Failures in Regulator-Led Deinstitutionalization of Questionable Business Practices

Abstract

Prior works in institutional theory are characterized by an assumption that the legal basis for authority of regulatory agencies is sufficient to ensure compliance by business organizations. From a business ethics standpoint, this would imply that regulatory oversight can hinder organizations’ pursuit of questionable business practices. However, the evidence for regulatory efficacy is far from clear as questionable business practices tend to persist despite regulatory monitoring. Drawing on the case of the regulatory failure to trigger a shift away from aggressive banking practices in Ireland, which had serious social and economic costs, we highlight three barriers to deinstitutionalization: (1) insufficient advocacy for change coupled with an inability to problematize the risks of extant business practices, (2) unwillingness to impose change through the use of threats, power, or sanctions, and (3) contradictions in the institutional environment that can obfuscate the regulators’ message. Thus, our study proposes that regulator-led change might not be as straightforward as previously theorized. In doing so, it advances prior theory through an explicit focus on the importance of three types of institutional work that are necessary for regulator-led deinstitutionalization.