Regulatory Capture: Political Corruption Made Easy

Regulatory or agency capture is a form of corruption when a political entity, policymaker, or regulator serves the interests of a minor constituency, such as a geographic area, industry, profession, or ideological group. These could be in search of commercial, ideological, or political gain. By definition, regulatory capture leads to a net loss for society, since a special interest is prioritized over the general interests of the public. It’s like a small-scale version of state capture. And it occurs whenever most or all of the benefits of a program “go to some single, reasonably small interest (e.g. industry or locale), but most or all of the costs are borne by a large number of people (e.g. the taxpayers)”.

It occurs because groups or individuals with high-stakes interests focus their resources to gain the policy outcomes they prefer. Whereas members of the public each have, at best, a tiny stake in the outcome. Thus the interest group has a much larger influence on the regulator. Any agency, be it a government body or business, is at risk of regulatory capture. This form of corruption is present even in mature democracies that are highly transparent. Big companies effectively hijack the regulator with a high salary, and there’s little normal people can do about it.

The rationale behind it is simple. Vested interests in an industry have great financial stake in the regulations that affect them. Thus if they can control those laws, they hold more leverage. Businesses have an inherent incentive to control anything that has power over them. Think: the media, academia, and popular culture. This comes at the compromise of the public good: consumer protection, worker well-being, and environmental conservation.

It literally breaks the entire point of a regulatory agency. They are there to provide impartial oversight. When they are closely aligned with the industries they regulate, a conflict of interest arises. Think of a government wing that oversees financial institutions. What if those who work within the regulatory body were former industry executives? Exactly. This phenomenon isn’t all too rare. A regulator can leave government service to join a lobbying firm or corporate board. Or vice versa. As regulators work side to side with industry interests, policies are crafted to benefit established players. Take the example of environmental regulations. They can be weakened to allow a company to produce its goods at cheaper cost and maintain higher profit margins. The fact that the planet is melting doesn’t matter to them.

Real-life examples of regulatory capture:

• Financial Sector Oversight: leading up to the 2008 financial crisis, countless regulators were criticized for failing to curb with the risky practices taking shape in banking. The close ties between regulatory offices and Wall Street contributed to policies that allowed banks to take excessive risks. Ultimately the economy collapsed.

• Environmental Regulation: in some countries, regulatory agencies have been accused of relaxing pollution controls on major industrial corporations. These agencies, influenced by lobbying and financial incentives, prioritize economic growth over the environment. This results in significant ecological damage and public health issues.

• Telecommunications: a communications regulator adopts policies that favor incumbent telecom companies. Translated, this means its nearly impossible for new providers to enter the market. This results in higher prices and less innovation for customers.

• Pharmaceutical Industry: regulatory bodies overseeing drug approvals can be swayed by pharma companies’ lobbying and bribery efforts. This results in the fast approval of drugs without adequate safety reviews. Public health is potentially compromised.

How you can use regulatory capture as a mental model: (1) connect the cables — scrutinize the relationships between regulatory agencies and industries they oversee, looking for signs of personnel exchanges and policy changes that disproportionately benefit certain players; (2) make it clear — advocate for clear reporting and independent audits in your business for both higher-level management and lower-level employees to stay accountable; (3) give everyone binoculars — let and support everybody in overseeing regulatory decisions, such as by making their rationale public and whose perspectives were considered to form it; (4) be a regulatory accountant — protect whistleblowers and reporting undue influence in your company so as not to polarize power; (5) tell everyone else about it — raise awareness of the problems and consequences that come with regulatory capture.