The playbook for companies stepping into world of politics

Apple CEO Tim Cook is not alone in believing that, given the growing dysfunction in government, it is up to companies and other areas of society to “step up” to the 21st century challenges of employment, diversity, climate change and education. Tesla CEO Elon Musk and a consortium of the biggest technology companies are pouring millions of dollars into research to anticipate how to manage powerful artificial intelligence and autonomous systems. Facebook executives Mark Zuckerberg and Sheryl Sandberg are also using their platforms and profile to speak out about immigration policy.

It is easy to dismiss this as a bad idea. Public policy and regulation are supposed to come out of a legitimate and accountable political process, representative of diverse interests. We are suspicious of businesses writing rules that enrich their shareholders at the expense of workers, consumers and other citizens. And it’s possible to read a recent study to say that technology executives are hostile towards regulation.

But the reality is more complicated than the corporations versus government storyline would have it. The failures of government are not just the product of too much money in politics and polarization. They are also the fairly predictable result of the vaulting complexity of our rapidly transforming global, digital world. That’s probably why otherwise liberal technology executives are so negative about regulation: the problem is not regulation per se but rather the dysfunctional nature of what they see from their catbird seat in the new economy. Global executives identify law and regulation as the biggest source of complexity they face.

{mosads}The fact is we have no choice but to open up a larger role for the private sector in devising new rules of the game, not only for businesses but for a wide array of nongovernmental groups as well. We need more diversity and innovation than governments alone can provide to meet the challenges of regulating in the global digital age. The trick is to figure out how to align private regulatory efforts as much as possible with the interests of citizens as a whole.

One example of this is what I call super-regulation. Our conventional approaches to regulation and policymaking rely on people who are responding to political and bureaucratic incentives and working with public resources to keep up with an exploding array of technologies and challenges. The response of those systems is inevitably top-down, protracted and out of touch. Moreover, those rule-producing entities are tied to territory in a digitally and globally connected world where money, contracts and ideas can zip across 10 borders before breakfast.

Super-regulation refocuses our political processes on the results our communities want, rather than the details of how those results are achieved. Developing alternative ways of achieving those results is left to private regulators: for-profit and not-for-profit organizations that step up to design and implement regulatory schemes. The targets of regulation — the companies that have to comply with regulatory rules — are required to choose which of these private regulatory schemes to submit to, and pay for, that service. The catch is that companies can only choose a private regulator that continues to satisfy the government that it achieves the results the political process has set.

Under super-regulation, governments regulate the regulators: auditing their performance, surveying consumers and citizens, and tracking metrics that show whether a regulated industry is meeting targets. This may sound like just another layer of government regulation, but done correctly, it can reduce the role of government by getting them out of writing and enforcing detailed rules and more narrowly focused on determining the appropriate goals for regulation.

Private regulation is already taking place globally on a massive, but somewhat hidden, scale. Thousands of global corporations like Nike and Ikea now include codes of conduct in their contracts with suppliers in the developing world to prohibit the use of child labor, improve workplace conditions, and ensure environmental compliance. Hundreds of thousands of corporations routinely participate in private standard-setting organizations to coordinate efforts that go well beyond the historical goals of achieving technical interoperability. They create standards to address the financial crisis, protect the environment, impose ethical constraints on artificial intelligence, and tackle corruption, that lead, and sometimes preempt, government-set standards.

Even where governments make the rules, their implementation is often delegated to the very companies being regulated because of limitations in technology, confidentiality and resources. The European Court of Justice, for example, announced in 2014 that European Union citizens had a right to be forgotten on the internet but it gave Google the job of adjudicating claims — 500 a day at last count — in the first instance. Google may not be happy about that, but it was likely preferable to allowing government regulators to roam their servers to enforce the law themselves.

What’s missing from the emerging regimes of private regulation is political accountability. Moreover, the markets in which private regulators are operating are rarely competitive. The Financial Industry Regulatory Authority, for example, is the only game in town for regulation of broker-dealers, and they behave accordingly, like a monopolist, with little incentive to innovate better regulation. But competition is precisely what we need to recruit the money, brains and incentives of profit and nonprofit organizations to come up with better ways of achieving the goals we hold out for our economies and civil society. This would be another task for a super-regulator: ensuring competition.

Truly global competitive markets for regulatory regimes also could bring another big benefit. Today, countries are often pressured by industry to adopt a single global regulatory standard to streamline compliance. But imagine a world in which five or 10 private regulators are competing to provide regulatory services, for example, in workplace safety. Individual countries could approve all or some subset of this group. Companies could choose a private regulator that is approved in all the jurisdictions in which they want to operate without that necessarily being the same regulator chosen by every other company in their industry.

Super-regulation is no panacea. It will not work for all types of regulation. And it will require serious research, design and experimentation to figure out how to do it well. But the need for corporations to play a substantial role in making and enforcing rules that affect us all in a complex, global and fast-moving world is not going to go away. Now is the time to start figuring out how private participation in regulation can be made more transparent and responsive to political oversight.

Gillian Hadfield is a professor of law and economics at the University of Southern California and the author of “Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy.”