Achieving Better Regulatory Compliance

Every summer, parts of the Chesapeake Bay die. Nitrogen and phosphorus runoff from upstream farms consume all of the water’s oxygen, suffocating fish, crabs, and other marine life. To combat this problem, the U.S. Environmental Protection Agency (EPA) imposes strict limits on the amount of nitrogen and phosphorous that can enter rivers that feed the Bay.

But rules are only as good as their enforcement. The EPA recently found, for example, that only 30 percent of the nearly 40,000 farms in Pennsylvania, whose rivers supply 35 percent of the Bay’s water, comply with regulations that cap the runoff of nitrogen- and phosphorus-rich manure and fertilizer. Since the EPA released its finding, Pennsylvania regulators have weighed multiple strategies for promoting improved compliance, including outsourced inspections.

In a chapter of the recent book Achieving Regulatory Excellence, Neil Gunningham, a professor at the School of Regulation and Global Governance at Australian National University, has laid out the key strategic enforcement choices facing regulators like the state of Pennsylvania. He offers guidance for regulators when choosing among these strategies.

Gunningham says a regulator must choose an enforcement scheme based on its likely effectiveness in reducing the social and economic harms that a rule seeks to reduce. He lists multiple well-known enforcement options suited to different contexts.

Gunningham first describes a relatively hands-off “advice and persuasion” approach, where regulators rely on negotiation and education, using penalties only as a threat to be invoked in extreme cases. This scheme works only when regulated parties are likely to comply voluntarily, he explains.

At the other extreme lies the deterrence model, according to which regulators detect violations, establish guilt, and penalize violators. Gunningham notes that this approach works best with smaller organizations and warns regulators that its adversarial nature can create a “culture of regulatory resistance.”

In between advice and deterrence lies what Gunningham calls responsive regulation, which allows regulators to explore different approaches based on the actions of regulated parties, escalating sanctions when necessary and de-escalating when parties comply. Gunningham cautions regulators to use a responsive approach only when they regularly interact with the regulated party.

Gunningham also describes what he calls risk-based regulation, according to which regulators apply enforcement resources based on the degree of risk the regulated party poses. Although scoring risk can help regulators identify the parties to which it should devote its regulatory resources, Gunningham cautions that merely ranking potential violators by risk offers little guidance to regulators about how exactly to bring regulated entities into compliance.

The vast number of variables at play in any regulatory setting, from market factors to political dynamics, means that no simple formula exists for regulators to know which strategy will best secure compliance, writes Gunningham. Still, he provides several “signposts” that can guide regulators toward selecting and tweaking enforcement strategies that will achieve excellent results.

Gunningham urges regulators to evaluate an enforcement strategy’s “fit” with the characteristics of the regulatory challenge. To demonstrate how a strategy fits well in some instances but not others, Gunningham argues that risk-based regulation enables regulators to alleviate routine, identifiable risks, like occupational injuries, but not low frequency, high consequence risks, like the global financial crisis. Regulated parties’ motivations, including fear of punishment and sense of duty, also inform fit, he says.

Sometimes, one strategy might not be enough to secure compliance. Gunningham states that complementary strategies can benefit regulators, but warns that some combinations are incompatible. For example, because risk-based regulation mandates that action be taken against high-risk parties, but responsive regulation might reward good behavior in spite of risk, the combination of these tactics could prove ineffective unless the regulator uses them sequentially, first allocating regulatory resources based on parties’ risk level and only then using responsive regulation to secure compliance.

To achieve optimal compliance across the board, regulators might consider encouraging organizations to outperform compliance standards. But when enforcement resources are scarce, achieving “beyond-compliance” can be costly. As a result, Gunningham urges regulators to seek “beyond-compliance” only when it might lift the performance of all regulated parties. In Japan, for example, automobile manufacturers compete with one another to develop fuel-efficient technologies, making that industry an ideal target for responsive regulation that encourages innovation beyond minimum fuel efficiency standards.

Gunningham also encourages regulators to partner with third parties. Sometimes, outside groups have built-in incentives to help. For example, environmental groups can often assist regulators by threatening corporate reputations. But other times, regulators may need to create incentives for third parties to act. For instance, Gunningham notes that the regulatory regime for preventing intentional oil spills drastically improved when decision-makers required oil tankers to be fitted with a certain kind of tank. Inspectors’ and insurance companies’ subsequent involvement has led to near-total compliance, he notes.

Gunningham asks that regulators treat enforcement strategies as experiments that can be improved. Some models, like responsive regulation, specifically account for the need for improvement through trial and error, but other models require regulators to reevaluate their assumptions actively. Risk-based regulators, for instance, must frequently redefine risk levels in light of regulated firms’ experience and performance.

Finally, Gunningham tells regulators that public opinion and political risk must sometimes trump effectiveness. Just as political will might block what would otherwise be an effective enforcement scheme, a major incident at a major industrial facility might require a regulator to take action to preserve its legitimacy—even if the evidence shows that the regulated party has little culpability.

Gunningham hopes that his analysis will encourage regulators to view enforcement strategy selection not as a simple choice among options, but as a multi-faceted, ever-changing scheme with more than one right answer.

His chapter can be found in Achieving Regulatory Excellence, a new book edited by Cary Coglianese, the Edward B. Shils Professor of Law at the University of Pennsylvania and the director of the Penn Program on Regulation.