06.12.08
Does Risk Awareness Cost Too Much?
In recent years, it seems as if corporate decision making has become increasingly risk driven. Compliance requirements are seen as a key driver - because of some of the corporate excesses of the recent past, complex regulations like Sarbannes-Oxley have unquestionably increased the difficulty of addressing compliance issues.
These regulations have also had another, less positive (in my mind) effect. They have made most public companies in the US extraordinarily risk averse. Sure, avoiding unnecessary risk should be a cornerstone of most corporate decision-making, however what began as an avoidance of unnecessary risk has seemed to evolve into an aversion to any kind of risk at all.
Domestically, this factor has increased the entrepreneurial gulf between private and public companies. Free from much of the compliance regulation that public companies tolerate, private companies can take advantage of opportunities that are all-but-foreclosed from the public company marketplace. As a result, innovation is lagging, investment is declining, and companies are forced to increase profitability by scaling back on the expense side rather than scaling up on the investment side.
In short, many public companies are now, for all intents and purposes, run by their accountants and lawyers - neither profession known as a dynamic center for growth or innovation.
This approach has, no doubt, been good for portions of my profession (law) and for the CFO class (and their minions). However, I think we must begin to ask whether or not we’ve regulated ourselves into a hole where innovation and creativity is simply too risky for public companies to chance. Furthermore, with recent revelations about the mortgage industry, and recent apparent abuse of the oil commodities sector, it isn’t clear to me that the regulations are accomplishing their goal which, in my mind, is simply making it more difficult for the cheaters to cheat.
Asian countries, with their history of free markets, and, no doubt, with their history of heinous labor practices, are relatively free to innovate. Even in a controlled economy, like China’s, it seems as if innovation is prized and encouraged, at least to a certain extent and in certain places. Yet the U.S. has a unique competitive advantage - diversity - in its workforce, in its customer base and in its creative minds. If it makes it here, it has a good chance of making it anywhere.
I’m not suggesting that we scuttle regulations and encourage a laissez-faire approach to regulation, but instead am suggesting that we revise our regulatory scheme to reward innovation at least as much as we reward accountability. Until we do that, and begin to benefit from the innovation marketplace, I fear that we will continue to loose ground to those countries who prize and reward innovation.
