Corporate Design for Regulability: Comment

Abstract

Engel's paper (Engel [2006]) discusses an important aspect of modern business: regulability. In regulated markets firms have an incentive to mitigate the effects of regulation that might create extra costs, foreclose business options, and thus reduce profits. On the other hand, regulatory authorities face the problem of ineffective regulation due to asymmetric information between regulator and regulated firms. Thus the problem of regulability is a reciprocal one. In traditional theory of regulation the regulator supposedly is pursuing the bonum commune (public interest); thus he should get full powers to be able to effectively execute his regulatory task. But this argument breaks down if those actors who are working in regulatory agencies are assumed to maximise rationally their individual utility. In modern positive theory of regulation a typical problem of regulation is regulatory capture. Regulated firms tend to influence regulation and collude with regulators to the detriment of third parties. Market foreclosure by means of regulation is a well-known example for this sort of win-win game between regulatory authorities and regulated industries. In order to achieve these goals, regulated firms and regulatory authorities have to communicate and to invest in their reciprocal relationship. One of the possible devices to be introduced by regulated firms (or by regulators) is an interface actor, who acts as an intermediary between the firm and the regulator. The paper presented by Christoph Engel introduces a modified principal-agentsupervisor model in order to better understand the role of the interface actor. Thus a specific aspect of regulation i.e., a mode of communication between regulated firms and regulators is analysed within a corporate governance framework. Regulated firms employing interface actors adapt their corporate design to the specific needs of their regulatory environment. This is a new aspect of corporate governance. Corporate governance structures are not supposed to be designed in order to improve the firm's position on capital markets, but to improve its relations with regulators, thus strengthening its competitive standing vis-a-vis its competitors.