What is Industry Self-Regulation?

Self-regulating organizations, or SROs, operate within a wide range of industries and can have varying impacts on the standards that are set for the way those industries do business.  While limits that are set by SROs (for example, limits on the calorie content of a soft drink) might seem beneficial for the health of the general public, they may simply be efforts to stave-off effective, more stringent regulations that might otherwise be implemented by state and federal entities.

Consequently, the activities of these industries should be viewed with a jaundiced eye and taken for what they are – simultaneously standard-setting and self-protecting.  An organization like the Motion Picture Association of America, a relatively benign self-regulator of the motion picture industry that’s known to many moviegoers, is an organization that not only sets industry standards through its assignment of ratings (the well-known ‘G,’ ‘PG,’ ‘PG-13,’ and ‘R’ classifications) to motion pictures, but also routinely and actively lobbies members of the United States Congress to enact legislation beneficial to (or block legislation that might be harmful to) the motion picture industry.

Self-regulators should not be viewed as inherently noble or harmful, but instead as more ambiguous organizations that likely serve to increase quality standards for consumers in an effort, spoken or unspoken, to limit or hold-off government scrutiny and oversight of their industry.

And that’s not to say that there aren’t benefits that can go along with self-regulation versus government regulation.  Certainly the level of cost incurred by taxpayers can be reduced if industries take on a degree of regulatory oversight for their activities.  It’s also worth noting that industry participants do generally possess a greater level of industry expertise than do government officials, making self-regulation, in some instances, more informed and less disruptive than might be the case if the industry were subject to more strict government oversight.  Some believe that self-regulation can also be more flexible and implemented more timely than increased government oversight.

Still, there remains a real question as to the extent to which an industry group will go in policing itself and curbing business practices that may be both lucrative and less than honorable.  Clearly, the financial services industry’s self-regulatory organization, the Self-regulatory body failed – utterly and completely – to foresee and prevent the devastating financial crisis that began to gain real momentum in 2008 and whose destructive effects are still being dealt with to this day.

We believe that it is frequently useful to think of self-regulating organizations as not so much self-regulating organizations per se, but industry trade organizations that engage, to varying degrees, in self-regulation.  Too often, we find that characterizing these organizations’ efforts as strictly self-regulating would simply be giving them too much credit.

When looking at the way countless successful industries have grown and evolved within our economy over the course of hundreds of years, we see consistent themes present themselves again and again – and again – in this order:

1. a growth opportunity in a business sector emerges;
2. as the industry grows, companies – understandably – aggressively pursue the business (and wealth) opportunity; before
3. inevitably beginning to overstep the broader interests of their customers and the economy; compelling
4. the government to step in and begin to take action to address these activities and protect consumers; when
5. industry participants begin to see a threat from government intervention and only then proclaim that they are prepared to ‘self-regulate’ their business practices.

And the story in the advertising industry has been much the same.  So, while the work that these late-to-the-party self-regulators are doing is in some instances valuable, its scope is also frequently very limited, largely intended to take the minimum level of action required to placate the government and consumer groups.

Self-regulators are, by definition, funded by the companies they claim to regulate. Don’t for a second believe that any self-regulator wants – or even would be permitted by its constituent members – to do all that it can to prevent harmful or deceptive business practices that are proving lucrative for the industry.

Take the BBB for example. Companies pay thousands of dollars to the BBB to become accredited members. And while consumers may think of the BBB as a consumer watchdog, the BBB considers itself a mediator between aggrieved consumers and companies. BBB ratings of a company depend upon how a company responds to a customer within the BBB’s own system, thus even if it has thousands of complaints against it, or state or federal consumer protection officials have taken action against a company, it can still have a positive rating.  A CNN Money investigation found that more than 100 businesses had A- or higher ratings despite having been the subject of government action regarding serious regulation violations.

The BBB itself maintains that its ratings are not a guarantee of the reliability or performance of a company’s product or service and that consumers should consider a BBB rating in addition to all other available information about the business.

So, since you’re likely to run into these organizations again and again in the media, we feel as though it’s important for you to learn more about some of the more prominent groups in a number of our economy’s leading industries.

In some instances, you may come away with the uneasy feeling that the fox may be guarding the henhouse.