risk and regulation winter 2004

Regulatory Creep

Risk&RegulationMagazine of the ESRC Centre for Analysis of Risk and Regulation No 8 Winter 2004

Risk&Regulation: CARR ReviewNo 8 Winter 2004

Editor: Robert KayeAssistant Editor: Sabrina Fernandez

Enquiries should be addressed to: Centre ManagerESRC Centre for Analysis of Risk and Regulation

The London School of Economics and Political ScienceHoughton Street, London WC2A 2AE

United Kingdom

Tel: +44 (0)20 7955 6577 Fax: +44 (0)20 7955 6578Website: www.lse.ac.uk/Depts/carr/

Email: [email protected]

Published by theESRC Centre for Analysis of Risk and Regulation

The London School of Economics and Political ScienceHoughton Street, London WC2A 2AE

Copyright in editorial matter and this collection as a whole:London School of Economics © 2004

Copyright in individual article:p4 Frances Cairncross ©, 2004.

p8 Richard Ericson ©, 2004.p15 Tola Amodu ©, 2004.

Frances Cairncross, Richard Ericson and Tola Amoduhave asserted their moral rights.

All rights reserved. No part of this publication may bereproduced, stored in a retrieval system, or transmitted, inany form or by any means, without the prior permission in

writing of the publisher, nor be issued to the public orcirculated in any form of binding or cover other than that

in which it is published.

Design and Art Direction: LSE Design UnitPhotography (unless stated):

CARR and LSE PhotographyPrinted by: BSC Print Ltd

ISSN 1473-6004Online ISSN 1473-6012

Front cover photography: www.imageafter.com

3 Editorial: The Risk Industry CARR Co-Directors, Bridget Hutter and Michael Power examine thedangers of the risk management of everything.

4 Guest Column: Messing About on the WaterFrances Cairncross argues that over-cautious authorities and riskaverse insurers are curtailing the freedom of individuals to take part inrisky pastimes.

5 CARR NewsAll the latest news plus expert contributions from CARR members.

6 Regulatory Creep: Myths and MisunderstandingsClive Jones asks whether regulatory creep is just another urban legend.

7 Modernising Public Services and the Management of RiskPeter Miller and Liisa Kurunmäki examine the implications of thegovernment’s NHS reforms for risk management and accounting.

8 Catastrophe Risk, Insurance and TerrorismRichard Ericson argues that while the insurance industry successfullyresponded to the attacks of September 11, the possibility of catastrophicterrorist activity creates new uncertainties and vulnerabilities for anembattled industry.

10 CARR Forum: Changing TrainsCARR's Terry Gourvish and Martin Lodge discuss the government’sWhite Paper on the Future of Rail with John Dodgson of NERAEconomic Consulting.

12 CARR Books Controlling Modern Government: Beyond StereotypesRegulating Law: a clash of mentalities

14 CARR Seminars Reports from CARR’s regular seminar series.

16 CARR Student: The Law of the LandTola Amodu examines how negotiated contracts have long played aregulatory role in Britain’s planning system.

17 CARR Conferences CARR sponsors risk and regulation conferences throughout the UK.

18 CARR in PrintNew publications by CARR members.

19 CARR PeopleCARR staff and their expertise.

www.lse.ac.uk/Depts/carr/

Contents

The Risk Industry

There is little doubt that risk ideas and risk managementare more prominent and more extensive than they usedto be. And it could be said that CARR contributes to,and is part of, this general phenomenon. A risk industry

has taken off and new connections between hitherto separateworlds are being made – IT security, business continuity, healthand safety, financial solvency and so on. This process ofconnection involves the generation and formalisation of abstractlevels of risk management thinking, a new risk managementcharacterised by a variety of generic standards – beginning in1995 with the document produced jointly by the Australian andNew Zealand standards organisations and ending most recentlywith the publication of the final version of the COSO guidance onenterprise risk management in September 2004.

As organisational sociologists like John Meyer at Stanfordremind us, this process of abstraction and standardisationsupports the rapid diffusion of models of management practicewhich come to have the status of global blueprints. On this view,nation states and their regulatory organisations are adopters,rather than originators, of management knowledge. This seemsparticularly true in the case of risk management. As MichaelPower argues in his recent publication by the UK think tankDemos, this ‘genericisation’ of risk management thinking enablesthe extension of its reach across more and more organisationsand into more and more areas.* Indeed, the effect is that riskmanagement and ideas of good governance are no longer clearlydistinguishable; both are part of the social construction of aspecific conception of the organisation as an actor.

Power also argues that this growth in the volume and scope ofrisk management is characterised by something else which isdistinctive, namely the rise of secondary or reputational riskmanagement. If more and more areas of practice can be regardedas having potential risks for an organisation’s reputation, then therise of secondary risk management equates with the riskmanagement of nearly everything. Organisations are becomingmore preoccupied with how they appear, both to defendthemselves in highly competitive markets and also in the face ofpotential complaint and litigation.

In recent years in the UK, there has been much interest andconcern about the so-called compensation culture or litigationsociety, and how it might drive highly defensive and distracting riskmanagement strategies for large corporations and public sectororganisations. Complex internal processes may be documentedless for reasons of operational efficiency and more for justificatorypurposes. Actual litigation probably matters little in these settings;as the article by Francis Cairncross shows (p4), in the field of health

and safety public organisations may prepare for the worst becausesub-units and insurers have an interest in playing up the risks, asituation which results in daily absurdities. It is as if a growth insafety warnings in public places has less to do with protecting thepublic and more to do with protecting the organisation.

In other settings, multiple heavyweight regulatory initiatives – theSarbanes Oxley Act, International Accounting Standards, Basel 2 –also reinforce the perception of a risky regulatory environment, andcreate considerable direct and indirect costs. However, as CliveJones also suggests (p6), ‘regulatory creep’ may be self-inflictedby organisations.

All this raises the essential critical point of the risk managementof everything: organisations may get safer because they simplytransfer risk to those least able to transfer it themselves, namelythe general public. This explains why there is no evidence to date,nor is there likely to be, that public trust in corporations is improvedby the industry of certifications and disclosures they currentlyproduce. The general public is smart and knows that this is allsecondary risk management.

This general point applies particularly well to the predicament ofprofessions and professionals at the current time. Founded on aprinciple of state support for the exercise of expert judgement witha strong public interest dimension, it is now almost impossible toget teachers, doctors and accountants to say anything sensiblewithout lengthy and barely intelligible disclaimers in small print.These people know more than they can publicly say becausehonest mistakes are heavily punished. Consequently, society isdenying itself a source of valuable expertise.

The critical problem of the risk management of everything isnot therefore in the domain of a technical fix, of finding a newtechnique or organisational structure. It reaches into the macro-societal sphere, into the institutional environment in whichorganisations and experts operate. Even regulatory organisationsoperate in an environment of considerable political risk. Theprescriptive challenge therefore has nothing to do with modifyingguidelines, like COSO 2004; it can only be conducted at the levelof a political and legal culture which supports the idea of an‘honest mistake’ and which truly accepts and internalises theidea that risk implies: that things do go wrong sometimes, andno-one is to blame.

Bridget Hutter and Michael PowerCARR Co-Directors

* The Risk Management of Everything is available atwww.demos.co.uk

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GUESTCOLUMN

For the past few years, a couple oftimes a week, I have begun myday with a swim in HighgateLadies’ Pond. This lovely corner of

Hampstead Heath is open all year,although as autumn progresses, thenumber of early morning swimmersdeclines until only a small group of hardysouls remains, swimming through thewinter. Mad though it might sound, there isnothing more thrilling than plunging into icywater in the earliest light of dawn, whilefrost drifts from the trees. Nearby, theMen’s Pond has an equally devoted groupof swimmers.

Last year, the Corporation of London,which administers the pond, told winterswimmers that they could no longer swimwhen there was ice on the water andmust wait until the sun was up to havetheir dip. The Corporation cited legaladvice: if a lifeguard were to drown in theprocess of rescuing a swimmer, theHealth and Safety Executive (HSE) mightprosecute them. The swimmers wereangry. Why should intelligent adults not befree to judge for themselves the level ofrisk they will accept?

Open-air swimmers are caught by twoseparate restrictions – legislation to protectthe safety of people (such as lifeguards) atwork, and occupiers’ liability, which makeslandowners partly responsible for injuriessustained on their land. So often is ‘healthand safety’ used as a reason to stoppeople swimming that the River and LakeSwimming Association has severalexasperated pages devoted to the subjecton its website. But increasingly, ‘health andsafety’ has become the excuse for all sortsof changes that constrict freedom (andoften add to costs).

On the face of it, this is odd. After all, verylarge risks such as the Flixborough disasterhave become much less common; andaccidents at work have also fallendramatically, partly because it is more easyto sustain an injury from a piece of movingmachinery than from a PC. Some of the

FrancesCairncrossis Rector of ExeterCollege, Oxford, and chairs theEconomic and Social ResearchCouncil (ESRC). She was formerly a senior editor on The Economistwith specialresponsibility formanagement issues. health risks that now concern the HSE, the

quango that administers the Health andSafety at Work Act, would once haveseemed frivolous – such as stress at work.

The HSE is acutely aware of the tensionbetween ensuring public safety andprotecting people at work on the one hand,and allowing people to take reasonablerisks on the other. On 12 October it held anopen meeting in London, to try to launch apublic debate on the issues. But there areseveral dilemmas. First, it is difficult todefine what is an acceptable level of risk,and even harder to persuade the public toaccept the concept. Most people, deepdown, stil l think that zero risk is aworthwhile goal. Ordinary folk often findhard to accept the economist’s approach,that the elimination of risk comes only inexchange for costs that rise ever faster, thenearer ‘zero’ approaches. Second, thepublic may object to nannying one moment– but then insist on pinning blame ordemanding compensation in situations thatwould once have been regarded as acts offate – a rail crash, say, or the death of asoldier on duty in Iraq.

The courts, on the whole, have taken quitea tough line on the development of a‘compensation culture’ – much tougher

than American courts. For example, theHouse of Lords last year threw out a claimfrom John Tomlinson, a young manseriously injured when he dived into a lakeon public land. In a triumph for commonsense, Lord Hoffman observed, ‘I think itwill be extremely rare for an occupier ofland to be under a duty to prevent peoplefrom taking risks which are inherent in theactivities they freely choose to undertakeupon the land. If people want to climbmountains, go hang-gliding or swim or divein ponds or lakes, that is their affair.’

So why are so many companies and publicbodies still eager to remove potential risks?The reason, argues the HSE, is that peopleare more likely today to make claims forcompensation when they suffer accidents,and insurers may be more willing to offerout-of-court settlements rather thanundergo the uncertainty of a court case. Ifso, part of the burden may lie with insurers:perhaps they should be more willing toallow some people seeking compensationfor risks to take the consequences. As longas there is perceived to be money indemanding compensation for accidents,people will claim it – and those who want totake more risks will suffer.

Messing about on the water

The Risk Management of Everything In June, Mike Power gave the final lecture in the P D Leake TrustSeries on ‘The risk management of everything’. Mike examined theexpansion of risk management since the mid-1990s, its centrality toagendas for corporate governance and regulation, and its emergenceas a generic model of rational organisation which is increasinglyformal and systematic.

The lecture was based on his Demos pamphlet published the same day (see editorial)and attracted an audience of over 200 at the Chartered Accountants’ Hall, London.

Further information on this lecture, held in association with the Institute of CharteredAccountants in England and Wales, can be found at:www.icaew.co.uk/index.cfm?AUB=TB2I_66701,MNXI_66701

Roundtable on Regulatory CreepThe notion of regulation going beyond its original source of authority or intention wasexplored in this stakeholder forum, organised by Bridget Hutter and Clive Jonesfrom CARR and the Better Regulation Task Force, in July. The high level discussionreceived contributions from the worlds of business, regulation, academia, consumergroups and the civil service, and contributed directly to a recent BRTF report. For moreon this topic see page 6.

CARR in the CommunityThe Charity Law Association sought advice from Julia Black on the regulatorypowers proposed in the Charity Bill for the Charity Commission, comparing themagainst selected UK regulators and the proposed charities regulator in Scotland. Thepaper formed part of the Charity Law Association’s submission to the Joint Committeescrutinising the draft Charity Bill in July.

Bridget Hutter led a discussion on ‘Can Regulation be a Social Good?’ at the WorldEconomic Forum Finance Industry Agenda Meeting 2004 in London. The meetingincluded senior industry representatives from Europe, USA and the Middle East.Bridget has also become a member of the Social Market Foundation Risk Commision.

Mike Power was invited by a joint working group of the Financial Reporting Counciland the Institute of Chartered Accountants in England and Wales to advise on theprocess to review the Turnbull Report. He also advised the ICAEW on its recentlypublished report on Sustainability.

Research alliance launchedCARR members took part in the ‘Test Society’ workshop in May at the Centre deSociologie de l’Innovation in Paris, an event that launched a collaboration amongresearchers interested in the role of testing in modern society. Researchers fromCARR, BIOS, the Saïd Business School, the CSI, the Institut National de la RechercheAgronomique and the CNRS discussed the role of testing and experimentation in theirrespective areas – genetics, medical imaging, financial markets, food control, focusgroup research, terrorism and policing, among others. For more information on the‘Test Society’ group, contact Javier Lezaun or Yuval Millo.

CARRNEWS

Have you moved or changed jobs recently? Please keep us informed of any changes in your contact detailsso you can continue receiving Risk&Regulation. Email: [email protected] or Tel: +44 (0)20 7955 6577 I Winter 2004 I Risk&Regulation I 5 I

International eventsIn August Javier Lezaun (far left)and Yuval Millo (left) gave papersat the joint annual meeting of theSociety for the Social Studies ofScience (4S) and the EuropeanAssociation for Study of Science

and Technology (EASST). In addition, along with Dr Fabian Muniesa(Ecole de Mines, Paris), they arranged a series of conferencepanels on: ‘Economic Experiments’.

Robert Kaye presented a paper in Trento, Italy entitled ‘Bribery,Conflict of Interest and Beyond’ at a major conference ofinternational scholars organised by the University of California,Berkeley on conflicts of interest in public life.

Mark Thatcher spoke on independent regulatory agencies at theNew York University Centre for European Studies and at ColumbiaUniversity in September. He also presented a talk on ‘New regulatoryinstitutions for markets’ at the World Bank, Washington.

In December Colin Scott presented invited plenary papers on hisresearch ‘Governance Beyond the Regulatory State’ at theRegulatory Institutions Network Annual International Conference(Canberra) and on ‘The Regulatory State of Tomorrow’ at theInstitute of Public Administration Canada Workshop (Toronto).

Staff NewsCARR welcomes William Jennings who joins us as ESRC/BP Postdoctoral Research Fellow. Will’sresearch interests predominantly focus upon theregulation of government by public opinion (publicpolicy and public opinion); blame avoidance; theoriesand analysis of policy implementation; and the politics

and administration of governmental policies of public celebration.

Our congratulations go to Michael Barzelay, CARR ResearchAssociate, who was awarded the Brownlow Book Award inNovember by the US National Academy of Public Administration forhis book Preparing for the Future: strategic planning in the US AirForce. The award is given in recognition of outstanding contributionsto public administration literature.

CARR has also been privileged to welcome two leading scholars asresearch visitors to the Centre: Dr Reimund Schwarze, ResearchAssociate, German Institute for Economic Research (DIW) Berlin andProfessor Anthony Heyes, Royal Holloway, University of London.

We extend our gratitude and appreciation to Joan O’ Mahony forher hard work on Risk&Regulation over the last year. Congratulationalso to Joan on the birth of her new baby. We welcome the neweditor, Robert Kaye.

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CARRRESEARCH

Regulatory Creep:Myths and Misunderstandings

Have you heard the one about thefactory owner who wanted to build atwo-storey extension onto his factory tocater for 50 new employees, with a

panoramic window on the second f looroverlooking the river? The planning officer signedit off, the health and safety officer signed it off, butthe fire officer said he had to lower the bottom ofthe window by three bricks. He did this, and fitteda new window with a new frame, but then thehealth and safety officer said he contravenedanother regulation. The owner wrote to the threeofficers and explained his situation and askedthem to just tell him what to do. They each wroteback saying if you break this subsection of theseregulations then we will prosecute.

This story, told by the CBI Director-General DigbyJones, bears all the hallmarks of the typical urbanmyth – plausible enough to be true and attributedto some unknown but credible second-handsource. It has just enough detail to soundauthoritative, but not quite enough for its veracity tobe checked. And like the typical urban myth,variants of the story are retold wherever people ofbusiness come together – each time withdifferences that, taken together, should lead one todoubt whether the story was ever true. Forbesmagazine even quoted an American businesswoman who claimed that each of her Londonbagel cafes required ten licences, including one‘authorizing a certain type of window’.

Complaining about regulation has become thebusiness equivalent of complaining about theweather. To further complicate the myths andlegends a discourse of imprecision is evolvingwhere aspects of the UK regulatory environment aredescribed through a form of quasi-business jargon.One such term which is gaining in prominence is‘regulatory creep’. The range of contexts in whichthis term appears to be used are very different,unconnected and several are certainly ‘old wine in anew bottle’. However it is the mythical and ‘expert’contexts which are most important.

The origins of the term regulatory creep seem to liein military or project management terminologysuch as mission creep and scope creep. A quickGoogle reveals that the term started to appear inthe mid-late 1990s in the USA but has occurred inthe UK with increasing frequency in the last four

years. What is striking about regulatory creep isnot that it may be true but that knowledgeable andexperienced people are prepared to believe that itis true. What explains the popularity of suchmyths? The notion of regulatory creep chimes witha public expectation that common sense hasnothing to do with regulation. This in turn makes ita useful outlet for political protest, especially, anti-Europeanism. But in addition, paid consultantsthrive on uncertainty, fear of blame and ignorance.They are certainly not above exaggeratingimagined threats for their own gain.

Widespread confusion exists within the lay publicsas to who regulates what and where. Expertpublics are not beyond confusion either. Forexample how many of those who work in thefinancial services industry could name all thelegacy regulators of the Financial ServicesAuthority? Myths and whispers may take holdwhere confusion is the norm. Lay publics may viewany new regulation at all as regulatory creep.However ‘experts’ see regulatory creep assomething entirely different such as legislation thatstate enforcers have interpreted differently fromthat interpretation which a legislature intended.

In its recent report ‘Avoiding Regulatory Creep’the government’s own Better Regulation TaskForce further widens the definition of regulatorycreep by stating that it is the process by whichregulation is developed or enforced in a less thantransparent fashion and not in accordance withtheir f ive principles of good regulat ion:proportionality, accountabil ity, consistency,transparency and targeting.

These definitions rely upon four assumptions:• that the state is the only source of regulation –consequently businesses may fail to distinguishbetween what ‘the law’ requires and restrictionsimposed by voluntary associations, informal codesof conduct, best practice and professionalnorms and standards;• that which is understood as beingregulation is regulation – for instance,contractual requirements are often mistakenlybelieved by businesses to be regulatoryrequirements; in addition, a business’s excessivelycautious risk managers may demand higher internalstandards than regulators themselves require; • that regulatory creep should only be viewed

from the perspective of the regulated – that is,usually, business;• that regulatory creep has only negative qualities.However, there is a positive aspect to creep. Formalresponsibilities may leave gaps in enforcement.Shifting priorities and creative interpretation of aregulator’s brief may be necessary to tackle newlyemergent issues. A regulator should not be boundby a previous failure to enforce existing regulationsadequately.

The business community is not ahomogeneous community – varying levelsof management sophistication existwithin it. When faced with aregulation most comply. Someover-comply. Some almostcomply and some have nointention of complying.However, with severeshort-term demandson managers forprofitability, it isunderstandablethat extra requirements – regulations – may not belooked upon favourably. Competition in manybusiness sectors is intense, so that in search ofextra revenue business is right up against the limitsof what is correct and occasionally what is legal ormoral. It may be that for some otherwise legitimatebusinesses the only means by which a profit margin is achieved is by occasional non-compliance.

The quality of the debate must improve if thetechniques used to manage and regulate risk in theUK are to evolve and continue to be some of thebest in the developed world (OECD, 2002). Anoverly simplistic approach fixated on ‘aninspector’ does not serve the businesssector or consumers particularly well.Since the 1980s the ‘deregulation’argument has moved on through several

lifecycles, apparently without some high-profile business and political figures

noticing.

Clive Jones is a researchassistant at CARR.

Clive Jones asks whether regulatory creep is justanother urban legend.



CARRRESEARCH

‘Modernisation’ is the battle-cry for the currentgovernment in its attempts to encourage a furtherstage in the reform of public services. Few wouldquestion such a noble objective. Indeed, who couldbe against cooperation, flexibility and innovation,terms that form a central part of this new politicallexicon? But, as researchers we need to lookbeyond the rhetoric. We need to examine the waysin which such dreams and schemes are put towork. We are interested in how they are givensubstance. We are interested in what helps themwork as intended, and what hinders them. And weare particularly interested in the ways in whichaccounting and risk management practices aregiven a central role in the organisation of innovativeforms of service delivery.

In a recent CARR discussion paper, we look at howthe terms modernisation and partnership have beenput to work in the context of the ‘ModernisingGovernment’ programme, and at the juncture ofhealthcare and social services. This programmewas outlined in the White Paper Modern PublicServices for Britain (1998), and in more detail in theModernising Government White Paper (1999). Acore part of its philosophy was the claim that publicservices could be improved by promoting innovativeand ‘joined-up’ working between agencies andexperts that provide complementary services tocitizens. For the fields of health and social care, thisimpetus to erode the boundaries between serviceproviders, and to build services ‘around the needs ofthose who use them’, was reflected in two WhitePapers: New NHS: Modern, Dependable (1997)and Modernising Social Services (1998).

The abstract notions of modernisation andpartnership were given concrete form andsubstance in the Health Act 1999, which proposedways of making operable the modernisinggovernment agenda. Section 31 of this Actencouraged voluntary and innovative, yet formal,inter-agency and inter-professional cooperationthrough three new mechanisms, or ‘flexibilities’:pooled budgets allowed service providers to bringtogether resources into a joint budget; lead

commissioning allowed one authority – eitherhealthcare or social services – to commissionservices on behalf of the other; and integratedprovision allowed provision of services in one settingrather than many.

Accounting practices were central to thetransformation sought by the modernisinggovernment programme. That is the case for manyof the initiatives directed at the public sector acrossthe past quarter century under both Conservativeand Labour administrations. But, in linkingaccounting practices to an injunction to cooperate,the Health Act 1999 was novel. Cooperation, forinstance bringing resources into a single pooledbudget for the care of a specific client group,depended on joint planning and management ofresources. Similarly, experimentation with the‘flexibilities’ required a commitment to establishsystems for performance measurement that wouldprovide an account of the improved performance ofthe arrangement. Finally, accountability for the useof pooled resources was to be secured both bymore traditional audits and inspections, and byjoined-up audits and inspections between multipleauditors and inspectorates.

If accounting practices were called upon to play acentral role in the modernising government agenda,so too were technologies for the management ofrisks. The innovative forms of cooperationproposed in the Health Act 1999 were held to bringwith them risks that needed to be identified,assessed and managed. ‘Risk taking’ wasencouraged by government, but only in so far as itwas ‘well managed’. In the case of partnershipworking, the possible risks were seen to be multipleand novel. Instead of risks understood as pertainingto an individual organisation, as is typically the casein the private sector, or a particular policy-domain,as has traditionally been the case in the publicsector, risks were held to exist at multiple levels andacross organisations. Risk management was thusaccorded a key role in the modernising governmentagenda, linking the twin ideals of cooperation andinnovation.

Research conducted in five sites experimentingwith Health Act 1999 ‘flexibilities’ showedconsiderable informal cooperation already existingat local levels, and significant enthusiasm for furtherdevelopments. But it also showed relatively littleprogress towards the more ambitious forms ofpartnership working such as pooled budgets. Inaddition, progress had been slow in thedevelopment of formal governance mechanisms,such as performance measurement and riskmanagement tools. Different governance regimesfor central and local government, distinctprofessional cultures for issues such as care needsassessments, and blunt issues such as control ofresources and the need to build trust between the‘partners’ were cited as some of the main reasonsfor slow progress.

Despite tensions and obstacles, those responsiblefor managing and delivering services were busydevising practices that would align the ideal ofcooperation with existing governance practices andprofessional cultures, and in ways that securedbenefits for users while avoiding the most obviousrisks. While formalised practices for measuring thebenefits and managing the risks of partnershipworking often remained to be developed, theimperative to cooperate had become firmlyestablished. Prediction is difficult, but one thing thatseems certain is that formalised practices for themanagement of risk will come to assume greaterimportance in areas where inter-agency working isthe norm. Whether this results in improvements inthe quality and performance of public servicedelivery remains to be seen.

Peter Miller is a member of CARR and Professorof Management Accounting. Liisa Kurunmäki is a Lecturer in Accounting and Finance.Modernisation, Partnerships and theManagement of Risk by Liisa Kurunmäki andPeter Miller, CARR Discussion Paper 31, isavailable at: www.lse.ac.uk/collections/CARR/documents/discussionPapers.htm

The government’s plans for modernising the NHS envisage new flexibilities and cooperation for healthcare providers. But it also requires new techniques in accounting and risk management, argue Peter Miller and Liisa Kurunmäki.

Modernising Public Services Modernising Public Servicesand the Management of Risk


Analyses of risk and regulationreveal the limits of knowledgeand extent of uncertainty. Manyperceived dangers are not

readily calculable with respect to frequencyof occurrence and severity of loss. Scholarssuch as Ulrich Beck even contend that welive in a post-risk-calculation society inwhich some sources of catastrophe cannotbe controlled through scientific knowledgeof risk. In this respect we live not so muchin a risk society as an uncertain society. Theuncertain society is characterized by franticand often misplaced efforts at riskmanagement, and by a new politics of pre-emption, precaution and vigilance regardingimagined sources of catastrophe.

The insurance industry is an instructivelocus for understanding the uncertainsociety. Insurance is an institution andtechnology for converting uncertainty intorisk. Insurers engage in risk analysis toascertain whether they should underwritea risk, and if so, how they should regulatethe risk including those admitted to theinsurance pool. Where insurers facetroubling uncertainties in risk analysis andregulation, they may still insure by ignoringthe uncertaint ies and substitut inginsurance logics of capital risk taking anddistribution. Through mechanisms such ascharging the highest premiums the marketwill bear, making substantial investmentreturns on those premiums, spreading riskthrough reinsurance, and controll inglosses through insurance l imits andstringent claims procedures, insurers arewilling to take risks in highly uncertaincircumstances. Thus many f ieldscharacterized by limited knowledge and

potential for huge catastrophic losses –for example, those pertaining to nuclear,biological and chemical production anduse – are insured. Catastrophe risk andinsurance meet where the insatiableappetite for financial protection fromdanger intersects with the insatiableappetite for profiting from uncertainty.

Terrorism of the type experienced onSeptember 11, 2001 (9/11) is especiallyrevealing of how insurance functions in theuncertain society. Terrorism is intentionalcatastrophe. Terrorists are in the businessof uncertainty, playing on randomness tokeep whole populations in fear, anticipationand disestablishment. The terrorist power ofuncertainty is especially strong because welive in a culture dominated by the desire totame chance and effect security, and byinstitutions increasingly organized aroundrisk analysis and regulation. Terrorismstrikes at the foundation of this culturebecause it is a stark reminder of the limits ofrisk analysis and regulation. It hits home thepotential ungovernability of modernsocieties, how those with little power canwork cheaply and efficiently againstpowerful institutions to destroy.

Prior to 9/11 insurers made terrorismcoverage widely available across differentinsurance l ines – property, businessinterruption, workers’ compensation, life,health, various liabilities – pertaining tocommercial properties such as the WorldTrade Centre (WTC). They did so with therealization that terrorism was a known butunpredictable risk. The WTC was attackedby al-Qaeda in 1993, as were otherAmerican targets abroad in subsequent

years. Journalists, law enforcementofficials and terrorism experts pointed tothe continuing al-Qaeda objective of totaldestruction of the WTC. Following the1993 WTC attack, a leading reinsurancecompany produced a document urgingthe industry to restructure terrorisminsurance underwriting practices. Thisadvice was not taken up.

Terrorism insurance coverage remainedwidely available for several reasons. First,the catastrophic imagination of insurersand their clients did not extend to total lossof large commercial properties such as theWTC: the prevailing probable maximumloss estimate for such structures was twofloors. Second, while some insurersacknowledged the potential for total loss,catastrophic terrorism in the United Stateswas displaced from the radar screen bypressing concerns about other sources ofpotential catastrophic loss. Third, therewere insurance industry conventions andlegal restrictions on excluding terrorismcoverage in some lines of insurance: forexample, workers’ compensationinsurance was compulsory and coveredanything that happened at work, includingterrorist activity; property insurance policiesrequired compensation of losses from fireshowever caused, including terrorist activity.Fourth, commercial insurance marketswere soft in the 1990s, making itimpractical to sell stringent insurancecontracts that excluded terrorism coverageor required the insured to take costlymeasures to prevent terrorism.

Insurance markets after 9/11 exemplifiedwhat industry insiders call ‘the insurance

Catastrophe Risk,Insurance and Terrorism

CARRRESEARCH

Richard Ericson argues that while the insurance industrysuccessfully responded to the attacks of September 11, the possibility of catastrophic terrorist activity creates newuncertainties and vulnerabilities for an embattled industry.


curse.’ Catastrophes that are unimaginablebefore a loss have two impacts after theloss. First, there is the cost of unexpectedindemnity payments, estimated in this caseat up to $55 billion. Second, in the effort tolearn about the new catastrophe risk,uncertainty magnifies. Insurers experiencednew problems with geographic riskspreading (terrorism insurance is difficult tolimit geographically because terroristactivity can occur anywhere, anytime,repeatedly); aggregation risk (concentrationof risk in commercial high-rise buildings,which were previously among the bestinsurance risks, but now became seen ashigh risk using total loss scenarios);correlation risks (correlation of exposureacross several lines of insurance arisingfrom the same event in ways notappreciated previously); and, enterpriserisks (9/11 insurance exposure interactedwith the capital markets downturn and lowinterest rate environment at the time toprovide new understanding of howunderwriting, investment and credit riskscorrelate in an actual case). Insurers madefrantic efforts to devise models of terrorismrisk and to form expert panels ofexperienced industry executives andformer FBI and CIA counter-terrorismoperatives. However, as one industryexecutive commented at the time, ‘This isvery speculative, it requires a level of insightinto what terrorists are thinking that rightnow is not there.’

Facing uncertainty, insurers’ instinct was tohop on the ‘pass the exposure express’.Reinsurers scrambled to get rid of terrorismcoverage in their contracts with primaryinsurers, or to change contractsdramatically with respect to conditions andprice. With inadequate reinsurance, primaryinsurers scurried to do the same to theircommercial clients, many of whom were leftwith no terrorism coverage or coverage thatwas too pricey. Left vulnerable, the insuredpressured government for regulatoryinterventions that would force insurers to

continue coverage and even augment it inface of perceived terrorism risk.

At the same time many insurers wereeager to capitalize on the uncertainty ofterrorism. As a reinsurance executiveobserved during an industry conferenceaddressing 9/11, ‘I think of risk not somuch as frequency and severity, but ratherthreat and opportunity.’ In the six monthsfollowing 9/11, an estimated $30 billion ofnew capital f lowed into catastropheunderwriting. This was venture capitalseeking profits from the terrorism scare.Aided by hardening insurance markets,insurers were able to increase premiumssharply and to write more stringentcontracts that placed preventive securityrequirements on the insured.

The US federal government slowed downthe ‘pass the exposure express’ throughthree measures. The Terrorism RiskInsurance Act required primary insurers toprovide terrorism coverage to commercialclients, and in return the governmentbecame a participant in reinsurancearrangements for acts of terrorism. TheAirline Transportation Safety and SystemStabil ization Act provided immediatecompensation and insurance coverage tosave the airline industry. It also establishedthe Victims Claims Fund which allowed9/11 vict ims to seek compensationthrough government as an alternative tolawsuits that would cripple the airlineindustry. While these measures weredesigned to help the insurance industryaddress the severity side of the terrorismthreat, the Patriot Act and other legislationfor vigilance, as well as exceptional policeand military expenditures, were intendedto address the frequency side.

The insurance system worked reasonablywell on this occasion. At the same time thelimitations of insurance became evident.The new terrorism is another catastropherisk that threatens global insurance

capacity: how many such losses can theindustry absorb? Insurance is a limited formof compensation: it protects against loss ofcapital, but not loss of loved ones,treasured environments or treasuredpersonal effects. Driven by profits andcapital risk taking, insurers speculate onuncertainty in ways that can generate crisesin insurance availability and perpetuate newpatterns of inequality and exclusion. Whilethe insurance industry is an importantbulwark against uncertainty, it can alsofoster it, and much stil l depends ongovernment as the ultimate risk manager.

Richard Ericson is Professor ofCriminology at the University of Torontoand co-author of Insurance asGovernance and Uncertain Business:Risk, Insurance and the Limits ofKnowledge, both published by Universityof Toronto Press.

CARRRESEARCH


CARR: Why do the railways remaincontroversial?

Terry Gourvish: That’s a good question. Weseem to have an obsession about the railwaysthat is out of proportion to the importance in thetransport system that they have.

John Dodgson: There’s a certain amount ofnostalgia among the British for their railways. DrBeeching has never been forgiven for his axe,which was wielded very sensibly.

Martin Lodge: It’s not only a British phenomenonthat the railways are special. It is everywhere.Politicians regard it as a prestige status subject tohave the railway line and it is also often seen asimportant for economic development.

TG: The crucial element is that they don’t makemoney in Europe. The extent to which they fail todo so is an important element in discussingorganisational solutions.

CARR: One of the main aspects of the WhitePaper is having a single regulator to takeover the functions of the Office of the RailRegulator and the Strategic Rail Authority.

TG: I think the difficulty with governmentregulation of the railways is that after thenationalisation it tended to be short term,influenced by party politics very often, and

contradictory. In the 1980s we were reachingtowards a more arm’s length system, where youset goals, financial goals, economic goals andthen tried to let the industry respond. And thenumber of trains procured, say, between 1983and 1989 by British Rail per annum is about thesame as the number of trains procured by theprivatised industry, which is allegedly one ofprivatisation’s great benefits.

JD: One of the things that BR had got right wasusing the capacity efficiently, in terms of thenumber of trains, so where you then got into anenvironment where the marginal track accesscost was very low, there was an incentive foroperators to run more trains. Which they did.Initially the government said ‘here’s a successwe’ve got an increase in train miles’. But itmesses up your capacity because you havethree-car trains running through very congestedparts of the network like Birmingham, which is acause of the problem in terms of reliability.

Of course the previous government’s aim was to have pretty much the same railways as atpresent but for less money.

TG: The difficulty was that a privatised railwaywas supposed to result in a reduced subsidy,year on year, which is what the Treasury wantedto happen. The private sector hasn’t delivered onsome of its contracts, particularly the franchises.It hasn’t operated the railways with reducedsubsidies. And because it hasn’t happened,there’ve had to be bail outs and revised and re-let franchises, and the economic regulator haspiled on the cash.

ML: In Germany we have exactly the samepattern. Private, often municipal, companiescoming in, often politically driven, saying, ‘We’regoing to show the DeutscheBahn’. In two yearsthey were more or less bankrupt, and then theDeutscheBahn has to step in again. So in thatsense you’ve got a similar pattern, so you couldsay that franchising, with all its optimism bias, is quite dangerous for a service which politicallyyou have to run.

Changing Trains

This summer the Government launched its White Paper on the Future of Rail. CARR's TerryGourvish and Martin Lodge met with John Dodgson of NERA Economic Consulting toask: are we on the right tracks?

CARRFORUM

TG: But doesn’t this happen in projectmanagement as a whole, private or public? Thesame trends seem to apply – optimism, costoverruns, delays, and somebody picking up thebill somewhere.

ML: Maybe we just need fifty years more railfranchising, and this would never happen again.We could build up knowledge about the costbase and then we would know what is credibleand what is not. When people fail, is that notexactly what we would like? People fail, theylearn their lessons, they go out of the market,those who succeed will be going strongly.

CARR: So is the review about streamliningregulation or reasserting state control?

JD: What the railway review was about wasabout the government reasserting control overthe budget.

TG: Since it pays for a large segment!

JD: You have a principle of independentregulators, but governments won’t becomfortable with independent regulators who are too independent. And I don’t think they’ll be caught again.

TG: It depends what the numbers are.

JD: Tom Winsor [the Rail Regulator] could havebeen as independent as he liked and come upwith small numbers for public support for therailways and the Government would have beenperfectly happy!

TG: I don’t think anybody thought that Winsorwould be in the position he would be in. Hedidn’t think he would be presiding over an agentthat had lost control of its business, and didn’treally know what state its assets were in. I havesome sympathy with Railtrack in the way it wasprivatised, but even so, it was shareholder drivenand certain things were sacrificed.

JD: It was put into a genuine monopolysituation, where it didn’t have to worry about itscustomers. It was fairly notorious for the way ittreated its customers.

CARR: And the new regulator will alsooversee health and safety…

JD: You might suppose that an economicregulator would be more concerned to comparecosts and benefits.

TG: I think that in the industry there was a lot of disquiet about the Health and Safety Executive(HSE). There was certainly a fear more broadlythat the HSE was imposing higher costs in termsof safety requirements.

JD: Such as making railway accident sites crimescenes. The time it took to clear up has been abig issue.

TG: It’s helpful if practitioners have a say in thesafety systems that are in place. If they havethem imposed from above from a complete non-railway person there is a danger that they mightnot understand the operational realities of runninga railway. As far as the health and safetyauthorities are concerned, railways are lumpedtogether with nuclear power and oil installationsas elements which required a considerableamount of regulation.

CARR: Why is safety such a big deal? Surelyrailways are the safest form of land transport?

TG: Safety is interesting. When you’re in a car it’sassumed you are the controlling hand, and inrailways you entrust that control to an agent. That’swhy the safety element tends to be gold-plated.

JD: The figures show a big improvement in railsafety since privatisation. I think the generalpublic as a whole might disbelieve that.

ML: But isn’t the problem the high visibility ofevents, even with low fatalities? You have areform that has generated a lot of hostility, andtherefore any little event causes an uproarregardless of broader trends.

JD: You have a railway accident in which sixpeople are killed in this country that would beheadline news. You have a pile up on themotorway in which six people are killed and thatwill feature in the news, but not very heavily.

ML: Looking at Germany we also had high-levelincidents and again there was a slight hint at acriticism: this is about cost-cutting, this isDeutscheBahn. This didn’t lead to a fundamentalquestioning of privatisation as an event as such.

JD: There were crashes which might have beensaid to be related to privatisation, the broken railat Hatfield and the driver who went through thered signal at Paddington with disastrousconsequences. Great Heck was a bad accidentbut it didn’t have the same impact on the publicview as Hatfield or Ladbroke Grove. It wasalmost a random event.

TG: To quote David Hare, “stuff happens”, sowhen the accident happens you say ‘these thingsdo happen, we can learn from them, find thecause and move on’. Compared with other formsof transport, it’s a safe industry.

TG: I think the argument relates to the art of thepossible, and then its cost. We can makerailways very, very safe – they’re pretty safe now– we can make them even safer, My puzzlementis with the roads. We could make roads a hell ofa lot safer, it would cost a lot of money. It’s thisissue of cost. We could make roads very safe.We could segregate the lanes, we could havelimiters on speed, we could do a heck of a lot.

ML: It brings us back to the contestability of thecurrent structure. Is the current system attackable,so an incident can be used to question thelegitimacy of the system? It’s not so much whetherfour people die, its the feeling ‘this is the fault of…’.As we found with London Underground, one trainsderails and you’ve got everyone jumping forwardwith ‘this is because of privatisation’.

CARR: Is the proposed system lessvulnerable to this sort of criticism?

ML: Do we think this is a stable arrangement? Ifwe claim that Railtrack was all on the wrongincentives, lightly monitored, profit seeking, andthe franchisees didn’t deliver, have we nowentered an age, with the White Paper, wherethere’s more stability?

TG: It’s a disappointing document. We nevertried a privatisation system that was simpler,quite frankly, that had fewer players in it. Wedon’t know what would have happened with aSwedish model or a Japanese model applied tothe British system

JD: The devil is in the detail and that’s still to bedetermined, such as the relationships betweenorganisations. There’s a lot of hand-waving in theWhite Paper about how companies will worktogether better than in the past. There’s a lot ofhope, I think, but not a clear indication of how itwill work.

TG: But where you have private operators withrights to run trains, it’s the regulator’s role toensure their requirements are met. And there isn’tan ultimate arbiter in the chairman of British Rail.You could make the government the regulator,which de facto you had historically.

JD: But would you get private sector investmentif you had?

TG: I doubt it.

JD: And there is the question of incentives forNetwork Rail which is a very peculiar structure.There was a lot of talk by John Armitt [NetworkRail’s chairman] about the objective beingengineering excellence. Economists view thattype of talk with some suspicion!

TG: That takes us full circle to the allegation thatwas levelled at the engineers in the 1950s and 60s,that were pursuing engineering excellence at theexpense of costs at British Rail, and they weregold-plating the network, which always puzzled me because one didn’t see much evidence of it.

John Dodgson is Director of the Transport teamat NERA Economic Consulting. Terry Gourvish isDirector of the Business History Unit and wasadviser to the House of Commons’ SelectCommittee on Transport. Martin Lodge is aCARR member and Lecturer in Political Scienceand Public Policy.


CARRFORUM


CARRBOOKS

As part of CARR’s ‘public sectorgovernance’ focus, a three-yearstudy involving some 17scholars compared how public

services were controlled in eight differentcountries, and how those controls hadchanged over time. It looked at what wascommon and different about the control ofthree public service domains – prisons,higher education and the conduct of seniorcivil servants – in those eight countries andhow those controls changed in each caseover a generation. The eight countries areAustralia, France, Germany, Japan, theNetherlands, Norway, the UK and USA.

To explore different styles of control thestudy focused on four ways of controllingindividuals operating in public institutionsand organisations, building on earlier workby CARR members. Those four ways were– mutuality, control of individuals by

formal or informal group processes,– competition, control of individuals in

the public sector by processes of rivalry,– contrived randomness, control of

individuals by more or less deliberatelymaking their lives unpredictable in some way,

– oversight, control of individuals byscrutiny and steering from some pointof authority.

This approach can be used at differentlevels of aggregation to make successivelyfiner distinctions to track movement incontrol systems, rather like the way micro-facial movements can be analysed withmodern digital-picture techniques. And byusing the approach systematically acrosstime, policy domains and countries, thisstudy reaches at least three non-obviousconclusions.

First, it casts a critical light on the popularidea that oversight and audit activity ofvarious kinds over public services hasexploded everywhere over the last twodecades or so, representing a new ‘age ofinspection’. There are cases and placesthat undoubtedly fitted that pattern. Butsuch developments do not seem to havebeen uniform across countries and policysectors. For instance, the much-discussedexplosion of government-sponsored auditand inspection systems over highereducation is notable by its absence in the

USA, and in none of our cases wereprisons exposed to a massive expansionin formal oversight. In many cases, littledramatic change has taken place in prisonoversight over fifty years or more – indeed,nearly a hundred years in the Japanesecase. In fact, there were numerous caseswhere only a low level of expansion ofoversight took place and several in whichoversight actually declined, as in theNetherlands, where the prisoninspectorate was actually abolished in anapparently rather absent-minded way inthe 1980s. But such cases tend to receiveless attention than the dramatic cases ofoversight expansion, even thoughexpansion appears to be the exceptionrather than the rule.

Second, this analysis also calls intoquestion the common stereotype of an‘Anglo-American approach’ to thegovernance of public services that issharply dist inguishable from theContinental European one. Viewed interms of the four-part analysis of controlacross three public services, this putative‘Anglo-American’ style turns out to be alltoo like Giovanni Sartori’s famous ‘cat-dog’ – a creature that does not actuallyexist. From this analytic perspective, theUK style of controlling public servicesacross the three policy domains is at leastas different from the US style as eitherstyle is different from the classicalContinental European state forms ofFrance or Germany.

Third, the study shows that during therecent era of government reform none ofthe four types of control disappeared fromview, though in many cases they were re-shaped and some new hybrids developed.Where oversight was reformed, it oftendeveloped in new hybrid forms, particularlyin competition-oversight and competition-mutuality mixes, or even the three-parthybrid of competition, mutual peer-groupevaluation and oversight that features inmany control systems applying touniversities. And while mutuality by nomeans disappeared as a form of controlover public services over this era (contraryto the claims of some critics of modern‘managerialism’), it was in many casesreshaped to include different players, forinstance in replacing traditional Humboldt-

ian structures of professorial governance inGermany and Norway by departmentaland faculty governance, plus a reshapingof traditional university senates, andseparate evaluation of teaching andresearch. Similarly, the death ofrandomness as a control style in moderngovernment seems to have been muchexaggerated, as has the idea thatcompetition in public services is a newdevelopment or a steadily rising influence.For example, an important element ofcompetition might be said to haveweakened during the long boom of thedecades after World War II, as the decliningattractiveness of public bureaucracy as asecure and respected career meant thatthe best and the brightest were lessinclined to compete for traditionalgovernment work in many states.

Indeed, one of the advantages of applyingthe four-part analysis to control overgovernment activities is that it cuts acrossconventional clichés about state systems.Going beyond the stereotypes meansbeing able to pin down what is commonand what is variable, how different orsimilar the various ‘state traditions’ arewhen it comes to their control architecture,and what are the counter-currents or compensating tendencies to some ofthe much-discussed changes in controlover government.

Christopher Hood

Controlling ModernGovernment: Variety,Commonality andChange. Edited byChristopher Hood,Oliver James, GuyPeters and ColinScott, Cheltenham:Edward Elgar, 2004.To order a copy: www.e-elgar.co.uk

Controlling Modern Government:Beyond Stereotypes


CARR Books and Special Journal Editions

Preparing for the Future: StrategicPlanning in the U.S. Air ForceMichael Barzelay and Colin Campbell

Business and Politics in Europe, 1900 –1970: essays in honour of Alice TeichovaTerry Gourvish, ed

On Different Tracks: designing railwayregulation in Britain and GermanyMartin LodgeGreenwood Press 2002

British Rail 1974-97: from integration to privatisationTerence GourvishOxford University Press 2002

The Labyrinths of Information –Challenging the Wisdom of SystemsClaudio Ciborra, OxfordUniversity Press 2002‘a series of highly literate jewel-like essays thatare intellectually fascinating but could alsochange the life of any practitioner.’Shoshana Zuboff, Harvard Business School

Environmental Policy in Europe:assessing the costs of complianceAndrew Gouldson and Evan Williams (Eds)European Environment 12(5) 2002

The Politics of Delegation: non-majoritarian institutions in EuropeMark Thatcher and Alec Stone Sweet (Eds)West European Politics 25(1) 2002

Biotechnology 1996-2000: the years of controversyGeorge Gaskell and Martin BauerLondon: Science MuseumPress and Michigan StateUniversity Press 2001

From Control to Drift: the dynamics ofcorporate information infrastructuresClaudio Ciborra and associatesOxford University Press 2001

Rational Analysis for a ProblematicWorld Revisited: problem structuringmethods for complexity, uncertaintyand conflict (2nd ed.)Jonathan Rosenhead and John Mingers (eds.)Wiley 2001

The Government of Risk:understanding risk regulation regimesChristopher Hood, Henry Rothstein and Robert BaldwinOxford University Press 2001‘...a significant contribution to the existingliterature on risk regulation.’West European Politics

www.lse.ac.uk/CARR/documents/books.htm

CARRBOOKS

Regulating Law: a clash of mentalities

Regulation and law are intimately boundup with one another. If regulation canbe conceived of as the processesthrough which conduct is sought to be

controlled through systematic oversight byreference to rules then, within many regimes, lawsupplies both the substantive rules and theprocedural rules governing monitoring andenforcement. Much regulation research has beenconcerned to address the role of law inregulation, for example seeking to explain orjustify the observable gap between the law as itis written and the way that it is enforced byagencies and others on the ground. Thequestion of what regulation looks like to thoseinvolved in the investigation and characterisationof contemporary law has less often beenexplored. In Regulating Law CARR researchershave collaborated with legal academics at LSEand associated with the Regulatory InstitutionsNetwork at the Australian National University inan attempt to fi l l this gap by viewingcontemporary regulation through the lens of law.The project was inspired by the work of LSE LawProfessor Hugh Collins, whose book RegulatingContracts highlighted the tensions betweenthinking about regulation and law.

Over twelve chapters the contributors toRegulating Law investigate three main sets ofquestions concerning law and regulation as theyapply within particular areas of law. Some of thechapters are organised around areas of legaldoctrine such as contract, tort, property, criminaland administrative law. Others focus on fields ofactivity which law is drawn into regulating,including ‘work’, ‘families’ and ‘corporate gover-nance’. The first set of questions involves thenature of the intersection between law and reg-ulation. The discussions highlight the limitedapplication of regulatory theory to substantivefields of legal activity and begin to remedy thedeficiency. The second set of issues investigat-ed concerns the question how law regulates.Whereas it is common to assume that regulationis, by definition, intentional and directed towardssecuring particular outcomes, classical law isconceived of as a backward looking normativestructure more concerned with the universality ofits rules than their effects. These two ‘mentali-ties’ are often in collision with each other, aswhere strict enforcement of a rule within a regu-latory regime is inhibited by the strict applicationof the general procedural norms associated withcriminal law. Many of the contributors to thisbook seek to evaluate whether the collision ofnorms is productive or disintegrative either forlaw or for the activities to be regulated. The third

question concerns how law is itself regulated.What is the role of wider social and economicactivities in steering law? The chapters in thisbook do not show any agreement, and in partic-ular offer variety in their understanding of theextent to which modern law is autonomous fromother social and economic phenomena.

In their concluding chapter John Braithwaiteand Christine Parker assess the implications ofthe diverse chapters for law and regulation. Acentral conclusion is that a regulatory analysis oflaw is supportive of moves within regulationscholarship to conceive of regulation in a morepluralistic way. Specifically the analysis encour-ages us to move beyond images of regulationoriented towards law (often referred to in termsof ‘command and control’) and think of othermechanisms through which control is achievedin regulatory and other settings. This analysishas particular application to the mechanismsthrough which norms of constitutional and inter-national law are made effective. But the analysisalso bears on the world of corporate gover-nance where, it is suggested, policy makers maybe wrong to rely increasingly on law to promotegood behaviour in the face of financial and otherscandals. Self-regulation and the regulation ofself-regulation (or meta-regulation) do, in prac-tice, play a key role in corporate governance andwe should learn more about making them effec-tive. Parker and Braithwaite reject both the viewthat law is dominant in regulation and the viewthat law is unimportant. They conclude thatdevelopment of the idea of meta-regulation, theregulation of regulation, might provide a way towork through the dilemmas associated withplacing too much or too little emphasis on law inregulation. Such an approach accommodatesthe pluralism that is observable at play in manyregulatory settings while not denying that law isoften a significant steering mechanism. The con-clusion is tentative because its vindication wouldrequire further empirical investigation on the roleof law in steering and, more particularly, on theway in which law is itself regulated.

Colin Scott

Regulating Law. Edited byChristine Parker, ColinScott, Nicola Lacey andJohn Braithwaite, Oxford:Oxford University Press,2004. To order a copy:www.oup.co.uk/isbn/0-19-926407-4


CARRSEMINARS

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Science: a puzzling profession?Professor Robert DingwallUniversity of Nottingham9 November 2004

This seminar explored the need to give greaterweight to the supply of professional regulation andthe particular relationships between this andcultural and social uncertainty. Prof Dingwalllooked at the implications of current thinking in thesociology of organisations on isomorphism andthe extent to which professions are susceptible topressures (DiMaggio and Powell). He argued thatwho does science and under what conditions areimportant precursors to the interesting and oftenneglected issues about how to regulate scienceand make it socially accountable withoutdestroying the essence of innovation anduncertainty involved. He suggested that science,as an organisation, has more in common withmedieval guilds, where membership followsrecognition by the masters of the craft rather thanthe public processes that we are used to.

Whistleblowing: A Theory withApplication to EnvironmentalRegulationProfessor Anthony HeyesRoyal Holloway College, University of London26 October 2004

‘Whistleblowing’ is a common feature of ourregulatory landscape, yet there is no formaleconomic model of it. Prof Heyes proposed sucha model and used it to explore how regulatoryinstitutions should be designed to accommodateit. Sociological and psychological research in thearea points to three alternative theories as to whyindividuals might disclose, even when such actionis not in their (apparent) self-interest: consciencecleansing, altruism, or punishment-motivation.The policy problem is to decide how frequently to pursue disclosures made by whistleblowers,how much protection to offer them, and howsubstantially to fine firms whose plans forwrongdoing are detected in this way. Notsurprisingly, optimal policy depends upon themotives attributed to whistleblowers, but is not in general characterised by maximal penalties nor routine pursuit of complaints, even whenpursuit is costless.

New Social Risks in EuropeProfessor Peter Taylor-GoobyUniversity of Kent12 October 2004

European welfare states developed through the‘old social risks’ that confronted citizens in idealtypical industrial society. As a result of the post-industrial transition, affecting labour markets, family

life and the scope for government policy making,new social risks have emerged onto the agenda.These concern integrating marginal groups intopaid work, ‘activation’, family restructuring, andmechanisms for balancing domestic andemployment responsibilities. The EU is seekingleadership for the new risk agenda and this paperreviews recognition of, and responses to, new risksin a number of European countries and theimplications for the politics of welfare. It is based on data from a recent EU FPV project: ‘WelfareReform and the Management of Societal Change’.

Catastrophic Risk, Insurance and Terrorism Professor Richard EricsonUniversity of Oxford22 June 2004

See page 8

The Uncertain Promise of RiskProfessor Pat O’MalleyCarleton University 16 June 2004

Conventional debates over risk in criminal justicetend to fall into several traps. These include theassumption that diverse configurations of risk canbe collapsed into a single category, to becontrasted en bloc with other approaches togovernment. However, by attending to thediversity of forms of risk we can begin to developcertain principles that could be put forward astools for thinking about the promise andlimitations of ways of governing by risk. Throughcontrasting actuarial justice with a number ofother configurations of risk-centred government,such relevant issues emerge as whether specifictechniques or risks are inclusive or exclusionary,whether they set up a zero-sum game betweenvictims and offenders, and whether they polariserisk and uncertainty. While this is promising, ProfO’Malley also concluded that a democraticpolitics of security may provide more promisethan a politics of risk per se.

Attitudes to the Risks and Benefitsof Agricultural Biotechnology inBritain: the role of ambivalence Professor Nick PidgeonUniversity of East Anglia 8 June 2004

Prof Pidgeon reported findings from a majornational GB survey of public attitudes to the risksand benefits of GM food and crops conducteddirectly after the end of the GMNation? PublicDebate on the commercialisation of agriculturalbiotechnology in Great Britain. Although manytraditional quantitative studies construe ‘attitudes’

in bipolar terms, previous qualitative work on thediscourses surrounding GM agriculture highlightsthe important role of ‘ambivalence’. This paperdeveloped a classification of four ideal-typeattitudinal positions towards GM food and crops:positive, negative, ambivalent and indifferent. Using quantitative risk and benefit measures itfound that the greatest proportion of respondentsare ambivalent about GM food and crops,simultaneously endorsing risks and some benefitsof this technology. Accordingly, the researchconcluded that at the time of GM Nation?ambivalence dominated UK public attitudes, with, additionally, a significant skew towards thenegative pole.

The Good, the Bad and theNotorious: risk differentiation in German third party motorinsurance Dr Reimund SchwarzeDeutsches Institut fur Wirtscharftsforschung, Berlin1 June 2004

This seminar discussed recent developments inthird party liability insurance for motor vehicles.Specifically, Dr Schwarze evaluated thepreventive effects at the firm level of a variety ofrisk classification measures such as vehicle age,single driver bonus, garage holding, etc. Thesenew tariff criteria had been introduced inGermany in 1994 following the European thirdmotor vehicle insurance directive. Based on tenyears' observation little improvement can befound. This talk also considered the potential ofusing performance-related tariff criteria such aspenalty points to improve the preventive effectsof risk classification in this field.

Full abstracts and details of seminars can be found on the CARR website: www.lse.ac.uk/Depts/carr

FORTHCOMING LUNCHTIMESEMINARS

18 January 2005 Corporate Governance,Labour Regulation and Legal Origin

Simon Deakin, University of Cambridge

1 February 2005 Securities Analysts as Frame-MakersDaniel Beunza, Universitat Pompeu Fabra

15 February 2005 Risk Transformation: anew era for chemicals regulation in the US and Europe?Arthur Daemmrich, Chemical HeritageFoundation

1 March 2005 What is Law in the EU? TheImplementation of the EU Directive onIntegrated Pollution Prevention and ControlBettina Lange, European University Institute

15 March 2005 European FinancialRegulation and National RegulatorsMarie-Anne Frison-Roche, Sciences Po, Paris

To receive the latest news on forthcoming CARR events sign up to our e-mail alert service:www.lse.ac.uk/collections/CARR/emailSignUpForm.htm


CARRSTUDENT

When examining the myriad practicesand stratagems adopted bygovernments to regulate activity,one is struck by a peculiar sense of

déjà vu. Some practices seen as a new way ofcontrol prove, on deeper investigation, to be farfrom innovative. One example of this is the use ofcontracting as a method of regulation. TheEighties wave of privatisation, heavily reliant uponcontractual practices as instruments of regulationwas often sold as a new regulatory approach.Looking at land-use planning, however, it ispossible to discern a number of recursive themes,which challenge this assumption.

Negotiated quasi-contractual strategies figure as aconsistent trend within land-use planning, andagreements have been used for almost a centuryto secure efficient land allocation, so as to satisfyboth individual and community needs. In land-useplanning the idea of ‘regulation’ emerges early inthe 20th century, and is a product of post-IndustrialRevolution effects. The rapid social and economicchanges of the age meant that successivegovernments had to meet the challenge of how tocontain and minimise adverse consequenceswhilst still allowing for progress. Contractingbecame a way of negotiating effective solutionswhere, for those regulating, either informationdeficits or other asymmetries existed. As in manyregulatory arenas, the capacity to regulate bycommand is severely limited where governmentdoes not control the subject matter. In the case ofland, the sanctity given to land ownership meant itwould never be easy to mould individuatedinterests or concerns to the collective will. In thecooperative environment that contractingpromoted it was possible to anticipate theimplications of change and accommodate thisfundamental dilemma. Contractual practicesfurthered a more subtle and incremental regulatoryprogression, through a process of ostensiblecollaboration. Initially, agreements were used tosecure public rights to private land, or to protectareas of natural beauty in circumstances where nocomprehensive regulatory frame existed, or a ‘light

hand’ was required. The contracting strategy wassubsequently adopted when the problemscommon in the creation of a comprehensivesystem became apparent.

Over the period agreements have been usedconsistently to secure community facilities, incircumstances where the public actors could notdictate to private landowners. Although initiallythey were used to compensate for knowledgedeficits associated with the regulation of new oremerging situations, they were subsequently usedas a supplement to a comprehensive land-useplanning regime, and now are used to provide allmanner of benefits that cannot be securedthrough the imposition of planning conditions.Looking at the history of negotiated solutions toplanning di lemmas, the same regulatoryinstrument – in this case the legal constructbroadly defined as a contract – has been craftedor manipulated to suit the various demands oragendas of public and private actors alike. Aswith so much regulation, future activity wasgoverned by accepted standards of the past. Thiswas in part a process of negotiating and definingacceptable limits and partly a process of resolvinghow these limits on acceptable conduct were tobe secured. The solution was found in ‘regulatoryplanning’ – an incremental if modest approach bygovernment to harness the activities of others.The use of negotiated agreements was a keyinstrument whereby government relied on otheractors to restrict their conduct whilst profitingfrom the beneficial effects. Regulation in this formwas seen as the antithesis of comprehensivestate-driven control, and contracting an integralpart of government’s limited ambition.

The advent of a centralised planning system afterWorld War II, did not stop the use of agreements.Regulation was equated with ‘heavy-handed’state intervention and the grand ambition ofcomprehensive intervention with regulatoryplanning becoming the regulation of planning.Although often posited as the antithesis ofwelfarist regulatory strategies, empirical data

shows that agreements continued to coexist withconventional command-based instruments. Thenegotiated solution became a necessary adjunctto the comprehensive planning system, perhapsby retaining an element of flexibility to the rigidityof the system. By the late 1990s it was estimatedthat just under 20 per cent of all large-scaledevelopments permitted also included anagreement, despite further changes in successivegovernments’ attitudes towards regulation. Whilethe shape of both central and local governmenthas changed significantly during this long period,the quasi-contractual tool continues to be used.This suggests that despite economic and socialshifts some practices either remain somewhatinsulated from or resistant to the changingcontext of regulation, or are sufficiently malleableto accommodate diverse and evolving agendasfrom l imited governance through tocomprehensive intervention and back again.

It is clear from the historical evidence that the useof contracts as regulatory instruments is not new.There may be regulatory domains where they arean innovation but land-use planning would appearnot to be one of them. Furthermore, in thecontext of planning, any understanding that useof quasi-contractual mechanisms is to beassociated with the minimal state is also open toquestion. Interrogating the historical foundationsof current trends can often lead to surprisingresults. Perhaps a dose of healthy scepticism isneeded when thinking about current regulatorypractices, and sometimes that can come fromtaking a historical perspective.

Tola Amodu is completing her PhD in the LSE’sLaw Department, and is a CARR affiliatedresearch student.

In the first of a new series highlighting the work of CARR’sresearch students, Tola Amodu examines how negotiatedcontracts have long played a regulatory role in Britain’splanning system

The law of the land

CARR sponsors risk and regulation conferences at LSEand at universities throughout the UK.

CARRCONFERENCES

Joint One Day CARR/SCOREWorkshopCARR, LSE, June 2004

Colleagues from the Stockholm Centre forOrganizational Research (SCORE) visited CARR fora one day workshop and exchange of ideas in thesummer. SCORE is very much a sister researchcentre to CARR with a special focus on governanceissues in the public sector and on regulation andstandardisation. Julia Black (CARR) openedproceedings with an account of the work of theregulatory innovation group. Göran Ahrne and NilsBrunsson (SCORE) presented a paper on meta-organisations (organisations whose members arethemselves organisations) and argued that suchentities have increased in size and significance forregulatory processes. Javier Lezaun (CARR) spokeon experimentalism in regulatory organisations,specifically in the context of GM foodstuffs. Finally,Ulrika Mörth (SCORE) discussed the role of so-called ‘soft law’ and modes of regulation in EU. Theevent resonated with common interests across thetwo groups and it was hoped that this meetingwould help to strengthen links for the future.

Risk and Regulation ResearchStudent Conference 2004CARR, LSE, September 2004CARR hosted its third annual internationalresearch student conference in September. Theconference has rapidly become established as amajor risk and regulation event for researchstudents from across the world. This year theconference attracted 100 participants fromEurope, North America, Africa, Australia andIsrael, with over 50 presentations on subjects asdiverse as independent regulators, GMOs, utilityregulation, bird flu and money laundering.

The two day event provided a unique opportunityfor students to develop and present their own ideas,consider problems through different pairs oftheoretical spectacles, to get an insiders perspectiveon regulation in a keynote speech from HowardDavies (LSE Director and past chairman of theFinancial Services Authority) and attend sessions ongetting into print and masterclasses on risk andregulation. The hugely positive feedback from theparticipants shows that the conference is trulyhelping define the boundaries of this important newresearch field for the next generation of scholarsacross the world.

Food Risk and RegulationBRASS, Cardiff University, October 2004In collaboration with the ESRC Centre for BusinessRelationships, Accountability, Sustainability andSociety (BRASS), CARR held a conference on foodrisks and their regulation. The event broughttogether academic researchers, industryrepresentatives and other stakeholders, to discusscurrent issues and experiences in the governanceof food. Three major themes were addressed:communication and public attitudes, governanceand reform (in the UK and Europe), and new formsof management for the supply chain. Speakersincluded Sue Dibb, from the National ConsumerCouncil, Christine Majewski, from the EuropeanFood Safety Agency, Anna Jung, from the EuropeanFood Information Council, as well as researchersfrom CARR, BRASS, City University, Exeter,Cambridge and Amsterdam. The presentations areavailable on the CARR and BRASS websites.



CARRCONFERENCES

Are Risk Managers Dangerous?Joint public debate with The EconomistCARR, LSE, October 2004Opening the debate, Mike Power of CARRportrayed risk managers as ‘cosmetic, legalisticand concerned with appearances’. In contrast,Reg Hinckley of BP thought the overall effect ofrisk managers was, on balance, positive. They had contributed to the quantification of risk, andhad at least prompted the ‘right sort’ ofboardroom discussions.

Avinash Persaud put the case differently: riskmanagement wasn’t working. Risk managementshould ensure that risks are distributed accordingto the ability to carry risks. In practice, risks arebeing transferred from those, such as banks, whocan afford to take risks, to members of the publicwho cannot. Likewise, a ‘one size fits all’ mentalityamong risk managers had the perverse effect ofdestroying the diversity which successful riskmanagement values, and increasing volatility.

A somewhat equivocal response was providedby Thierry Van Santen of Group Danone: theproblem was the failure to distinguish betweencompliance and risk management. The job of thelatter is to identify good and bad risks – since thecompany which takes no risks has no future.

A hand count of the audience suggested that theproponents had succeeding in convincing amajority that risk managers – the minority, perhaps?– were indeed dangerous.

More information on CARR events can be found on CARR’s website, www.lse.ac.uk/Depts/carr

Global Governance and the Role of Non-State ActorsConference in conjunction with the Social Science Center, Berlin and theAlfred Herrhausen Society forInternational DialogueCARR, LSE, November 2004 Non-State Actors (NSAs) are now established asintegral players in the architecture of globalgovernance. With the globalisation of manycontemporary policy issues, transcending nationalboundaries – from the environment to terrorism,from financial risk to local conflict – globalgovernance is increasingly a contested process,opening up new space for political action by stateand non-state actors. This makes processes ofglobal governance both highly salient, as well asproblematic. The conference examined how theregulatory capacity of non-state actors is aresource increasingly drawn upon by the state inpolicy domains where it is either unwilling – orunable – to act itself.

The event included contributions from DavidHeld (LSE), Michael Zurn (WZB/Hertie School ofGovernance), and Bill Emmott (Editor-in-Chief,The Economist). The capacity of non-state actorsto provide policy solutions to the problems ofglobal governance is confronted with a new waveof demands for improved representation,transparency, and accountability. In this regard,the conference considered if the rise of the non-

state actor is resulting in a legitimacy crisis forglobal governance – or alternatively if it offers thesolution as well as the problem. For futureresearch, this raised the problem of whether new‘democratic’ forms of global governance shouldbe unilaterally imposed upon civil society.

Dr Wolfgang Nowak (Alfred Herrhausen Society)and Professor David Held (LSE)


CARRPRINT

CARR publications can be viewed on the CARRwebsite: www.lse.ac.uk/Depts/carr/

Selected RecentPublications

Competency, Bureaucracy and the Orthodoxies of PublicManagement Reform: a comparative analysis Christopher Hood and Martin LodgeGovernance 17 (3) 2004: 313-333

Risk Management andGovernance Bridget HutterIn P Eliadis, MM Hill and M Howlett(eds). Designing Government: FromInstruments to Governance McGill-Queen’s University Press 2004

The Risk Management ofEverything: rethinking thepolitics of uncertaintyMichael Power Demos, 2004 Available online:www.demos.co.uk/catalogue/riskmanagementofeverythingcatalogue/

Regulatory Innovation and theOnline Consumer Colin ScottLaw and Policy 26 (3-4) 2004: 477-506

Varieties of capitalism in an internationalised world:domestic institutional change inEuropean telecommunications Mark Thatcher Comparative Political Studies 37 (7)2004: 1-30

CARR Discussion Papers

COMING SOON

DP31 Modernisation, Partnerships and the Management of Risk Liisa Kurunmäki and Peter Miller

DP30 Regulatory Experiments Yuval Millo and Javier Lezaun

DP29 From Risks to Second-order dangers in Financial Markets: Unintendedconsequences of risk management systems Boris Holzer and Yuval Millo

DP28 Decentralisation of Economic Law – An Oxymoron Myriam Senn

RECENTLY PUBLISHED

DP27 Digital Technologies and the Duality of RiskClaudio Ciborra

DP26 Risk Regulation and Interest Accommodation: Pharmaceuticals’ licensing in theEuropean CommunityJürgen Feick

DP25 The Role of Civil Society Organisations in Regulating Business Change Bridget M Hutter and Joan O’Mahony

DP24 The Battle for Hearts and Minds? Evolutions in organisational approaches toenvironmental risk communicationAndy Gouldson, Rolf Lidskog and Misse Wester-Herber

DP23 Creation of a market network: the regulatory approval of Chicago Board OptionsExchange (CBOE) Yuval Millo

DP22 Corporate-NGO Partnerships as a Form of Civil Regulation: lessons from theEnergy Biodiversity Initiative Stephen Tully

DP21 Access to Justice Within the Sustainable Self-Governance ModelStephen Tully

A complete list of our discussion papers can be found at:www.lse.ac.uk/collections/CARR/documents/discussionPapers.htm

Readers can now browse through Risk&Regulation in animproved, easy-to-access online format. You will find the latestarticles and news from CARR, with the advantage of increasedinteractivity featuring links to other relevant items, events andpublications produced by CARR.

We hope that the new format will allow readers to easily forwardarticles to colleagues and increase awareness of available CARRresources such as the Research Directory and Discussion Papers.

Back issues are also available from the new wesbite.To find out more go to: www.lse.ac.uk/Depts/carr or email [email protected]

Risk&Regulation Online

CARR research staff

Tim Besley

Director of Suntory and ToyotaInternational Centres for Economics and Related Disciplines (STICERD)

Professor of Economics

Public economics; Developmenteconomics; Political economy.

Julia Black

Reader in Law

Regulatory techniques and processes;Interpretive and discourse basedapproaches to regulation; Rule making;Financial services regulation.

Christopher Hood

CARR Programme Director: Regulation ofGovernment and Governance

Gladstone Professor of Government and Fellow of All Souls College, Universityof Oxford

Regulation of public-sector bodies;Institutional factors shaping regulation;Transparency and public sector governance.

Bridget Hutter

CARR Co-Director

Peacock Professor of Risk Management

Sociology of regulation and riskmanagement; Regulation of economic life;Corporate responses to state and non-state forms of regulation.

William Jennings

ESRC/BP Postdoctoral Research Fellow

Regulation of government by public opinion;Blame avoidance; Policy implementation;Politics and administration of governmentalpolicies of public celebration.

Clive Jones

Research Assistant

Corporate responses to regulation and risk;Reputation risk management.

Robert Kaye

ESRC Research Officer

Self-regulation and ethics regulation;Regulation inside parliaments and politicalinstitutions; Regulatory bodies in theprofessions.

Javier Lezaun


Biotechnology politics and regulations;Traceability and food control; Marketingand market infrastructures; Science andTechnology Studies.

Martin Lodge

CARR Deputy Programme Director:Regulation of Government and Governance

Lecturer in Political Science and Public Policy

Comparative regulation and publicadministration; Government and politics ofthe EU and of Germany; Railway regulationin Britain and Germany; Regulatory reformin the Caribbean.

Peter Miller

Professor of Management Accounting

Accounting and advanced manufacturingsystems; Investment appraisal and capitalbudgeting; Accounting and the publicsector; Social and institutional aspects of accounting.

Yuval Millo


Economic sociology; Financial regulation;Derivatives markets; Financial riskmanagement.

Joan O’Mahony

Leverhulme Special Research Fellow

Business regulation and civil society; Roleof non-state sources in risk management;Political sociology.

Michael Power

CARR Co-Director and ProgrammeDirector: Organisations and RiskManagement

Professor of Accounting

Internal and external auditing; riskmanagement and corporate governance;Financial accounting and auditing regulation.

Henry Rothstein

ESRC Research Fellow

Comparative analysis of risk regulationregimes; Risk regulation and publicopinion, the media, interest groups andregulatory professionals; Transparency and accountability.

Colin Scott

Reader in Law

Regulation of government,communications regulation and regulationof consumer markets; New dimensions ofregulation of the public sector andregulatory innovation.

Mark Thatcher

Senior Lecturer in Public Administrationand Public Policy

Comparative European regulation andpublic policy; Telecommunications andother utilities; delegation to non-majoritarian institutions and institutionaldesign; Independent regulatory agencies.

CARR research associates

Michael Barzelay

Reader in Public Management, LSE

George Gaskell

Professor of Social Psychology, LSE

Terence Gourvish

Director, Business History Unit, LSE

Andrew Gouldson

Lecturer in Environmental Policy, LSE

Carol Harlow

Professor of Public Law, LSE

Michael Huber

Research Associate

Donald Mackenzie

Professor of Sociology, University ofEdinburgh

Edward Page

Sidney and Beatrice Webb Professor ofPublic Policy, LSE

Tony Prosser

Professor of Public Law, Bristol University

Judith Rees

Deputy Director, LSE; Professor of Environmental and ResourceManagement, LSE

Lindsay Stirton

Lecturer in Law, University of East Anglia

Peter Taylor-Gooby

Professor of Social Policy, Sociology and Social Science, University of Kent at Canterbury

Brian Wynne

Professor of Science Studies, Lancaster University

CARR administrative team

Amy Eldon

Administration and Events Officer

Sabrina Fernandez

Events and Publications Administrator

Louise Newton-Clare

Centre Manager (Finance, Research andSpecial Projects)

Anna Pili

Centre Manager (Administration, Eventsand Communications)

CARRPEOPLE

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Dep

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ESRC Centre for Analysis of Risk and Regulation

The London School of Economics

and Political Science

Houghton Street

London WC2A 2AE

United Kingdom

Tel: +44 (0)20 7955 6577

Fax: +44 (0)20 7955 6578

Website: www.lse.ac.uk/Depts/carr/

Email: [email protected]

risk and regulation winter 2004

Documents