support to the victim, requiring the initiator to fund such support and repair; requiring the initiator to undergo psychological/behavioural assessment and adjustment, perhaps under licence conditions; if the initiator’s organisation has not responded appropriately to evidence of a problem, requiring oversight of its culture and any other risky individuals? 72 See K Hawkins, Environment and Enforcement: Regulation and the Social Definition of Pollution (Clarendon Press, 1984); K Hawkins, Law as Last Resort (Oxford University Press, 2002).

476  Intervention and Accountability binary categorisation, but one that contains multiple aspects observed over time and a sliding scale of trust. Nevertheless, there are two extremes, as illustrated by the Ontario heating engineers and the South Australian small energy and water supply regimes (chapter 13): A. Trust-based. Pre-existing commitment to taking responsibility for achieving desired common outcomes through contributing relevant effort, accepting accountability – providing (in a context of open and just culture) an open account of what people did and what happened, and commitment to instituting appropriate retrospective restorative and prospective preventative actions. B. Non-trusted. A legal operation but without production of evidence of trustworthiness, of an ethical culture and commitment to achieving the agreed common outcomes and avoiding undesirable outcomes, or of evidence of outcomes. The traditional matrix of rules, breaches, investigation and sanctions aimed at providing protection should apply. Where harm is caused by actors deliberately or without appropriate consideration for others, the response remains similar to traditional approaches and involves familiar ‘enforcement-like’ tools, although the language used should no longer involve terminology of deterrence or blame but of protecting society, achieving regulatory objectives and changing future behaviour and cultures. Traditional aggravating and mitigating factors, illustrated in chapter 13, will be relevant in calibrating a proportionate response based on the level of unethical intention and behaviour that has been evidenced. At the other extreme is where accidents happen in which honest, honourable people are trying to do their normal productive job to contribute to society, but something has gone wrong. The objectives here are to repair damages (a retrospective, restorative function) and to learn what might cause something similar to occur in again so as to institute changes that reduce future risk (a prospective, preventative function). In this context, the lessons of experience are that learning needs multiple perspectives to understand systemic and situational root causation, needs psychological safety so that people will share information, and engage in ethical responses. A differentiated response builds on the categorised approach of SEPA, illustrated in chapter 13. It requires a toolbox containing multiple responsive tools and techniques, and the knowledge of which tools are and are not appropriate in different circumstances. All tools should be available, but the real issue is which is the right tool to use in which circumstances. This requires authorities to have understanding of issues of the awareness, motivation and capacity of regulated entities and the variety of means of achieving effective intervention and building compliance. Most of the responses will be on an escalating spectrum of providing information, encouragement, oversight, support, intervention and only use of hard sanctions (which can be termed enforcement) as ultimate response. The principal focus is always based on achieving the core purposes and outcomes, and how people and organisations are performing in order to achieve them. This inherently involves taking steps to avoid harm and, where poor performance or harm occur, taking appropriate steps to improve performance and reduce risk. The primary set of common values and expectations, as discussed in chapter 6, should be set out in the OBCR code, constituting the overarching mode of consensual cooperative engagement in achieving the desired purposes and outcomes. Either there, or in greater detail in an annex, will be the common statement of policy on expected behaviours in the ‘response’ situation by regulators, regulatees and other stakeholders. These will follow the circular problem-solving model, involving cooperating in performance of these functions: (a) Monitoring; (b) Identifying problems, risks, harm, inadequate performance, non-compliance with standards;

Practice on Intervention   477 (c) (d) (e) (f) (g) (h)

Ceasing unacceptable harm or behaviour; Sharing relevant information; Identification of root causes of risk; Identifying steps to reduce risk to an acceptable level; Implementing those steps; Monitoring to see if any further changes are needed, and implementing them.

This list of steps should form the basis of the agreed common approach to problems, guiding regulators, regulatees and stakeholders as to how they should act and work together. It should also provide the matrix of accountability for any actor, such as a regulatee who has not entered into an OBCR commitment, and should provide the matrix against which such responses as occur are evaluated. Regulators should have powers to order or achieve all of these functions, as a fallback in case regulatees fail to respond in cooperating to deliver them. Responses directed at reducing risk might involve many different types. Selection of the appropriate response should ideally – unless an interim response has to be urgently implemented – be based on careful and objective risk analysis, remembering the lesson (chapter 13) that truth in causation has to be assessed from multiple viewpoints. Typical tools might include providing teaching on ethics,73 technical training, information, support, changing procedures, systems or culture. These interventions might be provided by people other than managerial or regulatory authorities: new ecosystems of information and support can emerge. It may be important to achieve improvements in the culture of an organisation. As discussed in chapter 14, this is not something that can be achieved from external requirement or force. Only those working within an organisation – at all levels – can behave in certain ways, and change their behaviours, so as to add up to a particular culture. This needs an understanding of the behavioural drivers of actions and the levers that affect culture. To guard against arbitrariness, capture or corruption, this flexibility has to be governed by safeguards, such as a written enforcement policy that states the objectives of enforcement (achieving compliance or imposing punishment), fair processes, aggravating or mitigating factors that will be taken into account as (eg that evidence of ethical motivation and steps to minimise the risk, to make reparation and to prevent future risk) and public transparency and oversight. UK regulators typically possess a wide range of civil and criminal sanctions, with some being reserved for courts. The preferred mode for resolution of formal issues between regulator and traders should be by agreement between business and regulator holistically on all relevant issues as a combined package, including cessation, actions to reduce risk and change culture, making redress or repair, and any penalties.74

73 C Engel, ‘Learning the Law’ (2008) 4(3) Journal of Institutional Economics 275–97; Y Feldman and HE Smith, ‘Behavioral Equity’ (2014) 170 Journal of Institutional and Theoretical Economics 137–59. 74 This function is typically more swift, efficient and cheap than courts. Relegating private redress to private litigation, on the other hand, is ineffective and inefficient: see C Hodges and S Voet, Delivering Collective Redress: New Technologies (Hart, 2018); C Hodges, ‘Collective Redress: The Need for New Technologies’ (2019) 42 Journal of Consumer Policy 59–90. There is provision for the central role of a public body in the CPC Regulation: Regulation (EU) 2017/2394 of the European Parliament and of the Council of 12 December 2017 on cooperation between national authorities responsible for the enforcement of consumer protection laws and repealing Regulation (EC) No 2006/2004, art 9.4(c) giving a power ‘to seek to obtain or to accept commitments from the trader responsible for the infringement covered by this Regulation to cease that infringement’.

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part b.iv Cooperation in Dispute Resolution

480

16 Cooperative Dispute Resolution It is axiomatic that where there are disputes, cooperation is more likely to be rebuilt or created if the process of dispute resolution supports bringing the parties together in a consensual way as opposed to encouraging them to fight in an aggressive adversarial way. Means of doing this are (partly) available and are spreading but are not the default style of dispute resolution in modern states. The United Kingdom is well placed to make a systemic transformative shift towards a more consensual system, but needs to confront some sacred cows. That point immediately highlights the difference between modes of dispute resolution. On one hand, there is the traditional adversarial model of courts.1 This is still an echo of mediaeval armed combat, whether between participants or their champions (lawyers) in an arena of legal rules and procedures that may be unfamiliar to many and hence highly discomfiting. On the other hand is an investigative model, currently adopted by some Ombudsmen. This is designed from the perspective of users, to be more user-friendly and less intimidating, usually involving only the parties and a single intermediary, who is independent of both and impartial but friendly in disposition and generally helpful. The performance objective of both modes – which I characterise somewhat simplistically as courts and Ombuds – is to resolve cases as soon as possible in the process. Also, the drivers of cost and other performance criteria, plus introduction of digital technology, is driving both modes to coalesce around the Ombuds model, which can be seen in the Online Court procedure. This chapter looks closely at civil disputes, whilst noting disputes between citizens and the state, and family and employment disputes, but not criminal cases. I will draw some distinctions between the disputes and justice system of this country and other countries. Important differences exist between the jurisdictions making up the UK, but they are possibly not relevant for the thrust of the argument here, and I will restrict illustrations to the jurisdiction of England and Wales – with apologies to Scotland and Northern Ireland.

Forms of Dispute Resolution We are currently in the middle of a process of rediscovering how to resolve disputes, experimenting with techniques as well as structures. By techniques I mean modes like direct negotiation between the parties, facilitated communication between the parties, mediation or conciliation by an independent person, adversarial argumentation before, and determination by, an independent third party (judge, arbitrator), whether formally or sometimes by giving an indication (one form being called Early Neutral Evaluation). 1 I will refer to courts generically as including tribunals (roughly, administrative courts) although some differences in practice and terminology between the two will be identified below where relevant.

482  Cooperative Dispute Resolution That incomplete list includes different types of intermediaries who perform different functions along a spectrum from representing a party to being independent of the parties, and from facilitating resolution by the parties themselves to reaching a decision that is then imposed on the parties. Intermediaries include lawyers, experts, case administrators, judges, arbitrators, ombudsmen and enforcement officers. By structures I mean courts, tribunals, arbitration schemes, mediation schemes, conciliation schemes, ADR schemes, Ombudsmen schemes and other types, perhaps surprisingly including state bodies like regulatory authorities or similar bodies.

Modes The classical model in common law countries (sometimes referred to as a judicial model) involves the parties, often through their representatives, putting forward their evidence and asserting the arguments in their favour, cross-examining opposing witnesses and criticising opponents’ arguments, before an independent third party reaches a decision on the facts and applies the relevant law to make an adjudication of which party is right and which wrong. All cases are based on legal rights and duties and asserting their breach. The decision-maker will be a judge in civil cases, a panel comprising legally qualified and expert individuals in some tribunals, and in criminal cases (very rarely in civil cases) involving fact finding by a lay jury. The forum will be a court or (in administrative justice cases) tribunal. (However, references below to courts almost always include tribunals, save where mentioned.) The underlying style, of course, is combative, with parties opposed to each other, fighting, even if in a mock-civilised and stylised manner. The outcome is binary – typically, one side wins and the other loses. The winner’s rights are ‘vindicated’ and the loser is declared to have broken a duty or opponents’ rights, and typically has to pay monetary compensation. In some cases, parties may agree to have their disputes resolved in a private adjudicative model, called arbitration. This often occurs in commercial cases, where the arbitrators typically have legal and commercial expertise, but the mode is essentially similar to a court and its procedure, perhaps with less formality. In commercial disputes, the strong influence of the preference for confidentiality has sustained extensive global practice of arbitration.2 There is also pressure for early resolution, to preserve commercial reputations.3 Arbitration is privatised justice, involving ‘private judges’ who are experienced lawyers and judges but whose authority comes from agreement between the parties rather than from the state. At the opposite end of the spectrum is dispute resolution involving direct communication between the parties, explaining their understanding, complaint and perhaps feelings, to each other, and reconciling their differences. Almost all forms of dispute resolution report that communication resolves a surprising number of problems. This may be facilitated by an independent intermediary – a mediator or conciliator – who might adopt techniques like shuttle diplomacy between the parties, talking to each independently and also bringing them together.

2 Y Delazay and B Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (University of Chicago Press, 1996). 3 The UN Guiding Principles on Business and Human Rights provide: Guiding Principle 29: ‘To make it possible for grievances to be addressed early and remediated directly, business enterprises should establish or participate in effective operational-level grievance mechanisms for individuals and communities who may be adversely impacted.’

Forms of Dispute Resolution   483 Mediation and similar techniques are just that – techniques.4 Yet sometimes they are referred to as structural modes, in which mediation is a particular process that is differentiated from a court process. Mediation is increasingly used before or alongside a court process, but some models have integrated mediation as part of the pathway (such as many consumer Ombudsmen and recently some forms of Online Courts) whilst some have not (referral to ACAS is a required first stage before an Employment Tribunal, and obtaining a Mediation Information and Assessment Meeting (MIAM) certificate is required before commencing divorce or some family proceedings in court). The term alternative dispute resolution (ADR) has been used to refer to any technique or process that is separate from court proceedings, but it is very imprecise and can confuse because it might possibly refer to a number of possible techniques or structures. It is now recognised that all forms of dispute resolution are valid, so that referring to ‘alternative’ forms is irrelevant and can prevent evolution towards a coordinated holistic system that deploys all relevant techniques at the appropriate point to resolve disputes well: nothing is ‘alternative’ and everything is dispute resolution.5 By no means all countries are mentally at this space, but England and Wales is certainly at a stage of potentially radical transformation to a better and more responsive integrated dispute resolution system. That is the critical question for this chapter. Is it possible to redesign the dispute resolution system so as to facilitate increased cooperation and trust?

Preferences When one thinks of resolving disputes, one might think that courts are the only – or at least the paradigm and ultimate – mechanism and forum. But this is far from the truth. Historical and anthropological investigations show that people living in many societies resolve disputes through a variety of techniques that often resemble mediation more than adjudication. Although the concept of ethical or moral law is ancient, the apparatus that ‘enforces’ the law – through judges and courts – has emerged mainly as a state emerges and starts to exert a monopoly on power.6 That process brings a monopoly by the state over formal forms of administration, including dispute resolution, so as to support its dominance through the rule of law. It also brings its own alienating formalities and jargon, such as rules on procedure and due process, and capture by intermediaries as guardians of process, access to justice and professionalism. There are numerous examples in history and currently of societies that have informal and flexible methods of resolving their disputes.7 Villages in Ladakh see a dispute as a tear in the fabric of the community, which must be mended with the payment of fines and a ceremonial process

4 Various other techniques include Early Neutral Evaluation, in which a neutral third party hears a summary of the case and gives a non-binding view of the comparative merits and likely outcome, which the parties may use as a basis for reaching a direct settlement between them. Some argue that there is a difference between mediation and conciliation, for example in the extent to which the third party expresses their own opinion on the merits of a case or not, or puts forward their own views on possible solutions or not. For present purposes, such distinctions are not relevant. 5 The author and others have asserted this point for some years: the term ‘ADR’ is misleading and imprecise, given the number of forms involved, and should be dropped. The viewpoint was recently advocated by Sir Geoffrey Vos MR, ‘Recovery or Radical Transformation: The Effect of Covid-19 on Justice’ Speech at London School of Economics, 17 June 2021; Speech by Robert Buckland QC, Lord Chancellor at London International Disputes Week, 13 May 2021. 6 F Fukuyama, The Origins of Political Order (Profile Books, 2011). 7 S Roberts and M Palmer, Dispute Processes: ADR and the Primary Forms of Decision-Making (Cambridge University Press, 2005); JS Auerback, Justice Without Law? (Oxford University Press, 1983); F Pirie, The Anthropology of Law (Oxford University Press, Clarendon Law Series, 2013).

484  Cooperative Dispute Resolution of mediation, rather than regarding a dispute as a clash of rights.8 Indeed, some societies have a strong impulse of aversion to state-based formal justice. Examples include the informal and community-based resolution of disputes in American colonial society, with an ideology of faithbased and communitarian justice without formal law, and strongly influenced by ‘the importance of enduring relations has made peace, harmony, and mediation’.9 It is interesting that community mediation mushroomed in the USA in the 1970s and 1980s.10

Diversification in the Landscape of Providers We should briefly review the landscape of dispute resolution providers in England and Wales, to identify what exists and compare the modes of dispute resolution employed. At a simple level, there has been a slow move away from the formality of courts so as to introduce greater informality, lower cost and increase speed. The adoption of arbitration and the creation of Tribunals were part of this process, and more recently enormous emphasis has been put on ‘ADR’, which exists in various forms but has largely involved providing a mediation facility, usually outside the formal court or arbitration process. ‘ADR’ facilities and schemes grew up as being provided by entities that are separate from the established formal pathways. This created barriers, including extra cost requirements for parties.

Adversarialism: The Courts and the Retreat of Justice There have been many statements over at least the past 70 years expressing increasing concern about the fact that civil procedure – the courts – and similar mechanisms are too slow and costly, and that the result is a denial of ‘access to justice’ by many people and small businesses who simply cannot afford the cost or be bothered to waste time in trying to seek justice through the system. This complaint has certainly been made in England and Wales11 and numerous other jurisdictions.12 The performance indicators of the process – cost, time and accessibility – have, therefore, driven increasing inaccessibility and lack of confidence in state justice systems. Various new types of ‘court’ have been introduced over time to try to address the performance problems – arbitration, tribunals, small claims – but all have been constrained essentially within

8 F Pirie, Peace and Conflict in Ladakh: The Construction of a Fragile Web of Order (Brill, 2007) ch 4. 9 JS Auerback, Justice Without Law? (Oxford University Press, 1983); CJ Greenhouse, Praying for Justice: Faith, Order, and Community in an American Town (Cornell University Press, 1986). 10 SE Merry and N Milner (eds), The Possibility of Popular Justice: A Case Study of Community Mediation in the United States (University of Michigan Press, 1993). A fascinating case study is RC Ellickson, Order without Law. How Neighbours Settle Disputes (Harvard University Press, 1991). 11 M Zander, The State of Justice: Fifty-First Hamlyn Lectures (Sweet & Maxwell, 2000); Evaluation: How Can We Measure Access to Justice for Individual Consumers? A Discussion Paper (Legal Services Board, 2012) ‘A range of research between 2007 and 2010 has repeatedly reported a general perception that legal services are expensive and unaffordable’, quoting: GfK, Consumer Attitudes towards the Purchase of Legal Services (Solicitors Regulation Authority 2010); Study of Defendants in Magistrates’ Courts (Legal Services Research Centre, 2009); Legal Advice for Small Businesses: Qualitative Research (AIA Research Ltd, 2010); IPSOS MORI, Perceptions of Barristers – Research Study Conducted for the Bar Standards Board (Bar Standards Board, 2007). 12 ‘It is an uncomfortable truth that court systems around the world are creaking – they are too costly and slow, and they are unintelligible for the great majority of non-lawyers.’ R Susskind, ‘Foreword’ in E Katsh and O Rabinovich Einy, Digital Justice – Technology and the Internet of Disputes (Oxford University Press, 2017). A classic study of the USA is DL Rhode, Access to Justice (Oxford University Press, 2004).

Diversification in the Landscape of Providers   485 the adversarial model, or the need to provide adequate support for individuals and small businesses who need help. The idea of aggregating mass claims – a ‘class’ or group action – usually creates a ponderous, expensive and slow monster.13 Empirical research establishes clearly that, in the consumer disputes area, a combination of regulators with redress powers and consumer Ombudsmen, or in the personal injuries area, administrative injury redress schemes, deliver far better results in delivering mass redress.14 The performance drawbacks of delay and cost are inherent consequences of a dispute resolution model that involves too many people – each party, lawyers for each party, witnesses of fact and expertise, case managers and a judge. Civil procedure typically proceeds in a series of logical steps, yet each takes effort and time (sometimes unnecessarily). Yet although these serious problems have long been recognised, the root cause has not been addressed – the inherent inefficiency of an adversarial system. The critical flaw is the fact that an adversarial system involving complex law and procedure has relied on professional advisers and advocates, and they needed to be paid. The result was a system that was far too disproportionately expensive for most people to contemplate being able to pay for, given successive reductions in the availability and scope of publicly funded legal aid.15 Repeated attempts have been made in England and Wales to reduce cost and delay through reforming civil procedure or tinkering with the arrangements on funding or costs. All have basically failed to improve accessibility to justice or reduce cost and delay. The sorry histories have been recorded in detail elsewhere.16 Those involved in the system as intermediaries – lawyers, funders and judges – have also mounted strenuous attempts to preserve their rents from the system, raising alarms about a collapse in access to justice, or the rule of law, or counter alarms about a ‘compensation culture’,17 but repeatedly failing to engage with the fact that the system itself had inherent flaws and needed to be radically reformed. The slogan ‘access to justice’ usually meant ‘more Legal Aid to pay for access to lawyers’. This was classic rent-seeking behaviour. The succession of attempts to reform the funding and costs rules in England and Wales can be summarised briefly. All of these failed to deliver anything like comprehensive access to justice and 13 C Hodges, The Reform of Class and Representative Actions in European Legal Systems: A New Framework for Collective Redress in Europe (Hart Publishing, 2008); C Hodges and A Stadler (eds), Resolving Mass Disputes: ADR and Settlement of Mass Claims (Edward Elgar, 2013); DR Hensler, C Hodges and I Tzankova (eds), Class Actions in Context: How Culture, Economics and Politics Shape Collective Litigation (Edward Elgar, 2016); C Hodges, ‘Evaluating Collective Redress: Models, Evidence, Outcomes and Policy’ in A Uzelac and S Voet (eds), Class Actions in Europe: Holy Grail or a Wrong Trail? (Springer, 2021). 14 C Hodges and S Voet, Delivering Collective Redress: New Technologies (Hart, 2018). 15 S Hynes and J Robins, The Justice Gap (LSAG, 2009), 71; J Sorabji, ‘Austerity’s Effect on English Civil Justice’ (2015) 8(4) Erasmus Law Review 159, 163. 16 J Peysner, ‘England and Wales’ in C Hodges, S Vogenauer and M Tulibacka, The Costs and Funding of Civil Litigation. A Comparative Perspective (Hart, 2010); J Peysner, ‘Tail Wags Dog: Contingency fees (and Part 36 and Third Party Funding)’ (2013) 231 Civil Justice Quarterly 1; J Peysner, Access to Justice: A Critical Analysis of Recoverable Conditional Fees and No-Win No-Fee Funding (Palgrave Macmillan, 2014); J Sorabji, English Civil Justice after the Woolf and Jackson Reforms: A Critical Analysis (Cambridge University Press, 2014); E Palmer, T Cornford, A Guinchard and Y Marique, Access to Justice: Beyond the Policies and Politics of Austerity (Hart Publishing, 2016); C Hodges, Delivering Dispute Resolution: A Holistic Review of Models in England & Wales (Hart, 2019), ch 5 ‘The Courts: A Story of Costs and Funding Problems’. 17 Lord Falconer, Compensation Culture (22 March 2005): quoted in Lord Dyson MR, Magna Carta and Compensation Culture, The High Sheriff ’s Law Lecture, 13 October 2015; M Boleat, Claims Management Regulation. Impact of Regulation. Third Year Assessment (Ministry of Justice, 2010); Common Sense, Common Safety. A Report by Lord Young of Graffham to the Prime Minister Following a Whitehall-wide Review of the Operation of Health and Safety Laws and the Growth of the Compensation Culture (HM Government, 2010); Press release, Turning the Tide on Compensation Culture (Ministry of Justice), 1 May 2013, at www.gov.uk/government/news/turning-the-tide-on-compensation-culture; The Compensation Myth (TUC, 2014); DG Green, Democratic Civilisation or Judicial Supremacy? (Civitas, 2016) referring to ‘a vast increase in lawyer-driven litigation’ that was ‘encouraging a claims culture based on gaining sectarian advantage’. See also A Look into the Perception of Civil Justice & Litigation Funding in England & Wales (Justice not Profit, 2015), which claimed that 56% of people ‘see the civil litigation system as becoming increasingly Americanised’.

486  Cooperative Dispute Resolution gave rise to serious unintended consequences.18 The system and its reforms involved considerable complexities. In 1995, Lord Woolf said that the system had, through its complexity, cost and delay, put the courts out of the reach of too many citizens.19 Legal aid was removed in 1999 for personal injury and business disputes,20 meaning that ‘the cost of our civil justice system is out of reach even for those on an income considerably above the national average’.21 A major reform of civil procedure was implemented in 1999, designed by Lord Woolf 22 to ‘strangle the costs monster’ through reform of civil procedure involving case management and rationing of procedure – but it failed to achieve this.23 One pillar of Woolf ’s approach was to require parties to engage before having access to court: this is discussed below. Another aspect was to accept that it was no longer possible to do justice in every individual case, and instead that judges had to ration the state’s resources, and manage the costs of the parties, subject to the principle of proportionality.24 This produced case and costs management in a somewhat streamlined procedure. In order to replace diminishing public funding of litigation, an array of possible private funding options have been tried, including before-the-event (BTE) legal expenses insurance (LEI),25 trade unions,26 conditional fee agreements (CFA),27 initially payable from a successful claimant’s damages and, from 1999 to 2013, with success fees and the premium for an after-the-event (ATE) insurance being recoverable from the losing defendant, which created complex economic dynamics,28 18 T Pilston, ‘Woolf Civil Justice Reforms Have Failed, says Former Judge’ The Times 30 September 2018, quoting Judge Charles Harris QC; Lord Wilson, ‘Our Human Rights: A Joint Effort?’, The Howard J Trienens Lecture, The Law School, Northwestern University, Chicago, 28 September 2018. 19 Lord Woolf, Access to Justice: Interim Report to the Lord Chancellor on the Civil Justice System in England and Wales (HMSO, 1995) 7ff. 20 The Access to Justice Act 1999. 21 L Bello, In Case of Emergency. Consumer Analysis of Legal Expenses Insurance (Consumer Focus, 2011). 22 Lord Woolf, Access to Justice: Interim Report to the Lord Chancellor on the Civil Justice System in England and Wales (HMSO, 1995); Lord Woolf, Access to Justice: Final Report to the Lord Chancellor on the Civil Justice System in England and Wales (HMSO, 1996). 23 J Peysner, ‘England and Wales’ in C Hodges, S Vogenauer and M Tulibacka (eds), The Costs and Funding of Civil Litigation. A Comparative Perspective (Hart, 2010), 291; J Peysner, Access to Justice: A Critical Analysis of Recoverable Conditional Fees and No-Win No-Fee Funding (Palgrave Macmillan, 2014) 24. A 2016 study found that lawyers overspent in 89% of High Court and county court cases where costs management orders were made: Research Reveals Overspend in 89% of Cases with Costs Budgets (Litigation Futures, 10/06/2016). More than 80% of members of a lawyers association said costs budgeting had driven up litigation costs, with 82% predicting costs would continue to increase: Litigation Trends – Over Disclosure? Why Costs Aren’t Working (New Law Journal and London Solicitors Litigation Association, 2016). 24 J Sorabji English Civil Justice after the Woolf and Jackson Reforms: A Critical Analysis (Cambridge University Press, 2014) 130. 25 In 2007, 59% of people were covered by BTE LEI, typically costing between £13 and £24 a year, and subject to a maximum claim limit of £50,000 or £100,000: The Market for BTE Legal Expenses Insurance (Ministry of Justice, 2007); L Bello, In Case of Emergency. Consumer Analysis of Legal Expenses Insurance (Consumer Focus, 2011); M Killian, Legal Expenses Insurance: Preconditions, Pitfalls and Challenges, Experience from the World’s Largest Legal Expenses Insurance Market (Legal Services Research Centre, 2010). LEI tended to be held by those with higher incomes. BTE LEI was not popular with lawyers because clients had the right to choose their own lawyer and this disrupted client capture and referral fees: The Law and Practicalities of Before-the-Event (BTE) Insurance. An Information Study (Civil Justice Council, 2017), para 13. The conditions drove selectivity of cases: No Win – No Fee Usage in the United Kingdom (ICD Research, 2011). 26 However, membership halved from a peak of 13 million (90% of employees) in 1979 to 6.2 million in 2017, with only 2.7 million (13.5%) in the private sector and 3.54 million (51.8%) in the public sector: Trade Union Membership 2017. Statistical Bulletin (Department for Business, Energy & Industrial Strategy, 2018). 27 Under the initial model, a client would pay nothing if he lost, and if he won his lawyer was entitled to be paid for work done on an hourly rate plus a success fee up to 100%: Courts and Legal Services Act 1990, s 58; Conditional Fee Agreements Order 2000. This could result in considerable risk and liabilities: A Higgins, ‘Referral Fees – The Business of Access to Justice’ (2012) 32(1) Legal Studies 109, 112. 28 J Peysner, Access to Justice: A Critical Analysis of Recoverable Conditional Fees and No-Win No-Fee Funding (Palgrave Macmillan, 2014); P Fenn and N Rickman, ‘Fixing Lawyers’ Fees ex ante: A Case Study in Policy and Empirical Legal Studies’ (2011) 8(3) Journal of Empirical Legal Studies 533; P Fenn, V Grembi and N Rickman, ‘“No Win, No Fee”, Cost-Shifting and the Costs of Civil Litigation: A Natural Experiment’ (2017) 127 The Economic Journal F142.

Diversification in the Landscape of Providers   487 lack of transparency,29 disproportionate costs30 and a significant disincentive to going to court with a claim.31 Insurers fought back in ‘costs wars’. Outrage over the practice of solicitors paying referral fees to insurers32 or to a new Claims Management Companies,33 led to the practice being banned in personal injury cases from 2013.34 Related reforms were made to the rules on controlling parties’ costs and to awarding costs to a winning party, These included a sequence of reforms inspired by Lord Justice Jackson from 2013,35 such as abolition of recoverability (the old loser pays rule was to be reinstated),36 and introduction of damages-based agreements (DBAs), under which a representative could recover an agreed percentage of a client’s damages if the case is won (the payment) but will receive nothing if the case is lost.37 DBAs were subject to various caps but failed to catch on and thus fill any funding gap.38 Lord Justice Jackson also sparked introduction of cost management by courts (budgeting),39 an increase of 10% in general damages (to give headroom for introduction of DBAs),40 qualified one-way cost shifting (QOCS), and effective removal of recovery of additional liabilities.41 However, both the substitution of recoverability by contingency fees42 and the introduction of QOCS43 fundamentally altered the balance between claimants and defendants (and the financial interests of their respective lawyers) and produced unintended consequences. The disproportionality between costs and damages44 prompted Lord Justice Jackson to propose that costs in personal injury cases in the fast track should be fixed, and costs in

29 Civil Justice Council, Improved Access to Justice – Future Funding of Litigation (2007). 30 R Jackson, Review of Civil Litigation Costs: Preliminary Report, Vol I (2009), 532; R Jackson, ‘The Review of Civil Litigation Costs in England and Wales’ in G Meggitt (ed), Civil Justice Reform – What has it achieved? (Sweet & Maxwell, 2010) 137; R Jackson, Review of Civil Costs: Final Report (2010). See Proposals for Reform of Civil Litigation Funding and Costs in England and Wales. Implementation of Lord Justice Jackson’s Recommendations (Ministry of Justice, 2010), Consultation Paper CP 13/10; Reforming Civil Litigation Funding and Costs in England and Wales – Implementation of Lord Justice Jackson’s Recommendations: The Government Response (MoJ, March 2011). 31 Lord Justice Briggs, Civil Courts Structure Review: Final Report (Judiciary of England and Wales, 2016) paras 6.28 and 6.5.5. 32 Lord Justice Jackson, Review of Civil Litigation Costs: Supplemental Report. Fixed Recoverable Costs (Judiciary of England and Wales, 2017) para 2.21; Referral Fees, Referral Arrangements and Fee Sharing. Decision Document (Legal Services Board, 2011). 33 Regulation of CMCs had to be introduced and extended: Compensation Act 2006, Part 2. Claims Management Regulation. Fees Determination 2010–2011 (Ministry of Justice, 2009); Conduct of Authorised Persons Rules 2013 (2); Financial Guidance and Claims Act 2018, amending the Financial Services and Markets Act 2000 and the Privacy and Electronic Communications (EC Directive) Regulations 2003 (S.I. 2003/2426). 34 Legal Aid, Sentencing and Punishment of Offenders Act 2012, ss 56–60. See guidance: The Prohibition of Referral fees in the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) Sections 56-60 (Solicitors Regulation Authority, 2013). The ban was later extended to qualified practitioners regulated by the Chartered Institute of Legal Executives (CILEx): The Referral Fees (Regulators and Regulated Persons) Regulations 2014 No 3235. 35 Solving Disputes in the County Courts: Creating a Simpler, Quicker and More Proportionate System: A Consultation on Reforming Civil Justice in England and Wales – The Government Response (The Stationery Office, 2012) Cm 8274. 36 Legal Aid and Sentencing of Offenders Act 2012. 37 The Damages-Based Agreements Regulations 2013/609. 38 The Damages-Based Agreements Reform Project: Drafting and Policy Issues (Civil Justice Council, 2015); CJC response to the survey for the Post‐Implementation Review of Part 2 of the Legal Aid, Sentencing & Punishment of Offenders Act 2012 (Civil Justice Council, 2018). 39 Amendments to the Civil Procedure Rules. 40 Simmons v Castle [2012] EWCA Civ 1039. 41 R Jackson, Review of Civil Litigation Costs, Final Report (2010) 88; LASPO 2012, s 44. 42 J Peysner, ‘Tail Wags Dog: Contingency fees (and Part 36 and Third Party Funding)’ (2013) 231 Civil Justice Quarterly 1. 43 Impact Assessment on Qualified One Way Costs Shifting (Ministry of Justice) 40, 15/11/2010, signed by Jonathan Djanogly, paras 2.8 and 2.9. 44 Solving Disputes in the County Courts: Creating a Simpler, Quicker and More Proportionate System A Consultation on Reforming Civil Justice in England and Wales (Ministry of Justice, 2011) para 56.

488  Cooperative Dispute Resolution non-personal injury cases should be capped at £12,000. He admired the German system of fixed costs backed by the wide availability of BTE LEI insurance.45 However, the realities of the German system were not adequately replicated in England and Wales. The German system in fact involved two sets of tariffs, one for what the client pays the lawyer (unless a different basis is agreed) and the other for loser’s shifted costs. All litigants must be represented by lawyers.46 LEI is widely available in the UK but has not been widely relied on, and, as the Civil Justice Council noted, ‘there are particular challenges in making BTE insurance available to those who are in the lower socio-economic demographic’47 who are precisely the people that need workable access to justice. In 2013, fixed recoverable costs (FRC) were applied for ‘fast track’ cases (claims up to £25,000 that can be tried in one day) and costs budgeting for the larger ‘multi-track’ cases. In 2017, Jackson LJ pushed further to ‘finish the job’ and recommended a grid of FRC for all fast track cases, whilst further consideration to be given to the problems of small but costly personal injuries cases.48 In April 2018 the government extended fixed costs to holiday sickness claims, saying that the increase in claims (reported by the Association of British Travel Agents to be from 5,000 claims in 2013 to around 35,000 claims in 2016, an increase of 500%) was not seen in other countries and involved an unacceptable level of bogus claims.49 Minister Rory Stewart referred to the position as ‘fraud … that damages the travel industry and risks driving up costs for holidaymakers’.50 The Ministry proposed further extensions of fixed costs in 2019.51 Cutting the justice budget in the decade of austerity after the global financial crash was achieved ‘by the crudest of strategies’.52 Legal aid was cut again and court fees were increased. From 1 April 2013, ‘whole tracts of law’ were removed from the scope of legal aid,53 reducing the expenditure by 40%.54 The number of people given ‘legal help’ fell by 74% from 575,000 in 2012– 13 to 145,000 in 2016–17,55 and remained flat in subsequent years. The Ministry of Justice estimated that the percentage of population eligible for free or contributory legal aid had dropped from 52% in 1998, to 29% in 2007 and around 25% in 2015.56 This produced ‘advice deserts’ 45 That conclusion was based on the research set out in C Hodges, S Vogenauer and M Tulibacka (eds), The Costs and Funding of Civil Litigation: A Comparative Approach (Hart Publishing, 2010). 46 German Code of Civil Procedure (ZPO), s 78. For the implications of this for a system, unlike Germany, that permits litigants in person: H Genn, ‘Do-it-yourself Law: Access to Justice and the Challenge of Self-representation’ (2013) 32 Civil Justice Quarterly 411, 423; H Genn and Y Genn, Effectivenenss of Representation in Tribunals (Lord Chancellor’s Department, 1989); R Moorhead and M Sefton, Litigants in Person: Unrepresented Litigants in First Instance Proceedings (Department for Constitutional Affairs, 2005) Research Series 2/05. 47 The Law and Practicalities of Before-the-Event (BTE) Insurance. An Information Study (Civil Justice Council, 2017) para 8. 48 Lord Justice Jackson, Review of Civil Litigation Costs: Supplemental Report. Fixed Recoverable Costs (Judiciary of England and Wales, 2017). 49 If parties reach a settlement of between £1,000 and £5,000, fixed costs are £950 and 17.5% of the damages. For claims worth up to £10,000, this increases to £1,855 and 10% of the damages over £5,000. Where claims exceed £10,000 in value, lawyers can claim £2,370 and 10% of damages over £10,000. 50 Ministry of Justice Press Release, 13 April 2018. 51 Extending Fixed Recoverable Costs in Civil Cases: Implementing Sir Rupert Jackson’s Proposals (Ministry of Justice, 2019). 52 E Palmer, T Cornford, A Guinchard and Y Marique, Access to Justice: Beyond the Policies and Politics of Austerity (Hart Publishing, 2016) 5. 53 The Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). See A Caplen, ‘Access to Justice: The View from the Law Society’ in E Palmer, T Cornford, A Guinchard and Y Marique, Access to Justice: Beyond the Policies and Politics of Austerity (Hart Publishing, 2016); Changes to Civil Legal Aid in England and Wales since 2013: The Impact on Clients – Briefing Paper (House of Commons Library, 2015) Summary. 54 J Sorabji, ‘Austerity’s Effect on English Civil Justice’ (2015) 8(4) Erasmus Law Review 159, 163. 55 Legal Aid, Sentencing and Punishment of Offenders Act 2012: Post-Legislative Memorandum. Submitted to the Justice Select Committee on 30 October 2017 (Ministry of Justice, 2017) Cm 9486, para 174 and Fig 6; Ministry of Justice, Legal Aid Agency, Legal Aid Statistics in England and Wales, January to March 2017, 29 June 2017, Figure 6. 56 House of Commons, House of Lords, Joint Committee on Human Rights Enforcing human rights Tenth Report of Session 2017–19, HC 669, para 35.

Diversification in the Landscape of Providers   489 across the country,57 significant problems for people such as victims of domestic abuse, and a major rise in self-represented litigants,58 who posed new and considerable practical challenges for judges, who were faced with having to function as advisers, investigators, cross-examiners and decision-makers. Significant increases were made in court fees, with the aim of moving to full cost recovery in the civil and family courts.59 Whilst the number of road traffic accidents (RTAs) fell by 19% between 2006 and 2012,60 the number of recorded insurance claims for RTA personal injuries rose, by nearly 60% in 2012.61 This was associated with fraudulent or exaggerated claims, especially whiplash injuries. Nearly 1200 whiplash claims were made a day in the UK, and £2 billion a year was paid out for them in compensation and costs.62 Reform measures introduced63 involving a new Pre-Action Protocol, Official Injury Claim portal64 and a tariff of damages.65 However, whiplash claims were replaced in popularity by holiday sickness claims, which rose by 500% between 2013 and 2017.66 By 2016, as a result of the system of justice being unaffordable to most, there was a considerable increase of litigants in person, for whom the court system was ‘simply not designed’.67 The situation was severely criticised by the National Audit Office68 and Commons Public Accounts and Justice Committees.69 The Law Society criticised the effect of the 2014 Jackson reforms on children, 75,000 of whom were estimated to lose entitlement to legal aid each year.70 The combined effect of reforms had a significant effect on the NHS. The cost of claims to the NHS rose significantly for many years and caused continuous concern.71 Clinical negligence settlements increased from 9,325 in 2006/7 to a peak of 19,620 in 2015/16,72 in which year 10,965 claims were

57 House of Commons, House of Lords, Joint Committee on Human Rights, Enforcing Human Rights Tenth Report of Session 2017–19, HC 669. 58 Changes to Civil Legal Aid in England and Wales since 2013: The Impact on Clients – Briefing Paper (House of Commons Library, 2015). See also Tackling the Advice Deficit. A Strategy for Access to Advice and Legal Support on Social Welfare Law in England and Wales (The Low Commission, 2014), Executive Summary; Getting it Right in Social Welfare Law. The Low Commission’s Follow-up Report (The Low Commission, 2015), 48. 59 Anti-Social Behaviour, Crime and Policing Act 2014, s180. Explanatory Memorandum to The Civil Proceedings Fees (Amendment No. 2) Order 2013 No. 1410 (L.13) in force 01.07.13. See J Sorabji, ‘Austerity’s Effect on English Civil Justice’ (2015) 8(4) Erasmus Law Review 15. 60 Source DfT: www.dft.gov.uk/statistics/tables/ras40007; http://www.dft.gov.uk/statistics/tables/ras45009. 61 Source DWP CRU: www.dwp.gov.uk/other-specialists/compensation-recoveryunit/performance-and-statistics/ performance-statistics/. 62 Tackling the Compensation Culture: The Legal Aid, Sentencing and Punishment of Offenders Bill. Improving Systems for All (Association of British Insurers, 2011). 63 Civil Liability Act 2018. See Reforming the Soft Tissue Injury (‘Whiplash’) Claims Process. A Consultation on Arrangements Concerning Personal Injury Claims in England and Wales (Ministry of Justice, 2016), per Foreword by Lord Keen of Elie QC; Part 1 of the Government Response to: Reforming the Soft Tissue Injury (‘Whiplash’) Claims Process: A Consultation on Arrangements Concerning Personal Injury Claims in England and Wales (Ministry of Justice, 2017). 64 www.officialinjuryclaim.org.uk/. 65 Whiplash Reform Programme: Information and FAQ, at www.gov.uk. 66 A Ellson, ‘Northwest Named as British Hotbed of Sickness Scams’ The Times 26 August 2017. 67 The Lord Chief Justice’s Report 2015 (Lord Chief Justice, 2016); see The Judicial Working Group on Litigants in Person: Report (Judiciary, 2013). 68 National Audit Office, Implementing Reforms to Civil Legal Aid, 20 November 2014, HC 784 2014–15 20. 69 The Public Accounts Committee, Implementing Reforms to Civil Legal Aid, 4 February 2015, HC 808 2014–15; National Audit Office, Implementing Reforms To Civil Legal Aid, 20 November 2014, HC 784 2014–15. 70 Figures supplied to JustRights by MOJ on 10/10/11 in response to a Freedom of Information request: http://justrights. org.uk/sites/default/files/Legal_Aid_-_ Child_Protection_Implications_sept_2013_FINAL.pdf. 71 eg Triennial Review of the NHS Litigation Authority: Review Report (Department of Health, 2015); Lord Justice Briggs, Civil Court Structure Review: Interim Report (Judiciary, 2016) para 5.46; Managing the Costs of Clinical Negligence in Trusts. Report by the Comptroller and Auditor General (National Audit Office, 2017); House of Commons, Committee of Public Accounts, Managing the Costs of Clinical Negligence in Hospital Trusts Fifth Report of Session 2017-19, HC 397, 1 December 2017. 72 As notified to the Compensation Recovery Unit.

490  Cooperative Dispute Resolution notified against the NHS and damages paid on clinical claims were £1.08 million plus £498.5 million on claimants’ costs and £125.7 million on defence costs.73 Costs were generally 300% of damages for small claims, and the disproportionality reduced as damages increased – and there was an increase during the past decade in small value claims, in which marketing activities by solicitors and funders played a part. In 2017/18 provisions almost trebled over the previous four years to £77 billion, and total annual payments in clinical claims doubled to £2 billion.74 In 2017–18, legal aid spending fell again by approximately £90 million in civil cases and £160 million in family cases, compared to £105 million and £130 million estimated in earlier impact assessments. The Ministry of Justice budget was cut again in 2019/20 to £5.6 billion, representing a 40% cut in real terms over the fiscal decade ending in 2020.75 The Government acknowledged that the system had a number of serious problems.76

ADR The Technique of Mediation ‘Mediation’ and similar techniques, sometimes generically known as ‘alternative dispute resolution’ (ADR), involve an independent third party bringing disputing parties together to facilitate resolution of their differences through communication, understanding, negotiation and consensus. These are techniques that humans have used for many centuries.77 The central techniques of mediation focus not just on resolving a dispute but on restoring the social relationships between people.78 They can provide opportunities for apology79 and healing.80 They can also provide parties with an opportunity to raise and address underlying issues that might not be addressed by a specific dispute about legal rights. Similarly, legal disputes can be solved by solutions that are wider than the range of available legal remedies. In social policy terms, this mode of problem solving is inherently more democratic and human-centred than adversarial argument or external imposition of a solution on the parties. The constitutional idea is that parties should have autonomy and ‘voice’. Mediation as a technique can be extremely successful in resolving disputes. In commercial cases, the Centre for Effective Dispute Resolution (CEDR) reports that use of mediation has increased continuously over the past 20 years, to over 16,000 cases in 2020, with a 93% settlement rate.81 Recently, CEDR notes widespread increase in levels of acceptance of mediating online.

73 NHS Litigation Authority Annual Report and Accounts. 74 Annual Report and Accounts 2017/18 (NHS Resolution, 2018) Fig 6. 75 Written Parliamentary Answer by Dominic Raab MP, 13 November 2017, no 112641. The total budget in 2010/11 was £9.3 billion (in 2017/18 terms). 76 Legal Support: The Way Ahead. An Action Plan to Deliver Better Support to People Experiencing Legal Problems (Ministry of Justice, 2019). 77 S Roberts and M Palmer, Dispute Processes: ADR and the Primary Forms of Decision-Making (Cambridge University Press, 2005); JS Auerback, Justice Without Law? (Oxford University Press, 1983). 78 S. Roberts and M. Palmer, Dispute Processes: ADR and the Primary Forms of Decision-Making (Cambridge University Press, 2005). 79 Surveys found that 73% of those taking cases to ADR and 31% to courts were seeking something without monetary value, such as an apology: Resolving Consumer Disputes: Alternative Dispute Resolution and the Court System (ICF Consulting on behalf of BEIS, 2018). 80 P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury, 2016); R Carroll, A Allan and M Halsmith, ‘Apologies, Mediation and the Law: Resolution of Civil Disputes’ (2017) 7(3) Oñati Socio-legal Series 569. 81 The Ninth Mediation Audit. A Survey of Commercial Mediator Attitudes and Experience in the United Kingdom (CEDR, 2021).

ADR  491

The Spread of ADR Consensual forms of negotiated dispute resolution tended historically to be forgotten as states accumulated centralised power and delivered justice through state judges in adversarial courts applying state-made laws. In the modern era, US scholar Frank Sander seems to have been the first to have used the label ‘alternative dispute resolution’ (ADR) in 197682 in connection with the ‘Pound Conference’,83 which started a general interest in ADR. Almost at the same time, Mauro Cappelletti and Bryant Garth are credited with concluding, from their extensive international and interdisciplinary study of access to justice, that three waves of reform could be identified and predicted: legal aid, procedural devices for class actions, and promoting systemic reform of the legal system through ADR.84 There was a wave of interest in ADR internationally in succeeding decades.85 Shahla Ali’s empirical comparison of various countries found concrete evidence of increases in access to justice through mandatory and voluntary mediation schemes.86 However, the meaning of ‘ADR’ varies considerably with the context,87 and this point is far from well understood, leading to confusion about what ADR ‘is’ – as stated above, one needs to distinguish techniques from structures. The primary technique is mediation, or some form of discussion between the parties facilitated by an independent third party, a mediator. That technique can be applied in the context of various different structures, and across an almost limitless range of types of disputes,88 such as a first stage before access to a court procedure or during an adjudicative or arbitration or investigative procedure. Depending on the context, the technique may be organised as a stand-alone form or as an integral part of a process that combines possibly multiple techniques in addition to the mediation technique. Various discussions on expanding ‘ADR’ can cause confusion because they are focused on a particular context, usually mediationlike techniques used with court processes.89

ADR and the Courts Lord Woolf faced the reality that most cases settle during the litigation process and are not decided by a judge but by negotiated settlements, so he encouraged this by incentivising and prioritising use of mediation (or other ADR techniques) before and during the litigation process, effectively

82 FEA Sander, ‘Varieties of Dispute Processing’ (1976) 70 Federal Rules Decisions 111–34. 83 See ABA Report of Pound Conference Follow-Up Task Force, 74 FRD 159, 192 (1976). 84 M Cappelletti and BG Garth, Access to Justice. Volume 1: A World Survey (Sijthoff & Noordhoff, 1978); M Cappelletti and BG Garth, ‘Access to Justice: The Newest Wave in the Worldwide Movement to Make Rights Effective’ (1978) 27 Buffalo Law Review 181; M Cappelletti (ed), Access to Justice and the Welfare State (Sijthoff, 1981); M Cappelletti, ‘Alternative Dispute Resolution Processes within the Framework of the World-Wide Access-to Justice Movement’ (1993) 3 The Modern Law Review 56. 85 N Alexander, International and Comparative Mediation: Legal Perspectives 53 (Kluwer Law International 2009); JM Nolan-Haley, ‘Is Europe Headed Down the Primrose Path with Mandatory Mediation?’ (2012) 37 North Carolina Journal of International Law and Commercial Regulation 981. 86 SF Ali, Court Mediation Reform. Efficiency, Confidence and Perceptions of Justice (Edward Elgar, 2018). 87 C Menkel-Meadow, ‘Mediation, Arbitration, and Alternative Dispute Resolution (ADR)’ in J Wright (ed), International Encyclopedia of the Social and Behavioral Sciences 2nd edn (Elsevier, 2015). 88 See M Roberts, Developing the Craft of Mediation. Reflections on Theory and Practice (Jessica Kingsley Publishers, 2007); A Sarat and WLF Felstiner, Divorce Lawyers and their Clients. Power & Meaning in the Legal process (Oxford University Press, 1995). 89 ADR and Civil Justice. CJC ADR Working Group. Final Report (Civil Justice Council, 2018); G De Palo and MB Trevor (eds), EU Mediation. Law and Practice (Oxford University Press, 2012); C Espluges and S Barona (eds), Global Perspectives on ADR (Intersentia, 2014); F Steffek and H Unberath (eds), Regulating Dispute Resolution: ADR and Access to Justice at the Crossroads (Hart, 2013).

492  Cooperative Dispute Resolution as a barrier to access to the courts.90 The 1999 Civil Procedure Rules introduced a primary injunction to ‘co-operate’ and to use ADR.91 Statements strongly supportive of mediation were made subsequently by senior UK judiciary.92 However, this introduced an extra service provider (eg a mediator or mediation body), with potential for confusion over the pathway(s) and an extra cost payable by claimants, which did little to help small value claimants. It also introduced the paradox of an inherent conflict between fighting and settling; one approach drives people apart, the other seeks to draw them together. One is divisive, the other is healing – but the system contains both. Pre-action protocols requiring exchange of information – that would in theory assist communication and spontaneous settlement by parties – had the effect of front-loading the costs of a case, by requiring detailed investigation start sufficient to clarify whether the case was valid: this could often result in unnecessary work and disproportionate costs.93 In England and Wales, it seems that the spread of mediation and other forms of ADR in commercial cases94 led to a significant reduction in the number of higher value claims and trials from 1990: certainly the number of High Court claims issued fell dramatically from then (over 350,000 per annum) to a consistently low state from around 2000 (around 2,000 per annum).95 Resolving cases through ADR was adopted by the UK Government for cases in which it was a party in 201196 and by HMRC in resolving tax disputes.97 Employment disputes must be notified to the Advisory, Conciliation and Arbitration Service (ACAS) since 2014 to see if the parties wish to use ACAS’ highly effective ‘conciliation’ process before they can be started in court or an Employment Tribunal.98 There has been increased reliance on early settlement and mediation in clinical negligence claims against the NHS. In 2020–21, 15,574 clinical and non-clinical claims were settled, of which 11,704 (74.7%) claims were settled without formal court proceedings, 3,914 (25%) with proceedings but without trial and 56 (0.3%) at trial.99 An increased ‘spirit of cooperation’ was hailed by the chief executive of NHS Resolution during 90 Civil Procedure Rules 1999, inspired by Lord Woolf, Access to Justice: Interim Report to the Lord Chancellor on the Civil Justice System in England and Wales (HMSO, 1995); Lord Woolf, Access to Justice: Final Report to the Lord Chancellor on the Civil Justice System in England and Wales (HMSO, 1996). 91 The CPR provided: –– –– –– –– ––

Rule 1.1(1) ‘overriding objective’ to ‘enable the court to deal with cases justly’. Rule 1.1(4) ‘the court must further the overriding objective by actively managing cases’. Rule 1.4(2)(a) ‘encouraging the parties to co-operate with each other in the conduct of the proceedings’. Rule 1.4(2)(e) active case management includes ‘encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating their use of such procedure’. Rule 1.4(2)(f) case management also includes ‘helping the parties to settle the whole or part of the case.

92 Lord

Philips of Worth Matravers CJ, ‘Alternative Dispute Resolution: An English Viewpoint’, Speech in India, 29 March 2008, www.judiciary.gov.uk/Resources/JCO/Documents/Speeches/lcj_adr_india_290308.pdf. 93 Emerging Findings: An Early Evaluation of the Civil Justice Reform (The Lord Chancellor’s Department, 2001); D Dwyer, The Civil Procedure Rules Ten Years On (Oxford University Press, 2010); CS Konstantinou, ‘Pre-Action Protocols 14 Years on: Have they Been Proven to be Conducive to Settlement?’, available at http://ssrn.com/abstract=2175448; J Peysner, Access to Justice: A Critical Analysis of Recoverable Conditional Fees and No-Win No-Fee Funding (Palgrave Macmillan, 2014). 94 R Caller (ed), ADR and Commercial Disputes (Sweet & Maxwell, 2002). 95 See H Genn, S Riahi and K Pleming, ‘Regulation of Dispute Resolution in England and Wales: A Sceptical Analysis of Government and Judicial Promotion of Private Mediation’ in F Steffek and H Unberath (eds), Regulating Dispute Resolution: ADR and Access to Justice at the Crossroads (Hart, 2013). 96 Pledge, 19 March 2011, at www.justice.gov.uk/courts/mediation/dispute-resolution-commitment. 97 Alternative Dispute Resolution in Large or Complex cases: Pilot Evaluation Summary (HM Revenue and Customs, 2013); HMRC Launches Alternative Dispute Resolution Service (HMRC, 02/09/2013) available at www.gov.uk/government/ news/hmrc-launches-alternative-dispute-resolution-service. 98 The Employment Tribunals Act 1996 ss 18, 18A and 18B and the Employment Act 2002 (Dispute Resolution) Regulations 2004. 99 Annual Report and Accounts 2020/21 (NHS Resolution, 2021).

ADR  493 the pandemic: ‘A welcome development was greater cooperation between the parties. Our efforts to keep cases out of court gained more traction as there was an increased willingness to resolve matters without formal court proceedings and to try new approaches such as remote mediations.’100 Mediation has been slower to be adopted in family disputes.101 From 2013 all small claims were automatically referred to mediation, but ‘on the basis that this is not compulsory mediation, but rather a requirement to engage with a small claims mediator’.102 However, the pathways in employment, family and small claims did not treat mediation as an integral part of a seamless process, but as a voluntary separate process. The court system has had difficulty in integrating the technique of ADR into its fixed concept of a structure. In this context, ADR is often regarded as a stage that has separate administration from the courts. The consequence has been that users are forced to use two systems – the court system and the ADR system – which adds to complexity and cost. Views have been growing that ADR should be compulsory for litigants,103 and a 2021 Report clears away possible objections on human rights and institutional grounds.104 In contrast, businesses and ombudsmen systems have been more flexible to deploying the techniques of ADR, either informally where required105 or as integral elements within their structures, as noted below.

Challenges to ADR A forceful academic attack has been made against ADR that it undermines justice and legal rights. The argument is that the settlement of cases, especially where there was an imbalance of power between the parties, would result in unfair outcomes – people accepting and paying less than they should – with the result that people’s rights and the law would be circumvented and the rule of law itself would be widely undermined. Hazel Genn pithily summed up the concern in the phrase that it was ‘just about settlement rather than about just settlement’.106 American and German scholars also weighed in against ADR and mediation.107 100 J Hyde, ‘Pandemic Cooperation Keeps Clin Neg Claims Out of Court’ Gazette 19 July 2021. 101 M Roberts, Mediation in Family Disputes. Principles of Practice 4th edn (Ashgate, 2014); M Roberts, ‘Family Mediation: The Development of the Regulatory Framework in the United Kingdom’ (2005) 22(4) Conflict Resolution Quarterly 508; M Maclean and J Eekelaar, Lawyers and Mediators. The Brave New World of Services for Separating Families (Hart Publishing, 2016). 102 Solving Disputes in the County Courts: Creating a Simpler, Quicker and More Proportionate System: A Consultation on Reforming Civil Justice in England and Wales – The Government Response (The Stationery Office, 2012) Cm 8274. 103 eg Germany has adopted legislation requiring mandatory court-connected mediation in some cases. See N Alexander, German Law Paves the Way for Mandatory Mediation (2000) 2 ADR BULL 9, art 2. 104 Compulsory ADR (Civil Justice Council, 2021). That Report identified five criteria for making ADR mandatory, which remain based in a traditional conception of civil procedure: 1. 2. 3. 4. 5.

Is the form of ADR proposed or required too burdensome or disproportionate in terms of cost or time? Are particular specialist jurisdictions better suited to compulsion than general litigation? Is there sufficient confidence in the neutral person, the ADR provider? Do the parties taking part in the ADR have access to legal advice? At what stage should ADR be required?

105 J Lande and PW Benner, ‘Why and How Businesses Use Planned Early Dispute Resolution’ (2017) 13 University of St Thomas Law Journal 248. 106 H Genn, Judging Civil Justice (The Hamlyn Lectures 2008) (Cambridge University Press, 2009). 107 O Fiss, ‘Against Settlement’ (1984) 93 Yale Law Journal 1073; PH Lindblom, ‘ADR – The Opiate of the Legal System? Perspectives on Alternative Dispute Resolution Generally and in Sweden’ (2008) 1 European Review of Private Law 63–93; G Wagner, ‘Private Law Enforcement through ADR: Wonder Drug or Snake Oil?’ (2014) 51(1) Common Market Law Review 165–94; H Eidenmüller and M Engel, ‘Against False Settlement: Designing Efficient Consumer Rights Enforcement Systems in Europe’ (2014) 29(3) Ohio State Journal on Dispute Resolution 261.

494  Cooperative Dispute Resolution However, the focus of this debate was typically about comparing ADR and mediation, and perhaps ODR, with courts. Much confusion has remained because the term ‘ADR’ has multiple meanings. Other forms of ‘ADR’ such as Ombudsmen were often ignored. Their governance, transparency and operation largely seemed to achieve support for less powerful or informed parties, and to lead to fair outcomes.108 Further, the remit of consumer Ombudsmen was expressly to decide cases on the balance of what seemed ‘fair and reasonable’ to the Ombudsman, often supported by requirements for fair treatment in consumer law, regulatory requirements and codes of conduct. This meant that a distinction between ‘law’ and ‘fairness’, if it existed, tended to favour consumers. Negotiations can be designed to involve oversight by a trained intermediary to ensure alignment with law, regulators’ rules (which are often contained in less formal sources such as guidance, and often require fair behaviour) and principles of fairness. This is the essence of the ‘early facilitated communication’ model, which has proved to be highly successful. Jeremy Bentham vigorously opposed ‘compromise’ on the ground that it involves a denial of ‘justice’.109 As in various other aspects of his philosophy, Bentham appears to have been reasoning within the constraints of limited emotion.110 However, in many disputes, especially complex ones, both the facts and the strict legal rights are by no means clear. This is why many cases, especially commercial cases, settle before trial, as the parties’ understanding grows of the comparative strength of their facts and legal rights and they decide to reach a pragmatic compromise, usually in which each party gets something. In contrast, if a case is decided by a judge, the outcome is binary on each legal issue: one party wins and the other loses. Such an outcome might be perceived as involving unfairness overall. In this context, we should note the acceptance of Lord Woolf that, given constraints on any state’s resources, a balance has to be struck between, on the one hand, ensuring that accurate and substantive justice is done in each individual case and, on the other hand, ensuring that the state’s limited resources for delivering justice remain available to all at reasonable cost and without unreasonable delay, as a result of individual parties consuming disproportionate resource in individual cases.111 This drove Lord Woolf inevitably to seek the substantive delivery of ‘proportionate justice’ in order to maximise the number of people and cases who obtained justice.112 Given the reality that absolute forensic justice is simply unattainable in human societies, it was, therefore, important to maximise the number of situations in which some justice is attained rather than not. To this, we also note the intractable problems summarised above of delivering any form of ‘access’ to state courts. As John Peysner said, ‘the volume of claims that never reach the court process … [winnowed] away from a litigation process towards resolution by withdrawal or settlement … so that fewer than two per cent of cases reach a substantive trial’.113 Another consideration is that outcomes negotiated by parties, especially with the involvement of an experienced intermediary, can produce solutions that address underlying or important aspects that might not be directly raised by a dispute that has to be framed in terms of breach of legal rights. For example, a dispute in which a landlord sues a tenant for withholding rent may at 108 C Hodges, ‘Objectives, Mechanisms and Policy Choices in Collective Enforcement and Redress’ in J Steele and W van Boom (eds), Mass Justice (Edward Elgar, 2011). 109 W Twining, ‘Alternative to What? Theories of Litigation, Procedure and Dispute Settlement in Anglo-American Jurisprudence: Some Neglected Classics’ (1993) 56 MLR 380. 110 J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). Haidt cited evidence that Bentham was a sociopath. 111 J Sorabji, English Civil Justice after the Woolf and Jackson Reforms: A Critical Analysis (Cambridge University Press, 2014). 112 ibid, 21. 113 J Peysner, ‘England and Wales’ in C Hodges, S Vogenauer and M Tulibacka (eds), The Costs and Funding of Civil Litigation. A Comparative Perspective (Hart, 2010) 292.

ADR  495 bottom be about failure by the landlord to comply with obligations to repair, or poor behaviour by the managing agent. One of the strengths of consensual techniques involving communication between parties is the ability to take a wider view of the root cause of problems in a relationship. This point is developed below. This chimes with extensive evidence that people have problems rather than necessarily or exclusively legal problems – as established by Hazel Genn herself.114 A major study concluded: Thus the problems that result in formal legal action are a very small part of a much larger pool of problems that people experience and, for the most part, deal with alone or without legal or professional help. These findings are in line with those from previous surveys. Understanding the overall picture and the extent to which individuals are able to deal with their problems through less formal means is important in considering what access to justice represents for different groups, and how people can best be supported in resolving issues effectively and quickly.115

There is no reason why judges cannot be flexible in assisting parties without damaging their independence116 (as the most effective regulators do) and there is no reason why other intermediaries cannot maintain impartiality and uphold the ethical and legal rules of a society without being judges. The essential generic requirement here is simply the familiar regulatory requirements of good governance, transparency and professionalism.

Integration of Dispute Resolution Pathways and Institutions Leaders of the English and Welsh justice system have now recognised that ADR is a misnomer, and we should more helpfully talk of dispute resolution, and of the different structures, processes, techniques and intermediaries that might facilitate this best in particular contexts. In 2021, a profoundly important change of direction in policy was signalled by the senior judiciary117 and ministers.118 Sir Geoffrey Vos, the new Master of the Rolls, set out the new vision that ADR should be dropped as a description, since all options are ‘dispute resolution’ and are not alternative at all.119 Further, he proposed that all dispute resolution processes should be integrated into a single framework, that would provide clarity, effective and consistent outcomes for users, within what he described as an online funnel model. He accepted that all cases will be capable of being started and progressed online. He also said that ‘My sense is that there must be a process that does not so often involve getting lawyers, parties, experts and witnesses all in one place at one time, sometimes for days on end.’ Shortly afterwards, the Ministry of Justice indicated the start of a fundamental review of the complete system:120 We want to support people to get the most effective resolution without devoting more resources than necessary – financial, intellectual and emotional – to resolve their dispute. Creating more proportionate 114 H Genn, Paths to Justice: What People Do and Think About Going to Law (Hart, 1999) and subsequent studies. 115 R Franklyn, T Budd, R Verrill and M Willoughby, Findings from the Legal Problem and Resolution Survey, 2014–15 (Ministry of Justice, 2017) (emphases added). See earlier Evaluation: How Can We Measure Access to Justice for Individual Consumers? A Discussion Paper (Legal Services Board, 2012). 116 M Galanter, ‘The Emergence of the Judge as a Mediator in Civil Cases’ (1986) 69(5) Judicature 257. 117 Rt Hon Sir Geoffrey Vos, ‘The Relationship between Formal and Informal Justice’, speech at Hull University, 26 March 2021; Rt Hon Sir Geoffrey Vos, ‘London International Disputes Week 2021: Keynote Speech’ London, 10 May 2021. 118 Rt Hon Robert Buckland QC MP, speech at London International Disputes Week 2021, 13 May 2021; Rt Hon Robert Buckland QC MP, speech at the Law Society, 4 June 2021, www.gov.uk/government/speeches/lordchancellors-speech-london-international-disputes-week. 119 Rt Hon Sir Geoffrey Vos MR, ‘Recovery or Radical Transformation: The Effect of Covid-19 on Justice’, Speech at London School of Economics, 17 June 2021, www.judiciary.uk/announcements/speech-by-the-master-of-the-rolls-atthe-london-school-of-economics-recovery-or-radical-transformation-the-effect-of-covid-19-on-justice-systems/. 120 Dispute Resolution in England and Wales. Call for Evidence (Ministry of Justice, 2021).

496  Cooperative Dispute Resolution and constructive routes to resolution avoids the need for these resources to be expended, saving the user’s time, as well as reducing their levels of stress at an already difficult time. Our ambition is to mainstream non-adversarial dispute resolution mechanisms, so that resolving disagreements, proactively and constructively, becomes the norm. This is not simply about diverting people from litigation. We want to build a more proportionate system by giving people a fuller, more integrated, range of routes to get the best outcomes for their issue. Helping people to access the support they need at the right time to achieve a resolution, bringing disputes to a timely close without such frequent need for court-based litigation. The courts will, however, always remain as an option open to everyone; and we recognise that there will always be cases where people do need to go to court.

Proliferation of Institutions and Techniques Different dispute resolution institutions and pathways now exist for different types of disputes. In consumer-trader disputes, for example, the basic options include a number of sectoral Ombudsmen, numerous sectoral ADR (usually arbitration) schemes, or courts, such as the small claims track. The specific form of ADR known as Ombudsmen has spread from around the 1960s as consumer markets have increasingly become subject to regulation. The UK Financial Ombudsman Service blazed the path, and was created alongside a new financial regulatory authority specifically in order to function as an integral part of the regulatory system, to provide a consumer champion with sufficient weight to balance the power of large firms so as to frustrate repeat players’ advantage of an imbalance of power and to impose as behavioural pressure on firms.121 An interesting innovation from 2014 is the platform Resolver, which connects consumers with companies, and can flip a file into an Ombudsman if a case is not resolved.122 In general, consumers have moved almost entirely away from using lawyers and courts. The ADR process is quicker than the court process and cheaper for consumers (Ombudsmen are free).123 Consumers made over 12 million complaints to financial services, energy and water suppliers in the year before 2018, compared with roughly two million cases of all types started in County Courts. In employment cases, one has first to notify ACAS before being able to start a case in either an Employment Tribunal or a country court. In family cases, the courts cover four distinct areas of legal disputes in the families and children area: divorce, public law protection of children, private law disputes, and financial remedies. In public cases, public officials with social care or other expertise may be involved. The Children and Families Court Advisory and Support Services (CAFCASS) plays a crucial role in representing children in public and private family cases.124 Recent specialist creations include Family Drug and Alcohol Courts (FDACs)125 and the Financial Remedies Court (FRC).

121 C Hodges, I Benöhr and N Creutzfeldt-Banda, Consumer ADR in Europe (Hart Publishing, 2012) 414. 122 www.resolver.co.uk. Resolver has grown massively since commencing in 2014, and in 2018 its 15 million site visits and 1,400,000 case files exceed the traffic of Citizens Advice, which in 2017/18 advised 1.4 million clients. 123 Resolving Consumer Disputes. Alternative Dispute Resolution and the Court System. Final Report (BEIS, 2018). 124 www.cafcass.gov.uk. CAFCASS has around 2000 staff and was created on 1 April 2001 under the Criminal Justice and Court Services Act 2000 to bring together services previously provided by the Family Court Welfare Service, the Guardian ad Litem Services and the Children’s divisions of the Official Solicitor’s office 125 See J Tunnard, M Ryan and J Harwin, Problem Solving in Court: Current Practice in FDACs in England. Final Report (Lancaster University, 2016); J Harwin, B Alrouh, M Ryan, T McQuarrie, L Golding, K Broadhurst, J Tunnard and S Swift, After FDAC: Outcomes 5 Years Later. Final Report (Lancaster University, 2016); JE Harwin, B Alrouh, K Broadhurst, T

ADR  497 An interesting power imbalance dynamic applies between small traders (SMEs) and their larger customers. Many claims by SMEs relate to trading issues and late payment by customers.126 Whilst SMEs will use the court Small Claims track127 or efficient Money Claim Online facility to enforce some debts, SMEs have been shown to be reluctant to sue their major customers, for fear of reprisals. The effective solution has been to create a new type of intermediary that fuses a number of functions: informal dispute resolution, investigative powers, power to order money to be paid, a code of ethical conduct, powers to order changes and to impose sanctions and, above all, the ability to act spontaneously on anonymous information. Three bodies have combinations of most of these powers: (a) the Groceries Code Adjudicator (GCA),128 which has had notable success129 and has created ‘a culture change in payment practices’,130 based around a theme of collaboration between actors;131 (b) the Pubs Code Adjudicator (PCA),132 which has a somewhat more challenging remit because of an arbitration model but has made progress;133 and (c) the generic Small Business Commissioner (SBC), based on the successful model of Australian Territories, authorised to provide general advice and information to small businesses, and to consider complaints from small businesses relating to payment matters in connection with the supply of goods and services to larger businesses, and to make recommendations.134 There are clear signs that the concept of fairness is spreading from protecting consumers to the SME context. Unfair treatment of SMEs by banks arising out of the 2008 financial crisis and aftermath of austerity have led to expansion of the remit of the Financial Ombudsman Service135 and creation of the Business Banking Resolution Service.136 In personal injury cases against the NHS, the UK retains fault-based litigation, although there have been widespread calls for a switch out of the courts and into administrative redress schemes.137 These schemes were initially referred to as ‘no fault’ schemes, such as the New Zealand McQuarrie, L Golding and M Ryan, ‘Child and Parent Outcomes in the London Family Drug and Alcohol Court Five Years On: Building on International Evidence’ (2018) International Journal of Law, Policy and the Family, eby006, http// doi.org/10.1093/lawfam/eby006. 126 R Blackburn, J Kitching and G Saridakis, The Legal Needs of Small Businesses: An Analysis of Small businesses’ Experience of Legal Problems, Capacity and Attitudes (Legal Services Board, 2015); Treating Smaller Businesses Like Consumers – Unfair Contract Terms (Federation of Small Businesses, 2017); K Larkin, V Clarke, C McDonnell and M Turner, The Legal Needs of Small Businesses 2013/2017 (BMG Research, 2018). 127 J Peysner, Access to Justice: A Critical Analysis of Recoverable Conditional Fees and No-Win No-Fee Funding (Palgrave Macmillan, 2014) 15. 128 The Groceries Code Adjudicator Act 2013; The Groceries Code Adjudicator Act 2013 (Commencement) Order 2013, SI 20913 No 1236; GCA Compliance and Monitoring Policy (Groceries Code Adjudicator, 2016). 129 GCA Investigation into Tesco plc – Progress towards Following GCA Recommendations (Groceries Code Adjudicator, 2016); Statutory Review of the Groceries Code Adjudicator: 2013–2016 (Department for Business, Energy & Industrial Strategy, 2017); Investigation into Co-operative Group Limited (Groceries Code Adjudicator, 2019). 130 Speech by Andrew Griffiths MP, Minister for Small Business, Consumers and Corporate Responsibility at the Groceries Code Adjudicator conference, 25 June 2018; GCA Press Release, ‘Groceries Sector Survey Shows GCA Action Drove Big Improvements’, 25 June 2018. 131 Annual Report and Accounts 1 April 2017–31 March 2018 (Groceries Code Adjudicator, 2018). 132 Established under the Small Business, Enterprise and Employment Act 2015, Part 4. The Pubs Code etc. Regulations 2016, SI 2016 No 790. 133 Press release, ‘Heineken Pub Company Fined After Seriously Breaching Pubs Code’, Pubs Code Adjudicator, 15 October 2020. 134 Enterprise Act 2016, s 1. The SBC is established as a corporation sole, classified as a non-departmental public body, with a support staff and an advisory board, which has advisory and governance functions. 135 Increasing the Award Limit for the Financial Ombudsman Service (Financial Conduct Authority, March 2019), PS19/8. 136 http://thebbrs.org/. See S Walker, Review into the Complaints and Alternative Dispute Resolution (ADR) Landscape for the UK’s SME market (2018); C Hodges, Mechanisms (Centre for Socio-Legal Studies, 2018). 137 S Macleod and C Hodges, Redress Schemes for Personal Injuries (Hart, 2017).

498  Cooperative Dispute Resolution Accident Compensation Scheme,138 where separate accounts cover employers, motor vehicle, employees, unemployed and medical treatment injuries. All Nordic states have redress schemes that are highly effective and cover work, motor, medical treatment and pharmaceutical product injuries. Many countries around the world have vaccine injury compensation schemes and other types of injury compensation schemes. The pandemic spurred the spread or modernisation in many countries (not the USA139 or UK) of vaccine redress schemes.140 In all these schemes two critical changes have occurred. First, the switch from an adversarial to an investigative administrative process. Second, a switch in the eligibility criterion from negligence or fault to factual scientific criteria related to the condition of the injured person, rather than the actions of a particular individual who may have been one causative actor among several, or of failings in a system or culture. The shift to a ‘no blame’ culture is regarded as essential for underpinning the maintenance of an operating culture in which essential safety and performance information is openly and swiftly shared so that it can be analysed to identify root causes and implement action that will reduce the risk of future harm.141 Outstanding examples of how feedback of data from individual cases has been used to identify and address improvements in medical practice.142 The reduction in serious birth defects in Sweden between 2011 and 2015 from 20 to five per 100,000 is the most spectacular result of this system. It is no surprise that a similar reform has been called for in the UK.143 This reform is long overdue and would be transformative. There are multiple options for complaining against the state: it is a confusing matrix, with too many different rules and criteria.144 Every Government Department has a complaints system but each is different and accessed separately.145 Different appeals or re-hearings lie to a range of Tribunals. Judicial review of the legality of administrative action by a judge – rather than an appeal on the merits of a decision, unless it is significantly unreasonable – requires serious funding for lawyers, permission of the court, and limitations on what can be overruled. Coroners and public inquiries have specific and unfamiliar jurisdictions. The public Ombudsmen – principally the Parliamentary and Health Service Ombudsman (PHSO) and the Local Government and Social Care Ombudsman (LGSCO)146 – look at the quality of the administrative behaviour and related issues, under the confusing title of ‘maladministration’. The Tribunal system emerged partly as an administrative court for claims by or against the government, and partly as a forum that was consciously intended to be less formal than courts (not 138 See www.acc.co.nz. 139 The US Vaccine Injury Compensation Scheme remains adversarial, administered by a special court. 140 Led by the WHO: see News release ‘No-fault Compensation Programme for COVID-19 Vaccines Is a World First’ World Health Organisation, 22 February 2021 at www.who.int/news/item/22-02-2021-no-fault-compensation-pr ogramme-for-covid-19-vaccines-is-a-world-first. 141 C Hodges, ‘Achieving a Just Culture that Learns and Improves’ in P Vines and A Akkermans (eds), Unexpected Consequences of Compensation Law (Hart Publishing, 2020) ch 7. See also Delivering Dignity Report Highlights Vital Role of Complaints in Improving Care for Older People, says Health Service Ombudsman (PHSO, 21/10/2014). 142 See S Macleod and C Hodges, Redress Schemes for Personal Injuries (Hart, 2017) ch 5. 143 Better Births: Improving Outcomes of Maternity Services in England: A Five Year Forward View for Maternity Care (National Maternity Review, 2016); First Do No Harm. The Report of the Independent Medicines and Medical Devices Safety Review (2020); Health and Social Care Committee Report, The Safety of Maternity Services in England (2021). 144 C Hodges, Delivering Dispute Resolution (Hart, 2019) ch 13. 145 In England and Wales, Complaint Handler Members include The Adjudicator’s Office, Advertising Standards Authority, Immigration Services Commissioner, Welsh Language Commissioner, Information Commissioner’s Office, Independent Case Examiner for DWP, Independent Complaints Reviewer (for HM Land Registry and Northern Ireland Youth Justice Agency). 146 Others are the Prisons and Probation Ombudsman, the Independent Adjudicator for Higher Education, the Independent Complaints Reviewer (covering complaints about the Land Registry and the Northern Ireland Youth Justice Agency), the Independent Office for Police Conduct and bodies in Scotland, Wales and Northern Ireland.

ADR  499 generally bound by the law of evidence)147 and hence more user-friendly, quicker and cheaper. It delivers a specialist service,148 albeit one that, as at 2016, still aimed to ‘adopt a more inquisitorial and problem-solving approach, focused around the needs of individuals so that claimants can be more confident that their needs will be understood’.149 The success and proliferation of Tribunals within their own separate universe meant that they had to be reorganised into a simpler and more cohesive structure, pursuant to the 2001 Leggatt Report.150 In recent years, further energy has been put into modernisation of Tribunals, generally151 in Wales,152 with experimentation in different Chambers that responds to the differing nature of their work. The UK has a number of Ombudsmen who can investigate cases of maladministration by public bodies. The procedures and architectures are widely recognised to be in need of reform153 and there is ongoing pressure to change.154 There is academic consensus that a democratic public ombudsman should be founded on the ‘demosprudential’ values of community, human rights principles and democratic practice.155 Many other specific approaches exist in addition to the major dispute institutions and pathways summarised above. The landscape is firmly pluralistic, although gaps and confusion exist.156 We can, however, see emerging themes not just about ideals of consensual dispute resolution but also about the need to support those with less power, and to use sophisticated combinations of dispute resolution and intervention of regulatory techniques. Many dispute resolution professionals comment that a huge number of disputes can be resolved by communication between the parties or involving trusted independent experts. The communication process allows people to obtain as well as express information that another party may find transformative in resolving things. This observation is born out in the statistics on the success of early resolution through access to information and availability of mediation in almost every forum, whether court, ADR or Ombudsman.

147 T Endicott, Administrative Law 5th edn (Oxford University Press, 2021); N. Wikeley, ‘Future Directions for Tribunals: a United Kingdom Perspective’ in R Creyke (ed), Tribunals in the Common Law World (Federation Press, 2008) 185; R Thomas, ‘From “Adversarial v Inquisitorial” to “Active, Enabling, and Investigative”: Developments in UK Tribunals’ in L Jacobs and S Baglay (eds), The Nature of Inquisitorial Processes in Administrative Regimes: Global Perspectives (Ashgate Publishing, 2013). 148 Sir Ernest Ryder, ‘The Modernisation of Access to Justice in Times of Austerity’ 5th annual Ryder Lecture, University of Bolton, 3 March 2016. 149 ibid. 150 Sir Andrew Leggatt, Tribunals for Users: One System, One Service (Ministry of Justice, 2001). Implemented in The Tribunals, Courts and Enforcement Act 2007. 151 The Modernisation of Tribunals 2018. A Report by the Senior President of Tribunals (Senior President of Tribunals, 2019); Lord Justice Ryder, Justice in a Modern Way, speech to the Administrative Law Bar Association, 16 July 2018. 152 Justice in Wales for the People of Wales (Commission on Justice in Wales, 2019); R Thomas, ‘Current Developments in UK Tribunals: Challenges for Administrative Justice’ in S Nason (ed), Administrative Justice in Wales and Comparative Perspectives (University of Wales Press, 2017). 153 A Public Service Ombudsman: Government Response to Consultation (Cabinet Office, 2015); Draft Public Service Ombudsman Bill 2016 (Cm.9374, Cabinet Office, 2016). See earlier Public Affairs Standing Committee, More Complaints Please! Twelfth Report of Session 2013–14, HC 229, 14 April 2014; Public Affairs Standing Committee, Time for a People’s Ombudsman Service, Fourteenth Report of Session 2013–14, HC 655, 28 April 2014; R Gordon, Better to Serve the Public: Proposals to Restructure, Reform, Renew and Reinvigorate Public Services Ombudsmen (Cabinet Office, 2013). 154 M Doyle and N O’Brien, Reimagining Administrative Justice. Human Rights in Small Places (Palgrave Macmillan, 2020); R Kirkham and C Gill (eds), A Manifesto for Ombudsman Reform (Palgrave Macmillan, 2020. 155 N O’Brien, ‘The Public Services Ombud and the Claims of Democracy’ in R Kirkham and C Gill (eds), A Manifesto for Ombudsman Reform (Palgrave Macmillan, 2021). See also M Doyle and N O’Brien, Reimagining Administrative Justice. Human Rights in Small Places (Palgrave Macmillan, 2020). 156 C Gill, N Creutzfeldt, J Williams, S O’Neill and N Vivian, Confusion, Gaps, and Overlaps. A Consumer Perspective on Alternative Dispute Resolution between Consumers and Businesses (Queen Margaret University and University of Westminster, 2017).

500  Cooperative Dispute Resolution This points toward an integrated model of Early Facilitated Communication, which delivers three functions simultaneously: (a) independent advice/assistance to both sides (replacing lawyers); (b) inputting and collecting relevant facts; and (c) facilitating communications between the parties. This avoids the need for users to have to go through separate processes or stages, or to talk to separate people, to achieve advice, investigation and communication functions. The developing experience is that a case officer can provide relevant information and assistance to both parties without becoming partisan. The ‘facilitated communication’ function morphs imperceptibly into ‘mediation’, where the case officer facilitates further communication between the parties with a view to assisting them to reach a settlement if they so wish, ‘in the shadow of a trusted independent’. The case officer also acts as a guard of fairness in treatment and outcomes, especially where there is an imbalance of power and resource between the parties, guarding against inappropriate pressure or abuse. If parties cannot reach fair agreements, the file may need further investigation of some facts, overseen by the case officer, and can then be passed to a relevant independent decider – judge or ombudsman. Overall, the stages of information, investigation, mediation and case management are effectively fused and not subject to different cost requirements.

The Impact of Digital Technology All dispute resolution processes are converting to using digital and online technology – albeit at different speeds. The current period is one not only of transformation to digital but also experimentation and hence diversification in models. One major consequence of this transformation is that lawyers are being replaced in their advisory, transactional and representation roles. Professor Richard Susskind has asserted from the early 2000s that artificial intelligence would replace lawyers.157 Clients will eschew bespoke services, demanding more efficient, less costly points on the continuum to commoditization. Lawyers will pay more attention to recognition (of the need for legal advice), selection (of the source of legal advice) and service (the process of delivering legal advice and assistance), and IT will optimize each of these stages.158

The wide-ranging potential was noted by the Legal Services Board in 2012.159 Technology is propounded as the enabler for consumers to help themselves without lawyers, for lawyers to provide cheap online services, and as fundamentally changing the provision of legal services so that lawyers are no longer the keepers of the law.160 The Law Society noted that alternative service models such as ODR represent an area with enormous potential for meeting the needs of the legal system and its users.161 In 2018 the Law Society forecast that automation will replace 20% (67,000) legal services jobs within a generation, falling from 320,672 jobs in 2017 to 314,094 in 2025, although this would be offset by an increase in law firms’ annual productivity

157 R Susskind, Transforming the Law: Essays on Technology, Justice, and the Legal Marketplace (Oxford University Press, 2003); R Susskind, The End of Lawyers? Rethinking the Nature of Legal Services (Oxford University Press, 2008). 158 A Boon, ‘Armageddon for the Legal Profession?’ (JOTWELL, 2010) at http://legalpro.jotwell.com/armageddonfor-the-legal-profession. 159 Evaluation: How Can We Measure Access to Justice for Individual Consumers? A Discussion Paper (Legal Services Board, 2012) para 4.39. 160 See R Susskind, The End of Lawyers? Rethinking the Nature of Legal Services (Oxford University Press, 2008). 161 The Future of Legal Services (The Law Society, 2016) para 4.2.3.

ADR  501 from 1.2% to 2.4% within a decade.162 Richard Susskind has recently commented that, although no one sensibly contends that the purpose is to dispense with lawyers, their reduction in numbers is simply a price of making the law more accessible and affordable.163 Dispute resolution processes are also being transformed. First, the traditional exchange of parties’ statements (pleadings) and evidence can take place online. Second, communication between the parties and the administrator, case manager, judge or other decision-maker can take place online, remotely and asynchronously and out of normal working hours, without the presence of all those involved at the same time.164 Third, there is the ability to obtain assistance from AI, for example in mass searching of evidence or precedents, or predicting steps or outcomes based on previous data. Experts claimed in 2016 that computer programmes could match judges in decision-making165 and the technology continues to improve. We chart here three leading examples of developments: online dispute resolution (ODR) systems, the Online Court project in England and Wales and the process adopted by some Ombudsmen.

ODR In their recent overview of ODR, Ethan Katsch and Orna Rabinovich Einy record the scale and diversity of examples of use of digital technology to resolve disputes.166 The use of online mechanisms for complaints was integrated almost from the start by retail platforms such as eBay (launched 1995, incorporating a link to a complaints and feedback system from 1999, and processing 60 million ‘disputes’ by 2012), Amazon, Alibaba, SquareTrade, Airbnb, Twitter, Facebook, Wikipedia and (over domain names) ICANN. All of these trading platforms recognised the need to build the trust of customers and traders and to reduce risk,167 given that disagreements arise in perhaps 3% to 5% of online transactions, totalling around 700 million e-commerce disputes in 2017.168 Stand-alone dispute resolution platforms have emerged, such as Cybersettle, Youstice, Modria, PictureItSettled and (widely used by consumers in the UK and elsewhere to send complaints to retailers) Resolver. The basic model of all these systems might be categorised by a lawyer as arbitration, sometimes voluntary and non-binding arbitration, perhaps binding a trader to a decision or allowing one or both parties to take a case to a court if desired (which very rarely happens). E-commerce overshadowed face-to-face (F2F) transactions in business-to-consumer (B2C) commerce.169 The trading platforms are all online, transforming communication processes,170 so the paradigm of their complaint systems also changed171 so that their feedback and complaint mechanisms are all

162 Legal Services Sector Forecasts 2017–2025 (The Law Society, 2018). 163 R Susskind, Online Courts and the Future of Justice (Oxford University Press, 2019) 236. 164 ibid, 60. 165 M Foudzer, ‘Artificial Intelligence Mimics Judicial Reasoning’ Gazette 22 June 2016, reporting a conference at which research by Professor Katie Atkinson at the University of Liverpool into a decision-making algorithm had a 96% success rate looking at 32 cases. 166 E Katsh and O Rabinovich Einy, Digital Justice – Technology and the Internet of Disputes (Oxford University Press, 2017). 167 ibid, 113; A Schmitz, ‘Building Trust in E-commerce Through Online Dispute Resolution’ in JA Rothchild (ed), Research Handbook on Electronic Commerce Law (Edward Elgar, 2016). 168 R Susskind, Online Courts and the Future of Justice (Oxford University Press, 2019) 29. 169 A Schmitz, ‘Building Trust in E-commerce Through Online Dispute Resolution’ in JA Rothchild (ed.), Research Handbook on Electronic Commerce Law (Edward Elgar, 2016). 170 J van Veenen, ‘Dealing with Miscommunication, Distrust, and Emotions in Online Dispute Resolution’ TISCO Working Paper Series on Access to Justice, Dispute Resolution & Conflict System Design No 004/2010. 171 J Hörnle, Cross-Border Dispute Resolution (Cambridge University Press, 2009).

502  Cooperative Dispute Resolution online, and rely heavily on AI, some being fully automated. ‘Algorithms underlie the handling of very large numbers of disputes and, as a result, can provide access to justice in numbers never before possible.’172 AI can undertake ‘tasks in ways that are best suited to their unique capabilities and not ours’.173 Technology has powerful predictive ability, especially recognising patterns in a mass of data, which can be used to identify most likely outcomes and the occurrence of problems that need attention so as to reduce future risk.174 Courts have not done this systemically so far, although the Chinese Supreme People’s Court had assembled a platform containing over 94 million cases by 2018.175 Overall, the advantages in terms of saving cost and time are considerable. The accessibility and performance of ODR systems have the potential to dramatically increase access to our justice system.176 Governance and quality issues are needed in order to provide reliability and trust. As Colin Rule, who has been instrumental in creating various ODR systems, comments,177 Every society throughout history has crafted social institutions to resolve problems fairly and consistently, and that is true also for the online society we are building on the Internet. … With the expansion of artificial intelligence and machine learning, ODR has the potential to become the new default for fast and fair resolutions, but there are many questions that still need to be answered, and much potential for fraud and abuse.

Consumer Ombudsmen Leading sectoral Ombudsmen covering consumer markets were quick to adopt online systems, and some now operate ‘digital by default’ processes, whilst also providing traditional, especially phone, access for consumers who may be vulnerable or prefer to mail or speak to a person. There are two critical evolutions. First, several traditional stages have been telescoped to provide an integral, user-friendly and efficient pathway for users. The traditional model is for companies to be required to have internal complaint handling mechanisms (tier 1) and for consumers to be required to direct any complaint at the trader first, allowing the trader typically eight weeks before being able to take a complaint to an Ombudsman or other ‘ADR scheme’ (tier 2). This sequencing introduces delay that is unnecessary and fails to respond to users’ needs (on both sides) of swift and cost-effective resolutions. On accessing a portal, whether at the tier 1 or 2 stages, a technique referred to as Early Facilitated Resolution can combine a number of procedural stages to emphasise and nudge early resolution through facilitated communication.178 The process involves communication both between and to the parties, providing an opportunity for them to understand and resolve their issues swiftly, spontaneously or through facilitated communication, if they wish. People input their complaint, facts and supporting evidence once only, whether online through a portal or by talking to a case handler. Further, as an initial stage, AI can assist the provision of relevant information to both 172 E Katsh and O Rabinovich Einy, Digital Justice – Technology and the Internet of Disputes (Oxford University Press, 2017) 47. 173 R Susskind, Online Courts and the Future of Justice (Oxford University Press, 2019), 272 and see 286. 174 J-F Roberge and V Fraser, ‘Access to Commercial Justice: A Roadmap for Online Dispute Resolution (ODR) Design for Small and Medium-Sized Businesses (SMEs) Disputes’ (2019) 25(1) Ohio State Journal on Dispute Resolution 1. 175 R Susskind, Online Courts and the Future of Justice (Oxford University Press, 2019) 171. 176 MA Bulinski and JJ Prescott, ‘Online Case Resolution Systems: Enhancing Access, Fairness, Accuracy, and Efficiency’ (2016) 21 Michigan Journal of Race & Law 205. 177 C Rule, ‘Online Dispute Resolution and the Future of Justice’ (2020) 16 Annual Review of Law and Social Science 277. 178 C Hodges, ‘The Private Sector Ombudsman’ in M Hertogh and R Kirkham (eds), The Research Handbook on Ombudsman (Edward Elgar, 2018).

ADR  503 sides on relevant aspects of law, code or process. Digital processes can support better formulation of complaints and provision of information to both sides, in one Ombudsman resolving around 20% of cases immediately that had been left unresolved at the first tier because they are better formulated and articulated and consumers are given the confidence that their case is being conducted under the gaze of the ombudsman and that resolutions are legally binding. These 20% of cases therefore never proceed to investigation. The data on the cases is still collected so the regulator can access data, risk information and intelligence. This process can triage cases and also identify facts and evidence that are or are not relevant, the latter being ignored. Critically, the process therefore fuses the functions of communication, negotiation, mediation, case investigation and triaged case management. The adversarial mode is absent, as the process is investigative, and legal assistance for both parties is unnecessary, the independent case handler seeing that the relevant rules (low or code) are explained and applied. A further step is possible that in effect fuses tiers 1 and 2. API technology means systems can communicate with each other and can take cases from first to second tier if an Ombudsman’s platform is used, effectively as an outsourced complaint handling function for a business. People are encouraged to talk, if necessary coordinated and encouraged by an independent case officer at an Ombudsman, whose role morphs into combining mediation and case investigation, and can, if necessary, result in a file being passed to a separate Ombudsman for a determination. This model would be highly attractive to SMEs, who would not wish to incur the cost, resource or time of creating internal complaint mechanisms that might only have small or no throughput. For larger companies, Ombudsmen officials might be embedded into a company to provide independent engagement with improving practices within the firm. The Ombudsman involved has set up its own software house to tackle this and other tech opportunities. The second evolution is the ability to aggregate the mass of micro case data to provide a macro picture of issues and behaviour in the marketplace, which is then fed back and drives evidencebased intervention aimed at addressing the root causes of a problem and reducing the risk that it will recur. The Ombudsman plays an essential role in the market surveillance and supervisory system, working with a regulator, in many consumer markets but not for public sector bodies.

Online Courts Innovative models attracted considerable attention, such as the Civil Resolution Tribunal for low value claims in British Columbia,179 commenced in 2016, the family online system Rechtwiejser180 created by the Dutch Legal Aid Board, the Singapore Community Disputes Resolution Tribunals and Employment Claims Tribunals and the eCourtroom facility in Australia. Not all goes well, however. The comment made in 2009 by Dutch judge Dory Reiling that judicial organisations and justice authorities struggle with IT in the courts,181 was echoed in 2018 when the Judicial Council of the Netherlands decided not to implement a major piloted digitisation programme in first instance courts. In England and Wales, Money Claims On Line was introduced in 2002 as the Internet mailbox for the court, and Possession Claim On Line was launched in 2006. A Claims Portal was also developed by insurers for lodging claims and assisting the early settlement of uncontested claims, 179 S Salter and D Thompson, ‘Public-Centered Civil Justice Redesign: A Case Study of the British Columbia Civil Resolution Tribunal’ (2016/2017) 3 McGill Journal of Dispute Resolution 113. 180 M Gramatikov and L Klaming, Getting Divorced Online: Procedural and Outcome Justice in Online Divorce Mediation: TISCO Working Paper (Tilburg University, 2011). 181 ibid, 16.

504  Cooperative Dispute Resolution or their transfer into court. This proved to be a success and it was extended in 2013 to include claims for accidents at work and in public places, with an upper limit raised from £10,000 to £25,000.182 The Portal was extended further in 2021.183 Since 2015 a huge project has been underway to convert all courts and tribunals to digital processes. The initial investment of £738 million in modernising the courts’ IT systems was funded largely by closing 86 courts and selling the estate, leading to projected overall savings in Ministry of Justice expenditure of around £200 million a year from 2019–20.184 The blueprint for the wholescale shift to online process was announced by Lord Justice Briggs in 2016,185 and given political and judicial support.186 All claims in England and Wales under £25,000 would be switched into a new court structure, HM Online Court (OC), later called the Online Solutions Court (OSC), which was intended to be customer-driven and deliver justice ‘where it’s most appropriate’ rather necessarily than in courts.187 The OSC would operate in three stages, all essentially online.188 The model was based on – but with some differences from – how the Financial Ombudsman Service operated around 2010.189 In Stage 1, issues are identified, largely in an automated environment, with claimants supported by ‘assisted digital’ simple, commoditised online advice, and help lines. The system should ‘provide a civil court structure uniquely suitable for litigating without lawyers’.190 Stage 2 involves a mix of conciliation and case management by case officers, conducted partly online, partly by telephone, who manage the collection of evidence and allocation of the case to an appropriate track if the case is not settled. Stage 3 is determination by a judge, either on the documents, on the telephone, by video or at face-to-face hearings, but with no default assumption that there must be a traditional trial. It remained undecided whether the conciliatory role of the Case Officer in Stage 2 should be primarily that of mediator or evaluator.191 Briggs contrasted what he characterises as an ‘early neutral evaluation’ (ENE) approach of the Financial Ombudsman (which was highly successful in resolving over 80% of incoming complaints without the involvement of an ombudsman) with the more ‘rough and ready’ telephone mediation carried out in small claims

182 Press release, Turning the Tide on Compensation Culture (Ministry of Justice), 1 May 2013, at www.gov.uk/ government/news/turning-the-tide-on-compensation-culture. 183 www.officialinjuryclaim.org.uk/. 184 Spending Review and Autumn Statement 2015: Key Announcements (HM Treasury, 2015); Response to the Proposal on the Provision of Court and Tribunal Estate in England and Wales (Ministry of Justice and HM Courts and Tribunals Service, 2016). See later Modernisation of Justice through Technology and Innovation (HM Courts and Tribunals Service, 2016). 185 Lord Justice Briggs, Civil Courts Structure Review: Final Report (Judiciary of England and Wales, 2016). This was supported by other bodies: Online Dispute Resolution Advisory Group, Online Dispute Resolution for Low Value Civil Claims (Civil Justice Council, 2015); Delivering Justice in an Age of Austerity (JUSTICE, 2015). 186 The Lord Chancellor, the Lord Chief Justice and the Senior President of Tribunals, Transforming Our Justice System (Ministry of Justice, 2016). 187 Justice Matters. How Our Change Programme Will Make Services Better for Everyone Who Uses Them (HM Courts and Tribunals Service, 2017). 188 C Hodges, ‘Proposed Modernisation of Courts in England & Wales: IT and the Online Court’ (2016) 6(1) International Journal of Procedural Law 149–63. 189 See C Hodges, I Benöhr and N Creutzfeldt-Banda, Consumer ADR in Europe (Hart Publishing, 2012). 190 Lord Justice Briggs, Civil Courts Structure Review: Final Report (Judiciary of England and Wales, 2016) para 6.8. 191 ibid, para 7.18.

Switches between Systems   505 by non-legally-trained officials in the County Court Bulk Centre (with a 70% success rate).192 He preferred the latter simple mediation role for Case Officers.193 In relation to the investigation function, Briggs noted ‘the common experience of DJs hearing small claims track cases at present is that the key facts and evidence remain buried in the minds of the litigants and in their ill-assorted bundles of documents even when they arrive at court for a trial’.194 HMCTS proceeded from 2016 to implement a £1.2 billion programme to modernise courts and tribunals. By 2018 it was said that work on ‘civil, family and tribunals’ was 85% complete and the programme had delivered:195 • A new fully accessible online Civil Money Claims service giving the public the ability to make a small claim online – with 13,000 claims made online since its launch in late March, and user satisfaction at 90%. • A new system for applying for divorce online, which cut errors in application forms from 40% to less than 1%. • A new probate system in testing which has also cut errors, speeds up the process, and a user satisfaction rate of 95%. • A pilot of fully video hearings in the tax tribunal to test the potential for the use of video more broadly across the courts and tribunals system. This is now the subject of an independent, academic evaluation. • The national roll-out of a new in-court system to record the results of cases digitally and instantly. • A national Track Your Appeal service in social security and child support tribunals, allowing thousands of users, many vulnerable, to be kept informed about the progress of their Personal Independent Payment appeal. Online processes were piloted and introduced in sequence across the Tribunals landscape, which included coordinating with Government Departments, such as the Department for Work & Pensions (DWP) and the Social Entitlement Tribunal, and the Home Office and the Immigration Tribunal.196

Switches between Systems The extent to which claims by consumers have left lawyers and courts can be seen from the figures at Table 16.1. To the half million or so consumer cases handled by sectoral Ombudsmen annually, should be added an unknown number of cases processed by sectoral ADR (arbitration) schemes, mainly administered by the Centre for Effective Dispute Resolution (CEDR). The far greater number of inquiries received, that may not turn into cases, is of major value as data in identifying market conditions and issues.

192 ibid, paras 7.18–7.24. 193 ibid, para 7.26. 194 ibid, para 6.10. 195 Early Progress in Transforming Courts and Tribunals (National Audit Office, 2018); HMCTS Response to Public Accounts Committee Report on Court Reform Programme, 20 July 2018. 196 ibid, Fig 5.

506  Cooperative Dispute Resolution Table 16.1  Incidence of Major Claims in the Leading Consumer and Public Ombudsmen 2018/19 to 2019/20 Inquiries 2018/19

Cases received 2018/19

Pensions

13,964

2,566 early resolution 1,528 new investigations

Energy*

–

68,523

–

57,626

Communications*

?

20,183

45,078

20,426

Ombudsman Financial

Inquiries 2019/20

388,392

Cases received 2019/20

? 20,529

273,026 2,400 early resolution 1,192 new investigations

Legal

?

4,022

112,426

6,425

Property

–

17,353

–

11,025

Housing

8,671

7,623

–

19,117

Motor*

90,718

6,114

7,762

6,220

Rail

33,772

3,261

–

3,447

Disputes and Furniture & Home Improvements*

33,900

7,378

12,606

4,464

Consumers Total

526,943

400,904

PHSO

112,262

29,841

103,965

30,895

LGSCO

36,767

19,625

34,119

18,482

Armed Services Public Sector Total

754

322

862

286

149,783

49,788

138,946

49,663

* These reports are for 2019 and 2020 calendar years. NB not all cases received were considered to be within scope.

Claims handled by courts and tribunals mainly relate to (in descending incidence): debt, trading, road safety, social security, issues with public bodies, employment and family issues. A general indication of the main claim categories by incidence is summarised in Table 16.2. One issue to which we will return is how behaviour can be influenced so as to reduce the incidence of these problems. Table 16.2  Incidence of Major Claims Receipts in Courts and Tribunals197 Approximate Annual Numbers Types of Cases

2017/18

2018/19

2019/20

Civil Claims in County & Magistrates Courts, mainly money

2,048,000

2,077,000

1,980,000

850,000 2017*: 142,200

? 2018*: 124,100

? 2019*: 113,000

Personal Injury –– Total –– County Courts Family Courts

252,000

267,000

266,000 (continued)

197 UK Government: Civil Justice Statistics Quarterly, Family Court Statistics Quarterly, Tribunal Statistics, Royal Courts of Justice Annual Tables.

Desired Outcomes: Community and Consensus   507 Table 16.2  (Continued) Approximate Annual Numbers Types of Cases

2017/18

2018/19

2019/20

Social Security and Care Tribunal

239,000

196,000

162,000

Employment Tribunals

110,000

121,000

104,000

Property possession cases

148,000

141,000

129,000

Immigration and Asylum Tribunal

45,000

44,000

42,000

Other Tribunal Chambers

90,000

90,000

87,000

High Court (Administrative, Queen’s Bench, excl Chancery & Family)*

10,000

10,000

10,000

* Calendar years

Integrating Pathways and Techniques The landscape of pathways for dispute resolution in England and Wales is now extremely complex and diffuse. Different options exist for different types of disputes. Almost every type of dispute resolution institution and pathway involves a different mixture of forms and techniques, across a spectrum of negotiation, mediation and adjudication. In other words, the different options involve a mixture of models around how the parties are involved themselves and what roles are played by intermediaries – based around a spectrum of extremes between consensual negotiation or adversarial representation and combat. The inquiry of this book is to examine means of building cooperation between people and institutions. Thus, the cooperative modes of negotiation and mediation are intrinsically more attractive than the oppositional, argumentative modes of an adversarial system. So the former should be prioritised. However, there are some circumstances where parties cannot agree, or where the rules need to be clarified. That function requires an independent expert third party to make a binding decision. The ideal is a fusion of techniques, and recent reforms of various dispute resolution institutions and procedures have clearly moved in this direction. Various examples can be cited, such as the Groceries Code Adjudicator and the collaboration between consumer Ombudsmen and regulators.

Desired Outcomes: Community and Consensus From the perspective of supporting cooperation, the objective is to promote community and reconciliation through fair resolution of disputes. Accordingly, the dispute resolution process should avoid producing distancing and adversarial alienation. This would point towards focusing on techniques, processes and structures that stress communication and mediation in preference to an adversarial model. Processes that do this include the consumer Ombudsman model, which involves an integrated pathway that is investigative and provides opportunities for communication and mediation before (in a relatively small percentage of cases) an Ombudsman decision. The traditional legal system, involving partisan lawyers and courts, does not deliver the functions or outcomes needed. The court system has faced a real challenge to embed mediation into

508  Cooperative Dispute Resolution (as opposed to alongside) the pathway, which remains essentially partisan and adversarial. It also involves inherently greater cost than an Ombudsman system. Cappelletti described ADR as a means that can provide high quality dispute resolution solutions and, in particular, provide the opportunity to find an amicable solution between the parties, which ‘has the potential to preserve the relationship …, rather than a final break of the relationship’.198 If it is important to preserve relationships, such as in commercial or family engagement, it is clearly important that the dispute resolution system should not lead to unnecessary damage, even if it produces a legal result. It has long been claimed that mediation in particular is a process that gives parties direct personal involvement and an opportunity to express their feelings and needs.199 This means that the processes, techniques and structures should all be aligned. If people can be brought together through a range of techniques,200 then healing and reconciliation may occur. The relevance of systems aimed at bringing truth and reconciliation201 after major trauma has been well documented. The following are some examples.202

Restorative Justice Restorative justice is an approach that has ancient origins in customary societies, notably North American and Australasian indigenous peoples.203 It has been applied in recent years in attempting to achieve better outcomes in offending by, for example, youths or recidivist criminals than traditional penal sanctions,204 and impressive results have been reported.205 Restorative justice brings the offender and victim together with the following aims:206 Firstly, it aims to affect the offender’s future behaviour by confronting him with the effects of his crime. The approach moves them away from sole reliance on traditional deterrence-based approaches. Secondly, it aims to restore the victim’s sense of injury by giving an opportunity to express her feelings. Where this technique is successful, it achieves a social and behavioural rebalancing. It can also lead to reparative actions by the offender, not least saying sorry. Thirdly, the legal mechanisms by which reparative compensation may be paid to victims of crime have been developed. Several mechanisms exist, and from 2012 criminal courts are required to consider making a compensation order after every conviction.

198 M Cappelletti, ‘Alternative Dispute Resolution Processes within the Framework of the World-Wide Access-to Justice Movement’ (1993) 3 The Modern Law Review 56. 199 C Menkel-Meadow, ‘When Dispute Resolution Begets Disputes of Its Own: Conflicts Among Dispute Professionals’ (1997) 44 UCLA Law Review 1871. 200 eg mediation resulting in settlement, facilitative problem-solving, therapeutic or evaluative mediation: L Boulle and M Nesic, Mediation: Principles, Process, Procedure (Butterworths, 2001) 21–29. 201 L Radzik, Making Amends (Oxford University Press, 2009); R Carroll, A Allan and M Halsmith, ‘Apologies, Mediation and the Law: Resolution of Civil Disputes’ (2017) 7(3) Oñati Socio-legal Series 569. 202 This section is taken from the author’s Report on Mechanisms for the Independent Review of SME/Bank Dispute Resolution in the UK, 2018. 203 I Ayres and J Braithwaite, Responsive Regulation: Transcending the Deregulation Debate (Oxford, 1992); J Braithwaite, Restorative Justice and Responsive Regulation (Oxford, 2002). 204 See D Sullivan and L Tifft (eds), Handbook of Restorative Justice (Routledge, 2006); D Miers and J Willemsens (eds), Mapping Restorative Justice: Developments in 25 European Countries (European Forum for Victim-Offender Mediation and Restorative Justice, Leuven, 2004); I Aertsen, R Mackay, C Pelikan, M Wright and J Willemsens, Rebuilding Community Connections – Mediation and Restorative Justice (Council of Europe, Strasbourg, 2004). In the United Kingdom, restorative justice was first extensively used in relation to juvenile crime: see Home Office, Restorative Justice: the Government’s Strategy (Home Office, 2003). 205 Facing Up To Offending: Use of Restorative Justice in the Criminal Justice System (Criminal Justice Joint Inspection, 2012). Policy on expansion: Restorative Justice Action Plan for the Criminal Justice System (Ministry of Justice, 2012). J Shapland, G Robinson and A Sorsby, Restorative Justice in Practice (Routledge, 2011). 206 C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015) 213.

Desired Outcomes: Community and Consensus   509 UK Government policy on criminal harm as at 2012 was to use processes that bring those harmed by crime or conflict, and those responsible for the harm, into communication, enabling everyone affected by a particular incident to play a part in repairing the harm and finding a positive way forward.207

Transitional Justice The related concept of Transitional Justice describes ways in which different societies have dealt with past human rights abuses as they transition to different political and social regimes. Examples included the responses to address past human rights violations in dictatorships and armed conflict by regimes or civil war in Eastern Europe and Central America in the 1980s and 1990s. Principal goals have been ‘to ensure accountability, serve justice and achieve reconciliation’,208 although all elements are not always included. One of the features of transitional justice is its flexibility and contextual responsiveness.209 New approaches often arise because of political pressure and the inability of the legal system to deliver outcomes that are sought. Professor Christine Bell, an expert in Transitional Justice who has particularly studied ‘The Troubles’ in Northern Ireland, commented:210 These campaigns have been successful in forcing a modified or quasi-legal mechanism drawn from the repertoire of transitional justice mechanisms when two criteria have been satisfied: political pressure requires that the wrong be addressed, and the legal system has had no capacity to respond to the wrong because it had no individual perpetrator, because the wrong done was historic and because the wrong was legal (both under international and domestic law) when perpetrated.

Professor Bell and others have also noted the fact that in some situations the political goals of transition shape the justice that applies, rather than vice versa as in more stable societies. In other words, there can be a tension between whether the rule of law is applied (such as the certainty provided by agreements concluded under law of contract) and bending to political forces (possibly those who shout loudest) in determining what ‘justice’ means and what outcomes are delivered.

Truth and Reconciliation In countries where there has been widespread harm in society, such as disappearance, torture and death, a ‘Truth and Reconciliation’ process has been found to be both effective and necessary. This process has been used in South Africa to try to bind the nation together after apartheid.211 The website description says: The South African Truth and Reconciliation Commission (TRC) was set up by the Government of National Unity to help deal with what happened under apartheid. The conflict during this period 207 Facing Up To Offending: Use of Restorative Justice in the Criminal Justice System (Criminal Justice Joint Inspection, 2012). Restorative Justice Action Plan for the Criminal Justice System (Ministry of Justice, 2012). 208 Report of the Secretary-General on the Rule of Law and Transitional Justice in Conflict and Post-Conflict Societies, UN Doc S/2004/616 (3 August 2004) para 8. 209 As Professor Carrie Menkel-Meadow has said, the ‘“forum must fit the fuss”, and there are many different kinds of “fusses” that arise’ to be dealt with: C Menkel-Meadow, ‘Process Pluralism in Transitional/Restorative Justice – Lessons from Dispute Resolution for Cultural Variations in Goals beyond Rule of Law and Democracy Development (Argentina and Chile)’ (2015) 3(1) International Journal of Conflict Engagement and Resolution 3. 210 C Bell, ‘Transitional Justice, Interdisciplinarity and the State of the “Field” or “Non-Field”’ (2009) 3(1) International Journal of Transitional Justice 5. 211 www.justice.gov.za/trc/.

510  Cooperative Dispute Resolution resulted in violence and human rights abuses from all sides. No section of society escaped these abuses. ‘… a commission is a necessary exercise to enable South Africans to come to terms with their past on a morally accepted basis and to advance the cause of reconciliation.’ Mr Dullah Omar, former Minister of Justice.

The TRC established three committees: the Amnesty Committee, Reparation and Rehabilitation (R&R) Committee and Human Rights Violations (HRV) Committee.

Needs and Responses What is the right and effective response to harm? The key is that it involves individuals and responding to their emotions and relationships, for which resolution of legal rights does not directly respond. Let us examine a sequence of what might be called stages of emotional resolution: explanation, voice, being heard, apology and emotional closure. A related strand comprises explanation, accountability and assurance that the same thing will not recur and happen to others: that issue raises the need for feedback and self-correction or intervention so as to change behaviour. However, it is just noted here that people can frequently accept terrible events where they receive assurance that lessons have been learned and the same thing will not happen to others. Thus, providing credible assurance that a regulatory feedback mechanism exists and operates can assist in gaining closure. It is important to start with the realisation that achieving an outcome of being told that one’s rights were broken and that some money will be paid might address physical loss but does not address emotional damage. That point is closely associated with the expansion of the Ombudsman jurisdiction outside breaches of law to cover providing outcomes that are fair.

Explanation and Accountability Responses to medical mishaps demonstrate a need for ‘information in’ as opposed to ‘voice out’. Patients and families always call for a full and clear explanation of what happened and why. It is often not recognised that those recipients may need such explanation to be provided in simple language, to be repeated, to involve independent friends or experts, and to be available to be repeated more than once as the meaning and significance may need time to be understood. The need for explanation is linked to the call for voice and accountability. The call for account­ ability is frequently driven by the assumption that one or more individuals are to blame for wrongdoing and must be held to account. Whilst such situations of course exist, and are evidenced where some individuals are convicted, such an approach fails to address a systemic situation, such as where the culture of an organisation or business sector are involved. More sophisticated approaches to accountability exist in some sectors and organisations, the paradigm being the open safety culture discussed above in aviation safety, where strong and effective accountability is interpersonal. The way in which an explanation is given can significantly affect whether an issue gains closure. People feel even more hurt and affronted if they think that they have been lied to, or not told the truth, or positively lied to, or treated dismissively with a lack of respect, or not taken seriously. People who experience these feelings can ‘dig in and not give up’, even if that is irrational, when they might previously have been prepared to compromise or give up.212 212 ‘Emotions are the driving force that appear to overwhelm reason in dispute situations’: Archbishop Desmond Tutu, ‘Foreword’ in P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Continuum, 2016) xix.

Desired Outcomes: Community and Consensus   511

Voice and Being Heard Vindication of legal rights is an important issue but does not necessarily address deep damage to the ego of a person harmed. Vindication in psychological terms requires people to be heard and believed, and for that to be demonstrated. It is often said that people want their ‘day in court’. The implication might be that people should be given an opportunity to sound off before the judge imposes a more rational solution, and the process of expressing their views will be sufficiently cathartic even if they lose. However, various problems arise with this view. First, research establishes a clear link between outcome and satisfaction with even a process in which procedural fairness has been observed.213 Second, a seriously damaged loss of self-esteem will not be healed by such a process. It is important to people that they are not just given ‘voice’ but are also ‘heard’. The need to demonstrate that people have been heard through ‘reflecting back’ was clearly recognised by a striking statement at the start of the Report of the Gosport Memorial Hospital Inquiry:214 Introduction and key conclusions 12.4 Having looked at documents covering the whole period since 1987, the Panel can say: ‘Yes, we have listened and yes, you, the families, were right. Your concerns are shown to be valid.’ Indeed, as this Report shows, the practice of anticipatory prescribing and administering opioids in high doses affected many patients and families – not only those who have led the way in pressing for the truth, but also very many other families.

Apology There is plenty of evidence that receiving an apology can resolve a dispute.215 An apology carries a deep implication of appreciation of the fact that the other person has suffered hurt, and their ego has been damaged. It is regarded as morally essential as constituting the moral repayment of a moral debt (atonement).216 However, how an apology is given can significantly affect the result. There has been strong recent empirical evidence that perpetrators of harm provide less comprehensive apologies than victims desire, and their apologies thereby evoke lower forgiveness in victims.217 These differences were explained by their differing perception of torts, such that perpetrators regard their transgressions as less severe and intentional, and themselves as less blameworthy than victims do, and consequently offer less comprehensive apologies than victims desire. Therefore, subjectiveness in victims’ and perpetrators’ perception of torts may undermine the remedial effectiveness of legal apology.

213 N Creutzfeldt, Ombudsmen and ADR: A Comparative Study of Informal Justice in Europe (Palgrave, 2018). 214 Gosport War Memorial Hospital: The Report of the Gosport Independent Panel Ordered by the House of Commons to be printed on 20 June 2018, HC 1084. 215 E Latif, ‘Apologetic Justice: Evaluating Apologies Tailored towards Legal Solutions’ (2001) 81 Boston University Law Review 289–320; P Vines, ‘Apologies and Civil Liability in the UK: A View from Elsewhere’ (2008) 12 Edinburgh Law Review 200–30; BT White, ‘Say You’re Sorry: Court-ordered Apologies As a Civil Rights Remedy’ (2005) 91 Cornell Law Review 1261–69; LW Sherman, H Strang, C Angel, D Woods, GC Barnes, S Bennett and N Inkpen, ‘Effects of Face-to-face Restorative Justice on Victims of Crime in Four Randomized Controlled Trials’ (2005) 1 Journal of Experimental Criminology 367–95. 216 L Radzik, Making Amends (Oxford University Press, 2009). 217 C Reinders Folmer, P Mascini and J Leunissen, ‘Rethinking Apology in Tort Litigation Deficiencies in Comprehensiveness Undermine Remedial Effectiveness’, at https://ssrn.com/abstract=3113196.

512  Cooperative Dispute Resolution The lessons appear to be that those who cause harm should think more deeply about both the causes and effects of what they have done and should pay attention to how sincere their actions and statements actually appear to those who have been harmed.

The Need for Closure Where people who have been damaged suffer the kind of deep psychological harm described here an effective response needs to be found. This is so even if such people may be a minority of those who have suffered financial loss. Unless the issue is addressed, there can be no closure. Repeated concentration on traumatic past events can induce a level of obsession from which it can be difficult to move on.218 The distinguished mediator Paul Randolph has written that the vital objective of a mediator is to secure an attitude shift on the part of one or more of the parties in the conflict, and he quotes an ancient Tao observation, according to Wayne W Dyer (an American psychologist): ‘if we change the way we look at things, the things we look at change’.219 A central tenet of the classic book on mediation by Roger Fisher and William Ury was that if you want the other side to appreciate your interests, begin by demonstrating that you appreciate theirs.220 This country has seen a number of examples of the continued pursuit of issues by those who feel deeply hurt despite the conclusion of legal processes such as police investigations, inquests or court cases. Current examples are stories of the families involved in the Hillsborough Stadium, the Manchester bombing, the Telford maternity cases, and prosecutions by the Post Office. The ultimate demand by those involved is often for a Public Inquiry, as this appears to be the only option that people can identify as a means to achieve closure through ‘getting at the truth’, and ‘holding people to account’. Issues of financial compensation often fade into the background in such situations. The broad functions of a Public Inquiry are:221 Establishing the facts – providing a full and fair account of what happened, especially in circumstances where the facts are disputed, or the course and causation of events is not clear; Learning from events – and so helping to prevent their recurrence by synthesising or distilling lessons which can be used to change practice; Catharsis or therapeutic exposure – providing an opportunity for reconciliation and resolution, by bringing protagonists face to face with each other’s perspectives and problems; Reassurance – rebuilding public confidence after a major failure by showing that the government is making sure it is fully investigated and dealt with; Accountability, blame, and retribution – holding people and organisations to account, and sometimes indirectly contributing to the assignation of blame and to mechanisms for retribution; Political considerations – serving a wider political agenda for government either in demonstrating that ‘something is being done’ or in providing leverage for change. 218 P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Continuum, 2016). 219 ibid, 28. 220 R Fisher and W Ury, Getting to Yes: Negotiating an Agreement Without Giving In (Penguin Books, 1981). 221 Geoffrey Howe, ‘The Management of Public Inquiries’ (1999) 70 Political Quarterly 294–304, summarised in Kieran Walshe and Joan Higgins, ‘The Use and Impact of Inquiries in the NHS’ (2002) 325 British Medical Journal 896–97; reproduced in Government by Inquiry. First Report of Session 2004–2005 House of Commons Public Administration Select

Desired Outcomes: Community and Consensus   513 However, Public Inquiries suffer from some serious disadvantages, not least lengthy delay and massive cost. They remain based on an adversarial model, even if able to introduce some more personal elements. They may provide voice but not necessarily being heard, nor effective accountability by leading to change in future behaviour or culture.

Some Conclusions on Resolution Responding effectively to deep or extensive past hurt is an area which the legal system has not traditionally sought to address in terms now understood by modern psychology. Access to justice takes on a different meaning in this context: justice is inter-personal and social, rather than remote and a declaration of rights. It is an area for which effective new solutions need to be found, however infrequent the incidence might be for individuals. The legal system based on vindication of rights, and a process based on adversarial combat, are wholly inappropriate for resolving such problems. However, various bodies of knowledge and experience, and techniques, can be called upon. These considerations point to the need to adopt at least an approach based on ‘fairness’ rather than ‘law’ as a means of recognising the inter-personal nature of the relationships that need to be restored. Resolving issues over how certain banks treated some customers some years ago needs a mechanism in which the nature of the harm suffered by some of those harmed leads to personal restorative approaches. One view is that various processes have already addressed the major goals of a public inquiry noted above (establishing the facts, accountability and blaming) and providing ‘voice’, such as through criminal trials, the Promontory Report, the involvement of the Public Accounts Committee, the APPG and its hearings, the FCA, multiple court and ADR cases and extensive press and website reporting. An important issue is that effecting real improvements in creating a better dispute resolution process and a learning/regulatory process should come out of this Inquiry. It may be that the adequate telling of victims’ stories has been achieved through various means, not least in Parliament through hearings of the APPG. It may also be that regulatory steps have been taken to avoid repetition, although debate continues on that aspect, and the issues of affecting the culture of financial institutions remains current. But responses are needed by senior officials of the banks to demonstrate that individuals have been heard and, that responsible people are genuinely sorry. The effectiveness of an apology depends significantly on how it is done. Victims who feel that an apology is insincere or formalised will not accept it, and it may deepen their motivation to continue to fight.

The Psychology of Resolution Simon Roberts described the growing recognition of ‘settlement’ as an approved, privileged objective of civil justice.222 Parties in many jurisdictions had come to use the framework provided

Committee, HC 51-I (2005) and in Public Inquiries: Non-statutory Commissions of Inquiry (House of Commons Library, 2016). See also Inquiries Guidance (Cabinet Office); Briefing Paper: Statutory Commissions of Inquiry: The Inquiries Act 2005 (House of Commons Library, 2018). 222 S Roberts, ‘Settlement as Civil Justice’ (2000) 63(5) Modern Law Review 739.

514  Cooperative Dispute Resolution by civil procedure as the primary arena for their attempts to ‘settle’.223 The process can lead to an ‘ideal speech situation’ in which people cooperate to resolve their differences through voluntary communication. This reverses the priorities as between two foundational processes of ‘judgement’ and ‘agreement’.224 But, as Roberts noted, ADR requires a sea change in the traditional approach of lawyers to litigation, in its very essence an antagonistic, adversarial and secretive process under which actual combat (‘fighting’) is simply represented in an externally monitored, heavily ritualized verbal exchange.

Agreement is not realistic or ideal in every case. But if people continue to disagree, and to need their dispute to be resolved by an independent third party, the issue and options for possible remedies should be clarified and they should ‘disagree well’. A fundamental way of looking at these systems is through the lens of facilitating communication and sharing of information, viewpoints and explanations between parties. Many dispute resolution professionals, from both the mediation and adversarial worlds, have commented that communication and understanding is the key to resolving the vast majority of disputes. That viewpoint opens the mind to understanding how adversarial and state-based systems limit the ability of parties to restore their relations by offering constricted procedures and limited remedies. Antagonistic processes that lead usually only to a remedy of ordering payment of money – not only where money may be itself owed but also as a supposed mechanism for effecting change and producing different future behaviour and risk reduction – have ‘limited remedial imagination’, as well as having the potential to destroy relationships, lead to suboptimal outcomes, and result in overall dissatisfaction, as ADR scholar Carrie Menkel-Meadow said.225 She noted that fresh ideas on negotiation theory, hitherto described as a ‘Tower of Babel’,226 include the idea that problem solving negotiation ‘is not about “win-win” outcomes, but about seeking to meet the “needs” (from a social welfarist perspective) of the parties’.227 Considering dispute resolution from the perspective of the psychological needs of individuals, such as autonomy, self-determination and empowerment, is instructive.228 We have seen in chapter three that cooperation is facilitated where people discuss their differences with the objective of clarifying them and attempting to find a solution that integrates the best thoughts that emerge during the discussion, no matter who articulates them.229 It is important how people

223 M Galanter and M Cahill, ‘Most Cases Settle: Judicial Promotion and Regulation of Settlements’ (1994) 46 Stanford Law Review 1339. 224 S Roberts and M Palmer, Dispute Processes: ADR and the Primary Forms of Decision-Making (Cambridge University Press, 2005). 225 C Menkel-Meadow, ‘Pursuing Settlement in an Adversary Culture: A Tale of Innovation Co-Opted or “The Law of ADR”’ (1991) 19 Florida State University Law Review 1, 6. 226 AK Schneider and RJ Lewicki, ‘The Past and Future Challenges of Negotiation Theory’ (2016) 31(1) Ohio State Journal on Dispute Resolution 1; J Lande, ‘Building Negotiation Theory from Real-Life Negotiations’ (2017) Journal of Dispute Resolution 53. 227 C Menkel-Meadow, ‘The Origins of Problem Solving Negotiation and Its Use in the Present’ in S Cole, A Hinshaw and AK Schneider (eds), Discussions in Dispute Resolution (Oxford University Press, 2018). 228 JM Nolan-Haley, ‘Mediation, Self-Represented Parties, and Access to Justice: Getting There from Here’ (2018) 87 Fordham Law Review Online 15; T Cole, Pietro Ortolani and S Wright, ‘Arbitration in its Psychological Context: A Contextual Behavioural Account of Arbitral Decision-Making’ in Thomas Schultz and Federico Ortino (eds), Oxford Handbook of International Arbitration (Oxford University Press, 2018); JR Cohen, ‘Negative Identity and Conflict’ (2020) 35 Ohio State Journal on Dispute Resolution 744. 229 See DW Johnson, RT Johnson and D Tjosvold, ‘Constructive Controversy: The Value of Intellectual Opposition’ in M Deutsch, P Coleman and ED Marcus (eds), The Handbook of Conflict Resolution: Theory and Practice 2nd edn (Jossey-Bass, 2006).

Desired Outcomes: Community and Consensus   515 engage, namely respectfully and on the basis of common ethical values, if a controversy is to be fruitful, constructive, cooperative and provoke learning and innovation – all of which are possible and desirable.230 As Morton Deutsch says:231 There is no winner and no loser; both win if during the controversy each party comes to deeper insights and enriched view of the matter that is initially in controversy. Constructive controversy is a process for constructively coping with the inevitable differences that people bring to cooperative interaction because it uses differences in understanding, perspective, knowledge, and worldview as valued resources. By contrast, in competitive contests or debates there is usually a winner and a loser.

Experienced lawyer and mediator Paul Randolph’s analysis of the psychology and practice of mediation232 considered the importance of emotions in disputes, especially our need for control and anxiety when threatened, overwhelming reason in dispute situations. ‘Most disputes spring from some perceived injustice, and this will inevitably involve injury to feelings. This injury is aggravated by the fact that many conflicts often involve allegations of ‘fault.’ … Invariably it is a highly emotional state of mind that clouds the judgment and prevents parties from listening to reason … that this is related to a person’s values and value systems, and to their self-esteem and self-concept.233

Randolph drew here on Kierkegaard’s view that there is no such concept as ‘objective truth’: truth is what is true for the individual. He suggested that the role of a mediator is to diffuse anger and anxiety, and nudge the parties to move to a different perception of themselves and their opponents’ interests.234 As discussed in chapter four above, we have strong instincts to think of ourselves as highly principled, and to rationalise the rightness of what we have done. Accordingly, Randolph endorsed the view that confronting a person’s robust stance with an opposite robust opinion leads to a pointless cycle of positional antagonism.235 Instead, one technique he recommended is to invite an aggressive party to find and build a ‘Golden Bridge’ – a notion from the fourth century BC Chinese military strategist Sun Tzu’s treatise The Art of War – upon which his defeated enemy can retreat. Randolph recognised, of course, that a mediator must be highly sensitive to power imbalances between parties, and ensure that a weaker party is not exploited or treated unfairly, which in some circumstances means declining to act or to continue. However, Randolph identified a diversity of styles of mediation that may respond to particular situations: facilitative, evaluative, transformative and narrative styles. ODR, since it arises out of technology and online trading that is essentially global, offers an opportunity and a need to construct new transnational dispute resolution systems,236 based on

230 See ch 3 above and DW Johnson, Constructive Controversy. Theory, Research, Practice (Cambridge University Press, 2015). 231 M Deutsch, ‘A Theory of Cooperation – Competition and beyond’ in PAM Van Lange, AW Kruglanski and ET Higgins (eds), Handbook of Theories of Social Psychology (SAGE, 2012) 282. 232 P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Publishing PLC, 2016). 233 ibid, 50 and 35. 234 A highly influential text in the spread of mediation has been Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving (Penguin, 1981), which argues that if you want the other side to appreciate your interests, begin by demonstrating that you appreciate theirs. 235 P Randolph, The Psychology of Conflict, Mediating in a Diverse World (Bloomsbury Publishing PLC, 2016) 97. 236 J Zekoll, ‘Online Dispute Resolution: Justice Without the State?’ in P Collin (ed), Justice Without the State (Rechtsprechung. Materialien und Studien) (Vittorio Klostermann, 2014).

516  Cooperative Dispute Resolution universal norms of fairness.237 One ideal is of building societies of peace and non-violence that are otherwise impeded largely by the state-based justice systems that we inherit.238

Prevention of Harm and Delivering Changes in Behaviour The Need for Change A major requirement of those who raise issues is the wish to see things change. People accessing the legal system often do not just want money but for things to change. The legal system can sometimes deliver money or a decision or injunction, but is not good at delivering changes in behaviour or culture, or at repairing relationships. People typically say that they want the system to change and improve: • Jackson LJ commented that: ‘Most claimants stressed that they had brought their claims in order to change behaviour, rather than to make money.’239 • There is a huge research consensus that what patients who have been injured by the health system want is an explanation and apology, an admission of causation, compensation and the prevention of future accidents.240 • The Public Accounts Committee reported in December 2017 that ‘There is a growing body of evidence that when things go wrong many people simply want an apology, or want to know that the issue is being dealt with and it won’t happen again.’241 • The Parliamentary and Health Service Ombudsman (PHSO) stated in 2015: ‘People bring their unresolved complaints to us because they want an explanation, an apology and for the service to improve for others.’242

237 JM Hyman, ‘Beyond Fairness: The Place of Moral Foundations Theory in Mediation and Negotiation’ (2015) 15 Nevada Law Journal 959; MS Thomas, ‘Theorizing Mediation: Lessons Learned from Legal Anthropology’ (2016) 12(1) Utrecht Law Review 50. 238 C Menkel-Meadow, ‘Toward a Jurisprudence of Law, Peace, Justice, and a Tilt Toward Non-Violent and Empathic Means of Human Problem Solving’ (2012–13) 8 Harvard Journal of the Legal Left 79. 239 Lord Justice Jackson, Review of Civil Litigation Costs: Supplemental Report. Fixed Recoverable Costs (Judiciary of England and Wales, 2017) para 3.3. 240 Behavioural Insights into Patient Motivation to Make a Claim for Clinical Negligence. Final Report by the Behavioural Insights Team (The Behavioural Insights Team and NHS Resolution, 2018); Better Births: Improving Outcomes of Maternity Services in England: A Five Year Forward View for Maternity Care (National Maternity Review, 2016) para 3.32; RESOLVE News from the Ombudsman Service (PHSO, 2015); J Mellor, Report on Selected Summaries of Investigations by the Parliamentary and Health Service Ombudsman. October to November 2014 (Parliamentary and Health Service Ombudsman, 17 June 2015); Evaluation: How Can We Measure Access to Justice for Individual Consumers? A Discussion Paper (Legal Services Board, 2012); R Iedema, S Allen, K Britten et al, ‘Patients’ and Family Members’ Views on How Clinicians Enact and How They Should Enact Open Disclosure: The “100 Patient Stories” Qualitative Study’ (2011) British Medical Journal 343; S Lloyd-Bostock and L Mulcahy, ‘The Social Psychology of Making and Responding to Hospital Complaints: An Account Model of Complaint Processes’ (1994) 16 Law and Policy 123; National Audit Office, Handling Clinical Negligence Claims in England: Report by the Comptroller and Auditor General, Session 2000–2001, HC 403, 3 May 2001; L Mulcahy, Mediating Medical Negligence Claims: An Option for the Future (The Stationery Office, 2000); C Vincent, M Young and A Philips, ‘Why Do People Sue Doctors? A Study of Patients and Relatives Taking Legal Action’ (1994) The Lancet; A Simanowitz, ‘The Patient’s Perspective’ in MM Rosenthal, L Mulcahy and S Lloyd-Bostock (eds), Medical Mishaps. Pieces of the Puzzle (Open University Press, 1999) 228. 241 House of Commons, Committee of Public Accounts, Managing the Costs of Clinical Negligence in Hospital Trusts, Fifth Report of Session 2017–19, HC 397, 1 December 2017, para 5. 242 RESOLVE News from the Ombudsman Service (PHSO, December 2015).

Prevention of Harm and Delivering Changes in Behaviour   517 • Citizens Advice reported in 2016 that 52% of people who experienced poor public service said they didn’t complain because they felt ‘it wouldn’t change anything’.243 However, the predominant reason why people do not complain to the PHSO is that they think it will not make a difference.244 If the root causes of problems are not addressed, multiple problems can proliferate for individuals. Clusters can involve illness, disability, mental health, debt, housing, social support and entitlement, employment and other issues. The Low Commission raised serious concerns over the number of people who have multiple social problems.245 A significant but perennial issue identified by academic246 and official bodies is to improve the quality of initial decision-making by officials, especially in relation to decisions on social entitlement and immigration and asylum.247 It is salutary that there is evidence that the accuracy of decisions made with artificial intelligence is notably better than by humans.248 A challenge here is that some public Ombudsmen do not accept every complaint for investigation, and that they and Tribunals do not have developed systems of data collection, feedback and intervention (unlike most Ombudsmen operating in consumer markets). There have been various calls for more complaints so that the public administrative system can be confronted with the reality of outcomes and problems that it actually causes249 but this raises fundamental and unresolved issues over the purpose and powers of the public Ombudsmen and Tribunals.

The Different Role of Legal and Behavioural Norms and Systems The legal system is basically not geared to provide changes in behaviour, relationships and culture, but essentially to provide money – it misses the point and needs refocusing. There have been many calls for the NHS and product injuries to move from an adversarial system based on negligence to investigative administrative schemes based on factual criteria.250 An overwhelmingly 243 Learning from Mistakes: How Complaints Can Drive Improvements to Public Services (Citizens Advice, 2016). 244 What Do People Think About Complaining? (Parliamentary and Health Service Ombudsman, 2015). 245 Getting it Right in Social Welfare Law. The Low Commission’s Follow-up Report (The Low Commission, 2015). 246 S Halliday, Judicial Review and Compliance with Administrative Law (Hart, 2004); P Dunleavy, M Loughlin, H Margetts, S Bastow, J Tinker, O Pearce and P Bartholomeou, Citizen Redress: What Citizens Can Do if Things Go Wrong in the Public Services (LSE Research Online, 2005); R Thomas and J Tomlinson, ‘Mapping Current Issues in Administrative Justice: Austerity and the “More Bureaucratic Rationality” Approach’ (2017) 39(3) Journal of Social Welfare and Family Law 380. 247 Legal Support: The Way Ahead. An Action Plan to Deliver Better Support to People Experiencing Legal Problems (Ministry of Justice, 2019); Immigration and Asylum Appeals – a Fresh Look (Justice, 2018). 248 T Ruger, PT Kim, AD Martin and KM Quinn, ‘Supreme Court Forecasting Project: Legal and Political Science Approaches to Supreme Court Decision-Making’ (2004) 104 Columbia Law Review 1150; DM Katz, MJ Bommarito II and J Blackman, ‘A General Approach for Predicting the Behavior of the Supreme Court of the United States’ (2017) 12(4) PLoS One e0174698 at doi.org/10.1371/journal.pone.0174698; N Aletras, D Tsarapatsanis, D Preoţiuc-Pietro and V Lampos, ‘Predicting Judicial Decisions of the European Court of Human Rights: Natural Language Processing persepctive’ (2016) PeerJ Computer Science 2:e93; L Bull and F Steffek, ‘Die Entschlüsselung rechtlicher Konflikte. Der Einsatz künstlicher Intelligenz zur Ermittlung von Entscheidungsfaktoren der Konfliktlösung’ (2018) 21(5) Zeitschrift für Konfliktmanagement 165. See R Cellan-Jones, ‘The Robot Lawyers Are Here – and They’re Winning’ BBC, 1 November 2017 at www.bbc.co.uk/news/technology-41829534. 249 Complaints Handling Report (Parliamentary Ombudsman, 2013); More Complaints Please (Public Administration Select Committee, 12th Report, 2013); Learning from Mistakes: How Complaints Can Drive Improvements to Public Services (Citizens Advice, 2016). 250 C Ham, R Dingwall, P Fenn and D Harris, Medical Negligence: Compensation and Accountability (King’s Fund Institute and Centre for Socio-Legal Studies, 1988); Making Amends: A Consultation Paper Setting Out Proposals for Reforming the Approach to Clinical Negligence in the NHS (Department of Health, 2003); Response by Lord Darzi of Denham to a question by Lord Gregson, Hansard 18 March 2009: Column WA49; Health Committee – Sixth Report, Patient Safety (2009); ‘No-blame’ Redress Scheme: A Public Consultation on Draft Proposals for a ‘No-blame’ Redress Scheme in Scotland for Harm resulting from Clinical Treatment (The Scottish Government, 2016); Safer Maternity Care. Next Steps Towards the National

518  Cooperative Dispute Resolution important reason for making this shift is to enable the NHS to achieve an ‘open culture’251 in which all safety information is immediately shared so that learning and improved performance can be achieved,252 instead of the inexorable round of poor practice, cover ups and scandals in parts of the NHS.253 The critical issue is to aim to resolve not just the immediate dispute but its root cause and any underlying issues of which the dispute may be a symptom. If underlying problems are addressed, fractured relationships can be restored and changed behaviours and culture can reduce the risk that a situation may recur or give rise to additional and avoidable future issues. A critical realisation here is that the resolution of a dispute will not itself change behaviour, whether it is consensual or (especially) if it is imposed.254 A second realisation is that many disputes are not about breaches of law but have roots in poor behaviour. For example, the ‘majority of consumer transactions do not involve any dispute between a trader and a consumer caused by a breach of the law’.255 They are often about how the trader treated the customer. The traditional assumption is that laws are made, enforced and hence observed. It is assumed that the mechanism that produces the outcome of observation of law is that individual rights will be enforced, that such enforcement will be through the courts (and usually by private enforcement, in which individuals bring their own claims), that all decisions by courts will be observed, and that such enforcement will deter future wrongdoing. There are problems with all of these assumptions. People may not know that they have relevant rights, or that they can bring a complaint, or they may be unable to afford a lawyer or the court process, or they may just give up. Defendants might not observe rights, or judgments, or change their behaviour after a legal ruling. Legal philosophy has long assumed that because judges (or regulators) make decisions about law, such decisions are all that is required to affect future behaviour. The theory that deterrence has much effect on future behaviour has limited empirical support, and other incentives and mechanisms, notably ethical organisational culture, are far more effective. There is now extensive

Maternity Ambition (Department of Health, 2016); A Rapid Resolution and Redress Scheme for Severe Avoidable Birth Injury: a Consultation (Department of Health, 2017); Department of Health Birth Injury Compensation Policy Research (Ipsos Mori, 2017); No-Fault Compensation Schemes. A Rapid Realist Review to Develop a Context, Mechanism, Outcomes Framework (Department of Health, 2017); A Rapid Resolution and Redress Scheme for Severe Avoidable Birth Injury: Government Summary Consultation Response (Department of Health, 2017). 251 See Learning Not Blaming: The Government Response to the Freedom to Speak Up Consultation, the Public Administration Select Committee Report ‘Investigating Clinical Incidents in the NHS’, and the Morecambe Bay Investigation (Department of Health, 2015), Cm 9113; NHS England Serious Incident Framework (2015); Report of the Expert Advisory Group: Healthcare Safety Investigation Branch (Department of Health, 2016). 252 See review of the evidence at C Hodges, ‘Achieving a Just Culture that Learns and Improves’ in P Vines and A Akkermans (eds), Unexpected Consequences of Compensation Law (Hart Publishing, 2020) ch 7. 253 Major reports are Learning from Bristol: The Department of Health’s Response to the Report of the Public Inquiry into Children’s Heart Surgery at the Bristol Royal Infirmary 1984–1995, (2002) Cm 5363; Independent Inquiry into care provided by Mid Staffordshire NHS Foundation Trust January 2005 – March 2009. Volume I. Chaired by Robert Francis QC, HC375-I (2010); Dr B Kirkup CBE, The Report of the Morecambe Bay Investigation (Department of Health, 2015); Learning from Mistakes. An Investigation Report by the Parliamentary and Health Service Ombudsman into How the NHS Failed to Properly Investigate the Death of a Three-year old Child (Parliamentary and Health Service Ombudsman, 2016), also referring to A Review into the Quality of NHS Complaints Investigations Where Serious or Avoidable Harm Has Been Alleged (Parliamentary and Health Service Ombudsman, 2015); Gosport War Memorial Hospital: The Report of the Gosport Independent Panel (Department of Health, 2018); Report of the Independent Inquiry into the Issues Raised by Paterson, House of Commons, 4 February 2020, HC 31. 254 The 2018 ICF survey for BEIS found ‘Results from the CATI survey suggest that traders generally do not change their complaints-handling processes nor their business practices after their experience with the courts.’ Resolving Consumer Disputes: Alternative Dispute Resolution and the Court System (ICF Consulting on behalf of BEIS, 2018). 255 Reforming Competition and Consumer Policy: Driving Growth and Delivering Competitive Markets That Work for Consumers (HM Government, 2021), CP 488, para 0.27.

Prevention of Harm and Delivering Changes in Behaviour   519 evidence from behavioural and social psychology, and empirical studies on people and organisations, that decisions by courts, arbitrators and regulators do not have significant impact on changing behaviour or culture.256 More sophisticated intervention systems are needed, which we generally find operating through sophisticated organisational and public regulation regimes and rarely through private enforcement systems per se. For example, merely publicising problems is usually not enough. For many years, the public Ombudsmen and Tribunal judges have highlighted repeated problems with inaccuracies of decisions by public services in detailed Reports, calling for change, but little occurs. Some recent examples are as follows. A Report by Justice257 highlighted poor decision-making by the Home Office in immigration and asylum appeals leading to some 50% of decisions not being upheld on appeal in the First-tier Tribunal (Immigration and Asylum Chamber), compared with 25% historically.258 One in four complaints to the PHSO in 2016/17 related to failure in decisionmaking.259 The LGSCO has set itself the goal ‘to move the conversation about our work away from simplistic complaint volumes, to the lessons that can be learned and the wider good we can achieve through our recommendations to improve services for the many’.260 Innumerable reports have been issued about the NHS, from within261 and outside,262 with seemingly little impact on culture. Academic studies reach similar findings, such as Halliday’s study of three local authorities’ approaches to decision-making regarding homelessness, which showed considerable variation in organisational approaches and ability to internalise any learning from judicial review decisions.263 Many people may not be familiar with legal rules and find them complex and strange. But all human beings possess an innate sense of right and wrong – in simple terms, fairness – unless they are sociopathic or psychopathic.264 This drives immediate ‘gut feel’ responses to news about the fairness and rightness of any subject without knowing the intricacies of whether it is illegal, ranging from MPs’ expenses, and multinationals paying minimal tax, to sexual abuse. It is the ethical evaluation of behaviour that is more fundamental than legal rules.

256 See C Hodges, Law and Corporate Behaviour: Integrating Theories of Regulation, Enforcement, Culture and Ethics (Hart Publishing, 2015); TR Tyler, Why People Obey the Law (Yale University Press, 2006); TR Tyler, ‘Psychology and the Law’ in Gregory A Caldeira, R Daniel Kelemen and Keith E Whittington (eds), The Oxford Handbook of Law & Politics (Oxford, 2008). 257 Immigration and Asylum Appeals – a Fresh Look (Justice, 2018). 258 Ministry of Justice, Tribunals and Gender Recognition Statistics Quarterly: October to December 2017, Main Tables (October to December 2017), Table FIA.3 Q3 2017/18. 259 ibid, 7. 260 Building for the Future. Annual Report and Accounts 2017–2018 (Local Government & Social Care Ombudsman, 2018). 261 Recent examples: Gosport War Memorial Hospital: The Report of the Gosport Independent Panel (2018); A. Oates, Learning from Suicide-related Claims. A Thematic Review of NHS Resolution Data (NHS Resolution, September 2018); M Hutton, Spinal Services. GIRFT Programme National Specialty Report (NHS Improvement, 2019). 262 Independent Inquiry into Care Provided by Mid Staffordshire NHS Foundation Trust January 2005–March 2009. Volume I. Chaired by Robert Francis QC, HC375-I (2010); A Promise to Learn – A Commitment to Act. Improving the Safety of Patients in England (National Advisory group on the safety of Patients in England, 2013); K Evans, “Using the Gift of Complaints”: A Review of Concerns (Complaints) Handling in NHS Wales (Welsh Government, 2014); Public Administration Select Committee—Sixth Report: Investigating Clinical Incidents in the NHS, 24 March 2015; Learning Not Blaming: The Government Response to the Freedom to Speak Up Consultation, the Public Administration Select Committee Report ‘Investigating Clinical Incidents in the NHS’, and the Morecambe Bay Investigation (Department of Health, 2015). 263 S Halliday, Judicial Review and Compliance with Administrative Law (Hart, 2004). 264 EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012).

520  Cooperative Dispute Resolution

Supporting Cooperative Relationships Societies are based on trust between their members, which is based on evidence of trustworthiness that is evaluated against ethical values that are inherent in (almost) every human being.265 That fact of life highlights the need for societies to be built on shared ethical values rather than just rules of conduct. For many centuries society has been based on a dual system of ethical norms and legal rules, the former being supplied by religion.266 However, for some centuries, legal systems have developed in reach and sophistication, giving the impression that they, legal rules and the rule of law are all that matter for society. But that is only half the picture. In the last century, increasing secularisation and globalisation have eroded the ethical core of societies, and left reliance on legal rules, which can only operate as a safety net of basic requirements for human behaviour, rather than an aspirational code of desirable social behaviour that sets a higher standard than that required by law. This is why in recent years a considerable expansion has occurred within regulatory systems of codes of ethical practice that set higher aspirational and value-based standards of behaviour than legal regulatory requirements. Such codes are typically based on ­fairness in behaviour. These ethical requirements have found their way into legal requirements, such as a ban on unfair consumer trading. A fundamental review by the Legal Services Board concluded that access to justice is fundamentally about outcomes and relationships more than legal processes.267 It noted: justice is more than the resolution of disputes: it includes just relationships underpinned by law. … Justice is underpinned by legal knowledge, legislative frameworks, dispute resolution and the infrastructure of the legal services market and the court system as well as by the outcomes that consumers secure. Access to justice is the securing of these just outcomes rather than the process of dispute resolution.268

It is increasingly clear that relationships and behaviour need to be supported – and that the way to do that involves what used to be called enforcement (in the context of a legal system) but which (in the context of a human behavioural system) involves establishing ethical social norms and expectations of good behaviour, and providing support and intervention for when things are under stress. Various examples of this vision are readily available. In the family context, relationships have come under stress and are generally ending or have ended but need to continue on a cooperative basis, so support is needed to avoid serious harm to children. Employment disputes can also be broadly categorised into those where the employment relationship continues, and those where it has ended, plus a small category where the employment relationship has not yet commenced (eg recruitment and selection cases or cases where the employer reneges on an agreement to employ before the employment commences). In the consumer-trader context, a series of relationships 265 SH Schwartz, J Cieciuch, M Vecchione, E Davidov, R Fischer, C Beierlein, A Ramos, M Verkasalo, J-E Lonnqvist, K Demirutku, O Dirilen–Gumus and M Konty, ‘Refining the Theory of Basic Individual Values’ (2012) 103(4) Journal of Personality and Social Psychology 663–88; EO Wilson, The Social Conquest of Earth (Liveright Publishing, 2012); J Haidt, The Righteous Mind. Why Good People are Divided by Politics and Religion (Penguin Books, 2012). See earlier SH Schwartz, ‘Universals in the Content and Structure of Values: Theory and Empirical Tests in 20 Countries’ (1992) 25 Advances in Experimental Social Psychology 1; S Schwartz, ‘Are There Universal Aspects in the Structure and Content of Human Values?’ (1994) 50(4) Journal of Social Issues 19–45. 266 J Henrich, The Secret of Our Success: How Culture Is Driving Human Evolution, Domesticating Our Species, and Making Us Smarter (Princeton University Press, 2016); NA Christakis, Blueprint. The Evolutionary Origins of A Good Society (Little, Brown Spark, 2019); J Henrich, The Weirdest People in the World. How the West Became Psychologically Peculiar and Particularly Prosperous (Allen Lane, 2020). 267 Evaluation: How Can We Measure Access to Justice for Individual Consumers? A Discussion Paper (Legal Services Board, 2012). 268 ibid, para 3.6.

Prevention of Harm and Delivering Changes in Behaviour   521 between companies, customers, communities and the environment are of paramount importance. How to support these relationships is an area that has been significantly developed through regulatory and Ombudsman systems, in which ethical codes and data feedback play central roles. A fundamental reorientation in the family justice system is highly pertinent and looks imminent. Widely regarded as a system in crisis, a fresh direction was signalled by Sir Andrew McFarlane, President of the Family Division, in October 2021,269 supporting an earlier working party report.270 The report highlighted the fact that it is imperative to support children when inter-parental conflicts erupt, in view of the harm that is caused to children and can be manifest in multiple serious consequences. They called for a cooperative parenting approach and an holistic approach to providing support for children and families. Sir Andrew called for bundled support packages, led by multi-agency teams provided by a local Family Hub. Involving a court would only be one possible support option, and would be initiated after a Child Impact Assessment had been undertaken, led by CAFCASS. Parents would be expected ‘to exercise responsibility, not rely on rights, to prioritise child welfare above negative feelings about each other’. The language and approach of the support system would be changed to support cooperation and not adversarialism. Overall, the approach would change from a ‘justice’ response to being essentially about cooperative communication.

Combining Functions The point is that a number of different systems need to be joined up. One is a dispute resolution system, another is a system that guides behaviour based on ethical values and norms and the third is a ‘regulatory’ system that supports behaviour (including compliance with rules), triggering appropriate support and intervention and, where necessary, formal enforcement of the legal rules. Obviously, the greater the integration between these three elements, the more effective and efficient they will be, and the more cohesive relationships, markets and society will be. In this light, one can see why consumer Ombudsmen have spread – they perform several useful functions, not just dispute resolution: providing information and impartial advice to parties (both sides), supported by AI, resolving disputes (typically on the basis of a code or regulatory requirements, making decisions on the basis of what seems fair and reasonable to the Ombudsman in the circumstances of the case, taking the law into account),271 providing aggregated data on the number and type of issues that have been identified, and providing supportive intervention to improve organisations’ performance and reducing risk, against a backdrop of formal intervention and enforcement by a regulator where necessary. To some critics, the basis of making decisions on the basis of what seems fair and reasonable to an Ombudsman is an attack on the rule of law, or more about settlement of cases than about legal precision.272 But to others, it is reaching decisions that reflect and support a fair society and market, based on society’s agreed ethical values as expressed in a code. It is also increasingly the

269 Supporting Families in Conflict: There Is a Better Way. An Address by Sir Andrew McFarlane to the Jersey International Family Law Conference 2021, 9 October 2021. 270 ‘What About Me?’ Reframing Support for Families Following Parental Separation (Family Solutions Group, 2020). 271 DISP 3.6.1: ‘The Ombudsman will determine a complaint by reference to what is, in his opinion, fair and reasonable in all the circumstances of the case.’ 272 H Genn, Judging Civil Justice (Cambridge University Press, 2008); G Wagner, ‘Private Law Enforcement though ADR: Wonder Drug or Snake Oil?’ (2014) 51 Common Market Law Review 165; H Eidenmüller and M Engel, ‘Against False Settlement: Designing Efficient Consumer Rights Enforcement Systems in Europe’ (2014) 29(3) Ohio State Journal on Dispute Resolution 261;

522  Cooperative Dispute Resolution case that the relevant consumer protection273 and sectoral regulatory law that is being applied requires that traders will treat customers fairly,274 so a fairness standard has been required under law. The jurisdictions of the Groceries Code Adjudicator (GCA), the Pubs Code Adjudicator (PCA)275 and the Small Business Commissioner (SBC), discussed below, all extend the requirement of fairness to dealings with SMEs. It has long been one of the requirements of mediators that they must ensure fairness in their activities and procedure.276 An example of where a joined up cooperative approach is possible is in the housing and property sectors, where significant transformation is possible. In a system that is overloaded by complex and antiquated legal rules, simplification and culture could be lifted by emphasising good behaviour by all actors involved in delivering safe and fair living. This would involve expected aspirational ethical standards to be set out in codes that apply to all actors, tenants, owners, agents, surveyors financiers and others. Operationally, all three institutions would need to work together in an integrated system: first, law, legal rights and judges, second, behaviour, codes of ethical conduct and Ombudsmen and third, regulatory authorities and local support systems.

Link between Dispute Resolution and Affecting Behaviour Katsch and Einy point out that the traditional ‘map’ of conflict resolution was focused on the point in time after the disagreement had already evolved and grown.277 The system should include a focus on dispute prevention through identifying likely problems in advance or as soon as they can be identified – and then enabling them to be fixed. It is this function that well-designed Ombudsmen and ODR systems have delivered, based on collecting and using data and an understanding of human behaviour and interaction with systems. It has so far proved to be an ideal beyond the capacity of public institutions to achieve.278 Dispute resolution systems and information or complaint systems can provide rich data on what is happening, for example in markets, and what interventions or enforcement action may be required to change future behaviour and to reduce future risk. In order to do this, they need to be designed so as to capture as much data as possible on relevant activity, to aggregate it, and to feed it back into a system in which actions are taken to change behaviour and culture and to reduce risk. One aspect of this is that a data-generating dispute resolution system has to be seen as part of a regulatory, market surveillance and behavioural system. That link is only just being recognised in many sectors, and it provides huge potential for improving performance and reducing risk. The data collection function is a particularly valuable component of this wider system. It is an essential feature of all consumer Ombudsmen in regulated sectors, of platforms such as Resolver 273 The Consumer Protection from Unfair Trading Regulations 2008, SI 2008 No 1277, based on Directive 2005/29/EC, updated in Directive 2011/83/EU. 274 In financial services, see FCA Mission: Our Future Approach to Consumers (Financial Conduct Authority, 2017); see initially Principle 6 of the Principles for Businesses ‘to pay due regard to the interests of customers and treat them fairly’, Treating Customers Fairly After the Point of Sale, DP7 (Financial Services Authority, 2001). The Invoice Finance and Asset Based Lending Code of the Professional Standards Council requires that ‘Members shall act with integrity and deal fairly and responsibly with clients and guarantors’. 275 The Small Business, Enterprise and Employment Act 2015, Part 4. The Pubs Code etc. Regulations 2016, SI 2016 No 790. 276 See European Code of Conduct for Mediators (2004) at http://europa.eu.int/comm.justice_home/ejn/adr_ec_code_ conduct_en.pdf; Directive 2013/11/EU on consumer ADR, art 9. 277 E Katsh and O Rabinovich Einy, Digital Justice – Technology and the Internet of Disputes (Oxford University Press, 2017) 17. 278 ibid, 1724.

Prevention of Harm and Delivering Changes in Behaviour   523 and Amazon or eBay, and is envisaged in the Online Court. Regulators use information about performance to press companies to improve their service.279 However, some databases are unnecessarily limited, for example because they are just based on disputes about legal rights, or only collect partial data. They may not capture the vastly valuable amount of early data on what people ask questions about, as opposed to the subject matter and outcome of a formal claim. Dispute resolution platforms that focus exclusively on ODR and LawTech are typically not connected with systems that provide support and intervention to change the underlining and future behaviour. The design of most Ombudsmen who operate in consumer markets enables them to deliver valuable functions in addition to that of resolving disputes. They can: (a) provide impartial initial information and advice to both parties, on websites, orally and digitally, (b) collate aggregated data from individual disputes and (far more so) inquiries that identify issues that need to be addressed in the marketplace, (c) feed back that data to businesses, consumers and regulators as well as (d) engage in discussions on what changes in behaviour, rules, systems and culture need to occur to reduce future risk.280 In order to perform the data-driven intervention function, the database has ideally to be as comprehensive as possible, and not to be exploitable commercially until it is published in suitably anonymised form. Those requirements support governance and design conditions, including that dispute resolution coverage within a sector should be comprehensive, so a single Ombudsman per sector is advisable.281 There have been examples where the existence of competing ADR providers has enabled companies to game them, leading to reduction in quality, possibly as a result of undesirable price undercutting. System design is critical, and the creation of valuable databases requires a small number of portals (rather than a multiplicity of disparate dispute resolution schemes) so that people can easily identify where to go for information and assistance. A simple initial question is: ‘Can people easily identify the relevant place to get help for their problem?’ Having a choice of pathways is all very well except that users may be ignorant of the possibilities or confused between having too many options. At a certain point of diversification, some rationalisation is necessary, both for ease in selecting the right path and in avoiding wasting money on poor choices. Clarity for consumers is achieved in Belgium by a single national consumer website operated by the Consumer Mediation Service (which is the umbrella body of the leading Ombudsmen). That website provides extensive information to consumers and enables them to click onto the right Ombudsman or other ADR body (not more than one per sector) who can assist with their problem. It is working well. The creation of a single consumer website and portal operated by all of the consumer Ombudsmen, fusing ADR schemes and Citizens Advice, would be highly beneficial in UK. The data would then be maximised and held by a quasi-public body. The extension of online platforms and apps brings new possibilities. Traders might be able to access an Ombudsman scheme only if they satisfied a regulator that they had achieved a required 279 Modernising Consumer Markets. Consumer Green Paper (BEIS, 2018) para 66. Para 67 said: ‘Collecting and publishing performance data at company level can place reputational incentives on companies to improve outcomes for consumers and can inform consumer choice. It can also help regulators determine where to focus action. Regulators have taken steps to publish supplier performance data.’ 280 C Hodges, ‘Consumer Redress: Implementing the Vision’ in P Cortés (ed), The New Regulatory Framework for Consumer Dispute Resolution (Oxford University Press, 2017). 281 D Thomas and F Frizon, Resolving Disputes between Consumers and Financial Businesses: Fundamentals for a Financial Ombudsman. A Practical Guide Based on Experience in Western Europe (The World Bank, 2012).

524  Cooperative Dispute Resolution level of trustworthiness. Another idea is to collapse the Ombudsman’s ‘second tier’ into companies, ‘first tier’ of complaint handling by embedding an Ombudsman in companies’ customer relations departments. This would reduce delay and cost overall and enable independent expert advice to be directed at operational transformation and capability, seeing all data on the system. The Ombudsmen would remain employees of the independent Ombudsman entity rather than of the company in which they operated, and would form a cadre of professionals, rotating periodically so as to guard against capture.

Contrasting Political Styles The style of a community’s dispute resolution system reveals much about its values and culture. Once again, we can map connections between the disputes resolution system against where a state sits on the spectrum from individualist freedom to authoritarianism, with social solidarity somewhere in the middle. A striking difference can be identified between what might be called the political style of the justice system of the United States of America and that of European states, certainly including the United Kingdom. One of the criticisms of liberalist capitalist societies noted in chapter nine is that individuals may be free to express their individual views as a matter of free choice with little restraint and that institutions have not been sufficiently developed to moderate, reconcile or resolve conflicting views. Jerry Auerback recorded how the colonialists’ faith-based and communitarian approaches to resolving disputes through social disputation turned into a ‘Sue Thy Neighbour’ mode of individual self-expression, fuelled by invocation of Constitutional freedom-based rights and a professional community of lawyers and judges.282 Secular legal institutions replaced local religious institutions as communities were forced to expand, and the ‘rule of law’ achieved supremacy. Bob Kagan brilliantly analysed the resulting state of ‘adversarial legalism’ produced by reliance on a predominant style of individual freedom283 and Sean Farhang produced historical evidence for its development.284 This model entails a strong preference for enforcement by private, individual means rather than by public, representative means, given mistrust of ‘distant concentrations of power’. The logic of this model involves fully privatised funding by lawyers or commercial third party funders, no win no fee, large damages, ability to pool and cross-subsidise cases, and to aggregate similar claims. An initial risk assessment is made on the basis of whether the claim would be likely to deliver an adequate return to the lawyer for time invested, usually on the basis that a good case would settle. The quantum of money involved in cases and challenge of regulating individual remuneration practice raise a risk of ‘blackmail settlements’ where it is cheaper for defendants to settle than fight.285 A major switch occurred in the USA in individual employment and consumer disputes from litigation and class actions with the demise of individually negotiated contracts and permissibility of arbitration clauses imposed by retailers and employers.286 The consequence has been that many such claims have become invisible through arbitration or ODR systems, with limited

282 JS Auerback, Justice Without Law? (Oxford University Press, 1983). 283 RA Kagan, Adversarial Legalism: The American Way of Law (Harvard University Press, 2001). 284 S Farhang, The Litigation State. Public Regulation and Private Lawsuits in the US (Princeton University Press, 2010). 285 C Hodges, ‘US Class Actions: Promise and Reality’ in H-W Micklitz and A Wechsler (eds), The Transformation of Enforcement (Hart, 2016). 286 J Resnik, ‘Diffusing Disputes: The Public in the Private of Arbitration, the Private in Courts, and the Erasure of Rights’ (2015) 124 Yale Law Journal 2804.

Contrasting Political Styles   525 transparency, governance and independence. The British and European requirements for intermediaries to be regulated, seen especially in the consumer Ombudsmen, should support much greater trust in the system. Overall, European preference for social welfare and solidarity and shared protection has been more open to less adversarial solutions. Examples include the development of consumer complaint boards in Nordic states and the Netherlands and also the UK,287 and Nordic injury administrative schemes. The more legalistic culture in Germany than the UK was thought to underlie different attitudes to Ombudsmen in those countries.288 However, the strength of social solidarity has come under strain in the UK and European states in the past decade as austerity and equality issues surfaced, as discussed in chapter nine. Conservative ministers initially raised a theme of people taking ‘personal responsibility’, explained as ‘wherever possible citizens should take responsibility for resolving their own disputes, with the courts being focused on adjudicating particularly complex or legal issues’.289 They also mentioned ‘the prize [of] a less litigious society’.290 However, before long Lord Dyson MR expressed concern in 2015 about British national culture:291 One consequence of this is the view that as a society we have undergone a cultural shift. No longer is British society characterised by a somewhat philosophical and accepting approach to life. On the contrary, the view is taken that we are becoming more American in our approach; more ready to rush into litigation. To borrow from Tony Weir, we have become a ‘wondrously unstoical and whingeing society with (an) endemic neurosis’, and which rather than sees us ‘grin and bear it’ sees us ‘grit (our) teeth and sue’.292 Perhaps even more dangerously, this shift in approach has been accompanied by a growing concern that an unjustified burden is now being placed on employers, businesses, schools, the NHS and local and central government (as regards payment of compensation and, even worse, legal costs which often substantially exceed the amount of compensation).

By the end of the decade, both Houses of Parliament were expressing grave concerns over the state of access to justice, the rule of law and enforcement of human rights in the UK.293 They called for a national culture on human rights, and set out this statement of principles:294 For rights to be effective they have to be capable of being enforced. For that enforcement, it is essential to have: • adequate access to legal information, advice and assistance for everyone at all income levels and in all areas of the country; 287 C Hodges, Delivering Dispute Resolution: A Holistic Review of Models in England & Wales (Hart, 2019). 288 NJ Creutzfeldt, ‘What Do We Expect from an Ombudsman? Narratives of Everyday Engagement with the Informal Justice System in Germany and the United Kingdom’ (2016) 12(4) International Journal of Law in Context 437. 289 Solving Disputes in the County Courts: Creating a Simpler, Quicker and More Proportionate System A Consultation on Reforming Civil Justice in England and Wales (Ministry of Justice, 2011) para 1.3. It said: ‘A newer burden on the system is the move towards a compensation culture, driven by litigation. Lord Young’s recent review of health and safety has drawn attention to the phenomenon of individuals suing employers and businesses for disproportionately large sums, often for trivial reasons and without regard to personal responsibility. This has been fuelled by [CFAs] that mean cases can be opened with very little risk to claimants and the threat of very substantial costs to defendants. Partly as a consequence, we have seen problems being brought to the Court room that should have no place there.’ 290 ibid, Ministerial Foreword by the Rt Hon Kenneth Clarke QC MP, Lord Chancellor and Secretary of State for Justice, and Jonathan Djanogly MP, Justice Minister. 291 Lord Dyson MR, Magna Carta and Compensation Culture, The High Sheriff ’s Law Lecture, 13 October 2015, paras 19 and 20. 292 T Weir, ‘Governmental Liability’ (1989) 40 Public Law 76. 293 House of Commons, House of Lords, Joint Committee on Human Rights, Enforcing Human Rights Tenth Report of Session 2017–19, HC 669, para 83. 294 ibid, ch 7 and Summary.

526  Cooperative Dispute Resolution • a robustly independent judiciary; • a robustly independent legal profession; • a strong Equality and Human Rights Commission, held accountable for its work, and strong National Human Rights Institutions in the devolved administrations, similarly held accountable; and • a culture which understands the concept of the rule of law, respects human rights and accepts that they will be enforced and which is supported by the Government.

That call omitted consideration of other solutions that should be more powerful – different architecture of investigative and cooperative processes, imaginative remedies and outcomes, and a code of ethical values rather than a mass of legal rules. In the middle of 2020, it was notable that the Cabinet Office called for a different approach to suing for losses sustained during the pandemic, asking for people to think first, on the basis that we were all in this together and we are all going to need supply chains and customers to exist during and after the crisis and to operate with relationships of trust.

Conclusion The two main issues are these. How can positive resolution be better achieved for disputes so as to support cooperation? How can the incidence of risks be reduced? The objective is to promote community and reconciliation through fair and timely resolutions. The process should avoid producing distancing and adversarial alienation. Hence techniques, processes and structures that stress communication and mediation are preferable to an adversarial model. One of the biggest challenges is to be aware of the range of options that now exist before being able to assess whether fair resolutions of complaints, issues and disputes are occurring, and how those outcomes might be facilitated. A major challenge is that debates about future systems tend to occur in silos that are not connected.295 Some people focus only on courts, thinking that they are the only and ultimate locus for stating a nation’s law, and talking about developing ‘multi-door courthouses’. Others are familiar with ODR in the form of the online resolution of trading platforms’ contract-based problems but spreading to a potentially wide range of community or social disputes. Other groups focus on Ombuds in consumer markets and/or covering complaints against state bodies. These four areas have quite different architectures and solutions and they do not in practice interrelate, or even need to interrelate. Hence the idea that all claims ultimately end up in court is simply wrong. The important issue is to ensure that issues are identified, people have access to relevant pathways, fair outcomes are delivered as swiftly and efficiently as possible and data is captured, fed back and applied so as to achieve changes that reduce risk. The real issues relate to justice as fairness and to applying criteria that are familiar from earlier chapters of this book, namely governance, transparency, culture, outcomes, risk and intervention. I suggest the following. The system should be designed to bring parties together to support trust and cooperation, rather than encourage adversarialism. The investigative-plus-earlyfacilitated resolution model is preferable to an adversarial combative model. This is fortunately a strong current direction of travel in emerging online consumer, SME, court and tribunal systems,

295 A recent chapter addresses a need to integrate two bodies of literature in the ADR field, one relating to ‘disputes system design’ (DSD) and the other relating to ‘online dispute resolution’ (ODR): O Rabinovich-Einy and E Katsh, ‘Lessons from Online Dispute Resolution for Dispute System Design’ in MA Wahab, D Rainey and E Katsh (eds), Online Dispute Resolution: Theory and Practice (Eleven International Publishing, 2021).

Conclusion   527 but it needs to be strengthened further. A major shift away from litigation to administrative schemes is needed for personal injuries. Including facilitated early resolution automatically in the pathway for family and employment disputes is needed. Integration of the different pathways for disputes with an Ombudsman-based system of data collection would be very powerful in supporting the economic health of SMEs. Much attention is needed to integrate the Cinderella area of initial assistance and advice with the subsequent more formal process involving a state procedure or some other independent intermediaries. The landscape of complaints against the state, and especially involving the NHS, needs to be simplified. The gaping hole needs to be filled of a mechanism for overseeing the culture of public institutions or changes in them, driven by data collected from the Ombudsmen and Tribunals. There would be value in analysing the functions of a public Ombudsman and the Tribunals to distinguish between mechanisms that perform different functions.296 One function would be an appeal on the substance of a decision in individual cases, and another would be a means of addressing the manner of engaging with members of the public and systemic issues. The former mechanism would need a modern individual dispute resolution system, that could record and aggregate generic data. The latter mechanism would need to be a guardian of ethical practice and culture in public services, with investigative and remedial powers, supporting a code of ethical practice that would apply across all public services. Overall, we need to focus on the complete end-to-end process from the perspective of users, rather than of dispute resolution providers.297 Building cooperation also needs closer attention to reconstructing relationships based around ethical practice. We need to ensure that data from disputes feeds into the problem-solving model, resolving all elements of behaviour and redress at once through an integrated process.298 Resolving disputes through communication and settlement does not mean sacrificing the law. The substance of the norms and values that are being applied should also be reviewed consciously against the ethical values of our society. We can spread use of regulatory requirements to behave fairly and Codes of ethical practice. Governance and transparency of intermediaries can also be strengthened. The person who oversees the communication between the parties should be an independent person/body subject to a duty to uphold the public good, rather than an anonymous, unaccountable, unregulated person. Professional requirements are not enough. Overall, there is positive momentum and we are close to getting it right, but the solutions need to be grasped and embedded.

296 See M Remáč, Coordinating Ombudsmen and the Judiciary. A Comparative View on the Relations between Ombudsmen and the Judiciary in the Netherlands, England and the European Union (Intersentia, 2014). 297 C Hodges, Delivering Dispute Resolution: A Holistic Review of Models in England & Wales (Hart, 2019). 298 C Hodges, ‘Affecting Future Behaviour: Deterrence or an Open Culture that Learns and Improves’ in P Vines and A Akkermans (eds), Unexpected Consequences of Compensation Law (Hart Publishing, 2020).

17 Concluding Thoughts Cooperative Co-Creation by Stakeholders A cooperative outcome-based approach can be adopted effectively in almost every area of human endeavour. We have looked above at some specific contexts – social and political communities, organisations whether private and commercial or public, regulation, and dispute resolution – but this should not be regarded as a complete list. It is certainly the case that the more a trust-based ethical cooperative approach is adopted and demonstrated, the more it will spread. So there is a case for networks, sectors and nations to move together in adopting the same OBC approach. Some people and contexts will find OBC easier than others. In some business sectors and regulatory contexts, for example, the barriers and challenges will be greater than in others. Without listing all possible barriers, some relevant ones may be the international nature of multiple relationships, and the level of social capital that exists in a particular region or nation. Some voices may resist the basic ideas that blame, punishment and deterrence are ineffective and unhelpful concepts. But just because there are challenges, this does not mean to say that the effort to change is not called for. Many conversations about the scientific basis, about what purposes and outcomes are desired, about what harms are to be avoided, and what metrics and evidence are relevant to demonstrate trustworthiness and delivery of improved performance and of the desired outcomes. The essence of OBC can be illustrated in Figure 17.1. Figure 17.1  The Basic elements of OBC OUTCOME-BASED

Purposes

Outcomes

TRUST-BASED

Produce evidence of trustworthiness

Evaluation against ethical values, especially fairness

MOTIVATION-BASED

Intrinsic motivation Competence, autonomy, relatedness

Personal and group agency Intention & reflection

COOPERATION-BASED

Stakeholder co-creation

Accountability for roles and actions

Problem-solving & improving performance

Support & intervention

Concluding Thoughts  529 The basic set of actions revolve around co-creation – discussions involving all stakeholders and actors in relation to: –– the purposes, objectives, outcomes, –– harms to be avoided, and their root causes, barriers and solutions, –– metrics and evidence that will demonstrate trustworthiness, involving what ethical values and what operational management systems, and delivery of improvements in performance in achieving the right outcomes, –– the mode of engagement, supporting intrinsic motivation – a national policy, sectoral or organisational Codes of ethical practice. These are illustrated as a continuous cycle in Figure 17.2. Figure 17.2  The Cooperative Co-Creation Cycle • Purposes • Objectives • Outcomes

• Support intrinsic motivation • Demonstrate ethical values • Code of practice

• Metrics and evidence • Sharing information • Monitoring Changing things

Mode of engagement

Drivers of success

Demonstrating trustworthiness

Prevention • Harms • Root causes • Barriers • Solutions

These ideas require wide involvement of citizens, staff, communities, stakeholders in relevant groups. The Dunbar number indicates that multiple overlapping networks of the right number of people are effective: each with not too many and not too few members. Some important barriers we have identified are use of levers or behaviours that undermine intrinsic ethical motivation, such as requirements, targets, actions, interventions and sanctions that are imposed rather than widely recognised and adopted – save where they are necessary for general protection against those who cannot be trusted and cause unacceptable harm. This is an approach that shares information, learns, improves, innovates, and delivers great outcomes. We need to cooperate more to achieve the outcomes we want and deserve.

530

INDEX access to justice  488, 495 ADR as perceived solution (Cappelletti and Garth)  491 AI, potential impact  501–02 civil procedure delays and cost as barrier to  484 attempts to reform the funding and costs rules in England and Wales limited impact/serious unintended consequence  485–86 opposition to reform  485 definition, redetermination to reflect interpersonal/ social nature of justice  513 outcomes and relationships as new core (Evaluation: How Can We Measure Access to Justice for Individual Consumers? (Legal Services Board, 2012))  520 impact on the less advantaged  488, 495 political differences  524–25 state’s monopolisation of dispute resolution, effect  483, 491 UN SDGs inclusion of  33, 165 accountability banking practices Banking Code of Practice (Australia)  140–41 Banking Executives Accountability Regime (BEAR) (Australia)  305, 469 Brydon Review 2019 (UK)  282 evolving attitudes  304–07 FSB toolkit (2018)  189–91, 281–82 G30 Recommendations (2019)  191–92 post-GFC loss of confidence in traditional accountability mechanisms  111, 185 stakeholder capitalism  292 cooperative regulatory models  38–39, 349, 354 anti-corruption  330–31 BBfA/LEPs  404–07 Better Regulation  362 delegated administrative authority model  402–03 Hampton Report (2005)  362 Operating Engineers Regulatory Review. Findings and Recommendations Report 2017  388–90 performance-based regulation (aviation safety)  393–99 see also aviation industry

regulatory delivery model  357–58, 370–71 trust and accountability model (South Australia/ Victoria)  390–93 corporate governance codes  154, 156, 158, 194, 200, 380 definitions/scope  305, 369, 468–69 blame-free and accountability-free distinguished  469–70 ‘giving an account’ and ‘accountability’ distinguished  470 imposition of retrospective sanctions distinguished  470 prospective aspects  469 retrospective aspects  469 SM&CR  470 voluntary norms (UN SDGs) and  470 group behaviour/motivation  87–89, 177–78 see also group behaviour/motivation, factors affecting hierarchical regulatory model  410–19 see also financial services regulatory authority (UK) inherent accountability  34, 221 internalisation of morality and  125 mechanisms  31 civil society organisations’ ‘soft’ levers  470 tort law (ineffectiveness)  34 n10, 221 n66 MSV, consequences of a lack of accountability  305–06 neoliberalism and  220 OBCR approach  29, 30 accountability as mechanism for checking outcomes  167, 305–06 co-creation model  39–40, 41–42 delegation of power and  42 Economics of Mutuality (Roche and Jakub, 2017)  38 Indian Government’s Guidelines On business responsibilities  33, 165, 268 a new social contract.  252 OECD Recommendation on Open Government (OECD, 2017)  34, 243–44 as tool for cooperation  4, 238, 239 UN SDGs  33, 165 see also cooperative regulatory models above open and just culture performance model  426, 470–71

532  Index performance management and  315 psychological need for  28, 510 public sector and British secret services  147 Deliberative Wave (OECD, 2020)  34, 243, 253 ‘Good Practice Principles for Public Decision Making’ (OECD, 2020)  244–45 Open Public Services (2011) (UK)  144 Public Service of Ontario Act 2011  145 Seven Principles of Public Life (1995) (UK)  144–45, 201 ‘Toward Fair and Sustainable Capitalism’ (Strine, 2019)  265 remuneration grievances and  311–12, 326–27 Three Lines of Defence (IAA)  433–34 transparency and  141, 144, 369 trust-building OECD on  111 O’Neill (‘Trust, Trustworthiness, and Accountability’, 2014)  24, 99, 107, 118 TIGTech Project  118 adaptability  139, 142, 180, 207, 351 ADR (alternative dispute resolution) definition ‘any technique or process that is separate from court proceedings’  483 first modern use (Pound Conference (1976))  491 as impediment to development of a coordinated holistic system  483 as imprecise and confusing  483, 483 n5, 491, 495 mediation as primary technique  483–84, 490, 491 personal injury cases, switch from the courts to administrative redress schemes  497–98 separation from established formal pathways/ creation of barriers  484 state-based formal justice aversion to.  484 traditional alternatives to  482–83 structure and technique distinguished  491 use of multiple techniques  491 switches between systems  505–07 transparency and  494, 527 see also ADR/mediation (UK); conciliation; cooperative dispute resolution; dispute resolution; mediation; ODR (Online Dispute Resolution); Ombudsmen (UK) ADR/mediation (UK) adoption/encouragement of business and ombudsmen systems’ receptivity  493 Civil Procedure Rules 1999 (Woolf Reforms)/ problems with  492 Compulsory ADR (Civil Justice Council, 2021)  493

Dispute Resolution in England and Wales: Call for Evidence (MOJ, 2021)  495–96 HMRC tax disputes  523 increase in the use of for commercial cases (CEDR, 2021)  490, 492 NHS Resolution  492–93 senior UK judiciary’s support for  402 Voss MR (recommendations for total revamp (2021))  495 difficulties/opposition ‘ADR’ as imprecise and confusing  483, 483 n5, 491, 495 clarity and simplicity, importance/failure to achieve  523 complexity of pathways  567 a confusing matrix with too many different rules and criteria  498 equality of parties issues  493 human rights concerns  493 risk of conflict/competition between different options  523 separation from established formal pathways/ creation of barriers  484, 493 settlement vs just settlement  493 slow uptake in family disputes  493 threat to the rule of law/judicial independence  493 difficulties/opposition, counterarguments compromise as parties’ preference  494 ‘fair and reasonable’/‘fairness’, applicability  494 measures to ensure alignment with the law, scope for  494 non-legal remedies for legal problems  490, 494–95 opportunity to address underlying non-legal issues  494–95 ‘proportionate justice’, inevitability  404 institutions and techniques proliferation of  496–500 ACAS  492, 496 administrative redress schemes, ongoing failure to switch to  497–98 Business Banking Resolution Service  497 CAFCASS  496 Family Drug and Alcohol Courts (FDACs)  496 Financial Remedies Court (FRC)  496 Groceries Code Adjudicator (GCA)  497 Resolver  496, 501, 522–23 Small Business Commissioner (SBC)  497 see also Ombudsmen (UK); tribunals (UK) mediation as primary technique  483–84, 490, 491 use in parallel with court process/as part of an integrated pathway/as standalone  483, 491 difficulty of embedding into the court system  507

Index  533 see also ADR; cooperative dispute resolution; court reform (England and Wales); Ombudsmen (UK); tribunals (UK) Agency Theory Bandura (‘Toward a Psychology of Human Agency’ (2006))  80 see also personal agency (Bandura), core features Blair and Stout (‘A Team Production Theory of Corporate Law’ (2021))  264 Jensen and Meckling (‘Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure’, 1976)  7, 75, 259, 261, 295, 313 definition  7, 75 incentivisation of greed  261, 295 risk of rent extraction by intermediaries/staff rule-breaking  261 MSV and  261, 263–65 Algeria, capitalism in  230 altruism as basis for cooperation  53, 62, 63, 67, 72, 122 changes in cultural expression  62 development in children  53 losing out to money and profit  230 as a motivation  76 Prisoner’s Dilemma/altruistic punishment  15, 458–59, 460, 466–67 reciprocal altruism  51–52, 100, 122, 123, 458 transactional trust distinguished  8, 28, 38, 102–03 trend towards  19, 74 trust-building and  8, 9, 115–16 arbitration as adjudicative process  482 arbitrators, status  482 commercial disputes, particular applicability to  480 confidentiality, scope for  482 early resolution, desirability (UN Guiding Principles on Business and Human Rights (2011))  482 as privatised justice  482 transparency and  524–25 Australia ADR (eCourtroom facility)  503 banking practices Banking & Finance Oath  269 Banking Code of Practice (2019)  140–41 Banking Executives Accountability Regime (BEAR)  305, 469 Royal Commission into Misconduct in Banking (2019)  308, 309, 453–54 clawback  305 communities in (Goolwa, South Australia)  35 cooperative regulation (core functions)  350 Covid-19 in  11, 237–38 cultural entropy in  143 cyber-attacks in  3

enforcement/compliance compliance programmes (ACCC/AFSA)  430, 438, 439 supervising the culture (Royal Commission into Misconduct in Banking (2019))  453–54 ethical values in leadership/regulation, impact EPA Victoria  202 insider trading sanctions  267, 436 Ombudsmen Energy and Water Ombudsman (South Australia)  393 as important source of feedback from users on behavioural, quality and safety issues  393 Ombudsman’s scheme, compulsory membership of  393 political dissatisfaction  113 regulatory delivery key performance indicators  373 means of achieving  361 regulatory sandboxes  408 responsibility and accountability Banking Executive Accountability Regime (BEAR)  305, 469 stakeholder involvement Charter of Consultation and Regulatory Practice (2019) (ESCOSA)  390 ESCOSA’s light-track ‘trust approach’ (South Australia)  43, 358, 390–93, 476 PREMO (Victoria)  390 role of data/Energy and Water Ombudsman (South Australia)  393 Australian Territories ADR (Small Business Commissioner (SBC))  497 authoritarian punishment being found out vs severity of sanction as deterrent  460 playing God  472 private cooperation alternative  450 ‘Psychology and the Law’ (Tyler)  459 public endorsement of sanctions, pluses and minuses  459–60 risk to the common good[s], as response to  459–60 Ostrom (various)  459–60 Prisoner’s Dilemma (Nowak)  459 ‘The Tragedy of the Commons’ (Harding, 1968)  459 autonomy: see self-determination theory aviation industry, exemplar of an open and just culture  393–99 enforcement powers  397, 468 EU legislation  395 n144, 398 key features all-stakeholder involvement  184 cooperative and ethical culture  358

534  Index high-risk safety system  184, 393–94, 419, 464 holistic/systemic approach  396–97, 452–53, 461 intervention, responsibility and accountability  27, 395, 396, 469, 518 no-blame approach  366, 396–97, 426, 461, 464 operational management  420 performance-based regulation  349, 350, 393–99, 467 making the change high level of accidents/recognition that legalistic rules-based did not improve matters  394 ICAO-mandated switch to PBR (ICAO Annex 19)  394 maintaining the user’s trust, importance  93–94, 167–68 Managing the Risks of Organizational Accidents (Reason, 1997)  394 ‘SMS Implementation’ (Yantis, 2019)  394 The Transformation to Performance-based Regulation (CAA, 2014)  394 ‘‘Understanding the Past’ (Walmsley and Gilbey, 2019)  394 willingness to share information, counterindicators  395, 397, 426 Manual on Human Performance (HP) for Regulators (ICAO, 2021) HP principles  395–96 key purpose (‘to make it easy for people to do the right thing’)  397 national safety regulatory system  398 safety management system (SMS) purpose  394 safety assurance  394 safety policy  394–95 safety promotion  394 safety risk management  395 success of Enhancing Industrial Safety Management (CAA)  291 not yet perfect/factors impeding  396–97, 398–99 safety of flying as a measure  358, 393–94 banks/banking/financial services codes of financial ethics/guidance Banking & Finance Oath (Australia)  269 Banking Code of Practice (2019) (Australia)  140–41 Banking Code (UK) (1991)  138 Banking Executives Accountability Regime (BEAR) (Australia)  305, 469 Banking Standards Board’s annual surveys  138 Business Banking Code (UK) (2002)  138 Guidance on Board Effectiveness (FRC, 2018)  139

operational practice/enforcement  138 Royal Commission into Misconduct in Banking (2019) (Australia)  308, 453–54 ‘The Changing Nature of Banking and Why It Matters’ (Buckley)  164 Toward Effective Governance of Financial Institutions (Group of 30, 2012)  139 Transforming Culture in Financial Services (FCA, 2020)  154 core principles/values ‘Financial Codes of Ethics’ (Ragatz and Duska: 2010)  138 as a veneer  139 criticisms in the light of the 2008 financial crisis  185 Carney  238 dislocation between financial services sector and values of society conflict between maximising shareholder value and maximising stakeholder value  139 Welby  138 purposes/objectives conflicting purposes (making money, banks or customers?)  164 distinction  166 suggested objectives  164 risk from cyber attack  2–4, 332 stewardship  273–75 see also banks/banking/financial services, culture in; financial crisis 2008–10 (GFC); market, business and corporate moral values; rogue traders banks/banking/financial services, culture in criticisms foreign exchange rigging (FCA investigation)  185 risk-averse culture (Kay)  185 ‘selfish, arrogant and greedy’ (Cammock)  185 definition FSB  189 G30  186 GFC and bank culture as a contributory factor  185 a culture of responsibility and accountability as the aim  185, 380 magnitude of misconduct fines related to  215 guidelines Banking Standards Board/Financial Services Culture Board Annual Surveys  187 Behaviour and Culture of the Irish Retail Banks (Central Bank of Ireland, 2018)  186 FCA mission statements (firms)  186–88 FCA’s SM&CR (individuals)  188 FSB’s Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (FSB, 2017)  188 A Toolkit for Firms and Supervisors (FSB, 2018)  189–90

Index  535 incentives/motivation, avoiding unintended consequences  296–97, 299–300 bonuses (Pikulina et al., 2014)  298–99 deferment of remuneration  290–91 EU Capital Requirements Directive 2013 (Directive 2013/36/EU)  298 financial maximisation model  304–06 fines on Lloyds TSB Bank and Bank of Scotland  298 G30 recommendation to remove link between quantitative sales targets and compensation  298 ‘Getting Incentives Right’ (Bhagat, Bolton and Romano, 2014)  300 performance targets (‘what’ plus ‘how’)  306–07 Incentives Structures in the Banking Industry – Fostering Sound Behaviour and Conduct (Monetary Authority of Singapore, 2019)  307 progress report (Banking Conduct and Culture: A Permanent Mindset Change (G30, 2019))  306–07 ‘Rivals Without a Cause’ (Woike and Hafenbrädl, 2020)  307 ‘Reforming Executive Compensation’ (Bhagat and Romano, 2009/2010)  299 Risks to Customers from Financial Incentives (FSA, 2012, 2013 and 2014)  298 Strengthening the Alignment of Risk and Reward: New Remuneration Rules (BOE PRA and FCA, 2014)  300 time of vesting  299–300 see also remuneration methodology for discovering unethical conduct  206 Organisational Culture and Bank Risk (BOE, 2021)  206 women and  206, 237 see also women progress? an absence of a systemic approach  185, 192, 196, 207–08, 260, 264, 271–72, 295–96, 413–14, 418 Banking Conduct and Culture: A Permanent Mindset Change (G30, 2019)  190–91, 296, 298 from ‘tone from above’ to ‘tone from the top’  190 from ‘tone from the top’ to ‘tone throughout’  187–88 risk management vs risk eradication  192 Transforming Culture in Financial Services (FCA, 2018)  197 see also banks/banking/financial services behaviour, determining factors: see motivation; self-determination theory (Deci and Ryan) (competence/autonomy/relatedness); self-regulation theory

Belgium ADR simplicity and clarity, importance  523 antitrust compliance programmes (BIPT)  430 data collection/Consumer Mediation Service  521, 523 belief definition/value distinguished  126 benevolence Barrett’s Seven Levels  141 morality and  124 trust/trustworthiness and  9, 105, 107–08, 109, 115, 346 as universal value  132–33, 137 Better Business for All (BBfA) (UK)  405–07 as development of the Primary Authority Scheme  405 Five Principles  37–38, 406 German Chambers of Commerce model  405 key objectives  406 LEPS  400–401 ‘Better Regulation’ (UK) alternative approaches  447–48 restoration and repair  363 settlement of cases by agreement/DPAs  363 available sanctions/penalties  363 features ‘good outcome’/restorative justice approach  363 requirement to publish an enforcement policy/ advantages  363 the rogues vs the others, differentiating between  364 Sentencing Guidelines compared  363 stakeholder involvement  27 tendency to include aggravating/mitigating factors (Hodges (2015))  363 as top-down policy/bottom-up practice  361 key developments in date order  360–66 Principles of Better Regulation (1997)  362 Restorative Justice and Responsive Regulation (Braithwaite, 2002)  361, 365 Hampton Report (2005) (Reducing Administrative Burdens: Effective Inspection and Enforcement)  362 Implementing Hampton: From Enforcement to Compliance (2006)  362 Legislative and Regulatory Reform Act 2006 (LRRA)  362 Regulatory Justice: Making Sanctions Effective (Macrory, 2006/2010)  363–64, 447 ‘Intervention Choices’ (Russell and Kirkman (2019)) (‘earned recognition’/‘regulated self-assurance’)  365, 453 Regulators’ Compliance Code (2007)  362 Regulatory Enforcement and Sanctions Act 2008 (RESA)  362

536  Index ‘Trust-based Environmental Regulation’ (2010) (Lange and Gouldson)  365 OECD’s Best Practice Principles for Regulatory Policy (2014)  364–65 Regulators’ Code (2014)  362, 364 Deregulation Act 2015 (‘desirability of promoting economic growth’)  364 Regulatory Futures Review (Cabinet Office, 2017)  365 regulatory function, definition  362n.29 the brain bigger/more effective brains  57, 58 capacity for focus  150 changes produced by culture  13, 53–54 Dunbar number and  18, 63 inherent sense of right and wrong/ability to identify/articulate ethical values (Wilson/ Christakis)  126 internalisation of morality and  125, 252 a mechanism for making us feel good?  148 mental mechanism of trust and  115 moral evaluation in the absence of brain activity  125 moral intuitions and  123, 126, 148 neurological changes caused by a promise of reward  318–20 see also motivation Brazil amplification of messages for political ends (Bolsonaro)  226 antitrust compliance programmes (CADE)  430 Bolsa Familia (conditional cash transfer in welfare)  219 corruption, measures to tackle  331 covid-19 as mask for ineffective public administration  227 patrimonialism (non-WEIRD)  13–14, 56 political dissatisfaction  113 Brexit amplification of messages for political ends  226 cultural entropy and  143 declining social fabric and  216 dominance of ‘elites’ and  62, 225 emotional and irrational nature of the debate  225–26 financial services regulation following  410–18 see also financial services regulatory authority (UK) (post-Brexit debate) polarising effect  224 populism and  11, 225–26 post-Brexit focus on innovation, growth and outcomes  247, 357, 366–69 Taskforce on Innovation, Growth and Regulatory Reform (2021)  366–68 business organisations, cooperation in corporate governance common purposes, values and outcomes  37–38 see also corporate purpose, evolution of

‘Corporate Purpose and Financial Performance’ (Gartenberg et al. (2019))  182 ‘Economics of Mutuality’  38 ‘Five Principles for a Purpose Driven Business’  37–38, 406 OBCR model (evidence-based)  29, 38 stakeholder capitalism model: see stakeholder capitalism The UK Stewardship Code 2020 (FRC, 2019)  37 UK Corporate Governance Code (FRC, 2018)  37 corporate models community interest companies  38 FairShares model  38 multi-national ‘B Corps’  38 social enterprise firms  38 cultural origins of corporate disasters  25, 41, 162, 182, 184, 240, 291–92 ethics and/importance of ethical culture for a business  179–84 ‘CEO Values, Organizational Culture and Firm Outcomes’ (2008) (Berson et al.)  181 cultures of business organisations (Treviño et al.)  179–80 Organisational Culture Profile (OAP) (1996/2014)  179–80 ‘Regulating for Ethical Culture’ (2017) (summary of findings)  180 Ethical Business Practice (EBP) model  36–37 moral disengagement, reasons for  182 ‘Paradigm Lost’ (Chatman and O’Reilly, 2016)  181 ‘profit-with-purpose’  161 stakeholder corporation model (US Business Roundtable, 2019)  25, 31, 159, 268, 276–77, 379 Stewardship Codes, growing use of  31 ‘Taking the Floor: Models, Morals, and Management in a Wall Street Trading Room’ (Beunza, 2019)  182 ‘The Anatomy of Corporate Fraud: A Comparative Analysis’ (Soltani)  180–81 ‘Toxic Corporate Culture’ (van Rooij and Fine, 2019)  182 values (other than ethical), role integrity  183 moral obligations  182 perceptions of procedural and substantive justice, importance  182 workers’ perceptions  182–83 see also corporate purpose, evolution of; market, business and corporate moral values Canada antitrust compliance programmes  440 Civil Resolution Tribunal (British Columbia)  503 cultural entropy in  143

Index  537 Delegated Administrative Authority (DAA) in  41, 353, 358, 402–03 indigenous people, approach towards  246 insider trading sanctions (Ontario)  267, 436 public risk management in  369 public sector values (Public Service of Ontario Act 2006)  145 regulatory sandboxes  408 stakeholder involvement  17 heating and operating engineers (Ontario)  43, 476 facilitator, value of  353 Operating Engineers Regulatory Review  388–90 Women’s Institute (1897)  34 capitalism: see neoliberal capitalism; stakeholder capitalism caring/caring relationships antipathy of the law towards/need for reform (Herring (Law and the Relational Self: 2020)/‘Compassion, Ethics of Care and Legal Rights’ (2017))  65–66 caring business environments (Mackey and Sisodia)  152 Covid-19, effect on attitudes towards  149, 237, 249 economic man’s selfishness (Collier)  23, 236 Moral Foundations Theory  122 moral solidarity and (Sztompka (Trust: A Sociological Theory, 1999))  129 prosocial behaviour and Gibbs (Moral Development & Reality, 2019)  121–22 Hoffman (Empathy and Moral Development: Implications for Caring and Justice, 2000)  122 Humane Orientation (House et al.)  176 relationship-building (Barrett’s Seven Levels)  142, 143 trust and  107–08 undervaluation of caring jobs (Goodhart)  224 unfair remuneration, impact  308 as universal value  132–33, 135 Caucasian Asia, capitalism in  230 China capitalism in  230 cooperation, resultant controversies as a sign of healthy engagement  61 global growth, impact  22, 215 incentives (GSK bribery case (2013))  297 ODR, use of  502 political freedom/capitalist free markets as successful political and economic policy  263 conflicts/creation of multiple regulatory requirements  263 social organisation relationship (guanxi)  98 trustworthiness (xinyong)  98 western model distinguished  98 US trade wars  226

Christian Church decline in membership (UK)  215 effects on society  57 self-justification (crusades)  126 civil society as stakeholder  29, 34, 41, 157, 213, 237, 243, 252, 288, 329, 350, 354, 403, 418, 420, 470 clawback as means of regulating directors  264–65, 282–83, 295, 297, 300–301, 318, 325 attempts to formalise Australia (BEAR expanded with FAR)  305 UK Restoring Trust in Audit and Corporate Governance (BEIS, 2021)  301 SM&CR  305 Walker Review (2009)  300 climate change causal factors MSVs  288, 324–25 natural selection/random changes  60 ecological ceiling/Raworth (Doughnut Economics (1991))  231–32 economists’ treatment as an externality  229 as global systemic risk  2, 329 AR6 Climate Change 2021: The Physical Science Basis (2021)  2 impact on organisational culture  186 inequality and health  214 Strengthening Climate Resilience (OECD, 2021)  165–66 The Inequalities-Environment Nexus (OECD, 2021)  165–66 initiatives addressing environmental sustainability issues A Blueprint for Responsible Investment (Principles for Responsible Investment, 2019)  271 Climate in the Boardroom (Majority Action, 2020)  271 EBR, WICS’ adoption of  401 Environmental Agency (UK)  387 Paris Agreement (2015)  271 ‘The Current Challenges for EU Company and Financial Law and Regulation’ (Autenne et al., 2018)  271 The Leven Sustainable Growth Agreement Partnership  400 Transformation Capital (EIT Climate-KIC, 2020)  271–72 UK Treasury’s proposals for an authoritarian regulatory model (2021)  414 intergenerational fairness  169–70 Values (Carney, 2021)  239 Wellbeing of Future Generations Act (Wales) 2015  169–70

538  Index measuring performance in relation to purposeful business practice (Fig. 7.1)  157–58 A Roadmap Towards Mandatory Climate-related Disclosures (HM Treasury, 2020)  166 CDP global environmental disclosure system  166 mandatory reporting in New Zealand  166 morality, relevance  136 public support for measures to address  114 stewardship codes  273–75 see also stewardship codes strategic objectives  166 UN SDGs (Goal 13)  33, 165–66, 272–73 see also UN Sustainable Development Goals (SDGs) co-creation regulatory model  39–42 overview  342 balance between prosperity and protection  45 benefits to business  42, 45–46 ethical co-creation  183 examples of successful co-creation  43 Guidelines for Institutional Investors … in Public Limited Companies (Switzerland)  290–91 integration of functions and institutions, importance  42, 342 as OBCR model  29, 336 see also cooperative regulatory models/OBCR model obstacles to full realization of  251 post-Brexit  367 shift from vertical to horizontal  336, 342, 362 stakeholder involvement failing to pass the test  160, 416 allocation of functions  39–42, 350 Fig. 12.2 all stakeholders  17, 40, 41, 170, 280, 336, 342, 528–29 delegation of functions from Ministers to regulators  42 Parliament  40–41 regulatory authority (RA)  41–42 system Commissioner  41 System Governance Body (SGB)  41 traditional allocation  39–41 functions cooperative co-creation cycle (Fig. 17.1)  529 data-management  40 performance of allocated roles, sharing information and agreeing and implementing change  40 to reach agreement on balance between prosperity and protection  41 ethical contribution to the purposes and outcomes  40, 528 harms to be avoided/root causes, barriers and solutions  528 mode of engagement/Code of Ethical Conduct  40, 528 shared purposes and outcomes  40, 528

strategic objectives and outcomes  40 system design and allocation of functions, roles and responsibilities  40, 528 review and scrutiny of the system as a whole  40, 41 institutions required body for agreeing the Code of Ethical Practice  40 Delegated Administrative Authority (DAA)  40 judges  40, 42 Ombudsman  39, 40, 42, 46, 343 regulatory authority to oversee performance  40, 41–42 System Governance Body  40 trust as basis/establishment of  42–43, 342 see also trust-based regulatory system cognitive dissonance (Festinger)  12, 54, 76, 79, 101, 128, 296, 320–21 collaborative working  71–72 In a Different Voice: Psychological Theory and Women’s Development (Gilligan)  71 Institute for Collaborative Working (ICW)  17 ‘creating value through knowledge and relationships’  71 membership  71 standards British standard (BS 11000) (2010)  71 ISO standards (ISO 44001 (2017), ISO 4401, ISO 44002, ISO 4403)  71 Understanding the Psychology of Collaboration (ICW)  71 attributes of individuals  71 collective mindfulness (Weick)  77, 184–85, 461 Colombia, political dissatisfaction in  113 community rebuilding (UK)  233–35, 245–46 ‘Communitarianism’ (Etzoni: 2015)  234–35 ‘Connected Communities’ model (2006–10)/ endorsements of  235 Green Philosophy (Scruton, 2009)  34, 221, 245 ICSs  245 introduction of Regional Mayors (2013)  233 is more better?/optimum size of communities  234 A One Powerhouse Framework for National Convergence and Prosperity A Vision for Britain (2020)  234 ‘levelling-up’ agenda (Johnson Government)  234, 247–49 UK Levelling Up Missions (Table 9.1)  248–49 Local Government and Public Involvement in Health Act 2007  233 Remaking One Nation: Conservatism in an Age of Crisis (Timothy: 2020)  233 Strong and Prosperous Communities. The Local Government White Paper (2006)  233 overturn of some reforms by Tory/Lib Coalition  233 The New Golden Rule (Etzoni: 1996)  234

Index  539 compensation/remuneration motivating factor, whether  151 competence Common Approach to Competency (LBRO) (2016)  202 cultural competence  182 financial ethics and  138, 186–87 IBE Good Practice Guide on Performance Management  115 OECD Best Practice Principles for Regulatory Policy (2014)  202–03 performance-based regulation  396–97 a requirement of leadership  239 SM&CR  470 in a stakeholder system  17, 30 trust/trustworthiness and  1, 9, 90, 100, 107, 108, 109, 114, 115, 116–19, 345, 355 trust-based licensing model  391–92 see also self-determination theory; self-regulation competition vs cooperation  6–9 adverse outcomes of competition  49–52, 67–68 Heffernan  67 Stuke and Ezrachi  67–68 competition within/between groups  6 as constant evolutionary forces in conflict  49–50, 72 distinction competition, as response to the need to survive  6, 45–46 cooperation as means of group evolution and improvement of performance and outputs  6, 49–50 preferred approaches Collins and Porras  69 Meagher  69 Prisoner’s Dilemma  15, 51–52, 457, 458–59 realignment of competition from aggressive competition to increasing cooperation  7, 14 from unhealthy economic rent-seeking to healthy market exchange  68 from ‘warfare’ to ‘noble competition’  68 Posner and Sunstein  68 Stuke and Ezrachi  68 regulatory protection of consumers through promotion of competition, problems caused by  68–69 working in tandem  66–67, 72 Christakis  66–67 Sacks  67 compliance  432–45 culture of the organisation, importance  114, 187, 197, 198, 207–08, 267, 269, 443, 452–54 behaviour of managers  325 determination of compliance/non-compliance, absence of a mechanism for  266–67 fairness/perception of, importance  320 financial motivation model  295–96

integrated employment dispute resolution service, benefit of  257 post-GFC distrust of formalised accountability  111 quality of government, importance  239 reasons for non-compliance (Reducing the Risk of Policy Failure: Challenges for Regulatory Compliance (OECD, 2000))  433 regulators’ changing role  199–200, 201–02 regulators’ competence, need to ensure  203 regulatory delivery, means of achieving  361 remuneration policies, effect  264–65, 311–12, 318 small businesses, support for  258 Three Lines of Defence (IAA) 2013 formulation  433, 439 2020 reformulation  433, 439 governing principles  434 shift from ‘defence’ to ‘enablement’/embrace of the ethical  433–34 trust/cooperative approach  43–44, 102–03, 105, 106, 109, 111, 320 US ‘Fostering Cooperation’ approach  429–30 see also ‘Better Regulation’ (UK); compliance systems; deterrence; intervention/accountability; regulatory delivery model (UK) compliance systems overview enforcement authorities’ role in imposition of  445 ethical culture as critical element  445 injustice of failure to include mitigating/aggravating circumstances  445 problems disconnect between internal and external systems  446 failure to encourage higher performance  445 focus on compliance, risks  83–84, 299, 445 limitation of enforcers’ horizons  446–47 unintended consequences  445 effectiveness  441–44 alleged adoption for show  441 compliance professionals’ view of role  442 compliance trap  443 counterproductive complexities  441 distrust of compliance staff  442 factors making control of employees difficult  442 more effective factors  441–42, 452–55 resistance to formal programmes/organisations’ construction of own  441 surveys (Jenkins (The Relationship Between Business Integrity and Commercial Success, 2017))  443 ethics and compliance programmes  180, 205–06, 267, 443–44, 445 academic/General Counsel preference for  443–44

540  Index Beranek (Regional Business Integrity Conference, Singapore, 2017)  444 Killingsworth (‘Modeling the Message’ (2012))  443 Kurer (Legal and Compliance Risk, 2015)  443 Steinholtz (‘Ethics Ambassadors’ (2014))  444 Treviño and Weaver (Managing Ethics in Business Organizations, 2003)  443 definition  37 EBP model  36–37 integrity programmes distinguished  444 OECD Recommendation for Further Combating Bribery of Foreign Public Officials (2021)  330 evolving attitudes  439–40 from compliance and outputs to outcomes and impacts  306, 447–48, 456 see also UK, enforcement/compliance; USA, compliance programmes examples Australia  430, 438, 439 EU  438–39 USA  436–38 as internal mechanism  267, 297, 432–33 as means of complying with external compliance systems  433 generic rules, limitations on regulators’ powers  434 sector-specific regulatory regimes  434 origin of attempt to replicate external ‘deterrence’ systems  432 link with ethical culture  432 dissatisfaction with limitations of external sanctions  434–35 need for fairness in imposing sanctions for breach  433, 435–36 US adoption of compliance systems as key factor  435 pinning sanction to those responsible for the breach  435–36 applicability of mitigating/aggravating factors  435–36 see also ‘Better Regulation’ (UK); compliance; regulatory delivery model (UK) conciliation ACAS  256, 492 conciliation scheme as a structure  482 direct communication between the parties as key feature  482 mediation, distinguishability  483 n4 methods  482–83 OSC  504–05 as a technique  481, 482–83 see also mediation ‘condition of reversibility’ (Baier)  121, 124 conscious cognitive thought  101, 126

consistency compliance regimes  434, 436, 448 regulatory practice (Better Regulation (2007))  202, 362 trust/trustworthiness  90, 95, 97, 115, 116, 117, 391 consumer Ombudsmen: see Ombudsmen (UK) continuous performance improvement model: see problem-solving and continuous improvement model cooperation in communities  213–53 examples of communities  34 importance of strong communities  34 Together: Loneliness, Health and What Happens When We Find Connection (Murthy, 2021)  34–35, 136, 138, 246 inequality and  214–27, 236–37 see also inequality optimum size of communities Dunbar number  18, 34, 63–64, 252–53, 529 local/regional government, implications for  34, 106 solutions, possibilities  227–50 community rebuilding  233–35 democratic and social institutions, need for renewal  34, 242–47 see also democratic and social institutions, need for renewal values, division and solidarity  235–39 see also neoliberal capitalism, economists’ ideas on reform of see also community rebuilding (UK); a cooperative nation and economy; social solidarity cooperation, designing for characteristics of effective cooperative situation  61 effectiveness of focus on common goals and the interest of other stakeholders as key to  61 hierarchies and elites  62 see also hierarchy (society) resultant controversies as a sign of healthy engagement  61 size of groups and networks  18, 34, 63–64, 106, 252–53, 529 ‘social suite’ core (Christakis)  61–62 cooperation, evolution of the means of changes in the matrix of our norms, institutions, cultures and psychology, impact  64 coevolutionary interplay between psychology, institutions and culture (Henrich)  13, 53–54 collaborative working  71–72 see also collaborative working cooperation vs competition  66–69 see also competition vs cooperation core values as key  72

Index  541 genetic goodness genes and culture (Christakis)  58 inherent ethical sense (Wilson/Haight)  58–59 see also ethical values moral bonds, importance of  8, 59, 61–62, 84, 89, 129, 146 see also moral bonds groups, forms and transformations (Heinrich)  55–58 different forms (families, tribes, nations)  55 emergence of individualistic WEIRD groups/ impersonal prosociality  56 gradual development of political pluralism and modern democracy  57 non-WEIRD groups (Japan/Brazil)  56 emergence of kin-based groups after the last ice-age  55–56 behavioural culture  55–56 hierarchies as impediment to cooperation (Bertness)  57 modes inter-group competition (including war and aggression)  55 intra-group cooperation  55 social norms (values, cultures and institutions)  14, 24, 55 pivotal points 1950s China  57 changes brought about by the Western Church post-1000 AD  57 Reformation  57 human psychological consciousness and organisations  60–71 see also psychological consciousness, stages of development kin-based/WEIRD populations (Heinrich) from interpersonal prosociality to impersonal prosociality  55 move from kin-based to WEIRD, effect  54–55 social control of norms and feelings  54–55 law, changes in conception of  64–66 see also law, changes in conception of scientists on Barrett  24, 69, 70 Bertness  6, 7, 24, 49, 50–51, 52, 55–56, 60 Christakis  7, 13, 14, 24, 58–59, 60, 61–62, 63–64, 66–67 Cole and Herring  24, 65 Haight  12, 23, 24, 59 Heffernan, M  7, 21, 24, 67 Henrich  6, 13–14, 24, 53–57, 64 Johnson, David  50, 52–53 Laloux  14, 24, 69, 70–71 Maslow  24, 69, 70 Meagher  21, 70 Nowak  15–16, 24, 49–50, 51–52, 60, 62 Stuke and Ezrachi  7, 8, 21, 24, 67–68 Wilson, E  12, 18, 24, 51, 57, 59

social interdependence theory (Deutsch/ Johnson)  18, 24, 52–53, 61 values (goodness, reciprocity, altruism, fairness and justice), importance of  72 cooperation within organisations, features  36–37 ethical approaches and values  36–37 BBfA Five Principles  37–38, 406 Ethical Business Practice (EBP) model  36–37 flat organisational structures  36, 62 open, trusting and ethical environment of psychological safety  36 ‘productive engagement  36 shared purposes  36 trust/intrinsic motivation  36 undermining factors adversarial mechanisms  36 international platforms  36 Parliamentary oversight committees  36 see also business organisations, cooperation in cooperative capitalism  241 cooperative culture  172–208 overview  172–73 definitions/dimensions: see culture definitions/dimensions multiplicity of cultures within an organisation, mobilising for convergence  172–73 individuals’ behaviour/group culture, reciprocal effect  172 Managing Cultural Differences (Hoecklin, 1995)  179 research on business/corporate culture, plethora  25 public organisations, paucity  172 see also business organisations, cooperation in; corporate purpose, evolution of; psychological safety cooperative dispute resolution  481–527 ADR and  35 advantages as basis for greater post-dispute cooperation  35, 481 possibility of a constructive controversy  35 transitional justice  509 elements of addressing underlying causes  35 non-judicial approach to issues of behaviour and culture  35 talking rather than adversarial contest  35 integration of pathways, importance  507 remedies/responses to needs: see responses (dispute resolution) restorative justice  508–09 transitional justice  508 Truth and reconciliation process (South Africa)  509–10

542  Index cooperative dispute resolution (UK)  508–99 desiderata ‘no-blame’ culture, importance of  498, 518 switch from adversarial to an investigative administrative process  498, 517–18 negligence/fault of one causative actor to factual scientific criteria related to the injured person  498, 517–18 Resolver  496, 501, 522–23 sacred cows  481 transitional justice (Northern Ireland)  509 see also cooperative dispute resolution a cooperative nation and economy  250–53 problems bipolar approach to politics  253 continuing economic, social, employment and political inequality  250–51 political destabilisation consequent on  250–51 global poverty  250 neoliberalism’s failure to resolve issues  250 perceptions of poverty and inequality as key issue  251 psychological issues examples  251 populist responses  251 ways forward Better Administration based on cooperation?  253 lessons from Covid-19  251 a new social contract  251–52 see also social contract, need for a new one OECD’s Deliberative Wave  253 re-evaluation of society’s values and objectives  251 cooperative regulatory models/OBCR model overview/summary  335, 357–59 effectiveness of a trust-cooperative, open-andjust-culture and performance-based system  419 success of stakeholder engagement in setting purposes, objectives and outcomes  419 in system creation  419 basic elements agreement on functions, structures and bodies  337, 357, 420 design of the system  349 effective oversight  349 engagement between all stakeholders  336, 420 ethical values/principles for engagement  349, 357 holistic approach  420 self-identification approach  336, 420 specification of purposes/desired and harmful outcomes/identification of KPIs  336, 357 trust between stakeholders  336–37, 357

defining shared purposes  338–39 approach to  338 key elements  338 requirements  339 mode of engagement co-creation  342 see also co-creation regulatory model Code of Ethical Conduct and Practice  347–48 see also ethical codes, OSC Code of Ethical Practice/Engagement cooperative respectful deliberation as better option  420 full stakeholder involvement  342–45, 420–21 see also stakeholder involvement maximisation of trust  345–47 see also trustworthiness, evidence of/factors determining/characteristics outcomes/impacts definitions  341 examples/measuring  337 impact assessments  341 shift from traditional model  337–38 prioritisation of purposes and objectives conflicts  340 multiplicity of purposes and objectives, need to reconcile  339–40 OBCR approach (‘upstream’ agreement between all stakeholders)  340 proliferation of purposes  334, 339, 413–14 purposes/goals/objectives good behaviour  337 prosperity (business objective)  337 protection (public objective)  337 purposes (overarching)/objectives (strategic), distinction  16, 166 traditional model (top-down)  39–40, 351 see also Better Business for All (BBfA) (UK); ‘Better Regulation’ (UK); co-creation regulatory model; Ethical Business Practice model (EBP); Ethical Business Regulation (EBR); Primary Authority Scheme (UK); problem-solving and continuous improvement model; regulatory delivery model (UK); regulatory sandboxes (non-UK); regulatory sandboxes (UK); trust-based regulatory system cooperative relationships between all stakeholders  344 consumer/trader  520–21 employer/employee  520 regulator/regulatee  344 state/civil and economic operators  344 changes in behaviour and culture, contribution to  44, 520–21 contemporary dependence on  24 dispute resolution and  28, 520–21 ethical values and  520

Index  543 family context need to protect children  520 Supporting Families in Conflict (McFarlane, 2021)  521 ODR and  28, 520 support for approaches to  521 data/feedback, importance of  28 need for  520–21 corporate purpose, evolution of  151–58 conclusions/summary of requirements  170–71 Corporate Code references to (Box 7.1) Board leadership, transparency and governance – principles (Ofwat, 2019)  156 Building a regulatory framework for effective stewardship (FRC/FCA, 2019)  155 Corporate Culture and the Role of Boards. Report of Observations (FRC, 2016)  155 Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2014)  154 Davos Manifesto (2019)  157 G20/OECD Principles of Corporate Governance (Ofwat, 2015)  154 Guidance on Board Effectiveness (FRC 2018)  155 Policy & Practice for Purposeful Businesses (Final Report) (British Academy, 2021)  156 Principles for Purposeful Business (British Academy, 2019)  156 The Enacting Purpose Initiative. Report s2 (European Purpose Initiative, 2021)  157 UK Corporate Governance Code (FRC) 2014  154 2018  155, 161 Wates Corporate Governance Principles for Large Private Companies (FRC, June 2018)  155 from good to great (or not) Buckingham and Nilakant (Alternative Approaches to Corporate Management and Governance, 2012)  135, 152, 317 Collins (Good to Great, 2001)  151, 179 Collins (How the Mighty Fall, 2009)  151 Collins and Porras (Built to last, 1995)  36, 69, 151, 179 Frankl (Man’s Search for Meaning, 2008, original 1947)  152 Hoecklin (Managing Cultural Differences, 1995)  151 Manz and Simms (Business Without Bosses, 1993)  152 Pfeffer (The Human Equation, 1998)  151, 179 Pfeffer (What Were They Thinking?, 2007)  151–52, 179 Plato’s transcendent ideals  152 as key to corporate sustainability  164–66 AA1000 Stakeholder Engagement Standard (AA1000SES, 2015)  160

conflicting purposes  163 Corporate Governance and Business Integrity (OECD) (2015)  154 Cultural Health and Employee Well-Being as a Pathway to Sustainable Performance (Barrett)  141 Davos Manifesto (2019)  157 EU Food Code (2021)  141 Five Principles for a Purpose Driven Business (Health Foundation, 2018)  160 Guide to Corporate Sustainability: Shaping a Sustainable Future (UN Global Compact (2015))  19, 32, 164, 270 Measuring Purpose, An Integrated Framework (Barby)  157–58 national examples (Scotland and Wales)  168–70 social purpose vs profit (Mayer)  153–54 The Enacting Purpose Initiative. Report s2 (2021)  157, 158 UK Corporate Governance Code (2018)  155 Understanding Value Creation (International Federation of Accountants, 2020)  160–61 see also sustainability (corporations); UN Sustainable Development Goals (SDGs) multiplicity of purposes, need to integrate and balance  162–63 alignment of all stakeholders’ purposes, importance  150 Draft OECD Recommendation on the Role of Government in Promoting responsible business practices  162 importance of ‘all-stakeholder’ involvement  162–63 reconciling profit and protecting people from harm  162–63 George Merck II (profits as outcome, not purpose)  152–53, 162 in the regulatory sphere  163 risks of not doing so  158–59 timing of decisions  163–64 multiplicity of purposes, responsibility for choosing between  158–62 board of directors (Bainbridge)  159 codetermination (Hayden and Bodie)  159 multi-stakeholder involvement Davos Manifesto  160 definition of ‘value’ for purposes of  160 Mackey and Sisoda  159 Mayer  159, 161 means of achieving  160 UK Corporate Governance Code 2018  161 US Business Roundtable, 2019  25, 31, 159, 268, 276–77, 379 shareholder primacy (Bebchuk and Jackson)  159 team managed by shareholder-elected boards (Blair and Stout)  159

544  Index no purpose? Fisch and Solomon (‘Should Corporations have a Purpose?’, 2021)  162 legal constraints (UK)  162 outcomes, importance of measuring  166–68 accountability as mechanism for  167 examples  166 measuring purpose framework  157–58 metrics, need for transparency/limitations on  167–68 Measuring Peace (Caplan, 2019)  168 regulators’ focus on  166–67 A New Consumer Duty (FCA, 2021)  167 Consumer Protection (PAC, 2019)  167 RDM  166–67 Regulating to Protect Consumers in Utilities, Communications and Financial Services Markets (NAO, 2019)  166–67 see also regulation of organisational culture, need for/difficulties purpose and ethical behaviour, failure to match  162 purpose as motivating factor  150 purposes (overarching)/objectives (strategic), distinction  16, 166 social purpose, recognition of the need for  31, 37–38, 150 Enacting Purpose within the Modern Corporation (FCA, 2020)  154, 158 Kay (Obliquity, 2010)  152, 185 Mackey and Sisodia (Conscious Capitalism, 2014)  25, 152 Mayer (Firm Commitment, 2013)  25, 26, 37, 150, 153–54, 159, 268 Mayer (Prosperity, 2019)  161, 268, 290 The Business Case for Purpose (Harvard Business Review Analytic Services, 2015)  153 The Case for Purpose-Driven Business (Regenerate, 2020)  153 UK Corporate Governance Code (2018)  454 see also business organisations, cooperation in corporate social responsibility (CSR) an expression of conscience  271 Bowen (Social Responsibilities of the Businessman (1953))  270 ISO 26000 Guidance Standard on Social Responsibility  270 ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy  270 Joseph (‘Successful Examples of Corporate Social Responsibility’ (2019))  270 mixed views on  270 OECD Guidelines for Multinational Enterprises  270 a step on the way  19, 26, 163, 196, 268, 270–71, 272 replacement by ESG  272

UN Global Compact (2015)  270 UN Guiding Principles on Business and Human Rights  270 corruption as global risk  330 globalisation, contribution to  230 OECD Convention on Combatting Bribery of Foreign Officials in International Business (1999)  330 Recommendation for strengthening (2021)  330 ‘Pursue, Prevent, Protect and Prepare’ strategy (UK/ adoption elsewhere)  331 statistics (UK)  330 ‘whole-of-government’ approach/international coordination need for  330 courage Aristotle’s choice  132 n96 Barrett’s Seven Levels  142 as cardinal value  128 Committee on Standards in Public Life (2018)  145 moral courage  145 Plato on  152 Reimagining Britain (Welby)  235–36 Toward Effective Governance of Financial Institutions (G30, 2012)  139 court reform (England and Wales)  484–90 costs issues case management/rationing of procedure  486 court fees increases  489 holiday sickness claim  489 legal aid cuts 1999  486 and MOJ cuts 2017–18  490 post-2008 GFC  488–89 private funding options  486 rise in self-represented litigants  489 road traffic accidents  489 Jackson Reforms (2013) (Civil Litigation Funding and Costs)  487–89, 516 BTE LEI insurance, unworkability in the UK  488 summary  487 unintended consequences (alteration of the balance between claimants and defendants)  487 Jackson Reforms (2013) (Civil Litigation Funding and Costs), criticisms of effect on children (Law Society)  489 effect on the NHS  489–90 rise in self-represented litigants (National Audit Office/Commons Public Accounts and Justice Committees)  489 problems/opposition to  484–85 Woolf Reforms (1998) (reform of civil procedure)  485–87 encouragement for mediation/ADR  491–92 lack of success  486–87 ‘proportionate justice’  486, 494

Index  545 covid-19 Coronavirus Job Retention Scheme UK, losses due to fraud  332 death rate differences/levels of trust  237 as globe-threatening risk  2–3, 45, 329 manifest inequalities of treatment and response  236–37 Edelman Trust Barometer 2021  237 panic-buying  320 range of impact  236 The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis (OECD, 2021)  276 n121 ‘Recovery or Radical Transformation: The Effect of Covid-19 on Justice’ (Sir Geoffrey Vos: June 2021)  495 ‘Reopening the Economy Will Divide Society’ (Harford: 2020)  236 respect for the rules, factors affecting  464 as spur to vaccine redress schemes  498 trust as explanation for striking differences in behaviour and outcome  11, 114, 237–38 distrust in statistics  237 vaccine development as a cooperative success  408 regulatory sandbox contribution  408 values endorsed by citizens in the light of Covid  237–38, 249–50, 269 ‘Apocalypse How?’ (O’Connell: April 2020)  249 caring  149, 237, 249 re-evaluation of life, employment and rewards  312 Rescue: From Global Crisis to a Better World (Goldin, 2020)  312 solidarity, fairness, responsibility (Carney)  238, 250 World Happiness Report 2021  237–38 critical feeling/critical thinking, importance (Reber)  131 Croatia (amplification of messages for political ends (Tudjman))  226 cultural capital (Bourdieu)  129 culture blame culture  7 business, importance to  31 changes in brains caused by (Christakis)  58 changes in culture caused by brains Henrich  58 co-evolution with institutions, psychology and norms  13, 14, 24, 32, 53–54 compliance and  114, 187, 197, 198, 207–08, 267 ‘culture of governance’ (OECD Recommendation on open government (2017))  34 definitions/dimensions changing requirements  25 Christakis (Blueprint, 2019)  58 Conlisk (‘Why Bounded Rationality?’, 1996)  176 ethical status as essential  173

G30 (A New Paradigm: Financial Institution Boards and Supervisors, 2017)  186 Hofstede (Cultures and Organizations, 2001/2010)  175 House et al. (Culture, Leadership, and Organizations, 2004)  176 Mills (‘Navigating the Tension’, 2012)  176 Schein (Organisational Culture and Leadership, 2017)  173–75 Shweder (‘True Ethnography’, 1996)  173 ‘The way we do things round here’  59 Trompenaars (Riding the Waves of Culture, 1993)  175–76 effect on behaviour and outcomes  10 in financial services  185–92 see also banks/banking/financial services, culture in psychological safety: see psychological safety relationship between action drawing values from culture and action shaping culture  131 social norms arising from  13 systemic culture/culture risk  207–08 see also group behaviour/motivation; open and just culture; regulation of organisational culture, need for/difficulties cybersecurity  2–4, 45, 271, 329 data collection contribution to compliance  354 dispute prevention  522–24 problem solving  354 risk and culture analysis  400 criticisms of absence of a developed system of collection and feedback  517, 527 unnecessary limitations  523 desiderata avoidance of premature commercial exploitation  523 comprehensiveness  523 fusion of ADR schemes and Citizens Advice under a single website  523 governance and design conditions  523 sectoral comprehensiveness  523 small number of portals 523/limited pathways  523 Ombudsmen’s role in collection of  42, 258, 354, 360, 410, 420, 501, 503, 521, 522–24 sources  354 users of  522–23 UK DWI  409 decision-taking by officials, high level of inaccuracies complaints to the PHSO (MOJ, Tribunals and Gender Recognition Statistics Quarterly, October to December 2017)  519 immigration and asylum

546  Index Immigration and Asylum Appeals – a Fresh Look (Justice, 2018)  517, 519 New Zealand (reviews of immigration and family reunion)  199 NHS (recent reports)  519 statistics  519 Delegated Administrative Authority (DAA) in  41, 353, 358, 402–03 democratic and social institutions, need for renewal  34, 242–47, 252–53 decline of communities/institutions, suggested causes  242–43 OECD publications Employment Outlook 2019: The Future of Work, 2019  243 Good Practice Principles for Deliberative Processes for Public Decision Making (2020) (Box 9.1)  243–45 Innovative Citizen Participation and New Democratic Institutions (2020)  34, 243 Open Government. The Global Context and the Way Forward (2016)  34, 243 Recommendation on Open Government (OECD, 2017)  34, 243 writers on Acemoglu and Robinson (Why Nations Fail, 2012/Economic Origins of Dictatorship and Democracy, 2006)  10, 34, 218–19, 240, 252 Arnstein (‘A Ladder of Citizen Participation’, 1969/2019)  242–43 Carney (Values, 2021)  19, 23, 136, 149, 238–39, 242, 244, 250, 266, 271 Collier (The Future of Capitalism, 2018)  23, 34, 147, 236, 242, 250 Ferguson (The Great Degeneration, 2014)  11 n54, 23, 242 Ford and Goodwin (Revolt on the Right, 2014)  243 Hirst (Associative Democracy: New Forms of Economic and Social Governance, 1996)  242 Mazzucato (The Entrepreneurial State, 2013/2018)  11 n54, 22, 34, 242, 292 Micklethwaite and Wooldridge (The Fourth Revolution, 2014)  219 Olson (The Rise and Decline of Nations, 1984)  11 n54, 23, 242 Pabst (The Demons of Liberal Democracy, 2019)  11 n54, 34, 242 Raworth (Doughnut Economic, 2018)  10, 20, 223, 231–32, 252 Sacks (Morality: Restoring the Common Good in Divided Times, 2020)  11 n54, 23, 34, 146–47, 148, 242 Denmark corporate governance (codetermination)  277 Covid, trust in government and  114

deterrence appropriate use of  427 clawback as  300–301 counterproductive effect/ineffectiveness  75–76, 266–67 absence of impact on individuals involved in major disasters (Gray and Silbey)  424–25 academic literature on  425 as block on information sharing  426 Collier (The Future of Capitalism, 2018)  267 compliance with the law vs the spirit of the law (Carney)  266 costliness  426 Delaware fiduciary model  266 demoralising effect  426 dependence on (non-existent) consistent enforcement system  424 Employment Tribunals’ approach  249–50 FCA recognition of (2018/2020)  197 fines and damages as a cost of business  266, 425 Hodges (Law and Corporate Behaviour, 2015)  365–66 lack of clarity as to how it is meant to work  266–67, 424 as a mechanistic theory addressing the wrong issue  423–24 multiple examples of failure to control behaviour  267–68, 364–65 in criminal, regulatory and tort law contexts  425 resentment at sanctions perceived to be unfair  425–26 SM&CR as example  197 time-lags  266 EU approach to: see EU deterrence policy fear as key factor (Transforming Culture in Financial Services – Driving Purposeful Culture (FCA, 2020))  262–63, 266, 422, 426 mitigating and aggravating factors  430–32, 435–36 as outdated concept  455 rational cost-benefit calculation as basis  7, 75–76, 262–63, 422–23, 424 ouster of theory  76 trend towards ethical alternatives  19, 27, 43–44, 45–46, 62, 197, 426 trust relationships and  117 US SEC enforcement cooperation programmes  429–30 vertical dominance and  57 see also ‘Better Regulation’ (UK); compliance; EU, deterrence policy; intervention/accountability; regulatory delivery model (UK) dispute resolution ‘early facilitated’ communication/dispute resolution  42, 410, 494, 500, 502–03 description of  502–03

Index  547 modes of adversarial mode (common law countries), description of  482 arbitration  482 conciliation/mediation  482–83 Early Neutral Evaluation  481, 483, 504 political styles (US vs European models)  524–26 social solidarity and  524–26 as state-based responsibility alienating formalities and jargon  483 aversion to  484 monopoly of justice as means of domination  483, 491, 520 see also ADR see also arbitration; conciliation; cooperative dispute resolution; mediation; UK, dispute settlement, modes (England and Wales) Dunbar number  18, 34, 63, 252–53, 529 Early Neutral Evaluation (ENE)  481, 483, 504 definition  483 n4 elites/elitism as autocratic class dominating hierarchically organised society  51 capture of power in government, the economy and the culture (Lind)  222 negative effect of hierarchy  213 rising and falling elites  57 social dominance theory and  456–57 Brexit and  62 entrenchment under post-WWII authoritarian liberalism  228 EU, dominant role in  220 from aristocrats to capital-owners to the educationally privileged  253 knowledge without elitism  62 ‘levelling up’ (Europe) vs ‘levelling down’ (USA)  135 liberty and  240 moving away from  45, 49 perceived exploitation by/reaping of rewards denied to others  22–23, 26, 45, 213 inevitable failure of states with such elites (Acemoglu and Robinson)  218 politics and (UK) domination by small elites of politicians and the corporate rich (Crouch)  220 neoliberalism and  220–21, 222 populism and  223–24, 251, 253 punishment as means of retaining power  6, 15, 27, 51, 464 success of as source of destabilisation  10, 250–51 as threat to liberal capitalism  230 very rich and politically educated elites, retention of power  20 see also hierarchy (society)

empathy component of morality/the good  120, 121–22, 124–25 lack of (sociopaths/psychopaths)  12, 58–59, 101, 123, 519 parental discipline, effect on  122 see also morality employment (UK) Employment Tribunals/ACAS conciliation development since the 1980s  256–57 examples of regulatory bodies set up to oversea work of  256–57 from criminal remit to general remit by stealth  257 fragmented nature of system/plans to create a single labour market enforcement authority (Good Work Plan (2019))  257 individual private enforcement of labour rights, concerns confusing pathway  257 costs of providing tribunals  257 enforcing individual rights/addressing systemic workplace practices, gap  257 rising costs for individuals  257 as replacement for collective employer/employee negotiation  256 resolving the problem  257 trade union membership 1979–2020 (steep decline)  245, 486 n26 public and private sectors compared  256, 486 n26 WWII to 1980  230 enforcement G30 (Banking Conduct and Culture: A Permanent Mindset Change: 2018)  452–53 criticisms of  453 OECD Best Practice Principles for Regulatory Policy:2014  451 as outdated concept  455 UK Bribery Act 2010: Guidance about Procedures to Prevent Persons from Bribing (2011)  451 Deferred Prosecution Agreements  451 Enforcement Policies as ‘intervention policies’  448 regulatory authorities’ obligation to publish  448 FCA Mission: Approach to Enforcement (2019)  450 OPSS Enforcement Policy  449–50 SEPA (Segmentation of Offenders: Spectrum of Compliance) (Fig. 14.1)  448–49 The Deterrent Effect of Competition Enforcement by the OFT (OFT, 2007)  440 see also ‘Better Regulation’ (UK); compliance; deterrence; regulatory delivery model (UK)

548  Index US leniency policy (2010) changing practice  452 effect  452 see also ‘compliance; deterrence ethics: see business organisations, cooperation in, ethics and; Ethical Business Practice model (EBP); Ethical Business Regulation (EBR); ethical codes; ethical values; moral bonds; morality; values (general) Ethical Business Practice model (EBP)  11, 137–38, 199 description of/basic frameworks  36–37, 200–201, 291 fairness as essential requirement  36–38 focus on intrinsic motivation  473–74 Ethical Business Regulation (EBR)  345 n18, 346–47, 358, 366, 401, 454 ethical codes applicability to organisations and systems  31 in business  31 a code vs rules  348, 526 dispute resolution and  527 examples ASA Codes  347–48 Ethical Business Practice (EBP) model: see Ethical Business Practice model (EBP) UK Corporate Governance Code (2019)  31 see also stewardship codes fairness and  37, 520 importance of  31, 149 legal requirements, incorporation of  520 OSC Code of Ethical Practice/Engagement  30, 31, 40, 45, 347–48 holistic approach as target  347 impact on culture  59 Ombudsman and  42, 410 responsibility for drafting  40, 41, 149, 347 scope  347 as response to the erosion of the ethical core of societies  148–49, 520 ethical values  128–30 as basis of substance and modes of behaviour underpinning relationships  31, 129, 520–21 business and: see business organisations, cooperation in ethics and ‘cardinal values’ (hope, faith, charity, justice, courage, temperance and prudence)  128 corporate design and  18 culture, interrelationship  1, 25, 36, 58–59 as determinant of cooperation partners and the intensity of cooperation  19, 31 humans’ inherent understanding of/inevitable drive towards  1, 31, 58–59, 72, 84, 126–27, 130, 148–49, 520 distorting factors  59

inherent commitment to shared ethical values  294 morality in markets (Carney)  238 as means of distinguishing the ‘bad’ and the ‘good’  31, 72 social norms overriding  87, 182 Ethiopia, capitalism in  230 EU aviation industry, legislation  395 n144, 398 Capital Requirements Directive 2013 (Directive 2013/36/EU)  298 CFR (2000)  143–44 climate change ‘The Current Challenges for EU Company and Financial Law and Regulation’ (Autenne et al., 2018)  271 compliance systems  440 Compliance Matters – What Companies Can Do Better to Respect EU Competition Rules (2011)  438–39 examples of the adoption of compliance elements  439 Member State practice  439 corporate governance Corporate Governance in Financial Institutions and Remuneration Policies (White Paper, 2010)  264–65, 318 Report on Directors’ Duties and Sustainable Corporate Governance (European Commission) (2020)  278–79 deterrence policy Dieselgate (‘a failure of public enforcement’)  432 ‘effective, proportionate and dissuasive’ test  428–29 Fining Guidelines  423 GDPR/consumer protection regimes  431–32 increasing levels of fines/absence of evidence to support  428–29 jurisprudence  423, 428 n28 leniency programme  423 Member State discretion  430–32 mitigating and aggravating factors  430–32 see also deterrence dominant role of elites  220 Food Code (2021)  141 Regulatory Sandboxes and Experimentation Clauses, Council Conclusions on (2020)  408 UN SDGs, adoption in all legislative proposals  148 European Parliament  221 fairness applicability balancing conflicting goals, purpose and values  16, 338–39 competency of regulators  202 cooperation in society  241, 251

Index  549 cooperative culture  180, 182, 196, 250 cooperative dispute resolution  410, 493, 494, 500–502, 507–08, 510, 511, 512, 513–19, 520–22, 526–27 cooperative regulation  338–39, 379–80 distribution of health Fair Society, Healthy Lives (Marmot Report, 2010)  214 Sustainable Health Equity: Achieving a Net-Zero UK (Institute of Health Equity, 2020)  214 enforcement regimes/sanctions  432–33, 435–36, 463–65 motivation, impact of fairness/unfairness  76, 83, 159, 294, 314–15, 320–21, 425, 426, 445, 461–62 public inquiries  512–13 remuneration/pay differentials  83, 159, 255, 296, 307, 308, 310–12, 320–21, 326–29 social institutions, decline of/renewal  242, 252 social and political destabilisation  251 social/legal rules, importance of procedural fairness, fair application, fair creation and fair substance  15–16, 43–44, 105, 462–65 legitimacy and  16, 44, 82, 462–63 stakeholders, treatment of  139–40, 159, 160, 327–28, 343–44 FairShares model  287 truth and reconciliation  509–10 what is fair?  327–28 characteristics inconsistency with purposes of capitalist markets/ commercial companies  325–26 inherent/innate value  1, 84, 320 as intergenerational issue  169–70, 214, 239 unfairness as stress-inducing (Barrett)  142–43 as critical value behavioural choices  129 Brosnan  129 in business  137, 255, 347–48 Carney  23 cooperation  72 Equity Theory and  84 morality and  84, 128, 134, 135, 231 on social, business, environmental and governance issues  22–23 examples Australian Banking Code (2019)  140–41 Consumer Scotland Act 2020  400–401 EBP model  36–37 Economics of Mutuality  140 Fairer Scotland (2010)  168–69 FCA Mission: Approach to Enforcement (2019)  450 Golden Rule (‘do as you would be done by’)  4–5, 19, 121, 125, 128, 132 Moral Foundations Theory (Haight) and  122–24 NHS (problems)  291–92 OBCR model  45, 46, 337–38, 346, 355–56

Public Service of Ontario Act 2006  145 SM&C  188 UK Regulatory Authorities’ mission statements (Table 13.2)  381–87 US Corporations’ Statement on the Purpose of a Corporation (2019)  379 WEIRD populations  56 Wellbeing of Future Generations Act (Wales) 2015  169–70 relationship with Covid-19  238, 250 ethical culture  206, 347–48 financial ethics  138 inequality, as exacerbation of  237, 307, 308, 310–12 neoliberalism  220, 289 proportionality  236 reciprocity  23 social and political destabilisation  251 see also fairness and justice fairness and justice  465–67 academics on MacIntyre  13 Sandel  12 Sen  12 an obsolete social contract  12 divided views  12 ethical principles as basis  25, 29 giving effect to  31 as inherent values  8, 12, 31 interpretation changes over time  12 dependence on value beliefs and context  12, 20 trust and  8, 91, 118 as universal values  12, 23, 59, 134, 135, 236 see also fairness financial crisis 2008–10 (GFC) causes  185 compensation/remuneration practices  263–64, 295–96, 306–07 culture as contributory factor  185 deregulation policy  260 short-termism  185, 221, 288, 296 see also banks/banking/financial services, culture in changes to corporation governance arrangements following  185 Better Regulations  260 loss of credibility of structures and legal duties of accountability  111 recognition of the importance of trust/values  111, 137–38 Regulatory Reform: the PRA and FCA regimes for Approved Persons (FSA, 2012)  305 remuneration and bonuses  27 as demonstration that markets are not inherently moral  238 as key global risk  2–3

550  Index loss of trust in accountability mechanisms  111 vulnerability of suppliers following the Russian invasion of Ukraine compared  68–69 see also banks/banking/financial services; maximisation of shareholder value (MSV) financial motivation model (FMM)  295–96 Agency Theory and  295 MSV and  295–96 risks bad behaviour threatening the financial system as a whole  295–96 non-compliance with the law  295 risk-reduction techniques  295 financial services regulatory authority (UK) (post-Brexit debate)  410–18 basic model (Fig. 13.6)  411 FSMA model as amended 2012, 2013 and 2016  411 as a traditional hierarchical model  410–18 open and just culture  185–92, 197, 415–18 Transforming Culture in Financial Services (FCA, 2018)  197 Parliamentary role  413, 416 Treasury proposals (2020)/issues arising  411–12 Treasury proposals (2021) incompatibility with cooperative co-creational model  416–18 mechanism for stakeholder engagement, inadequacies  416–18 omission of any discussion of outcomes  414 oversight mechanisms/accountability, concerns  414, 415–18 proliferation of purposes/confusion  339, 340, 413–14 recommendation letters/PRA/FCA’s obligation to respond  414 strategic objectives/principles  413–14 Finland antitrust compliance programmes (TUKES)  430 personal and social values (Schwarz)  133 populism, causes of  11 France community, loss of a sense of  222 governance code  192 inequalities, destabilising effect  227 liberalism, as fore-runner  219, 240 as a low-trust society  112 populism (gilets jaune)  11 freedom of expression, finding the balance  218, 226 genetic makeup, scope for changing  60 danger of natural select/random choices  60 intentional manipulation of values, norms, institutions and culture  60 Germany ADR academic opposition to  493 mandatory mediation  493

amplification of messages for political ends (Hitler)  226 corporate governance Chambers of Commerce  405 codetermination  159, 264, 277 governance code  192 shareholders and workers as participants with voting rights  277 court costs (BTE LEI insurance as basis)  488 Covid-19, impact  114, 237 enforcement/compliance  450 Ombudsmen, attitude towards  525 personal and social values (Schwarz)  133 trust/integrity, correlation with commercial success  10, 110, 112 global risks climate change  2, 329 cybersecurity  2–4, 45, 271, 329 digital communication  8 finance/economic insecurity  2–3, 45, 329 globalisation  8 [im]migration  2–3, 11, 45, 329 Brexit and  225 economists on Haidt  223 Milanovic  223 Sandbu  223 poor decision-making New Zealand  199 UK  517, 519 reasons for fears of  223 inequalities and societal fragmentation  3, 45, 223 economists/psychologists on Gerhardt  223 Kapteyn  223 Raworth  223 pandemics  2–3, 45, 329 populism  3 secretive and uncoordinated risk management systems  3 secularisation of society  8 summary of (Goldin)  2, 329–30 terrorism  45 undermining of existing communities, values and institutions  225 see also corruption; modern slavery; money laundering; UK, serious and organised crime globalisation Bodó on  114–15 corruption and  230 destabilising effect  218, 240 eroding effect on ethical core of societies  520 as a global risk  8 impact on middle-class incomes  308 Laloux on  71 Milanovic on  230 undermining of trust  10, 95, 108, 114–15

Index  551 Golden Rule (‘do as you would be done by’)  4–5, 19, 121, 125, 128, 132 new ‘golden rule’ (Eyzioni)  234–35 Greece cooperation in communities  287 social punishment, effect  458–59 trust in politicians  113 group behaviour/motivation, factors affecting accountability/need to justify actions deterioration of performance for unusual tasks  88 emphasis on accountability  18, 88 as encouragement to dominant responses/focus on strong points  88 increased awareness of the complexities of the task  88 as inducement to work harder, not smarter  88 inherent accountability (Scruton)  34, 221 raising of the stakes  88 behaviour of individuals and behaviour of groups distinguished  176–77 establishment of mutual expectations  88 ethical infrastructure  178 as a generic generalised observation about the behaviour of members of the group  86–87 higher stakes and risks in relation to internal consistency  88 openness to facts  88 penetration  88 risk averseness  88 use of the available information  88 identification with a group and status as a member  104 importance of understanding and affecting the behaviour of group members  86 individual’s character  177 influence of institutions on behaviour/means of exercising Kahneman’s Type II reasoning  87–88 routines, procedures and problem-solving cycles (May and Wildavsky)  87 skill sets and professionalism Gehlen  87 Goldstein and Hogarth  87 ‘The Impact of Institutions on the Decision How to Decide’ (Engel and Weber)  87–88 ‘messages’  177 optimum size of groups  18, 34, 63–64, 106, 252–53, 529 organisational culture  88, 176–78 social influences  177 systemic environment  177 values  177 writers on Conlisk  176 Engel  176–77 Treviño et al.  177

see also culture, effect on behaviour and outcomes; motivation; psychological safety; trust hierarchy of needs  206 hierarchy (society) animal origin  57 co-creation and  342 flatter/horizontal stakeholder forms, move to  62, 70, 72 effectiveness  229, 323 ethical businesses’ preference for  36 state institutions’ difficulty in achieving  219 hierarchical self-organisation  51–52 as illusion of intent and design  60 hierarchically structured goal systems  80 hierarchy-based dependence (China)  98 keeping one’s place in  15 options (collapse/conversion to cooperation)  57 regulatory models (post-Brexit reform of UK regulatory financial regimes)  359, 410–18 systemic problems in developing cooperation  37, 83, 183, 213 as a universal value (Haidt)  23, 135, 143, 236 see also elites/elitism honesty accountability and  305, 469 Barrett’s Seven Levels  141–43 business and  37, 137, 138 n139, 183 Five Principles for a Purpose Driven Business (2018)  160 IBE Good Practice Guide on Performance Management (2014)  315 the dishonesty of honest people/cognitive dissonance  78 as ethical value  112 finance sector and Australian Banking Code on Practice (2019)  140 FCA Mission: Our Approach to Supervision (FCA, 2018)  186 Guidance on Board Effectiveness (FRC, 2018)  139 Toward Effective Governance of Financial Institutions (G30, 2012)  139 Golden Rule (‘do as you would be done by’)  132 honest mistakes  396 as instrumental value (Rokeach)  132 n102 integrity and  470 as intrinsic value variation across the world  79 public sector and Public Service of Ontario Act 2011  145 Seven Principles of Public Life (1995)  144–45, 201 trustworthiness and  92, 107, 118 UK Corporate Governance Code (2018)  193

552  Index Hong Kong insider trading sanctions  267, 436 as a low-trust society  112 horizontal vs vertical models  27, 39–40, 51, 57, 62, 72, 213, 259, 336, 342, 427, 457–58, 464–65 human rights Cotterrell on  143 prioritisation of  143 statements of EU CFR (2000)  143–44 Guiding Principles on Business and Human Rights (UN, 2011) (Ruggie Principles)  144 ICCPR (1966)  143 ICESCR (1966)  143 UDHR (1948)  143 see also modern slavery; religion humility  23, 133, 136, 148, 162, 239, 317 Hungary covid-19 as mask for ineffective public administration  227 inequalities, destabilising effect  227 populism amplification of messages for political ends (Orban)  226 causes of  11 impartiality ADR and  495 integrity and  118 Ombudsmen and  42, 481, 521, 523 regulators and  200 WEIRD populations and  13, 54–56 incentive/incentivisation: see motivation; remuneration India ethics, transparency and accountability in business  33, 165, 268 investor support/sustainable investment  232, 283 mass production techniques in hospitals  219 National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (2011)  33, 164, 277 Women Self Help Groups (‘value at the bottom’)  283 indigenous peoples (Australia/Canada) partnership approach  237 restorative justice  508 individual multiple identities/integrated into a single, coherent self  81–82 perceived traits (Code)  65 relational self distinguished  64–66 see also relational self individual responsibility  66, 77 individualism as basis for belief in fakes as facts  218

characteristics/assumptions acceptable regulation and restrictions on free choice/free markets  218 free markets’ self-imposed motivation and discipline, sufficiency  218 MSV as goal  259 see also maximisation of shareholder value (MSV) non-dominance (Pettit)  218 resistance to being told what to believe/ interference with free choice  218 resistance to state imposed regulation  218, 259 sufficiency of market forces  218 unfettered right to freedom of expression  218, 226 as integration of theories of personal freedom, free markets, motivation by money, monetary approach to externalities  218 neoliberalism and  19, 21, 74, 90, 91, 217, 241, 259–60 social capital, impact on  114–15 see also self-determination inequality declining social fabric  216 dimensions of (The Hidden Dimensions of Poverty. International Participatory Research)  214 economic, social and political causes of  217–27 political ideology of individual freedom  217–18 health inequality climate change and  214 Marmot Report (2010/2020)  214 UNHRC Rapporteur’s Report on Extreme Poverty and Human Rights in the USA (2018)  214 intergenerational economic mobility, impact of poor access to education  214 nuclear weapons  8 political instability resulting from Capital and Ideology (Piketty: 2020)  227 The Tyranny of Merit (Sandel: 2020)  227 post-Covid-19 inequalities  236 regional productivity differences  22, 215 rich countries’ failure to meet 1970 promises of increased aid  214–15 as source of destabilisation  10, 22, 227, 250–51 a squeezed middle class as critical factor in political instability  217, 230, 250–51 failure to benefit from global economic growth  216–17 Under Pressure: The Squeezed Middle Class (OECD, 2019)  217 stagnation of incomes of lower-paid in the industrialised West  215 CEO/worker pay ratios (USA/UK)  215

Index  553 unfairness as exacerbation of  237, 307, 308, 310–12 worsening in the last four decades  214 see also inequality (UK); USA, inequality in inequality (UK)  215–16 CEO/worker ration, growing disparity  22 declining social fabric  216 destabilisation and  227 increasing pressure on the financially vulnerable, stretched or distressed (2020)  216 low-income households/destitution  216 ranking (Rosés and Wolf)  215 regional variations levelling-up  22 Onward/Institute of Fiscal Studies  216 statistics (Onward)  215–16 integrity Barrett’s Seven Levels  141–43 commercial success, correlation with  10, 110, 183, 195, 280 UN global Compact (2015)  270 cooperative culture Best Practice Principles for Regulatory Policy (OECD, 2014)  202–03 EBP (Values-Based Integrity Framework) (Table 8.1)  201 SM&CR  188, 470 Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (FSB, 2017)  188–89 cooperative regulation UK Regulatory Authorities  381–87 corporate governance Corporate Governance and Business Integrity. A Stocktaking of Corporate Practices (OECD, 2015)  154, 278 corporate rating of  137–38, 183 G20/OECD Principles of Corporate Governance (2015)  278, 380 UK Corporate Governance Code 2014  154, 193 2018  279–80, 380, 454 definition (lack of integrity)  470 dispute resolution and  521–22 enforcement/compliance compliance and integrity programmes distinguished  444 robust anti-corruption programmes, effectiveness  443 financial sector and  138, 238 Australian Banking Code (2019)  140 FCA Mission: Our Approach to Supervision (FCA, 2018)  186 FCA’s strategic objective  413, 414 Guidance on Board Effectiveness (FRC, 2018)  139 Toward Effective Governance of Financial Institutions (G30, 2012)  139

good government and OECD Good Practice Principles for Public Decision Making (2020)  244 OECD Recommendation on Open Government (2017)  34, 243 noble competition and (Stuke and Ezrachi)  21, 68 public sector and Regulator’s Code of Practice: Integrity in Pursuit of Compliance (Ontario, 2011)  145 Seven Principles of Public Life (1995)  144–45, 201 punishment and  27 sanctions for employee’s failure to perform with  315 trust/trustworthiness and  9, 99, 107, 115, 116–17, 118, 346 international cooperation/institutions examples Financial Action Task Force  32 OECD (Draft Recommendation on International Regulatory Cooperation to Tackle Global Challenges (2022))  32 UN Sustainable Development Goals (SDGs): see UN Sustainable Development Goals (SDGs) World Health Organization  32 World Trade Organization  32 varied levels of support/effectiveness  32 intervention/accountability overview  27 competition vs cooperation  456 elites’ use of punishment to retain power  6, 15, 27, 51, 464 from arbitrary power to rule of law  456–57 from compliance and outputs to outcomes and impacts  306, 447–48, 456 from enforcing to supporting  456, 464 continuing use of authoritarian language  457 from protecting the leadership/group to protecting all  458 from vertical command and control to horizontal equality  27, 39–40, 51, 57, 62, 72, 213, 259, 336, 342, 427, 457–58, 464–65 ‘good’ vs ‘bad’ people, distinguishing between  465 The Law of Good People (Feldman, 2018)  465 Why Children Follow Rules (Tyler and Trinker, 2018)  465 intervention vs enforcement  467–68 ‘one size fits all’ debunked  465 power to change values, behaviour and institutions  456 reconciling profit and protecting people from harm  162–63, 456

554  Index authoritarian punishment  459–60 see also authoritarian punishment causes of errors and accidents (Reason)  460–61 root cause analysis as route to a just society  465–66 intervention practice  473–77 choosing the right tool  476 code of practice, points for inclusion  476–77 distinguishing between the cooperative and the non-cooperative  475–76 possible interventions  477 intervention, principles justifying  471–73 summary  473 achievement of outcomes  472 causation, importance of  473 cooperative and non-cooperative distinguished  471 evolution from state monopoly of the use of force  471–72 intention to cause harm, response to  472–73 intentional harm  472 legitimate authority, respect for  471–73, 476 mutual respect between adults as basis  471 proportionality  472 purposive approach  472 reduction of risk/protection of society as determining factor  472 social covenant, obligations of citizens and the State  471–72 timing of intervention (present, past and future)  471, 474–75 intervention (responsive) EBR model, as essence of  473–74 Ethical Business Practice model (EBP) and  11 evidence, role  474 focus on intrinsic motivation with supportive intervention  31, 473–74 objectives (updated Macrory)  474 linked to timing  474–75 reconciling the no-blame approach with supporting those who have been harmed  474–75 moving forward an open and just society/root cause analysis  465–67, 470 intervention to achieve change vs reinforcement of rules  467–68 performance vs rule-based model 350 (Fig. 12.2),  465, 467, 468 responsibility and accountability  468–71 see also accountability obeying the rules, key factors  462–65 fairness  460–61 general observance of the rules  463–64 historical emphasis on enforcement (punishment, sanction, deterrence)  464

intrinsic motivation  464 legitimacy  16, 462–63 scientific approach clubbiness  457 Prisoner’s Dilemma experiments/punishing defectors and free riders  15, 51, 87, 457, 458, 459, 460, 466 social domination theory  456–57 social punishment  458–59 see also social punishment states of mind, the law’s focus on  460 conflict with behavioural concepts  461–62 Ireland cooperative regulation (core functions)  350 organisational culture (Behaviour and Culture of the Irish Retail Banks, 2018)  453 Israel (personal and social values (Schwarz))  133 Italy Covid-19, impact  237 governance code  192 inequalities, destabilising effect  227 as a low-trust society  112 personal and social values (Schwarz)  133 Japan moving forward (Governance Innovation. Redesigning Law and Architecture for Society5.0 (2020))  18 social organisation cultural intensity, stability and productivity (non-WEIRD)  13, 56 moai system  35, 246 trust, distinctive role  98 trust/integrity, correlation with commercial success  10, 112 ‘beyond self-interest’  117 Nissan vs Honda  110–11 joined-up government (UK) consumer Ombudsmen and  521–22 ‘fairness’ test extension to consumer protection and sectoral regulatory law, effect  521–22 as linking factor  521–22 housing/property sectors, scope for  522 systems involved (dispute resolution/ethics-based system/regulatory system)  521 justice as moral bond  8, 59, 124, 129, 146, 182 rational basis  120–21 utilitarianism  121, 240, 313, 422–23 social practice and  121 solidarity and (Sandel)  12, 146 universality  12 see also fairness and justice kin selection/kin-based clans  5, 18, 52, 54–55, 57, 62, 70, 134

Index  555 law, changes in the conception of  64–66 areas for consideration  64 from individual rights to relational law  64–66 individual with unfettered personal rights, criticism of  64, 65 relational self, emergence of  64–66 see also relational self legal rights vs ethical values and principles  64 WEIRD people, non-applicability of research on to other people  64 leadership climate crisis and  239 commitment to promotion of culture  178, 186–98 EBP Cultural and Leadership Frameworks  36, 201, 291 leadership versus followership  198 compensation vs leadership as incentive  306, 310, 441–42 distribution of power, authority and status, importance  174–75 dominant leadership/command and control  6, 15, 20, 458 ethical leadership  144, 155, 180, 206 LEP ambitions for  407 mitigating cultural drivers of misconduct  281–82 Box 10.3 in public organisations  202 as a Principle of Public Life  201 regulation of directors and auditing Brydon Review (2019)  282 Kingman Report (2018)  282 regulator culture  198–99, 201, 369 remuneration, impact on trust in  311 role/responsibilities  144, 155–57 Board Leadership, Transparency and Governance (Ofwat, 2019)  377 implementation of EBP  371–72 training role, importance  306 ‘tone from the top/above’  138, 187–88, 190, 202 UK Corporate Governance Code 2018  279–80 Box 10.2 as value/attribute  71, 146, 205 women in leadership roles  237 legal positivism centrality of rights/rules-based approach  19, 102 move away from  19, 102 legitimacy  238, 239 as basis for voluntary compliance  16, 43–44, 444, 463 dependence on fair application  16, 82, 462–64 fair substance  16, 82, 462–64 procedural fairness/justice  16, 44, 82, 462–64 legitimacy of each other’s interests, importance of recognition  61 legitimate authority, respect for  124, 426, 471–73, 475

political legitimacy  113 trust and  97, 110 liberty in 18th/19th century Europe  240 definition Deneen  219 Locke  239 impact on trust  115–16 ‘liberty’ vs ‘dignity’  135 negative liberty  220 state’s use of force against its citizens and  458, 472 striking a balance (Acemoglu and Robinson)  240 as universal value  23, 135, 236 loyalty changing shareholder/director relationship, effect  264 definition (Sztompka)  129 earning loyalty/trust and  99, 111, 117, 160 as ethical value  112 excessive loyalty  125 in-group loyalty  55 as innate value  84, 122, 123 as moral bond  8, 59, 124, 129, 146 Moral Foundations Theory (Haight)  122–23 outsourcing, effect on  230 as universal value  135, 236 Mafia (social purposes/ethical norms)  87, 92, 93, 162 Malta (antitrust compliance programmes)  430 market, business and corporate moral values  136–43 common law flexibility vs Islamic inflexibility  136 core principles/values  138, 139 endorsement of principle vs prescription of values  137–38 identified values personal integrity  138 importance of  136 institutions, need for  136 mission statements, examples of Banking Code of Practice (2019) (Australia)  140–41 EU Food Code (2021)  141 Netflix  140 US corporations’ Statement on the Purpose of a Corporation (2019)  140 writers/writings on Barrett (Seven Levels of Organisational Consciousness)  141–43 Blumberg  139 Dietz and Gillespie  138 Guiso  137 Hodges and Steinholtz  137–38 Institute of Business Ethics  138 Malloch and Mamorsky  138 Sandel  136

556  Index Solomon  137 Stout  139 Welby  138 Zack  136 see also values (general), reapplying/re-embracing (views on) see also banks/banking/financial services mastery as value  6, 75, 80, 89, 324 maximisation of shareholder value (MSV) overview  259 Agency Theory (Jensen and Meckling (‘Theory of the Firm’, 1976)) and  261 see also Agency Theory, Jensen and Meckling criticisms of Armour, Gordon and Min (‘Taking Compliance Seriously’ (2020))  264 Brochet et al. (Short-Termism, Investor Clientele, and Firm Risk, 2012)  263 Bushee (‘Do Institutional Investors Prefer Near-term Earnings over Long-run Value?’ (2001))  263 contribution to serious corporate disasters  265–66, 288–89 contribution to serious corporate disasters/systemic culture risk  29, 288–89 ESG Priorities for UK Companies (Institute of Directors, 2022)  267 Gentilin (The Origins of Ethical Failures (2016))  265 global regulation difficulties  265 Green Paper: Corporate governance in financial institutions and remuneration policies (EU Commission, 2010)  264–65, 318 Luyendijk (Swimming with Sharks, 2015)  265 Mazzucato (The Value of Everything (2018))  263 Omarova (‘The “Franchise” View of the Corporation’, 2021)  267–68 Stout (‘The Toxic Effects of Shareholder Primacy’ (2013))  264 definition  200 founding theorists Berle and Meals (The Modern Corporation, 261)  261 Milton Friedman (Capitalism and Freedom, 1962)  260 maximising stakeholder value distinguished  139–40 primacy of capital doctrine  260–61 explanation for (Mazzucato)  261 remuneration, impact on  263–65, 295–96, 313 shifts away from  268–69 short-termism  259, 261–62, 263–65, 288–89 unintended consequences  263 mechanisms (anti-money laundering)  333–43 mechanisms (business/organisations)  4 accountability mechanisms  30, 118, 167–68, 369, 371, 415–16 ‘command and control’  305, 458

compensation mechanisms  191, 475 complaint mechanisms  346, 501–02 complaints against the state  498 internal mechanisms  503 contracts/legal systems  9–10, 65–66, 101–02 cultural mechanisms  170–71, 172–73, 180–81, 198 deterrence/enforcement  262–63, 266–67, 422–27, 454–55, 464–65, 466, 470–74 see also deterrence disciplinary mechanisms  191 employment issues, mechanisms for resolving  257 energising inclusiveness, mechanisms for  245 Integrated Care Partnerships  245 ethical mechanisms  111 trust mechanisms compared (Fukuyama)  112–13 EU GDPR  430–32 grievance mechanisms  482 n3 integration mechanism  220 internal control mechanisms  434–35 failure to act as expected  445 as means of avoiding injustice  435–36 new mechanisms, need for  27 OBC model  39–42 OPSS Enforcement Policy  449 outdated mechanisms  36 Primary Authority scheme  404 professional integrity  9 punishment/sanctions  15, 118, 459 regulation  352–54 control mechanisms  355 Regulators’ Codes  339, 347–48, 380–81 reward  15, 459 stakeholder engagement  416–18 insufficiency of mechanisms  289 statement of purpose/accountability mechanism (Mayer)  25, 275 traditional legal and regulatory systems  39 warning mechanisms  475 mechanisms (mental) overview  101–06 automaticity of (heuristics)  101 cognitive dissonance (Festinger)  12, 54, 76, 79, 101, 128, 296, 320–21 defence mechanisms  5 emotional mechanisms  5 ethical mechanisms  72, 111 identity fairness  129 evaluation mechanism  5, 8 evidence  5, 8, 72, 106, 115–16, 119 evolution of/ability to change  7, 8, 117 factors affecting  101 identification with a group/status within  104–06 importance of  4 intrinsic motivation: see motivation mechanisms for critical challenge  72

Index  557 moral bonds  84 moral compass/morality  12, 72, 225–26 Haidt on  122–24 need for strengthening/reinvention  8 planned behaviour (Ajzen)  79 psychological mechanisms  55–56, 87, 225–26 reciprocity  97 self-worth  12, 54, 76, 79, 80, 148, 241, 305 trust mechanism  5, 93–95 academic theories  111 as foundational mechanism  24, 91, 115 as innate and universal mechanism  115 trust-building mechanisms  116–17 values  5, 8, 72, 97, 125–28 Christakis on  127–28 Cotterrell on  126–27 Goodenough and Cheney  127 need for a mechanism for resolving conflict/prioritisation  139, 148–49 validation of values  149 mechanisms (National Referral Mechanism (Modern Slavery))  332–33 mechanisms (non-specific) amplification of half-truths  226–27 competition  49 cooperation/mechanisms underpinning  25, 49 altruism  53, 62, 63, 67, 72 collaboration  53 failure to develop effective mechanisms  52, 72 kin selection  52 multilevel selection  51 repetition  51 reputation  51, 97 spatial selection  51 dispute resolution mechanisms  483–85, 495–96 ODR  501–02 mediation conciliation, distinguishability  483 n4 see also conciliation cooperative dispute resolution and  28, 35 as democratic/human-centred process  490 direct communication between the parties as key feature  482 effectiveness  490 in England and Wales  491–93 increase in use of  20, 490, 491 mediation scheme as structure  482 methods  482–83 online mediation, acceptance of  490 as primary ADR technique  490 see also ADR restoration of social relationships as focus  490 non-legal remedies for legal problems  490, 494–95 opportunity to address underlying non-legal issues  490, 494–95 as technique  483

use in parallel with court process/as part of an integrated pathway/as standalone  483, 491 Men’s Sheds  35, 246 Mexico (political dissatisfaction)  113 mindfulness  82 see also collective mindfulness (Weick) modern slavery international cooperation, need for  333 statistics  144 supply chains  333, 434 UN SDGs  163 modern slavery (UK) classification as  332 Modern Slavery Act 2015  257 Modern Slavery (Amendments) Bill  332 modern slavery statement registry (March 2021)  333 money-laundering, association with  332 recommendations for action (Preventing Modern Slavery and Human Trafficking (2021))  333 reporting requirements  332–33 extension to public bodies  332 mandatory topics  332 penalties for failure to meet  332 proposals for enhanced reporting requirements (2020)  333 under-reporting (Independent Review of the Modern Slavery Act 2015 (2019))  332–33 statistics  144, 332 ignorance of  144, 333 money laundering AML measures FATF  333 global regime, criticisms of  332 as global risk  330 international cooperation, importance/ insufficiency  331 statistics  331 UK experience  331–32 moral bonds Christakis on (‘social suite’)  61–62 Johnson D on  61, 84 need to strengthen  89 Sztompka on  8, 59, 129, 146 moral capital (Haight)  123, 225–26 moral community Fukuyama  127 Sacks  147 Sztompka  25, 127, 129 components (trust/loyalty/solidarity)  129 Moral Foundations Theory (Haight)  12, 122–23 morality as both innate and learned  12, 126 pairs authority/subversion  123 care/harm  122 factors affecting the ‘righteous’ individual’s place on the spectrum  123 ‘looking good’ vs ‘being good’  123

558  Index ‘righteous’  123 ‘taste receptors’  123 fairness/cheating  122–24 need to suppress free-riding  123, 225 loyalty/betrayal  122–23 sanctity/degradation  123 moral intensity (Jones)  130 morality components good/empathy (emotional/affective basis)  120, 121–22 right/justice (rational basis)  120 fairness as critical component  84, 128, 134, 135, 231 the good as component caring and feeling (Gibbs)  122 empathy, role  121–22 internalisation of prosocial norm (empathy) (Hoffman)  121–22 welfare/beneficence/empathy as basis  121–22 as intrinsic component of behaviour/internal moral compass  12, 72, 84, 122–24, 225–26 justice as component rational basis  120–21 reciprocity principle  120 social practice and  121, 127–28 ‘Three Roads to Organizational Justice’ (Cropanzano et al. 2001)  182 justice/fair-mindedness/autonomy vs non-maleficence/beneficence (Beauchamp and Childress (Principles of Biomedical Ethics: 2013))  124 logic and (Piaget)  120–21 market, business and corporate values  136–43 see also market, business and corporate moral values moral evaluation in the absence of brain activity  125 see also the brain the right as component ‘condition of reversibility’ (Baier)  121, 124 conviction of rightness/ethical correctness  126–27 dynamic nature of  121 ‘feel good’ factor, importance  4, 128, 148 from a social perspective  121 Golden Rule (‘do as you would be done by’)  4–5, 19, 121, 125, 128, 132 rational/cognitive basis  120–21 rationally right, morally wrong  121 societies’ need to be righteous/ethically bound Goodenough and Cheney  127 Reber  127–28 Richerson and Boyd  127 Sztompka  127 right and good, resolving a conflict (Frankena (Thinking about Morality: 2013))  124 right vs good (Gibbs (Moral Development & Reality: 2019))  124–25 affective primacy vs cognitive primacy  124

affect-regulating goal-attaining skills, importance  125 epistemological difference  124 moral identity as additional primary source of moral motivation  124–25 right vs good (Haight (The Righteous Mind: 2012))  122–24 evaluation  124 omission of the condition of reversibility  124 morality as both innate and learned (Moral Foundations Theory)  122–23 see also Moral Foundations Theory (Haight) synthesis of approaches to moral reasoning  122 affects/emotions vs moral reasoning, primacy  122 creation of social solidarity  122 social persuasion  122 telling right from wrong as critical turning point in the evolution of homo sapiens  12, 59, 72, 126 theories of Culture Consequences (Hofstede: 2001)  4, 10, 25, 134, 175–76 developmental theory of (Kohlberg)  120–21 ‘morality-as-cooperation theory’ (Curry, Mullins and Whitehouse)  134 see also ethical codes; ethical values; justice; moral bonds; values (general) motivation authoritarian force/external regulation absence of trust and  342 Collins on  151, 179 command and control approach  161, 197, 199, 305, 458 continuous surveillance and intervention, problems with  4, 7, 17, 31, 36, 43, 75–76, 82, 89, 291, 305, 322, 360, 426 ineffectiveness/potential harmfulness  89 ‘open culture’/‘just culture’ alternatives  358 Tyler on  104, 106 behaviour of individual vs individuals in groups  73–74, 86–89 see also group behaviour/motivation causal factors factors other than intrinsic motivation  77 fairness/unfairness  76, 83, 159, 294, 314–15, 320–21 individual responsibility as feature of some legal systems, questionable validity  66, 76, 77 multi-factorial causations  77 needs and attributes of the individual  6–7 systems issues  77 tendency to attribute blame to sole proximate cause of harm  77 financial motivation model (FMM)  295–96 incentive-based approach ineffectiveness  78

Index  559 MSV and  261 see also maximisation of shareholder value (MSV) injunctive vs descriptive norms (Cialdini)  84 intrinsic motivation, psychology of  241, 294, 319–21 creativity, impacts on (Amabile)  85, 319 Future-Minded: The Psychology of Agency & Control (Osman, 2014)  319 humans’ internal sense of fairness (Haidt)  320 Not just for the Money (Frey, 1997)  319 Show Me the Money! The Behavioural Science of Reward (Lupton et al. (2015))  319 intrinsic vs extrinsic motivation individuals  74, 128 organisations (internal versus external controls)  7, 74 risk of external incentives crowding out internal motivation/ethical and social norms  59, 77, 83, 307, 455 Amabile/Fehr  14–15, 24, 83, 85, 87, 96, 319 Ariely et al.  24, 85, 308, 319–20, 322 Bowles  85 Gubler et al.  322 Pink  320 Raworth  231–32 Roe et al.  136 Stuke and Ezrachi  67 Transparency International  323 Weibl et al.  319 personality factors influencing behaviour  79 research, difficulties in conducting  72 theories of behaviour  6–7, 74–75 Agency Theory (Jensen and Meckling (‘Theory of the Firm’, 1976))  7, 75, 259, 261, 295, 313 causes of error Feldman  77–78 Haidt  77 Reason  77 core characteristics  74–75 Table 4.1 DeScioli et al.  320 Equity Theory (Osman and Wiegmann)  84 Foa and Foa (Societal Structures of the Mind (1974))  85 Focus Theory of Normative Conduct (Cialdini)  84–85 good people behaving badly/moral wiggle room  14–16, 78–79 Aronson  320 Dana, Weber and Kuang  78 Festinger (cognitive dissonance)  79, 320–21 Haight  320 Larson and Capra  78 Mazar, Amir and Ariely/Ariely  77–78, 84, 126, 311 influences on researchers/neoliberalism  74 Medici Effect (Johansson)  237

Need-to-belong Theory (Baumeister)  86 men and women distinguished  86 self-esteem as measure of degree of acceptance by others  86 Need-to-belong Theory (Kahan)  86 planned behaviour theory (Ajzen)  77, 79 popularity of, statistics  74 psychological/behavioural theories vs theories of pure economics/law  75 rational acting theory  7, 75–77 see also personal agency self-determination theory: see self-determination theory social interdependence theory Deutsch/Johnson  87 Sociometer Theory (Leary)  86 theory of social exchange Cropanzano et al.  85–86 Molm  85–86 see also banks/banking/financial services, culture in; banks/banking/financial services, culture in, incentives/motivation, avoiding unintended consequences; the brain; corporate purpose, evolution of; group behaviour/motivation, factors affecting; remuneration; rogue traders, greed and money as motivation, or are they?; self-determination theory (Deci and Ryan); self-determination theory (Deci and Ryan) (competence/autonomy/relatedness); selfdetermination theory (Pink) natural selection negative effects  15, 50–51, 60, 71 selfishness of  15 neoliberal capitalism amorality  139 capital, primacy of  260–61 demands for reform of  26 as dominant post-WWII political theory  217–18 Economics of Mutuality model alternative  140 equality vs freedom  135 individualism as basis  19, 21, 74, 90, 91, 217, 241, 259–60 instability of, reflections on the causes  218–20 Economic Origins of Dictatorship and Democracy (Acemoglu and Robinson: 2006)  218–19 The Fourth Revolution. The Global Race to Reinvent the State (Micklethwait and Wooldridge)  219 Why Liberalism Failed (Deneen: 2019)  219–20 Why Nations Fail: The Origins of Power, Prosperity and Poverty (Acemoglu and Robinson: 2012)  218–19 see also neoliberal capitalism, economists’ ideas on reform of investors’ approaches to reform of Amartya Sen (The Idea of Justice (2009))  232 Shafik (What We Owe Each Other (2020))  233

560  Index meritocracy and  230 poverty, as alleged solution to (trickle-down theory)  214, 250 prosperity vs protection, tension  37 social solidarity and  19, 74, 219, 241, 259–60, 289 trust and  91, 98 US origin of  240–41, 260 see also maximisation of shareholder value (MSV); neoliberal capitalism, economists’ ideas on reform of; stakeholder capitalism neoliberal capitalism, economists’ ideas on reform of  228–33 Cohen (Impact. Reshaping Capitalism to Drive Real Change (2020)) (‘impact’ vs ‘extraction’) G8 Social Impact Investment Taskforce (G8T)  232 Global Steering Group for Impact Investment (GSG)  232 Principles of Responsible Investment (PRI)  232 Social Impact Bond  232 Social Investment Taskforce (2000)  232 Collier (problems) reason-based rights/morality  236 Collier (solutions) ethical capitalism built on values honed by reason  236 reciprocal obligations  236 Henderson (problems) ‘freedom from approach  229 overpowerful business  229 ‘wealth … rushing to the top’  227–28 Henderson (solutions) fixability within the free market system  228–29 political adjustments (from extraction to inclusion)  229–30 promotion of ESG metrics  229 restoration of deeply rooted common values/ shared purpose  229 rethinking traditional economic cost-benefit analyses  229 Milanovic (problems) concentration of wealth  230 disappearance of social controls of morality and religion  230 loss of the post-WWII social policies reducing inequality  230 outsourcing  230 squeezed middle class  230 world-wide adoption of the same questionable economic principles  230 Milanovic (solutions) adoption of self-interest-preserving tools  231 Green (Civitas) ‘no intellectually coherent alternative’/‘some fundamental flaws’  231 ‘inclusive capitalism’ as the answer  231

opposition to EU ‘utopian-building project’  231 Rawlsian egalitarian capitalism  230 Piketty (problems) ideological freeze  228 Piketty (solutions) increased circulation of capital a possible follow-up  228 ‘justice through participation and deliberation’  228 progressive taxation  228 Raworth (Doughnut Economics (1991))  231–32 see also neoliberal capitalism, instability of, reflections on the causes Netherlands ADR (judicial struggles with IT)  503 antitrust compliance programmes (Education Inspectorate)  430 bankers’ oaths  269 cooperative dispute resolution consumer complaint boards  525 Ombudsman  525 ethical values in leadership  202 governance code  192 ODR (Rechtwiejser)  503 public sector values (Basic Principles for Good Enforcement (2000/2005))  145 regulators, competency (Inspection Academy)  203 stakeholder involvement, value of a facilitator  353 New Zealand Accident Compensation Scheme  498 climate change (mandatory reporting)  166 personal and social values (Schwarz)  133 NHS cultural failings, link with disasters  162, 240, 291 Environmental Health 2012. A Key Partner in Delivering the Public Health Agenda (Burke et al., 2003)  447 funding issues  240 ‘grin and bear it’ vs ‘grit (our) teeth and sue’ (Dyson MR)  525 hospitals as conveyor belts  222 integrated care system  245 litigation costs, impact of Jackson reforms  489–90 mediation, resort to  492–93 patients’ preferences  516 pride in  237 Public Inquiries  512–13 reform, repeated calls for fault-based litigation, continuing use of  497–98 innumerable reports/no change  519 move to an open culture/move away from adversarial litigation  517–19 tackling the problems  527 Nordic countries (cooperative dispute resolution) consumer complaint boards  525 injury administrative schemes  525 redress schemes  498

Index  561 Norway, corporate governance (shareholders and workers as participants with voting rights)  277 OBC model actions a. production of evidence of trustworthiness  30, 32 b. constant monitoring system  30 c. treatment of stakeholders with respect  30 d. contribution by all to achievement and problem-solving model  30 e. appropriate responses to failures  30 agreements a. mode of engagement  30 b. common core purposes, strategic objectives and outcomes  30 c. institutions  30 d. functions, roles, responsibilities, objectives, outcomes, metrics and accountability mechanisms  30 e. type of evidence  30 applications: see cooperation in communities; cooperative dispute resolution; international cooperation ethical values: see ethical values evidence of intentions, behaviours and culture as basis of OBC model purpose (identification of trustworthiness)  30, 32 scientific and research evidence  38 scope of evidence-gathering  32 sources and types of evidence  29, 32 key elements a. support for people  30 b. building trust  30 c. reliance on intrinsic motivation with supportive interventions  31, 319, 473–74 d. involvement of all in a collaborative co-creative exercise  31, 354 principles a. trust-based system  29, 38, 354–55 b. trusted stakeholders working together to achieve common purposes  29, 38 c. co-creation  29, 38 d. performance-enhancing and problem-solving approach  30, 38 OBCR model: see cooperative regulatory models/ OBCR model ODR (Online Dispute Resolution) advantages/harnessing as global mechanism  514–15 improved access to justice  520 integration into general disputes system design (DSD)  526 ‘Online Dispute Resolution and the Future of Justice’ (2020)  502

summary  35 time and cost savings  502 features of the system  501–02 use of AI  501–02 legal profession’s views on Digital Justice –Technology and the Internet of Disputes (Katsch and Einy, 2017)  501 Evaluation: How Can We Measure Access to Justice for Individual Consumers (Legal Services Board, 2012)  500 The End of Lawyers? (Susskind:2008)  500–501 The Future of Legal Services (The Law Society, 2016)  500–501 traditional processes, changes asynchronous communications between people involved in the case  501 computer-aided searches and predictions of outcomes  501–02 Chinese Supreme People’s Court’s use of  502 exchange of pleadings and evidence  501 integration of judges and Ombudsmen, possibility of  35 transparency and  524–25, 527 UK’s adoption of  503–05 conversion of all courts and tribunals to digital processes (Civil Courts Structure Review (2016))  504–05 Financial Ombudsman Service (2010)  504 HMCTS modernisation programme Early Progress in Transforming Courts and Tribunals (National Audit Office, 2018)  505 HMCTS Response to PAC Report on Court Reform Programme (20 July 2018)  505 modernisation of courts and Tribunals (Early Progress in Transforming Courts and Tribunals (2018))  505 Money Claims On Line (2002)  503 Official Injury Claim portal  489, 504 Possession Claim On Line (2006)  503 users (examples) domain managers (ICANN)  501 Ombudsmen: see Ombudsmen (UK) retail platforms  501 scope for expansion  526 stand-alone dispute resolution platforms  501 users’ objective (customer trust-building/reduction of risks)  502 see also data collection Ombudsmen (UK) advantages economy of time and cost  42, 46, 496 protection against exploitation of commercial data  258, 410 claims by incidence (consumer and public Ombudsmen)  506–07 Table 16.2

562  Index consumer Ombudsmen Note: most of the discussion on Ombudsmen applies to consumer Ombudsmen even where this is not specifically indicated. an easily-identified platform and trusted data controller  359 API technology as effective coordination tool  503 cooperative dispute resolution, role in  460, 502–03, 507–08, 521–22, 527 embedding of an Ombudsman in companies’ customer relations departments, possibility of  503, 524 integrated pathways, use of  28, 507 openness to online systems  502 telescoping of traditional stages/early facilitated resolution  502–03 use of mediation  483 cooperative dispute resolution role ADR, openness to  493 approach to early resolution of cases  481 user-friendliness  481 ODR, use of integration of judges and Ombudsmen, scope for  35, 481 regulation of access to Ombudsman’s scheme  523–24 sectoral approach  495 Resolver, relationship with  496 standard of review ‘fair and reasonable’/as threat to the rule of law  494, 521 quality of the administrative behaviour/ maladministration  494, 498 techniques early facilitated communication model (UK)  42, 410, 494, 500, 502–03 integrated pathways  28, 57, 507 telescoping of traditional stages/early facilitated resolution  502–03 development of the system  496 increasing use of  410 Financial Ombudsman Service Business Banking Resolution Service, creation of  496, 497 difficulties  403 n187 ‘early neutral evaluation’ approach  504–05 expansion of remit post-2008 GFC  497 Online Solutions Court (OSC) compared  504 organisational/procedural/regulation matters basic principles (‘demosprudential’ values (community, human rights principles and democratic practice))  499 embedding of an Ombudsman in companies’ customer relations departments, possibility of  524 modus operandi  410

need for reform  499 Ombudsman’s scheme, compulsory membership of  393 private not-for-profit entities as/advantages  358, 403 proof of trustworthiness as possible requirement for access to  523–24 recommendations for change  523–24 sectoral approach: see Financial Ombudsman Service above; sectoral approach below simplicity and clarity, importance  42, 523 private not-for-profit entities as/advantages  358, 403 problems of Financial Ombudsman Service and Legal Ombudsman compared  403 public service Ombudsmen  498–99 Local Government and Social Care Ombudsman  498, 519 need for reform/Public Service Ombudsman Bill  499 Parliamentary and Health Service Ombudsman  362 n30, 498, 516, 517–18 see also cooperative dispute resolution role above role in co-creation regulatory model  39, 40, 42, 46, 343 collection of aggregated data on market behaviour as basis for evidence-based interventions  42, 258, 360, 410, 420, 501, 503, 521, 522–24 cooperative engagement  403 cooperative regulatory models  353, 354, 358, 360, 410, 420 data collection  42, 258, 354, 360, 410, 420, 501, 503, 521, 522–24 discussion of changes needed to reduce risk  523 dispute resolution  410, 521 evidence-based support services  42 feedback from users on behavioural, quality and safety issues  39, 345, 393, 410, 521 focus for impartial information, advice and support to businesses, consumers and others  42, 258 impartial information, advice and support  410, 521 issues of behaviour and culture/ethical codes  35, 410 market surveillance  503 mass redress claims  485 OBC/OBCR models  42, 258, 345 provision of advice, assistance and IT-and AI-supported ‘early facilitated dispute resolution’  42, 410, 494, 500, 502–03 review of administrative malpractice  494, 499 taking on companies’ complaints-handling functions  42, 523 sectoral approach  496 examples  403

Index  563 justification  523 Legal Ombudsman  403 n187 ODR  495 single Ombudsman alternative  42, 496 see also Financial Ombudsman Service above see also Australia, Ombudsmen; Ombudsmen (UK); scope of possible operation below open government  115 OECD publications  34, 115, 243–44 open and just culture aviation industry: see aviation industry features of  39, 184–85, 195, 466 acceptance of responsibility  470 accountability  470 all-stakeholder involvement  184–85 commitment to achieving desired common outcomes  470, 476 no-blame approach  461, 465–67 performance-based model  467 regulation through culture  198 regulator as coordinator  184 root cause analysis  465–67 financial services  185–92, 197, 415–18 high-risk safety systems, importance in  184 mechanisms for  410 NHS  291, 464, 517–19 scope for regulating culture Transforming Culture in Financial Services. Driving Purposeful Cultures. Discussion Paper (FSA, 2020)  197 Transforming Culture in Financial Services (FCA, 2018)  197 writers on Reason (A life in Error (2013))  184 Weick et al. (‘Organising for High Reliability Processes of Collective Mindfulness’ (1999))  184–85 Weick (‘Organizational Culture As a Source of High Reliability’ (1991))  184–85 openness/transparency accountability and  141, 144, 369 ADR and  494, 527 to challenge and feedback  116, 117 to change  133 codes/rules/practices/guidelines ABI Principles of Remuneration  303 ‘An “All Stakeholders’” Approach’ (2019)  159, 379 Basic Principles for Good Enforcement (2000) (Netherlands)  145 BBfA key objectives  406 Board Leadership, Transparency and Governance – Principles (Ofwat, 2019)  377 Building a Regulatory Framework for Effective Stewardship (2019) (FRC/FCA)  273 Chartered Institute of Internal Auditors (2016)  198

Code of Practice for Statistics. Ensuring Official Statistics Serve the Public (2018)  399 Corporate Ethics Virtues Model (Kaptein)  295 DAA (Canada)  358 Directors’ Remuneration Reforms (2013)  302 Economic Crime Plan (2019)  331–32 Environment Agency Enforcement and Sanctions Policy (2019)  378 EU Shareholders Rights Directive II (2017)  302–03 EU Third Capital Requirements Directive (CRD3) (2010)  301–02 FSB Stocktake (2017)  188–89 FSMA’s regulatory principles  414 G20/OECD Principles of Corporate Governance (2015)  380 Guidance on Board Effectiveness (FRC, 218)  139 How to Achieve Good Governance of Pay, People and Culture (CIPD) (2021)  312 National Voluntary Guidelines (2011) (India)  165, 278 OECD Best Practice Principles for Regulatory Practice (2014)  202–03 OECD Good Practice Principles … for Public Decision Making (2020)  244–45 OECD Recommendation on Open Government (2017)  34, 243 OECD Stocktaking of Corporate Practices (2015)  111, 154 Open Public Services; White Paper (2011)  144 Principles of Better Regulation (2005)  362 Remuneration Principles (2013) (NAPF)  303 Seven Principles of Public Life (1998)  144, 201 The Investment Association Principles of Remuneration (Investment Association, 2016)  303 UK Corporate Governance Code (FRC, 2018)  192, 193–95, 279, 303, 454 proposals to amend (2021)  192 codes/rules/practices/guidelines, variation in state practice  432 compliance/enforcement and  477 cooperative continuous model  349 as corporation’s preferred value  137 cultural change and  182, 205 data-handling (UK Drinking Water Inspectorate (DWI))  409 dispute resolution, legal costs issues as impediment  486–87 to experience  79 n40 in financial services (PRA/FCA)  412 in government  33, 34, 144, 290–91, 459 OBC Model  42 justifiable limitations  167–68 liberal openness, reaction to  223–24 money laundering and  331–32

564  Index ODR and  524–25, 527 price-setting and/WICS  345 Regulatory Delivery Model (RDM)  27, 185, 290–91, 369, 371, 412, 414, 495 remuneration/compensation and  301–04, 325 lack of engagement  303–04, 311–12, 326 SDGs and  470 seven levels of organisational consciousness (Barrett)  142 stakeholder model and  276, 277, 292 striking a balance  240 trust and  116, 117 outcomes: see corporate purpose, evolution of, outcomes, importance of measuring; problem-solving and continuous improvement model, outcomes; regulatory delivery model (UK) outsourcing problems caused by  21, 67, 222 change of relationship between workers and employers  230 squeeze on the middle class  230 undermining of home workers  230 public functions complaint function to Ombudsmen  503 suggestions for outsourcing of public functions  219 Parliament/MPs, changes to role  36, 39–41, 344–45, 419 The Role of Parliament in the Future Regulatory Framework for Financial Services (2021)  415–16 pay differentials: see remuneration, pay differentials performance management, assessment based on [ethical] values competencies, examples of  315–16 getting it right  145, 177, 190–91, 201, 203, 205 models of appraisal ‘Appraisal of Ethical Performance: A Theoretical Model’ (Selvarajan and Sardessai, 2010)  315 IBE Good Practice Guide on Performance Management (Steinholtz and Dando, 2014)  314 ‘(Un)Ethical Behavior and Performance Appraisal’ (Jacobs et al., 2014)  315 personal agency (Bandura), core features forethought  80 intentionality  80 people’s belief in their collective power to produce desired results  88–89 shared perceptions, organisations and civil communities distinguished  89 self-reactiveness  80 self-reflectiveness  80 see also self-regulation

Poland antitrust compliance programmes (UOKiK)  430 Covid-19, impact  237 inequalities, destabilising effect  227 personal and social values (Schwarz)  133 populism amplification of messages for political ends  226 causes of  11 political insularity  226 political ideologies conflict/pairing opposites freedom and independence/self-restraint  135 status and personal success/concern for the wellness of all  135 see also Moral Foundations Theory (Haight); values (general), plurality/mutability/conflict between differences between  135–36 evolution of  19–20, 67, 239–41 impact  19 individual freedom  217–18 levelling down (USA) vs levelling up (Europe)  135 see also individualism; neoliberal capitalism populism as a global risk  3 immigration and  11 Portugal personal and social values (Schwarz)  133 poverty: see inequality predictability of CEO characteristics  179 predictable irrationality  77 see also trust, predictability and risk reduction, trust as a mechanism for of remuneration  319 trust/trustworthiness and  9, 90, 91–92, 95, 97, 107, 346 calculative trust  119 unpredictability of humans  76 in large organisations  429 Primary Authority Scheme (UK)  404–05 assured advice  356, 358, 404, 405 BBfA and  405 cooperation with Ombudsman  42 effectiveness  454 elements of  404 as framework for communications between local authorities, national regulators and national businesses  353, 358–59, 404 as mechanism for regulatory intervention  375 outcomes and impacts  341 ‘Outcome Measurement’ (Russell and Kirkman, 2019)  405 Primary Authority: Statutory Guidance (2017)  340, 341 as problem-solving model  27

Index  565 psychological safety and  404, 405 structure (Fig. 13.5)  404 as trust-based system  43, 355, 358–59, 404, 405 Prisoner’s Dilemma  15, 51, 457, 458–59 problem-solving and continuous improvement model overview  44–45, 294–95, 355–56 core functions action to prevent recurrence  39, 352, 477 as aid to rational thinking  88, 319 clear ethical rules  39, 351 collection and analysis of data  349 effective support systems and cultures  39, 351 establishment of clear ethical rules  351 identification of problems  38–39, 352, 353–54, 476 monitoring/identification of follow-up action  39, 352, 476 Problem-Solving Cycle (Fig. 2.1)  39 root cause analysis  39, 294–95, 352, 466, 477 see also cooperative regulatory models/OBCR model figures Continuous Performance Improvement and Problem-Solving Model (Fig. 12.2)  349–52, 409, 410, 465, 468, 470, 474 importance of integration/coordination  349, 353 data-management  527 dispute resolution and  527 UNCTAD approval of the holistic approach (Manual on Consumer Protection (2018))  354 scientific evidence  349 key elements communication  349 engagement  349 evidence-based trust  349 shared ethical values  349 stakeholder involvement  29, 349–52 mechanisms, institutions and intermediaries  39, 352–54 communications between government, regulators, businesses and trade association  353 country specific  352–53 DAA (Canada)/Netherlands/Ontario engineers  353 data, collection and review of  354, 410 digital age solutions/Internet Commission  353 facilitation, usefulness  353 involvement of citizens, customers and users  353 Primary Authority Scheme (UK)  27 see also Primary Authority Scheme (UK) replacement of old systems, possible need for  353 sharing of information  477 traditional model  353 as OBC model  23–24

outcomes  44–45 changed behaviour and culture  475 cooperative dispute resolution  45 fair behaviour  45 innovative ideas  45 more cohesive and fairer communities  45 strengthened cooperation in response to global risks  45, 294–95, 465–66, 475, 477 swift and effective regulatory approval  45 problem-solving cycle (Fig. 2.1)  38–39 as a continuous model vs traditional vertical model  351 root cause analysis  294–95 The Problem Solving Cycle (Fig. 2.1)  38–39 psychological consciousness, stages of development  69–71 Barrett (Seven Levels of Organisational Consciousness)  70 hierarchy of needs (basic needs vs growth needs (Maslow))  69 matching level of cognitive complexity to level of task complexity (Jacques and Clement)  70 organisational development to match evolution of ideas and social, economic and political needs (Laloux)  70–71 in a shift to a new consciousness of collaboration  71 ‘teal’ level (the zenith), characteristics  70–71 three plateaus (socialised, self-authoring and selftransforming mind (Kegan and Lahey))  70 psychological safety as basis for effective cooperation  7, 14, 36, 39, 177 Edmondson ‘Psychological Safety and Learning Behavior in Work Teams’ (1999)  178 The Fearless Organization (2019)  14, 36 facilitation of feedback/effective whistleblowing and  195, 197 Table 8.1, 352, 394, 418, 457, 464, 476 Frazier et al. (‘Psychological Safety’ (2017))  178 G30 Recommendations (2015/2018)  191, 452 intrinsic motivation and  241, 294 Kahn (‘Psychological Conditions’ (1990))  178 Primary Authority Scheme (UK)  404–05 Schein and Bennis (Personal and Organizational Change (1965))  178 ‘The Basic Frameworks of Ethical Business Practice’  201 ‘The Basic Frameworks of Ethical Business Practice’ Table 8.1 psychopaths/sociopaths  12, 58–59, 101, 123, 519 Public Inquiries functions  512 problems adversarial model  513 delay and cost  413 difficulty in achieving closure  513

566  Index public sector values (UK)  144–46 Canada/Netherlands compared  145 consumer Ombudsmen, absence of regulatory responsibility for public sector  502 effectiveness of an open and just approach to concerns of users  291 ‘pay-for-performance’, [in]effectiveness  321, 323–24 publications in date order The Seven Principles of Public Life (CSPL, 1995)  144 extension to the private sector (2013)  144 Legislative and Regulatory Reform Act 2006  144 Open Public Services: White Paper (2011)  144 Striking the Balance (CSPL, 2016)  144 The Continuing Importance of Ethical Standards for Public Service Providers (CPSL, 2018)  145 call for ‘moral courage’  145 Upholding Standards in Public Life. Final Report of the Standards Matter 2 Review (CPSL, 2021)  145 emphasis on respect  145 ‘leadership’  145 punishment elites’ use of to retain power  6, 15, 27, 51, 464 popular belief in/evidence of little value  104 see also authoritarian punishment; intervention/ accountability; social punishment purpose: see cooperative regulatory models/OBCR model; corporate purpose, evolution of reciprocity authority and  124 Christakis on  59, 63 ‘condition of reversibility’ (Baier)  121, 124 fairness and loyalty, relationship with  23, 236 Golden Rule (‘do as you would be done by’)  4–5, 19, 121, 125, 128, 132 justice, principle of reciprocity as basis  120–21 as moral bond  8, 59, 124, 129, 146 moral reciprocity  124, 127, 134, 146 n186 multiple forms of  72, 130–31 Prisoner’s Dilemma/altruistic punishment and  466 reciprocal altruism  51–52, 72, 100, 122, 123, 458 reciprocal nature of trust (vicious/virtuous spirals) see also trust, reciprocal and negotiated trust, mechanisms reciprocal obligations vs individual rights (Collier)  23, 72, 236 reciprocating nature of the relationship between action drawing values from culture and action shaping culture  131 self and society  65 in Renaissance Venice  235 n166 repetition (direct reciprocity)  51, 458 reputation (indirect reciprocity)  51, 97, 111, 458

responses to crises and (GFC/Covid-19)  238, 239, 250 as social contract-based approach  271 n87 social interdependence theory (Deutsch/ Johnson)  18, 24, 52–53, 55, 61, 87 variation in reciprocity norms (Raworth)  130–31 regulation (OBCR model): see cooperative regulatory models/OBCR model regulation of organisational culture, need for/ difficulties business conflicts/cultural trade-offs A Duty to Care? Evidence of the Importance of Organisational Culture to Effective Governance and Leadership (CIPD (2016))  198 predictable harm/acceptability of risks  198 business culture ‘A Regulatory Perspective: Measuring and Assessing Culture’ (2021)  198 specificity to the business in question  197, 453–54 deterrent sanctions/SM&CR  197 FCA recognition of failure/analysis of causes (2018)  197 FCA review of progress/focus on transforming business models (2020)  197 see also deterrence GFC, expectations following  197 performance-based approach  452–53 reconciling profit and protecting people from harm  162–63, 456 identifying middle space in which integration of public and private objectives is possible  163 outcome-focused and collaborative approach (UK) (The Benefits of Brexit (HMG, 2021))  163 regulation through ethical culture  19, 31, 348, 452–54 support vs authoritarian enforcement/fear  4–5, 456–57, 464–65, 468, 473–75, 476, 477 trust-based model (Behaviour and Culture of the Irish Retail Banks, 2018)  453 regulators, competency core regulatory competencies  203 giving full weight to professional competency vs advantages of a rules-based system  203 OECD Best Practice Principles for Regulatory Policy. Regulatory Enforcement and Inspections (2014)  202 training arrangements, examples  203 transparency  203 regulatory authority (RA) flexibility, desirability  41 functions  41–42 public sector, limited research on  198–99 regulatory delivery model (UK) core practices applicability to the whole system  420

Index  567 intervention choices (as opposed to enforcement)  290, 357 outcome measurement (as opposed to outputs)  166–67, 357 risk-based prioritisation  290, 357 prerequisites accountability [to stakeholders]  357–58 culture/elements  357–58 competency  201 leadership  201 values  201 governance framework  290, 357–58 transparency  290 trustworthiness of regulators  346 see also ‘Better Regulation’ (UK); compliance; compliance systems; intervention/ accountability regulatory intervention: see intervention/ accountability regulatory sandboxes (non-UK) EU Council Conclusions on Regulatory Sandboxes and Experimentation Clauses (2020)  408 Ontario Energy Board  408 Regulatory Sandboxes and Innovation Hubs (ESMA, EBA and EIOPA, 2019)  408 Regulatory Sandboxing (Australian Energy Regulator, 2021)  408 worldwide replication  407 regulatory sandboxes (UK)  407–09 basic elements  45 as cooperative regulatory/OBCR model  27, 45, 46 expected benefits  45 FCA tools  407–08 popularity  367, 407 post-Brexit encouragement  368 Covid-19 successes (speed of development of vaccines and ventilators)  408 purpose (support for market entry or trials on innovative ideas)  407 as ‘regulatory-light’ regime  45 success of Call for Input: Cross-Sector Sandbox (FCA, 2019)  407 fintech’s extensive use of  407–08 launch of GFIN (2019)  408 reasons for  407 Regulatory Sandbox Lessons Learned Report (FCA, 2017)  407 Securing the Future of UK Fintech (HM Treasury, 2018)  407 statistics  407–08 as trust-relationship between innovating business and regulator  359, 409 relatedness definition  81, 241 incentives, effect  87 as intrinsic value  7, 75

kin selection and  52 OBC/OBCR model  30, 36, 354 self-determination and  75, 81–83, 89, 241, 321–22 relational self  64–66 dependence of self on relationships  65 in a communal context  65 self–society as a reciprocal relationship  65 disciplines exploring the concept  64–65 implications for the legal system (Herring)  65–66 an ethic of care in medical law, difficulties  66 contractual freedom, scope for change  65–66 human rights/best interests approach, criticism of  66 overfocus of criminal law on individual responsibility  66, 77 protection of the vulnerable, importance of respect for  66 individual self distinguished  65 religion commitment to things beyond ourselves, importance  147, 225–26 decline as a fault line (UK)  224 ethical codes/cooperation and  128, 132, 251–52, 520 fundamentalism  8, 19 Golden Rule (‘do as you would be done by’)  4–5, 19, 121, 125, 128, 132 as moral covenant  147 neoliberalism and  222 as a recipe for cooperation  51 secularisation, impact  250–51 as a socially-cohesive force, a disappearing phenomenon (Sacks)  8, 20, 147, 230 need to rebuild  19, 26, 147 religious freedom  143, 218 religious groups ethical codes and  84, 109, 116 excessive loyalty to a particular religion  125 tendency to cooperate  63 remedies: see responses (dispute resolution) remuneration fairness, need for  159, 255 GFC and changes following  27 as contributory factor  263–64, 295–96, 306–07 high levels as a cause for concern capture and control arguments  316 revolts against  308 unfairness/exacerbation of inequalities  307, 308, 310–12 unintended consequences adverse effect on motivation and behaviour  307 conflict with other motivations  316

568  Index decline/detrimental effect on performance  307 increase in misconduct  308 as motivating factor  296–97, 316–18 amplification of risk-taking  318 competitive attraction argument/lack of evidence  315–16 counterindications  308–09 evidence of lack of manager impact on profits  316, 324 internal morale/external credibility arguments  317 short-termism  317–18 pay differentials: see remuneration, pay differentials (UK) trying to move forward (attempts to control remuneration)  297, 316, 324–25 absence of common best practice  325 scientific behavioural studies  325 sound evidence-based policy  325 transparency  325 from outputs to outcomes and impacts  325 see also cooperative regulatory models/OBCR model, outcomes/impacts some modest shifts  303–04, 325 trying to move forward (confronting systemic risk)  326–27 ‘a fair and cooperative capitalist democratic social system’, what hope for?  327–28 Economics of Mutuality as possible approach  38, 140, 327 failure of attempted reforms to achieve results (FRC, 2016)  326 systemic capture by rent-seeking intermediaries as root cause  326–27 values and incentives, need for alignment (FRC, 2021)  326 a vicious cycle  326–27 trying to move forward (examples) ‘Allianz Chief Faces Bonus Cut After US Scandal Hits Net Profit’ (Storbek and Smith, 2022)  324 ‘Bonus for Calamitous Chief Keeping Reins of LV=’ (Hosking and Martin, 2022)  324 ‘Bonus Season 2022: Will You Invest, Save or Spend Yours?’ (Barrett, 2022)  324 ‘Ending Bonus Scheme Would Lift FCA’s Performance’ (Griffiths, 2022)  324 ‘Human Resource Management: An Ideological Perspective’ (Horwitz, 1991)  324 Incentivising Ethics, Managing Incentives to Encourage Good and Deter Bad Behaviour (Transparency International, 2016)  323 ‘Stop Paying Executives for Performance’ (Cable and Freek, 2016)  323 Taylor Review (2017)  323

The Breakthrough Challenge (Elkington and Zeitz, 2014)  323 The Moral Heart of Public Service (Foster-Gilbert, ed.)  324 The Surprising Truth About What Motivates Us (Pink, 2009)  324 remuneration, pay differentials (UK)  310–12 attempts at reform, limited success  311–12 Executive Pay in the FTSE 100. Is Everyone Getting a Fair Slice of the Cake? (CIPD and High Pay Centre, 2019)  311–12 John Lewis Partners, bonus issues  312 deregulation, technological change and globalisation  313 effect of decade of austerity/Covid-19  312 from modest differentials to today’s disproportion/ relevant factors  312–14 contractarianism  313 corporate managements, changes  313 emergence of neoliberalism  313 focus on MSV  313 pattern of corporate ownership, changes  313 renewed utilitarianism  313 role of pension funds  314 impact on trust in the leadership  311–12 reports on BEIS Committee (Corporate Governance (2017))  310 BEIS Committee (Executive Rewards: Paying for Success (2019))  310–11 Cable (‘Responsible Capitalism’ (City of London bonuses) (2012))  314 CIPD (Role of the RemCo. How to Achieve Good Governance of Pay, People and Culture (2021))  312 CIPD (Show Me the Money! The Behavioural Science of Reward (2015))  314 G30 (Banking Conduct and Culture. A Permanent Mindset Change (2019))  310 High Pay Centre (CEO Pay and the Workforce (2020))  314 High Pay Centre (Performance-Related Pay: What Does Business Think? (2014))  314 IA (The Investment Association Principles of Remuneration (2016))  310 TUC, Common Wealth and High Pay Centre (Do Dividends Pay Pensions? (2022))  314 resilience as essential value  23, 136, 238, 239 National Performance Framework (Scotland)  169 regulatory authorities  384, 387 Resilience Statements  282 Time to Act, Together: Ofwat’s Strategy (Ofwat, 2019)  378 UK Economic Crime Plan (2019)  331 UN SDGs  33, 165

Index  569 undervaluation of  238 Wellbeing of Future Generations Act (Wales) 2015  169 respect ‘An “All Stakeholders’” Approach’ (2019)  159, 379 Barrett’s Seven Levels  142 co-creation and  342 compliance/enforcement and  464, 472, 510, 513–14 CPSL emphasis on (2021)  145 dependence of cooperation on  5, 17–18, 22, 27, 29, 30, 36, 72, 228, 229, 234, 246–47, 465 earning respect  17 ethical effectiveness and  178, 337, 347 Fairer Scotland (2010)  169 FRC/G30 on  139 Guiding Principles on Business and Human Rights (UN, 2011)  269 half-truths and  226 as a human need  69, 81 human rights and  143 India’s National Guidelines (2011)  278 as key corporation value  137, 183, 184 kin-based institutions and  55 Küng on  132 for [legitimate] authority  124 as moral bond  8, 59, 124, 129, 134, 146 motivation and  104, 105, 106 as a mutual obligation  468, 471 OBC model and  30, 59 OBCR model  337, 346, 419, 420 pay differentials and  255, 256 for the person (autonomy)  124 as public service requirement  17, 145 as a purpose/outcome  171 rule of law and  456–57 Self-Determination Theory  241 social contract and  12, 471–72 TIGTech Project  118 trust/trustworthiness and  91, 95, 113 UK Corporate Governance Code  192–93, 279, 380 US corporations’ Statement on the Purpose of a Corporation (2019)  276 responses (dispute resolution)  510–13 means apology  467, 490, 510 as atonement  511 ineffective apologies  511–12, 513 credible assurance of an effective regulatory feedback mechanism  510 Public Inquiry, problems with  512–13 needs: see responses (dispute resolution) (psychological needs) non-solutions to psychological needs adversarial processes  513, 514 legal solutions  490, 494–95, 511, 513, 517–20 monetary value as secondary consideration  490, 510, 514, 516

‘resolution’/‘settlement’, growing acceptance of as key objective  513 communication and understanding as key to resolution  514 ‘disagreeing well’  514 individual’s perspective  514–16 as reversal of priorities between ‘judgment’ and ‘agreement’  514 as voluntary resolution  514 responses (dispute resolution) (effecting change) evidence of parties’ need for Jackson reforms, supplementary report (2017)  516 Learning from Mistakes (Citizens’ Advice Report (2016))  517 Managing the Costs of Clinical Negligence in Hospital Trust (PAC Report, 2017)  516 research projects on health system failures  516 What Do People Think About Complaining (PHSO Report (2015))  516 ineffective solutions complaining, reason for not  517 deterrence  518 legal solutions to non-legal problems  490, 494–95, 511, 513, 517–20 publicising the problems, insufficiency  519 key considerations ethical evaluation as key  519, 520–21 insufficiency of a resolution of the dispute to change behaviour  518 misassumptions about the effectiveness of legal decisions  518–19 need to address root cause  518 poor quality of officials’ decision-making  517 data collection, feedback and intervention, absence of developed systems  517, 527 greater accuracy of decisions taken by AI  517 NHS (recent reports)  519 publicising failures, ineffectiveness  519 requirements cooperative relationships, support for  520–21 see also cooperative relationships joined up systems  521–22 see also joined-up government (UK) responses (dispute resolution) (psychological needs) accountability  28, 510 complexities of  510 autonomy of parties/a ‘voice’  490, 510, 514–15 ‘day in court’, insufficiency  511 Gosport Memorial Hospital Inquiry Report (2018)  311 need to be heard  511, 513 emotional closure  510 key requisites  512 legal closure, examples of ineffectiveness  512 public enquiry option  512–13

570  Index explanation  510, 516 do’s and don’ts  510 fairness  466, 510, 511, 513 healing  490 ‘psychology of resolution’  513–16 restoration of social relationships  467, 490 risk-reducing changes  28, 467, 516–24 see also responses (dispute resolution) (effecting change) truth  28 knowability  515 responses (dispute resolution) (where next?)  513 restorative justice aims  508 indigenous peoples (Australia/Canada)  508 UK policy on criminal harm  509 rise and fall elites  57 systems and empires  72 rogue traders, greed and money as motivation, or are they?  308–09 alternative explanations  308–09 behaviour of senior managers  310 offenders Adoboli  309 Kerviel  309 Madof  309 research on Ahmed (‘UBS Rogue Trader: “It Could Happen Again”’ (2016))  309 Fortado (‘Kweku Adoboli: A rogue trader’s tale’ (2015))  309 Royal Commission into Misconduct in Banking (2019) (Australia)  308, 309 Soltes (Why Do They Do It: Inside the Mind of the White-Collar Criminal (2016))  309 root cause analysis co-creation model  528–29 constant monitoring system/as protection against systemic culture risk  30, 352, 473, 476 cooperative culture and  205 cooperative regulatory model  35, 350, 352 data management, importance of  503 dispute resolution  495, 518 adversarial system as a root cause of problems  483 enforcement cooperation programmes as poor alternative  429 EU Study on Directors’ Duties and Sustainable Corporate Governance (European Commission, 2020)  278–79 failure to address  26, 425, 517 fairness principle and  435–36, 445 financial sector GFC and  185 Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks (FSB, 2017)  189–90

interventions for protection and  43, 455, 467–68, 473, 477 open and just society and  426, 461, 465–67, 470, 498 problem-solving model  39, 294–95, 352, 466, 477 ‘why’ vs ‘who’  366 rule of law achievement of supremacy in colonialist America  524 ADR as a threat to  485, 493 as constraint on the arbitrary use of power  456–57 as the foundation of trust  18 middle classes and  217 Ombudsman’s ‘fair and reasonable’ standard as alleged threat to  521 Parliamentary concerns (UK)  525–26 security and secret intelligence services and (UK)  167 as support for the state’s monopoly of power  483 Russia (social punishment)  458–59 Rwanda, capitalism in  230 sanctity, as universal value  135 sandbox: see regulatory sandboxes (non-UK); regulatory sandboxes (UK) Scotland cooperative culture Scottish Regulators’ Strategic Code of Practice (2015)  200 n.174 Sustainable Growth Agreement (2020)  402 Fairer Scotland (Equality Act 2010)  168–69 National Performance Framework (purposes, values and outcomes)  168–69, 232 adoption of doughnut economics  232 stakeholder involvement The Leven Programme  245, 252, 358, 402, 419 WICS price setting procedure  43, 345, 358, 400–401 Consumer Scotland Act 2020  400–401 EBR/EBP principles and  401, 454 promotion of company’s culture and  454 SDGs: see UN Sustainable Development Goals (SDGs) self-determination theory: see self-determination theory (Deci and Ryan); self-determination theory (Pink); self-regulation theory self-determination theory (Deci and Ryan) (competence/autonomy/relatedness)  24, 75 (Table 4.1), 81–83, 241, 321–22 autonomy definition  81, 241 individualism distinguished  81 balance between, importance  81, 82 competence ‘Competence As a Necessary But Not Sufficient Condition for High Quality Motivation’ (Elliot et al. (2016))  322

Index  571 definition  75 Table 4.2, 81 self-determination and  81 as core psychological needs  7, 75 (Table 4.1), 81 definitions  81 individualism, as tenet of shifting views  19, 64–65 integrated functioning (mindfulness), factors affecting  82 authoritative/controlling behaviour  82 inequality  82 intrinsic motivation, psychology of  7, 241 intrinsic motivation/external influences, relationship  7, 24, 74, 75, 82, 128, 319, 322 crowding-out effect  322 internalisation process  82, 322 as predictors of performance (quality vs quantity)  321 OBCR  28–31, 36, 43–45 rationality/economic and law-based theories distinguished  7, 75–76 relatedness and  75, 81–83, 89, 241, 321–22 satisfaction of psychological needs as functional requirement  81 frustration of, effect on functioning and wellness  81–82 see also motivation self-determination theory (Pink) (autonomy/ mastery/purpose)  83 focus on intrinsic desires  83 ‘purpose’  83 self-efficacy description/core characteristics (Table 4.1)  75 human agency theory (Bandura) and  80 rationality/economic and law-based theories distinguished  75–76 self-esteem, importance of  511, 515 self-justification  126, 128, 135 self-regulation theory description/core characteristics (Table 4.1)  75 free markets and  218, 229 frustration of perceptions of personal needs and opportunities, effect  26, 213, 251, 270–71 human agency theory (Bandura) and  80 intrinsic motivation/external influence, relationship  7, 74, 75 internalisation of external influences as key to effective self-regulation  82 moral values, role  80 motivation/amotivation, role  80, 82 see also motivation post-Reformation increase in individuality  57 rationality/economic and law-based theories distinguished  7, 75–76 regulatory compliance and  436, 453 see also self-determination theory Serbia (amplification of messages for political ends (Milosevic))  226

short-termism as causal factor in climate change/GFC/serious corporate disasters  259, 288 GFC  185, 221, 296 Commission Report on Directors’ Duties and Sustainable Corporate Governance (2020)  278–79 competition as contributory factor  67, 72 Kay on Obliquity, 2010  152, 263, 283 Report on UK Equity Markets and Long-term Decision Making (2012)  261–62 levelling-up agendas and  251 MSV and  259, 261–62, 263–65, 288–89 personal risk to managers making decisions for the long-term  262 policies leading to  14, 60 remuneration policy and  299–300, 311, 315–16, 317–18, 320, 321, 324–25, 326–27 as sign of an unhealthy culture  194 stewardship as counter  273–75 as stress-inducing value (Barrett)  142–43 Wellbeing of Future Generations Act 2015  169–70 simplification as aid to compliance  83–84 Singapore antitrust compliance programmes  440 bank remuneration (Incentives Structures in the Banking Industry (2019))  307 capitalism in  230 insider trading sanctions  267, 436 online courts  503 slavery: see modern slavery; modern slavery (UK) Slovenia corporate governance shareholders and workers as participants with voting rights  277 GDPR, failure to implement  431 social capital altruism vs transactional trust  8, 28, 38, 102–03 competition’s erosion of  21, 67 cooperation in communities and  235, 237 Fukuyama on  112 importance of  8, 10, 21 individualism and  115–16 level as a barrier to reform  528 measuring human, social and natural capital (Roche et al.)  286 psychological issues, impact on  251 social trust and  98, 112–14 Social Cognitive Theory (SCT) (Bandura)  80 social contract, need for a new one  10, 12, 23, 251–52 agreement on refreshed social values, need for  252 elements of  252 stakeholder capitalism  252

572  Index examples The Leven Programme  252 UK security and secret intelligence services  147 governing principles, suggestions for (Shafik)  233 specific requirements  233 ‘we owe each other’  23, 233 governing principles, UN SDGs as  252 ‘social covenant’ alternative (Sacks)  147, 233 addressing inequality (The Business Role in Creating a 21st Century Social Contract (BSR, 2020))  252 ‘social licence’ concept (Amartya Sen)  271 social interdependence theory (Deutsch/Johnson)  18, 24, 52–53, 55, 61, 87 social punishment  458–59 national differences  459 Prisoner’s Dilemma (Nowak)  458–59 social purpose: see corporate purpose, evolution of social solidarity between young and old (Goldin)  329–30 conscience collective (Durkheim)  94 Covid-19, impact  236, 238, 250 definition Carney  239 Sztompka  129, 146 n186 USA and  241 dispute resolution and  524, 525 as essential value Carney  23, 136, 238, 239, 250 Welby  235–36 ‘excessive’ remuneration and  308 group size and  252 justice and (Sandel)  12, 146 as moral bond  8, 59, 124, 129, 146 neoliberal capitalism and  19, 74, 219, 241, 259–60, 289, 524 religion and (Sacks)  147 a shift to  19–20, 26, 289 social trust and  97, 119 trust and  119 as a typology of culture  175 ways of fostering  26, 45, 115–16, 122, 171, 213, 251–53, 287 social trust  98, 104–06 the concept  98 distrust, effect  98 as driver for integration of local goals  45 exclusionary effect  98 motivation and  104–06 as self-generative/self-renewing  98 suggestions for building  104 Western/non-Western forms  90 see also trust, motivation, social groups and procedures (Tyler et al.) sociopaths/psychopaths  12, 58–59, 101, 123, 519 socio-political trust and mistrust  112–14 solidarity: see social solidarity

South Africa political dissatisfaction  113 Truth and Reconciliation process  509–10 South Korea (trust in fellow citizens and Covid)  114 Spain (antitrust compliance programmes (CNMC))  430 stakeholder capitalism ‘a fair and cooperative capitalist democratic social system’, what hope for?  327–28 ‘conscious capitalism’ (Mackey and Sisodia)  25, 152 Davos Manifesto  160 features of ‘better business’ model  37–38 The Leven Programme  252 inequality, as means of addressing  252 transition towards  19, 25, 26, 37–38 see also neoliberal capitalism stakeholder involvement co-creation regulatory model and  17, 40, 41, 160, 170, 280, 342 see also co-creation regulatory model functions, mechanisms and institutions for implementing and performing  352–54 digital communications technology  344 mediator, value of  353 OBCR model  344–45 public risk management (Fig. 12.1)  343 ‘stakeholder’, definition/classification as  17 government  343 providers  343 regulatory authorities  343 society  342 users  343 see also stakeholder involvement (UK) stakeholder involvement (UK) data-sharing  43 Independent Spectrum Broker  43 Ofcom’s revision of the Broadcasting Code  43 Primary Authority scheme  454 Statistics, Office for (UK) (Code of Practice for Statistics (2018)) co-creation and cooperation as key  400 principles quality  399–400 trustworthiness  399–400 value  399–400 purposes  399 as a set of actions leading to outcomes  400 as trust-based system  399–400 stewardship codes  273–75 as attempt to enlist activism of investors in moderating remuneration  303–04 Building a regulatory framework for effective stewardship. Discussion Paper (FRC and FCA, 2019)  155–56, 273 doubt as to investors’ sincerity  275

Index  573 emergence in multiple countries  275 Daeniker and Hertig (‘Capitalist Stakeholders: Shareholder Stewardship in Switzerland’ (2021))  290–91 as ethical codes  31 a step on the way  19, 26, 164, 190, 255, 259, 268–69 ‘The Role of Institutional Investors In Curbing Corporate Short-termism’ (Pozen, 2015)  273 UK Code  31, 37, 195 addressing systemic risks  274 principles (Box 10.1)  274–75 sustainability (corporations) as a contemporary, trending approach  9, 23, 25 diversification in corporate model  38 organisational culture and national corporate governance codes (CGCs) continuing shortfalls (2015)  192 post-GFC revisions  192–95 UN SDGs and  19, 26 see also UN Sustainable Development Goals (SDGs) Sweden ADR  493 cooperation in society  240 corporate governance shareholders and workers as participants with voting rights  277 ‘no blame’ culture, success of  498 Switzerland openness/transparency  290–91 personal and social values (Schwarz)  133 social punishment, effect  458–59 systemic culture/culture risk addressing the problem ADR as means of systemic reform of the legal system  491, 527 aviation industry’s example  396–97, 452–53, 461 FCA Mission (UK)  186–90 Operating Code of Practice  31 performance-based model  467 problem-solving and continuous improvement model  351–52 root-cause analysis  30, 352, 473, 476 stakeholder involvement  17, 160, 169, 170–71 Stewardship Code (UK)  274–75 contributory causes accountability, risk of misapplication  510 financial and commercial practices prior to the GFC  185–86 financial motivation model  294–95, 316, 325–27 financial sector’s failure to address the problem  185, 192, 196, 260, 264, 271–72, 295–96, 413–14, 418 hierarchical structure/vertical dominance  57 MSVs  29, 288–89 public sector’s failure to address the problem  199 systemically mandated role expectations  94

Taiwan as a low-trust society  112 taming of the ego (Laloux)  14, 70 terrorism anti-terrorist measures (UK)  333 as global risk  8, 45, 171 Thailand (regulatory delivery)  361 the right: see morality transitional justice description  509 examples  509 flexibility and contextual responsiveness  509 rule of law under  520 transparency: see openness/transparency tribunals (UK) as administrative court  498 appeals to high proportion of decisions overturned  519 data collection, feedback and intervention, absence of developed systems  517, 527 examples Employment Tribunals  256–57, 507 Table 16.2 First-tier Tribunal (Immigration and Asylum Chamber)  519 Immigration and Asylum Tribunal  505, 507 Table 16.2 Social Entitlement Tribunal  505 Social Security and Care Tribunal  507 Table 16.2 features ‘a separate universe’  499 comparability to courts  42, 482 inquisitorial/problem-solving approach focused on the individual as aim  499 as specialist providers  499 as a user-friendly, quick and cheap forum  498–99 membership  482 reorganization/modernisation Leggatt Report (2001)  499 ongoing reorganization (The Modernisation of Tribunals 2019)  499 Trump, Donald  113, 220, 226 trust overview  9–11, 24, 90 commercial organisations  109–12 compliance and regulatory systems, centrality  109 use of trust language, misleading effect  109 historic reliance on rules-based systems and competence  109 arrival of mechanistic trust-supporting institutions  109 integrity–commercial success correlation  110–11 inter-organisational trust, benefits  110 ‘The Business Case for Complying with Bribery Laws’ (Nichols)  110

574  Index ‘The Relationship Between Business Integrity and Commercial Success’ (Jenkins)  110 ‘Why Is Trust Necessary in Organizations?’ (Miller)  109 post-2008 GFC decline in reliance on formalised/ increase in ethical mechanisms (Nichols and Dowden)  111 transferring trust relations between individuals in different organisations to relationships between their organisations (Kroeger/ Vanneste)  111 trust inside an organisation, shareholder interests as impediment  109 compliance and  43–44, 102–03, 105, 106, 109, 111 Covid-19 death rates as reflection of levels of trust  11 definition/qualities  90, 91 amorality/ethical neutrality  10, 90, 92–93, 108 assurance distinguished (Yamagishi and Yamagishi)  9–10, 100 conviction that others will act as we expect  91 neoliberal influence/expectation of action beneficial to the trustor  91, 98, 100 related concepts (assurance, belief, confidence, legal trust, reliance)  90, 95 distinguishability, academic debate on  94 as a state of mind  9, 90 ‘The Conceptualization of Interpersonal Trust’  92 trust in individuals/organisations vs trust in processes/systems  94–95 degrees of trust  96 downsides  96 examples of trust trust in a foreign country  91 trust in political leaders  92 trust in regulatory, accreditation and auditing bodies to do their job  91–92 see also social trust; trust-based regulatory system judgement and evaluation  90–100, 336–37 competence-based trust, importance  100 development of processes for, importance  99 diversity of views, importance  99–100 ethical values as basis  336–37 experienced and novice customers distinguished  41 intra-group trust  100 task conflict and  100 mental mechanisms conscious cognitive thought  101, 126 speedy automatic processes  101 as moral bond  8, 59, 124, 129, 146 motivation, social groups and procedures (Tyler et al.)  104–06 building social trust  104

size of groups, importance  106 status/social identity, importance  104–06 predictability and risk reduction, trust as a mechanism for control  94, 95 a high-risk society  91, 95 importance of predictability  93 increasing complexity of interrelations in the social and cultural environment as driving force  91, 93–94, 95 trust as substitute for knowledge/confidence  94, 95 rational self-interest theory vs science  101–04 piecemeal approach to  104 self-interest theory dominance (1990s and 2000s)  101–02 legal positivism and  102 limited role of legal mechanisms  102 self-interest theory, challenge to Brann and Foddy  103 Dawes, Kragt and Orbell  103 Ermish et al.(factors affecting trust)  103 Misztal  103, 115–16 The Great Transformation (Polanyi: 1944)  102–03 Tyler and Dawes  102–03 reciprocal and negotiated trust, mechanisms  9–10, 100–101 automatic mental shortcuts  101 choosing between  101 distinction (Molm et al.)  9–10, 100–101 negotiated transaction, unintended consequences  100–101 reciprocal exchange, greater effectiveness  100–102 reciprocal nature of trust (vicious/virtuous spirals)  98 trust vs assurance  100 see also social trust; trust-building; trustworthiness trust in politicians/governments complexity of political legitimacy  113 Covid-19 distrust in statistics  114, 237 social capital and  112–14 studies ‘A Trust Recession Is Looming Over the American Economy’ (Unseen, 2021)  113 Edelman Trust Barometer (1921 and 1922)  114 ‘Individual-Level Evidence on the Causal Relationship Between Social Trust and Institutional Trust’ (Daskalopoulou, 2019)  113 ‘Interpersonal Trust, Political Trust and Non-institutionalised Political Participation in Western Europe’ (Kaase, 1999)  113 IPSOS Global Trustworthiness Monitor (2022)  114

Index  575 The Global Satisfaction with Democracy Report 2020 (Centre for the Future of Democracy, 2020)  113 Trust: Self-Interest and the Common Good (Kohn: 2008)  113 ‘Trust and Distrust in Government’ (TiGRE Project, 2020) (Verhoest and Six/ Levi-Faur)  113 Trust and Honesty (Frankel: 2006)  113 Truth and Evidence: NOMOS LXIV, 2021  113 ‘Why Do We Trust Our Congressman?’ (Parker and Parker, 1993)  113 trust-based regulatory system as co-creation model  43 effectiveness  43, 355–56 examples traditional/hierarchical systems  359 Trust-based Environmental Regulation’ (2010) (Lange and Gouldson)  365 trust-based systems  43, 358–59 see also aviation industry; Primary Authority Scheme (UK) intermediary track (regulation-light regime on a modular basis)  355 regulatory light option  43, 355 traditional track option (rules, inspection and enforcement)  43, 355 trust in the regulator vs establishment of trust in the regulated  91–92 trustworthy track (regulatory-light option) advantages  43 co-creation of purposes, outcomes, systems and requirements  43 as ideal  42 qualification for  355 see also Statistics, Office for (UK) trust-building  115–19 altruism and  8, 9, 115–16 evidence academics’ perspectives Hosking  117 Nooteboom  117–18 O’Neill  24, 99, 118 Sutcliffe/TIGTech Project  118 accountability mechanisms, importance  99, 107, 111, 118 criteria  9 see also trustworthiness, evidence of/factors determining/characteristics fairness/unfairness and  91 outward-looking focus  119 strengthening individual relations of trust recommendations for development of a strong relationship not dependant on threats  117 disciplinary systems  117 ethics training  118

evidence of integrity, ethical practice and maturity  116 models of trust repair  116–17 a relevant, extensive, deep, consistent and reliable evidence base  116 trust-reducing elements  117 strengthening networks of trust  115–16 recommendations by Hoskins  116 McGreer  116 Misztal, Habermas and Durkheim  116 Molm  9–10, 115 Seldon  116 Sztompka  115 recommendations for challenge to self-interest theory  115–16 consistency and irreversibility of policies  115 education on ethics  116 empowerment of the capacity to hope  116 evocation of tradition/emphasis on community  115 a generous giving society  115 good communication  116 open government  115 strengthening of institutions  115 universal moral code  116 trustworthiness evidence of/factors determining/characteristics  90, 91, 106–08, 342 ability  167 adverse evidence  97 benevolence  107 capacity and resources  346 classification as relevant evidence  106–07 Luhmann  107 Sztmopka  107 commitment to purposes/outcomes  346 competence  346 ‘Conceptualizing Trust: A Typology and E-commerce Customer Relationships Model’ (McKnight and Chervany, 2001)  9, 24, 107–08 consistency  90, 95 consistent history/adequate evidence  97 culture  346 definition  90 ease of assessment (ability/predictability-based trustworthiness vs integrity/benevolencebased trustworthiness)  107 effective presentation, importance  107, 346 emotional trustworthiness  92 ethical values  346 evidence of verifiable facts  97 evolutionary nature of the need for evidence  117, 346–47, 421 examples of evidence  118, 346 familiarity with trustee  97

576  Index honesty  92 integrity  107 OBCR model  345–47 predictability  95, 107, 346 regulators, applicability of requirement to  348 reliability  92 reputation  97 respect and trust shown by authorities  105, 106, 113 self/social identity with the authority  105–06 self-identification approach  336, 420 shared values  105 structural/institutional governance  346 tools for  107 see also trust-building, evidence globalised intermediate trust, problems of (Bodó)  114–15 truth and reconciliation process (South Africa)  509–10 Turkey (personal and social values (Schwarz))  133 UK AML/CTF regimes challenges  144 amplification of messages for political ends (Brexit)  226 anti-terrorism measures  333 international (FATF)  333 arbitration adversarial approach  484–85 banking/codes Banking Code (1991)  138 Business Banking Code (2002)  138 core principles/values  138, 139 fines on Lloyds TSB Bank and Bank of Scotland  298 importance of application throughout the organisation  138 operational practice/enforcement  138 Risks to Customers from Financial Incentives (FSA, 2012, 2013 and 2014)  298 slavery/money-laundering and  333 Strengthening the Alignment of Risk and Reward: New Remuneration Rules (BOE PRA and FCA, 2014)  300 BBfA: see Better Business for All (BBfA) (UK) church attendance  215 clawback: see clawback communities in (Compassion Project, Frome)  35, 246–47 community rebuilding  233–35 see also community rebuilding (UK) conciliation ACAS  206, 492 mediation, distinguishability  483 n4 OSC  504–05

constitutional structure inter-jurisdictional differences  481 suggestions for change  34 cooperation in communities (optimum size of communities) Dunbar number  18, 34, 63, 252–53, 529 local/regional government, implications for  34 cooperative culture organisational culture/sustainability, review of governance codes (2018/2021)  192–95 cooperative dispute resolution: see cooperative dispute resolution (UK) corruption in  330 see also corruption courts: see court reform (England and Wales) covid-19 care for each other shown during  237 distrust of statistics  237 inequalities consequent on  236–37 panic buying  320 values endorsed by citizens (solidarity, fairness, responsibility) (Carney)  238 cultural entropy in  143 decision-taking by officials, high level of inaccuracies  517, 519 enforcement/compliance antitrust compliance programmes (OPSS, SRA & FS)  430 Business Perceptions Survey 2012 (IFF Research, 2012)  440 promotion of company’s culture (UK Corporate Governance Code 2018/OFWAT)  454 ‘See No Evil: Cartels and the Limits of Antitrust Compliance Programmes’ (Stephan, 2010)  440 ethical codes  31, 347–48 ethical values in leadership/regulation, impact ‘Strategic Leadership in Modern Local Government’  202 The Seven Principles of Public Life (1995)  201 Human Rights Act 1998  144 inequality in: see inequality (UK) insider trading sanctions  267, 436 legal system inter-jurisdictional differences/limitation of discussion largely to England and Northern Ireland  481 see also Scotland; Wales mediation: see ADR/mediation above mediation  483–84, 490 modern slavery: see modern slavery (UK) money laundering in global AML regime, criticisms of  332 international cooperation, importance/ insufficiency  331 statistics  331

Index  577 strategic priorities (Economic Crime Plan (2019))  331 see also money laundering morality and values (official publications in date order) The Seven Principles of Public Life (1995)  144 Open Public Services (2011)  144 Ethical Standards for Providers of Public Services (2014)  144 Striking the Balance. Upholding the Seven Principles of Public Life in Regulation (2016)  144 The Continuing Importance of Ethical Standards for Public Service Providers (2021)  144–45 Upholding Standards in Public Life. Final Report of the Standards Matter 2 Review (2021)  145 neoliberal capitalism instability (The Demons of Liberal Democracy (Pabst: 2019))  220 NHS: see NHS ODR: see ODR (Online Dispute Resolution) Office for Statistics: see Statistics, Office for (UK) Ombudsmen: see Ombudsmen (UK) political dissatisfaction  113 political transformation access to justice, rule of law and human rights under threat  525–26 from stoics to whingers  525–26 Primary Authority Scheme (UK): see Primary Authority Scheme (UK) public sector values: see public sector values (UK) regulation of directors and auditing  282–83 see also leadership regulators, competency apprenticeship scheme (Regulatory Compliance Officer: Details of Standard (2018))  203 incorporation of core regulatory competencies in training programmes, job descriptions and performance management  203 regulatory delivery: see ‘Better Regulation’ (UK); regulatory delivery model (UK) regulatory sandboxes: see regulatory sandboxes (UK) religion, decline as a fault line  224 remuneration: see remuneration restorative justice, policy on  509 rule of law  167, 525–26 see also rule of law serious and organised crime coordinated approach  332 Coronavirus Job Retention Scheme, losses due to fraud  332 post-Brexit cooperation with the EU, importance  332 statistics  332

short-termism, effect (Kay Report on UK Equity Markets and Long-term Decision Making (2012))  261–62 see also short-termism social punishment, effect  458–59 social solidarity Covid-19 and  236, 238, 250 post-WWI  245 post-WWII  241 stakeholder involvement: see stakeholder involvement (UK) Stewardship Code  31, 37, 195, 274–75 trust in politicians/government, decline  14, 113 trust/integrity, impact failure to build on  110 see also ADR/mediation (UK); Brexit UN Global Compact (2015) (Guide to Corporate Sustainability: Shaping a Sustainable Future)  19, 32, 164, 270 UN Sustainable Development Goals (SDGs)  32–33, 164–66 broadening of global purposes  25 corporation/business and  19, 26 EU’s adoption of  149 mixed response to  33, 165, 272 A Guide to SDG Interactions (International Council for Science, 2017)  272 ‘Mapping Interactions between the SDGs: Lessons Learned (Nilsson et al., 2017)  272 non-binding effect, problems with  272–73 ‘Redefining the Corporation for a Sustainable New Economy’ (Sjåfjeli, 2018)  272 ‘Securing the Future of European Business: SMART Reform Proposals’ (Sjåfjell et al., 2020)  272 National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (2011) (India)  33, 165 transparency and  470 see also climate change; corporate purpose, evolution of; sustainability (corporations) unintended consequences  14, 60, 259, 263, 291, 297, 299–300, 306, 327, 341, 435–36, 468, 485, 487 contractual protection as negative influence on trust in relationships  9–10, 100–101 high levels of remuneration  307 mental shortcuts/heuristics as cause  76 multi-factorial causation/‘things just happen’  77, 190 regulating culture and  196–97 risk management  187 traditional social contract, reason for breakdown  233 USA ADR/mediation academic opposition to  403 community mediation  484

578  Index communities in (Village Movement, Boston)  35, 246 compliance programmes ‘A Framework for OFAC Compliance Commitment’ (OFAC, 2019)  438 Antitrust Compliance: Perspectives and Resources for Corporate Counselors (ABA, 2005)  440 antitrust compliance programmes  440 Evaluation of Corporate Compliance Programs (US DOJ)  437–38 ‘Fear no Evil’ (Boehme and Murphy, 2014)  440 leniency programmes  452 limited implementation  442 Principles of Federal Prosecution of Business Organizations (Justice Manual)  430–31 summary of the position (Hodges and Steinholtz (Ethical Business Practice and Regulation, 2017))  438 US Federal Organizational Sentencing Guidelines Manual, Compliance Program Requirements (US Sentencing Commission)  437 cultural entropy in  143 deterrence counter-arguments  266 SEC enforcement cooperation programme  429–30 dispute resolution, problems  524–25 individualism in, problems raised by  241 inequality in CEO/worker pay ration  215 destabilisation and  227 insider trading sanctions  267, 436 levelling down  135 market, business and corporate moral values  140 neoliberal capitalism emergence of post-Cold War/collapse of communist rule  240 exacerbation of ideological and political division  241 instability (Why Liberalism Failed (Deneen: 2019))  219–20 as US-led phenomenon  241 personal and social values (Schwarz)  133 political dissatisfaction  113 populism amplification of messages for political ends (Trump)  226 causes of (rust belt)  11 political insularity (‘America First’/President Jackson)  226 regulatory delivery, means of achieving  361 social punishment, effect  458–59 social solidarity in  241, 524–25 trade wars (China)  226 trust in politicians/government, decline  14, 113 trust/integrity, correlation with commercial success  112 ‘calculative self-interest’  117–18

utilitarianism  121, 240, 313, 422–23 values (general) Note: ‘value’ is an elusive term, sometimes referring to the value itself, sometimes to the behaviour which leads to the virtue, the dividing line being thin. It sometimes also refers to the thing valued (eg ‘family’) rather than an inherent value. And sometimes they are given an epithet other than ‘value’. This list is intended to be limited to the value rather than the behaviour. codes G20/OECD Principles of Corporate Governance (OECD, 2015)  278 India’s National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business 2011  277 Netherlands’ Basic Principles for Good Enforcement 2000/2005  145 OECD Best Practice Principles (2014)  202 Public Service of Ontario Act 2006  145 Toward Effective Governance of Financial Institutions (G30, 2012)  139 compilations classification of values (Rokeach)  132 n102 Culture Consequences. Comparing Vales, Behaviors, Institutions, and Organizations Across Nations (Hofstede: 2001)  4, 10, 25, 134, 175–76 human and fundamental rights statements  132 ‘morality-as-cooperation theory’ (Curry, Mullins and Whitehouse)  134 religious and philosophical texts  132 scientists  132 social psychologists  132–33 state constitutions  132 World Values Survey  131–32 survival vs self-expression values  132 traditional vs secular values  132 continuum of values (Schwartz)  11, 132–36, 148, 520 Covid-19, effect  236–38 see also covid-19, values definition/concept/function of ‘value’  125–26, 132 ‘a prescription for what to do’ dependence on context  11 (Rokeach)  125 ‘the energetic drivers of our aspirations and intentions’ (Barrett)  125 ‘an enduring belief ’ (Rokeach)  132 ‘belief ’ distinguished/tendency to use interchangeably  126 classification of values (Rokeach)  132 n102 a critical link between principles and actions  128 as divine command  126 living with inconsistency  148 mechanisms to assist in choice  148–49 importance of a match between values of individuals and institutions  149

Index  579 philosophers’ approach (concept based on rational thought and logic)  126 social anthropologists’ approach (inherent sense of right and wrong)  126 sociologists’ approach (value as essential element in the construction of society)  126–27 Stakeholder Engagement Standard (AA1000SES, 2015)  160 Understanding Value Creation (IFA, 2020)  160 values as immutable principles to govern the behaviour of members of a group  127 see also plurality/mutability/conflict between below hierarchies of  132, 134 market, business and corporate values  136–43 see also market, business and corporate moral values plurality/mutability/conflict between  130–31 complexity of interrelationships (Cotterrell)  130 conflict with feelings and emotions  130 critical feeling/critical thinking, importance (Reber)  131 culture, ever-shifting pattern of (Cotterrell)  131 pairing opposites Hofstede  134, 175 Rockeach  25 Schwartz  135, 139 reciprocity between culture-based values and action based on/giving to  131 relativity to time and place  126–27 variation in reciprocity norms (Raworth)  130–31 working as opposites  120, 148 Moral Foundations Theory  12, 122–23 see also Moral Foundations Theory (Haight) potentially limiting values blame  142, 143 caution  142 control  142 fear  142 hierarchy  143 likeability  142 reapplying/re-embracing (views on)  146–48 Collier (The Future of Capitalism (2018))  147, 236 de Waal (‘How Selfish an Anima?’ (2008))  148 Devlin (‘Society means …) (The Enforcement of Morals (1965))  146 Sacks (Morality: Restoring the Common Good in Divided Times (2020))  146–47 Sandel (Justice. What’s the Right Thing to Do? (2009/2010))  146 Sztompka (six moral bonds)  146 universality of values  12 Haidt  23, 59, 134, 135, 139, 142, 143, 236 Schwartz  148

workers’/employees’ perceptions of  182–83 see also ethical values; legitimacy values (identified values) accountability: see accountability adaptability  139, 142, 180, 207, 351 altruism: see altruism autonomy: see self-determination theory benevolence: see benevolence caring: see caring common good  12, 146, 207 Fig. 8.1, 235, 236, 249, 337, 459 competence: see competence consistency: see consistency courage: see courage dynamism  23, 136, 239, 250 empathy: see empathy ethical values: see ethical values fairness: see fairness family  143 hierarchy  135, 236 see also hierarchy (society) honesty: see honesty humility  23, 133, 136, 148, 162, 239, 317 impartiality: see impartiality integrity: see integrity intergenerational fairness  169–70, 214, 239 see also climate change; fairness leadership: see leadership legitimacy: see legitimacy liberty: see liberty loyalty: see loyalty mastery  6, 75, 80, 89, 324 motivation: see motivation openness: see openness/transparency perspective  239 predictability: see predictability; trust predictability and risk reduction, trust as a mechanism for preparedness  238 proportionality  144 prudence  238 purpose: see cooperative regulatory models/ OBCR model; corporate purpose, evolution of reciprocity: see reciprocity recognition  142 relatedness: see relatedness resilience: see resilience respect: see respect sanctity  23, 84, 123, 133, 236 selflessness  67, 144, 201 self-worth  12, 54, 76, 79, 80, 148, 241, 305 solidarity: see social solidarity subsidiarity  23, 84, 123, 135, 236 sustainability  239 transparency: see openness/transparency trust: see trust; trustworthiness

580  Index vertical vs horizontal models  27, 39–40, 51, 57, 62, 72, 213, 259, 336, 342, 427, 457–58, 464–65 Vietnam capitalism in  230 Wales tribunals, reorganization of (Justice in Wales for the People of Wales (2019))  499 Well-being of Future Generations (Wales) Act 2015  169–70

WEIRD phenomenon characteristics  13, 54–55, 56, 57, 64, 73 non-applicability of research on to other people  64 women presence in the FTSE 150 companies male/female ratios in executive/non-executive director posts compared  206 reduced misconduct consequent increase in  206, 237 Women’s Institute  34, 246