Aligning Regulatory Activity With Value Creation

The writings of Michael Porter help us understand why NCUA's activities have discouraged the creation of member-owner value.

Harvard Business School Professor Michael Porter wrote a McKinsey Award-winning article in the January-February 2011Harvard Business Reviewon addressing the role of corporate purpose and regulatory activity. He posits that if the regulatory system is not aligned with the institutions it oversees, the result can block innovation and inflict unnecessary costs.

In his article Porter proposes a new business model for shareholder, capitalist firms that he described as Creating Shared Value. For this to occur in market economies, government regulation would have to recognize this new model and the varied outcomes it is meant to achieve.

Porter’s focus is on privately-owned shareholder corporations. But his insistence on the necessity for change in the way regulators understand their role is front and center for the cooperative credit union movement. Credit union experiences with NCUA from 2008 to the present are an unfortunate validation for Porter’s main point, which follows:

The right kind of government regulation can encourage companies to pursue shared value; the wrong kind works against it… the ways in which regulations are designed and implemented determine whether they benefit society or work against it… .

Regulation that discourages shared value … forces compliance with particular priorities rather than focusing on measurable social improvement. It mandates a particular approach to meeting a standard [thereby] blocking innovation and almost always inflicting costs on companies. When governments fall into the trap of this sort of regulation, they undermine the very progress they are seeking while triggering fierce resistance from business that slows progress further and blocks shared value…

NCUA’s actions during and post crisis validate Porter’s concerns. The Agency’s activities have discouraged the creation of member-owner value. Until cooperative principles guide their actions and priorities, credit unions will be uncertain, if not distrustful of the regulatory system. Credit unions contribution to the economic recovery will be hindered and future innovation discouraged.

June 2, 2014

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