The role of risk-based thinking in regulatory stewardship

This is a transcript of a key-note lecture in the “Driving Risk-Based Regulation” conference, presented on 24 February 2021. The slides to the presentation are available at the end of the transcript (below).

Kia ora.

It is my pleasure to kick off today’s sessions in this excellent online conference.

Since 2013, New Zealand’s regulatory agencies have had a statutory obligation to carry out regulatory stewardship. They have been expected to adopt a whole-of-system, lifecycle view of regulation and take a proactive and collaborative approach to monitor and care of the regulatory system(s) for which they have responsibilities.

Today, I will explore the idea of regulatory stewardship as being an ideal and a practice. I will touch on the role of risk-based thinking in regulatory stewardship. And finally, I will zoom in on how regulatory stewardship principles can improve risk-based approaches.

Much of the material I touch on today is discussed in these two recent publications. One is a recent article in which I discuss the challenges of implementing regulatory stewardship. The other is a systematic review of the academic literature on risk governance and risk-based regulation. Both publications are available online.

But before I begin talking about regulatory stewardship, we should ask the question: is it a uniquely New Zealand idea? The long answer short is: no, it is not. After all, for a long time, governments worldwide have developed principles and guiding philosophies for the regulation of regulation. Their ambition is to ensure that regulatory agencies across the government comply with a set of coherent and consistent criteria when proposing, developing, implementing, reviewing, and terminating regulation and regulatory interventions.

For example, in the mid-1940s, the United States introduces the Administrative Procedure Act (APA), which requires regulatory agencies, among others, to keep the public informed of how they are organised, and their procedures and rules; to provide for public participation in the rulemaking process, and to establish and follow uniform (whole-of-government) standards for making and implementing rules.

On the other side of the Atlantic, the European Commission launched its Better Regulation Agenda (BRA) in the early 2000s. Akin to the APA, the BRA is a set of requirements and expectations for regulatory agencies at the EU level. The purpose is to ensure that regulation is developed and implemented openly and transparently, builds on the best available evidence, is backed by stakeholders, and respects the principles of subsidiarity and proportionality.

Down Under, we have seen similar developments since the early 1990s. Initially, both Australia and New Zealand set off on a trajectory of regulatory reform guided by the principles and underlying philosophy of deregulation and the reduction of red tape and compliance costs. While Australia is still very much following this philosophy in its Deregulation Agenda, the focus in New Zealand has shifted to regulatory stewardship.

Over time, expectations for regulatory stewardship have been developed by the New Zealand Treasury (the Treasury), with the latest guidance dating from April 2017. The Treasury defines regulatory stewardship as a responsibility of government regulatory agencies. It involves them adopting a whole-of-system, lifecycle view of regulation and taking a proactive, collaborative approach to the monitoring and care of the regulatory system(s) within which they have policy or operational responsibilities.

Stewardship responsibilities require regulators to keep track of the performance of their regulatory systems (through the “monitoring, review and reporting on existing regulatory systems”), to seek to keep their regulatory systems fit for purpose (through “robust analysis and implementation support for changes to regulatory systems”), and to ensure proper implementation of their regulatory systems (“good regulator practice”). These responsibilities and expectations are, to some extent, laid down by the Treasury. It is relevant here to note that regulatory agencies are expected to do all this actively without requiring their minister’s explicit direction or permission.

In my role as Chair in Regulatory Practice at the Victoria University of Wellington, I have worked closely with regulatory agencies, and it has become evident to me that the struggle of regulatory agencies to operationalise their stewardship obligations and role has at least three overlapping origins:

First, the overall regulatory stewardship obligation is akin to performance-based regulation. It stipulates the intent or outcome to be achieved but leaves a large amount of (discretionary) space for regulatory agencies to fill in their stewardship role. The intent or outcome is that regulatory systems are “an asset for New Zealanders, not a liability”. Regulatory stewardship then “simply means having a proactive duty of care of a [regulatory system that] belongs to, or exists for the benefit of, others”. But, as is so often the case with performance-based regulation, the targets of the regulation (in this case, regulatory agencies) often want to know what minimum requirement they must meet to comply. This holds even more strongly when the outcome that is to be achieved is broad and somewhat opaque, as is the case with regulatory stewardship.

Second, the government expects regulatory agencies to work collaboratively on their stewardship responsibilities. However, little progress has been made as regards such collaboration. Within-system engagement between agencies remains the biggest implementation challenge to date. Arguably, it is impossible to achieve the whole-of-system perspective envisaged by the Treasury unless multiple agencies work together. Arguably, the Treasury envisages an individual regulatory agency as just ‘a’ steward of a regulatory system (or systems) but never ‘the’ steward of that system (or systems). Whether the lack of collaboration between regulatory agencies results from a lack of clarity about their regulatory stewardship obligations or a lack of resourcing and commitment at the agency level is beyond the scope of my presentation today. What I should add, however, is that the Treasury has recently started an initiative to further support agencies in operationalising their stewardship obligations.

Third, conceptual confusion results in questions about what stewardship is, what it could be, and what it should be. The idea of regulatory stewardship aims to introduce a coherent or holistic form of (whole-of-government) regulation of regulation and a guiding philosophy for regulatory reform. This is akin to examples elsewhere in the world. However, the term ‘stewardship’ indicates that the New Zealand government has high ambition in this respect.

So what is stewardship?

The idea of stewardship frequently recurs in the organisation, management, and governance literature. For example, ‘stewardship theory’ is a theory devised to explain and conceptualise organisational behaviour and applies to public and private organisations. Contrary to many other organisational theories, it holds that leaders of organisations are willing to act in their organisations’ best interests and are motivated by a need and desire to perform excellently and with honour. To nurture stewardship behaviour, the theory recommends that these leaders are provided with rewards that give them intrinsic satisfaction, such as a chance to grow and achieve self-actualisation, rather than with ever-larger financial gains

In a similar vein, ‘ethical stewardship’ is a theory devised to explain and conceptualise the relationship between organisations and their staff, organisations, and stakeholders, who include direct beneficiaries and parties indirectly affected by the organisation. Central to the theory is the need for organisations to create trust by engaging staff and stakeholders in important decisions that involve them and sharing critical information that may affect them. Honouring the duties owed by organisations to their staff and stakeholders is expected to nurture and strengthen their long-term commitment, which contributes to the long-term success of the organisation.

Both these theories focus on the activity side of stewardship. Other theories, however, focus on the structural side of stewardship. This includes institutional and process aspects. For example, theories on ‘corporate stewardship’ hold that the type of virtuous organisational practices and values discussed above should be thoroughly institutionalised in the organisational culture, rather than being dependent on individual leaders’ personality. Such institutionalisation may be achieved by training future organisational leaders and having well-articulated organisational values and clear and transparent internal accountability processes.

In the slipstream of theories that focus on stewardship’s structural aspects, there is an ever-expanding codification of stewardship expectations and an ever-expanding set of frameworks for embedding stewardship in organisational structures. For example, the UK Stewardship Code 2020is a voluntary code for asset owners and managers and the service providers that support them. It sets out expectations about how these individuals should manage and oversee the capital entrusted to them by their beneficiaries and clients and ‘apply and explain’ principles that will help them put the idea of stewardship into practice and explain to stakeholders how they do this. Likewise, initiatives such as the Forest Stewardship Counciland the Marine Stewardship Council effectively provide organisations with a set of guidelines for putting the idea of stewardship into practice and being held accountable for following these guidelines.

In sum, stewardship is one of those abstract concepts that we all tend to define slightly differently. There is no fixed understanding of what exactly is meant by stewardship in the academic, policy, and practitioner literature. With that caution in mind, it safe to say that stewardship broadly implies “the careful management of something that belongs to others” and leaving something “in better condition for use by future generations”. In a similar vein, it is generally accepted that a steward “does not necessarily own the entity that is being taken responsibility for” and does not “necessarily have the right of control over the resources being taken responsibility for”.

In sum, the ‘simple’ term stewardship encapsulates a wide variety of meanings and expectations. First, the idea of stewardship is both a virtue and a mechanism. As a virtue, it touches on values such as looking after others’ interests, taking care of what is given in trust, serving others, and looking after the interests of future generations. As a mechanism, it touches on practical issues such as being accountable for one’s actions, being honest about one’s behaviour, not taking unnecessary risks with what is given in trust, and keeping in mind short-term and long-term outcomes.

Second, the idea of stewardship is about both activity and structure. As activity, it touches on the motivations of human and organisational behaviour. It raises questions, for example, about how we nurture organisational leaders, staff, and stakeholders to see the prosperity of their organisations and the environments they serve and influence as more important than their personal interests. As structure, it touches on the processes and institutions that we have in place to put stewardship into practice. This resonates very much with the idea of stewardship as a mechanism that includes accountability processes, transparency requirements, risk reduction strategies, and periodical reviews.

Third, the idea of stewardship is both outward-looking and inward-looking. As outward-looking, it very clearly touches on the central understanding that stewardship is about holding something in trust for another, whether this is a current other or a future other. As inward-looking, it touches on the responsibility and obligations of collectives and organisations (including regulatory agencies) to serve the wellbeing of those that make up these collectives and organisations (such as the staff of regulatory agencies).

Rounding up, after unpacking the bounded set of values and expectations associated with the idea of stewardship, we can now safely conclude that it is hard to define exactly what regulatory stewardship is, let alone what it takes to be a regulatory steward. Still, it goes without saying that some stewardship mechanisms need to be in place to achieve stewardship as a virtue. The literature discussed and the analytical distinctions provided some starting points for thinking about the necessary elements of regulatory stewardship as a mechanism. Particularly when we think about how stewardship’s structural and activity aspect can be merged with the outward and inward-looking focus.

In what follows, I will show you a two-by-two diagram that analytically maps these elements. Please don’t try to read it in full once I show it. I will take you through it step by step.

So, in the top-left cell, we see the inward-looking activity part of regulatory stewardship. This is where we ask questions about how staff is involved in decision making, how they are rewarded and nurtured, and how we want our leaders to act.

In the top-right cell, we see the outward-looking activity part of regulatory stewardship. This is where we ask questions about how to engage stakeholders in essential decisions, share information with them, and make sure to be receptive to public concerns about our work.

In the bottom left cell, we see the inward-looking structure part of regulatory stewardship. This is where we ask questions about internal accountability processes, systems of monitoring and evaluation, and, typically, risk-based allocation processes for our limited resources are found here as well.

Finally, in the bottom-right cell, we see the outward-looking structure part of regulatory stewardship. Here, we ask questions about our external accountability processes, apply and explain principles about what we are doing, and collaborations we may want to start with other agencies.

Please note, the cells just provide some aspects. The figure is by no means an exhaustive list of what regulatory stewardship can be.

All in all, and what I hope for the Australian participants has become clear, regulatory stewardship as envisaged here goes well beyond the very narrow and arguably “new New Public Management” understanding that the Australian Morrison government has of regulatory stewardship. I quote a PMC press release from 19 October 2020 here: “The stewardship approach [of the Australian Morrison Government] replicates best practice in business management by ensuring line accountabilities and performance expectations are clear and are attributed to driving improved outcomes.” That understanding of regulatory stewardship, in my humble opinion, truly misses the point.

So let’s look back at that diagram again. Looking at it differently, the bottom cells are the traditional aspects/values of regulatory governance: effectiveness and legitimacy. They reinforce each other and compete at the same time.

The top-right cell is something we’ve seen emerging worldwide over the last decades. It is part of many regulatory reforms and processes to “regulate regulation”: processes of participation and deliberation with those subject to regulation.

The top-left cell is quite unique to the idea of regulatory stewardship and would be a meaningful add on to processes of regulatory reform globally. It has not fully crystalised in NZ yet. Still, programs such as the Regulatory Practice Initiative (or G-REG) indicate how regulatory agencies can work together to shape a shared culture of regulatory governance.

I would argue that risk-based thinking has the most influential role to play in the bottom half of this figure. On the one hand, it is about making sure that resources are allocated in the best way to effectively reduce harms to individuals and society. This was extensively discussed in the different panels yesterday.

Yet, risk-based thinking is also about making sure that regulatory agencies’ political and reputational risks are managed well. So that’s why I think meaningful risk-based thinking in regulatory governance is both inward-looking and outward-looking.

Moreover, the stewardship principles I have discussed earlier allow us to bridge the traditional notions of risk-based thinking for effective regulatory governance and legitimate regulatory governance.

At the same time, they allow you to bring in external stakeholders in your risk-based processes. These processes are only meaningful if they capture both the risks as experienced by the regulator and the risks as experienced by its beneficiaries, its targets, and other regulators it relates to.

Finally, notions of regulatory stewardship will also allow you to make sure that your risk-based processes are understood and supported by your staff and leadership. After all, we do not want risk-based processes to fail simply because they are not supported internally or applied too slavishly and without critical thinking.

And with that, I have come to an end. Peter Block, quoted here, has put much thought into what stewardship means as a guiding principle for individuals and organisations. This quote strikes me, mainly because it drives home a simple message: you cannot expect others to be stewards if you are not clear about what it means to be a steward. At the same time, there is no point in telling others how to be stewards from a position of authority – stewardship is about serving rather than ruling. If we take stewardship seriously as a guiding philosophy for regulating regulation, we can only expect others to become stewards if we are stewards to them.

I think the same holds for risk-based regulation. Your staff, your leaders, your beneficiaries, and your targets all need to understand your approach to and understanding of risk-based regulation before you can expect them to commit to it. I hope the regulatory stewardship principles I have discussed in this presentation will help you achieve precisely that.

Thank you.

Here are the presentation slides: