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Posted on April 21st, 2014, by

1 Free-riders

In spite of obvious benefits of self-regulation, corporations and other organisations should come prepared to possible difficulties and weaknesses of self-regulation. In this regard, free-riders are one of the main weaknesses of self-regulations because the self-regulation implies the honesty and responsibility of corporations but, sometimes, corporations may fail to fulfil its self-regulatory functions properly[1]. Instead, they may prefer to hide the true information on their performance to gain a positive public image and, thus, they misuse their self-regulatory functions. In such a way, the maintenance of control over free-riders may be challenging, especially of corporations fail to introduce efficient and independent system of self-regulation. However, such problems arise in corporations, which tend to bureaucratisation and which have the wide gap between top executives and the rest of the corporate staff. In fact, it is top executives, who are more likely to slip to free-riding because they attempt to maximise their personal benefits, even if they do it at cost of corporate interests. Nevertheless, self-regulatory rules are elaborated in the collaboration between corporations and the government that normally decreases the risk of free-riders. At any rate, self-regulation emerges on the ground of the growing social responsibility of corporations that decreases the risk of free-riding practices being used by corporations.

2 Unwillingness of many corporations to implement self-regulation

Many corporations are still unwilling to implement self-regulation, while the introduction of self-regulation is rather the obligation imposed on corporations by the public and customers than their good will act[2]. At this point, it is worth mentioning the fact that many corporations are forced to introduce self-regulation under the growing public pressure or as an alternative to the increased government regulation[3]. Naturally, when corporations are forced to introduce self-regulation, there is always the risk of resistance to the change within corporations as well as attempts of corporations to gain maximum benefits from self-regulation. In such a situation, the efficiency of self-regulation may decrease, especially when self-regulation is introduced, when corporations are not prepared for such change[4]. Corporations can avoid adequate self-regulation, if they are unwilling or unprepared to such regulation. On the other hand, the poor self-regulation is likely to lead to the misuse of power within corporations, deterioration of the company-customer relationships, the decline of the corporate reputation and development of negative brand image and overall deterioration of the organisational performance[5]. Corporations cannot escape the public pressure on them because they are dependent on customers, while customers appreciate the reputation and brand of corporations. Poor self-regulation deteriorates both brand and reputation of corporations[6]. Hence, unwillingness of corporations may slow down the introduction of self-regulation but, if corporations decide to introduce self-regulation, they have to conduct it properly. Otherwise, they face a risk of the downturn in their marketing performance and business development because of the deterioration of their company-customer relationships, brand and reputation.

[1] Tirole, J. (1989). The Theory of Industrial Organisation. Cambridge, Mass.: MIT Press, 175

[2] Lutz, S. et al. (2005) “Quality Leadership When Regulating Standards Are Forthcoming,”¯ Journal of Industrial Economics, 13, 114

[3] Ibid.

[4] Ibid.

[5] Lyon, T. P. (1991). “Regulation with 20-20 Hindsight: Heads I Win, Tails You Lose?”¯ RAND Journal of Economics, 22, 587

[6] Ibid.

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