Compliance by Fire Alarm: Regulatory Oversight through Information Feedback Loops

Journal of Corporation Law, Forthcoming

54 Pages Posted: 1 Apr 2020 Last revised: 17 Apr 2020

See all articles by David Orozco

David Orozco

Florida State University - College of Business

Date Written: March 6, 2020

Abstract

This article contributes to the growing body of compliance law theory and scholarship. It does so by introducing a new and third approach to compliance called the fire alarm approach. This approach is grounded in the theoretical perspectives of negotiated governance and director primacy. It also contrasts but complements two other well-known compliance approaches discussed by scholars; the policing and architectural approaches. The fire alarm approach is executed throughout the compliance system that includes regulators, firms, executives, and third-party relationships. A virtue of the fire alarm approach is that it helps reduce agency costs by increasing transparency and information flows across the various system elements. This is achieved through what are called information feedback loops. These information flows, or feedback loops, reduce agency costs that lead to opportunism, shirking of duties and conflicts of interest. This in turn, promotes the goals of regulation that are designed to ensure trust in the marketplace and the protection and integrity of public welfare, health and safety.

Part I discusses the fundamental problem of compliance as an agency cost problem related to information asymmetries. This part will examine how each subsystem within the compliance system generates its own unique set of agency costs. Information feedback loops are necessary to address the significant information asymmetries created by the various principal-agent relationships that inure within the compliance system. Part II discusses the policing and architectural compliance approaches. These two approaches are vital yet fail to capture the entire portrait of effective compliance. Part III introduces the fire alarm approach to compliance that has been neglected in the scholarly literature. Part IV describes information loops and provides a list of examples that can reduce agency costs and improve the compliance system. Part V discusses various theoretical, normative and policy implications that flow from this analysis.

Suggested Citation

Orozco, David, Compliance by Fire Alarm: Regulatory Oversight through Information Feedback Loops (March 6, 2020). Journal of Corporation Law, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3550124 or http://dx.doi.org/10.2139/ssrn.3550124

David Orozco (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

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