THREE POWERFUL PROTECTORS AGAINST CORPORATE MISCONDUCT

We don’t live in a perfect world. On any given day, you’ll find reports of businesses behaving in ways that are less than noble. We have reasons to be cynical. We can’t rely on superheroes to save us. Litigation is risky, expensive and slow. We aren’t powerless though.

We're protected against corporate misconduct by the combination of

1. Regulation
2. Competition
3. Publication

This trio isn't perfect but can be effective. We’ll use financial services as an example

Regulation

The regulators focus on keeping financial institutions solvent. They set rules and specify minimum capital requirements. When capital gets set aside, it's typically invested in conservative investments for security. There are likely restrictions on the types of investments permitted, which means lower (but safer) returns. Tying up capital is not attractive for investors but protects buyers.

Canada escaped the financial meltdown and the regulations were certainly a reason.

Competition

In the world of gadgets, market share is an important consideration. When there’s a clear market leader like the iPad, it’s tough for competitors to charge more (or even the same price). Lowering prices also increases the size of the market.

In financial services, profits seem more important. When I was designing insurance products, there was always pressure to boost profits but without losing market share. That’s virtually impossible. At any given time, some competitors will be more interested in market share.

Overall, competition is your friend and augments regulation.

Publication

Regulations may be followed and competition may be effective. There can still be problems. For instance

• mortgage life insurance from lenders is a bad deal
• multilevel marketing has risks
• mutual funds have high investment expenses

That's where publication comes in. The media can investigate and report. Bloggers can bring scrutiny too. Wikipedia is a living repository reminding us of what happened. You can do your part through social media too. Your messages reach the world instantly.

Awareness helps everyone who pays attention make better decisions. You’re still free to make mistakes you later regret but you can avoid them too.

What’s stopping you from buying from a good company? When you do, you punish a bad one at the same time. That’s an ideal win/lose.

Links

• Reasons to be cynical and how to fight cynicism
• What are you doing about your high investment expenses?
• Three reasons life insurance prices are shooting up
• Rate hikes: Is your advisor sleeping on the job?
• image courtesy of KaYann

Podcast 167

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PS What do you do if you see misconduct?