Involved, but independent: striving to improve the position of regulation

Prof. Floor Rink’s inaugural speech will focus on regulation in companies and organizations, to prevent undesirable social practices such as consumer deception, environmental pollution or fraud. It is the job of regulators to check compliance with legislation and regulations. The effectiveness of regulation is closely linked to the positions adopted by managers and regulators. Although independence is crucial, says Rink, the level of involvement on the part of regulators deserves more attention than is currently the case.

In many sectors, corporate culture is already the subject of regulation. This is a good start, admits Rink, but organizations and regulators should also take identity processes into consideration. This would help them to flesh out policy on culture, which often remains a vague and abstract concept in practice. Attention for identity processes is important because the group you belong to tells us something about who you are. This is also true of managers and regulators. We all tend to value our own people, while initially mistrusting other parties. An understanding of identity processes could help regulators to position themselves better. This would make regulation more effective, thinks Rink.

Internal versus external regulators

An understanding of identity processes enables you to predict, for example, that managers care about who they are accountable to – internal regulators, from within the organization (such as a supervisory board), or external regulators operating from outside the organization (such as De Nederlandsche Bank). Up to now, independence has always been considered the most important guiding principle, based on the idea that regulators must always be objective. According to this line of reasoning, an internal regulator who is also involved in managerial decision-making would be less effective than an external regulator, who monitors processes from a distance. But if you take identity processes into consideration, you could reasonably expect that managers would be more willing to adapt their behaviour for an internal regulator (who understands the organization and ultimately shares the same goals) than for an external regulator. After all, the sheer distance prevents an external regulator from ever fully comprehending an organization.

Balance

Ultimately, it is all about finding a balance between independence and involvement, says Rink. Independence will obviously always be an important factor. We now need to define what the right balance is. This the question Rink intends to answer in future research. Previous studies on the relationship between balance and independence carried out by Rink and her colleagues produced several interesting findings. In a large-scale investigation of managers and supervisory directors in the insurance sector, they discovered that managers were more inclined to listen to internal supervisory directors than to De Nederlandsche Bank, particularly if the composition of the supervisory board changed at regular intervals. However, if conflicts arose between managers and supervisory directors, De Nederlandsche Bank had considerably more influence.

These findings show that the unique position assigned to regulators, whether within or outside an organization, determines the role that managers allow them to play. Internal regulators are better sparring partners, while external regulators are considered better mediators. According to Rink, effective regulation depends on the positions that the managers of an organization and the regulators adopt with regard to each other. The level of involvement on the part of regulators perhaps deserves more attention than it has been given until now, concludes Rink. In organizing regulation, she suggests changing the basic premise from ‘independent, but involved’ to ‘involved, but independent’.

Board Effectiveness signature area

Floor Rink's research is part of the Board Effectiveness signature area of the Faculty of Economics and Business. This is an interdisciplinary collaboration in which the Faculty pools its knowledge of corporate governance, financial economics, accounting and psychology.

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