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Understand These Fundamentals of Government Regulation

Understand These Fundamentals of Government Regulation
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I’m George Siedel, and I want to welcome you to the module on creating value through government regulation. This is one of our most important modules because government regulation has such a huge impact on your business, but it also has a huge impact on all of your stakeholders. For instance, your investors, your employees, and your customers. Here are a couple of quotes that illustrate the importance of government regulation. Here’s something from the GE website. The success of GE, success of our company, depends significantly on sound public policies. Or something from the McKinsey Quarterly, the business value at stake from government and regulatory intervention is huge, about 30% of earnings.
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And according to a fairly recent PwC Global Survey, over-regulation is the top threat to business growth. Here’s a quote from John Browne, the former CEO of BP, and his coauthor. It illustrates the importance of government regulation. The logic of understanding government is simple and compelling. The success of a business depends on its relationships with the external world, regulators, activists, and legislators. Decisions made at all levels of the business from the boardroom to the shop floor, affect that relationship. So in other words, regardless of where you are in a business, government regulation is important, and this is our game plan for dealing with government regulation. First of all, I’m going to give you an overview of what government regulation means.
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And I’m going to provide a perspective that might be a little bit different from what you’re used to, which you learn traditionally in school. Then we’re going to focus on risk management. The strategies you can use to manage risk. That basically falls within the law pillar of decision making. And then we’ll move on to how you can create value by using regulatory law, which focuses more on the strategy pillar. So let’s start with an overview of government regulation. I think we’re all familiar with the separation of powers. That’s a part of governments throughout the world, anywhere where there’s rule of law.
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Now if there isn’t rule of law, if decisions are made by people in power based on their own discretion without any limitation, then these separate powers don’t operate. But in most countries we divide government into a judicial branch that interprets law, an executive branch that enforces law, and a legislative branch that creates law. That’s basic high school civics. A trivia question, especially for those of you from the United States. We have the three branches of government. We’ve got our congress, our president, and we have our court system. At what point during the year are these three branches together in one room? So that’s the trivia question. Hit pause and write down your answer.
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And the answer is that the three branches of government are together in the House of Representatives every year for the President’s State of the Union address. And here’ a clip, if you’re interested in watching this recent State of the Union Address. And what’s very interesting about this is when you look closely at the Supreme Court justices, you’ll notice that Justice Alito is saying something in response to what the president is saying. So your challenge is to see whether you’re a good lip reader or not. So, hit pause, watch the video, and see if you can guess what Justice Alito is saying.
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If you’re a good lip reader, you probably noticed his saying in response to the president’s comments, he’s saying, not true. In other words, he’s calling the president a liar. So, this little clip illustrates the tension that arises sometimes between the three branches of government. Now, the problem with what we have all learned in a high school civics class is that this depiction of government is not true.
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And it’s especially important to realize that it’s not true in one specific aspect. It says the legislature creates law. Well, judges also create law. And this is especially true in a so-called common law system where the courts rely on earlier decisions in deciding cases. So judges actually make law when they decide cases. And, it’s also not true in that the executive branch, depending on the country you’re in, but the executive branch can also make law. For example in the United States we have something called an executive order where the president can issue an order to government agencies to follow a particular rule. Fairly recently, President Obama issued an executive order that ordered a higher minimum wage for government contractors.
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And so, there’s a myth with regard to the separation of powers. It’s not as simple as it appears. There’s another reason, a very important reason why this is a myth. And that’s because in addition to the three branches of government, we have a fourth branch. And this is the way the fourth branch was described by Professor Turley. Our carefully constructed systems of checks and balances is negated by the rise of a fourth branch. The shift in authority from the other three branches has been staggering. The fourth branch now has a larger, practical impact on the lives of citizens than all the other branches combined.
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So, my question for you now is, what is this very important fourth branch that touches your life more than any other branch of government? Please hit pause and write down your answer.
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The answer is the government agencies in every country of the world. We have the three main branches of government. You’ve got elected legislators in the legislature. We’ve got an elected head of government. And then we have judges who may be appointed or elected. But beneath the surface of the separation of powers is a huge bureaucracy of government employees who aren’t elected and who are in their jobs for basically life. And it’s these employees of the agencies who have such a big impact on us. Here’s some figures from the United States. In the United States we have 2.8 million federal workers in 15 departments, 69 agencies, and 383 nonmilitary sub-agencies.
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There was a study in 2007 that showed that Congress enacted 138 public laws, while in the same year these federal agencies finalized, 2,926 laws including 61 major regulations. So these agencies have a huge impact on our lives. Here’s another example of the impact. There’s something called the Code of Federal Regulations, which is code of all the rules and regulations made by the federal agencies. And you can see here in 1960 we had 22,877 pages of rules and regulations, laws in other words. And by the end of 2014 we had 175,268 pages. And this gives you a sense of the scope of existing regulations that businesses, workers and consumers must comply with.
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In other words, you have to decide if you’re in business which of those 175,000 pages applies to your business and then comply with those rules. So, that gives you a sense of the scope of federal regulations, and in the next segment we’re going to take a deeper dive and look more closely at administrative agencies.
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