Innovations in Governance A Functional Typology of Private Governance Institutions.doc

Innovations in Governance: A Functional Typology of Private Governance Institutions Tracey M. Roberts*Tracey.Robertslouisville.edu© Tracey M. Roberts, 2010, 2011ABSTRACTThe need to manage the environmental and social impacts of globalization has never been more pressing. Rather than turning to formal government to address these problems, communities are increasingly looking to private governance institutions to set public policy and perform regulatory activities. These institutions, rules and structures for governing without government, remain undertheorized despite an expanding literature. Questions remain about why they have arisen, what functions they serve, and whether they are effective. This article advances the literature in several ways. First, the article pulls from the political science, economics, law, and sociology scholarship to introduce the various types of private governance institutions using a conventional taxonomy, which groups these institutions based on the identity of their constituent organizations (business interests, civil society, and government entities and their hybrid permutations). The article then outlines the inherent limitations of this approach as a descriptive and analytical tool. Second, article offers an alternative typology, viewing private governance institutions through an economic lens. The article examines what demands for governance arise at each stage of the regulatory process and what barriers keep formal government from meeting that demand. By sorting the institutions according to the kinds of barriers they address at each phase of the regulatory process, the article creates a functional typology. This process yields a number of insights. First, a functional typology clarifies the strengths of each type of private governance institution, reveals key structures needed at each stage of the regulatory process and suggests ways that both private governance and formal government may be improved. Second, the functional typology suggests that the conventional analysis is incorrect; it is not always necessary for a single private governance institution to provide a substitute for formal government at all stages of the regulatory process to be effective. Private governance institutions may complement formal government at key junctures or they may coordinate and collaborate with each other to create regimes with the capacity to substitute for formal government entirely. In fact, collaboration may be preferred, based on considerations associated with the theory of the firm. Third, only one type of private governance institution currently attempts to substitute for formal government at all stages of the regulatory process: voluntary standards, certification and labeling systems. This marks these systems for more focused study, since they provide a unique solution to the tragedy of the commons and regulatory fragmentation and other anti-commons problems. Fourth, the functional typology reveals that funding is important. Prior efforts to analyze these institutions based on the constituents, their motives, their capacities, and their relative power within the institution had obscured the role of funding in governance. The functional typology underscores the key role that the relative allocation of the burdens and the benefits of governance plays in determining the whether an institution will be effective and survive over the long term.Table of ContentsIntroductionI.Conventional Taxonomy: Sorting by AffiliationA.Business InstitutionsB.Hybrid Government / Business InstitutionsC.Hybrid Civic / Business InstitutionsD.Civic InstitutionsE.Hybrid Government / Civic InstitutionsF.Hybrid Civic / Business / Government InstitutionsG.Descriptive and Analytical Limits of the Conventional Taxonomy II.Functional Typology: How Private Governance Institutions Overcome Government Failures and Market Failures that Occur at Each Stage of RegulationA. Agenda-Setting B.Negotiation of StandardsC.ImplementationD.Monitoring and EnforcementE.Funding III.Institutional Interplay: How do these institutions interact, complement, and compete with one another?A.Between Government and Private Governance Institutions1. Complements Filling gaps 2.Conflicts Crowding Out and PreemptionB.Among and Between Private Governance Institutions1.Complements Collaboration and Coordination2.Conflicts Competition for Regulatory Space, Participants, and Investors/ConsumersConclusion: What a Functional Typology YieldsIntroduction Biodiversity loss, fishery collapse, deforestation, climate change, conflicts over natural resources, economic migration, and increasing inequality threaten economic and social stability throughout the world. Despite the economic gains it has brought much of the world, globalization is driving most of these negative externalities. Advances in communications technology have allowed communities to constitute themselves based on common interests and participation in common markets as well as by geographic proximity to act collectively to address those impacts. See Charlotte Hess & Elinor Ostrom, Introduction, An Overview of the Knowledge Commons, in Understanding Knowledge as a Commons: From Theory to Practice (Charlotte Hess & Elinor Ostrom eds., MIT 2008). Demands for governance may be met not just by governmental legislation or regulation, which results from the political process, but also from direct negotiations between individuals impacted by an environmental concern, advocacy groups, nonprofit organizations, corporations and other parties. Increasingly, communities are turning to private governance, rather than formal government, to address their needs. Private governance institutions provide governance without government; they are rules and structures by which individuals, communities, firms, civic organizations and other entities govern their interests without the direct involvement of the state or its subsidiaries. Private governance institutions are limitless in their variety. The political science, sociology, law and economics literatures describe hundreds of variations in case studies of communities throughout the world that have developed their own rules for managing resources and dealing with conflicts. See Indiana Universitys Digital Libarary of the Commons, available at http:/dlc.dlib.indiana.edu/dlc/. This article advances that literature in three ways. First, the article examines private governance from an economic point of view. Using the framework of supply and demand, the article examines the contexts in which private governance institutions arise. In general, private governance institutions arise to meet an unmet public demand for governance. Thomas P. Lyon, Environmental Governance: An Economic Perspective, in Governance for the Environment, New Perspectives 43 (Magali A. Delmas & Oran R. Young eds., Cambridge 2009) (suggesting, from an economic point of view, that demand for governance may arise from consumers seeking products or services from companies that have a record of fair treatment of their workers, fair payment to their agricultural suppliers or environmentally sound operations); Walter Mattli & Ngaire Woods, In Whose Benefit? Explaining Regulatory Change in Global Politics, in The Politics of Global Regulation 29, 33 (Walter Mattli & Ngaire Woods eds., Princeton 2009). Kenneth Abbott and Duncan Snidal, writing in the political science literature, indicate that there are five stages of regulatory activity, captured by the acronym “ANIME”: (1) agenda-setting, (2) negotiation of standards, (3) implementation, (4) monitoring, and (5) enforcement. Kenneth W. Abbott & Duncan Snidal, The Governance Triangle: Regulatory Standards Institutions and the Shadow of the Law, in The Politics of Global Regulation 46 (Walter Mattli & Ngaire Woods eds., Princeton University Press 2009). This article examines each stage of regulation and argues that private governance institutions arise in response to either to government failure or market failure at one or more stages of the regulatory process. Whether undertaken by formal governments, private governance institutions, hybrids, or through intergovernmental agreements, the parties seeking to develop effective regulation must overcome a number of barriers, including information problems, collective action problems, public choice dilemmas, rentseeking, regulatory capture risks, and the problem of funding public goods. Second, by sorting private governance institutions based on the functions that they serve in addressing government failure or market failure, the article takes a new approach. To the extent that scholars have previously attempted to classify the diverse array of private governance institutions, they have or have grouped them according to their dominant constituents, based on whether those constituents are primarily (i) firms and business groups, (ii) nongovernmental organizations and civic participants, (iii) some hybrid involving both groups, (iv) government partnering with either or both groups, or (v) a combination of all three sectors. See Graeme Auld, Steven Bernstein, & Benjamin Cashore, The New Corporate Social Responsibility, 33 Ann. Rev. Envtl. Resource 413 (2008). See also Abbott, supra note 4, at 46. Using this approach, scholars have questioned the value of certain institutional structures based on the capacities See Abbott, supra note 4, at 46. or mixed or compromised motives of the dominant players within those institutions. See Auld, supra note 5 at 416. In general, this approach obscures more than it illuminates. Formal organization may not reflect the underlying control. Participant motives may be mixed. Firms sometimes create private governance institutions to improve compliance, to avoid new regulation, and to avoid risks that they would not otherwise face if government structures such as the courts did not exist. In such cases, the lines drawn between public and business interests can blind scholars to important elements needed for effective regulation. In other words, classifying governance systems based on the composition of their constituents fails to get at the crux of the matter: predicting which private governance institutions will meet the demand for governance and which will not. Identifying the criteria that will render private governance institutions reliable as effective regulators is a meaningful exercise for a number of reasons. Parties that generate social costs may also use private governance to avoid regulation. Private governance institutions not only complement one other and formal government to meet demands for governance; they also sometimes preempt formal regulation and compete with one another for regulatory space, participants, consumers and investors. The consequences include label dilution and consumer and investor confusion. By inquiring into the reasons that there is a demand for governance at each stage of the regulatory process and identifying the structures each institution uses to address those demands, the article turns a spotlight on institutional strengths and weaknesses, revealing how private governance institutions (and formal government) may be improved. It also provides a set of criteria that the public may use to evaluate private governance institutions. The criteria could potentially be used to help consumers decide whether to buy wood certified by the Forest Stewardship Council or the Sustainable Forestry Institute, for instance. This broad approach yields important two key observations that are usually obscured when scholars examine private governance institutions and hybrid forms of governance using the conventional taxonomy. First, when formal government is involved, the process of finding funding for the regulatory process is decoupled from the other activities involved in regulating; much, if not all of the regulatory process is funded by tax revenues. In contrast, stakeholders must fund each stage of the regulatory process with private governance, which may result both in the under-funding of public goods and in institutional instability. Second, because there is no threat of criminal or other sanction except those that the parties agree to and can impose on one another, private governance is always limited to a coalition of the willing. Exit is always available and disputes can destabilize hard-won alliances. For this reason dispute resolution mechanisms are essential.The article is organized as follows: Part I describes the various types of private governance institutions using the conventional approach, dividing the organizations based on their main constituencies: private firms, civic organizations and hybrid forms that may or may not involve formal government. It then outlines the shortfalls of this approach. Part II describes the circumstances that give rise to a demand for private governance at each of the five stages of the regulatory process and the barriers and hazards that block effective regulation. This section also organizes private governance institutions according to the functions they serve in overcoming these barriers and hazards. Part III describes the interplay between private governance institutions and formal government and among private governance institutions themselves. While Part II discusses the complementary roles private governance institutions play, Part III is devoted primarily to the conflicts that arise among private governance institutions and between private governance and formal government. The section describes the ways private governance institutions compete for regulatory space, participants, consumers and investors and the impact these interactions may have on effective regulation. Finally, by drawing from the political science, economics, business, sociology, and legal literatures, the article provides a more comprehensive view of the scope of private governance and overcomes the silo effects that can limit analysis within each discipline. The article identifies key characteristics or structures needed at each stage of regulation to ensure its effectiveness. The article notes that voluntary standards, certification and labeling systems are the only private governance institution to attempt to substitute for formal government at all stages of the regulatory process. It describes how constellations of private governance institutions may collaborate to address demand for governance at all stages of the regulatory process. I.Conventional Taxonomy: Sorting by Affiliation This section divides the main private governance institutions along the lines of whether they are generated primarily by private firms, by civic organizations, by some hybrid of the two or with the involvement of formal government. A.Business InstitutionsEfforts by firms to addr