Thursday, December 19, 2013

From clubs to States: The future of self-regulating organisations

by Ajay Shah, Arjun Rajagopal, Shubho Roy.

This post is based on talk at the 2013 National Convention of the Institute of Company Secretaries of India.

India's governance environment is undergoing rapid changes, and this will drastically re-shape the role of Company Secretaries. As a professional body, ICSI needs to understand and anticipate these changes, in order to ensure that its members are equipped to fulfill their critical role. While the ideas here pertain to ICSI, they also apply more generally to other self-regulating organisations.

The citizen-government interface is changing


The development of the government-citizen interface of a country can be divided into two phases. In the first phase, the interface is characterised by poorly written regulations, wide variation in practice and very bad infrastructure. Each government office uses its own unique processes and practices, and requires physical filings on forms that are difficult to fill. Different branches of government collect the same information in different ways, the same function and form are widely different in different states.

In such contexts, professionals invest time in learning to ``work'' the system, and create a valuable niche for themselves as indispensable intermediaries between citizens and the state. Twenty years ago filing a personal income tax return was challenging and often required professional help. This culture persists in many government offices: forms have `unique' requirements which only `experienced' persons know. This knowledge/experience comes from being a member of the professional organisation (the club) and the club prevents this knowledge from falling into the hands of non-members. As a result citizens and businesses are `forced' to approach the club members to comply with laws.

The second phase of development occurs when the State-Citizen interface improves. This is occurring in India through computerisation and standardisation of processes and forms on the one hand, and increased empowerment of citizens on the other. The internet is changing the interface in two ways:

  1. Many government services are moving on to the internet. While India has only 18% internet penetration, around 39% of railway tickets are sold online.
  2. Even with poor systems, the internet is helping citizens deal with poor state interface through HOWTO documents, computerised services, etc.

As a result, consumers of professional services begin to demand more of their service providers, and professionals are faced with an existential crisis.

The profession's response


Professional organisations have two choices:

  1. The knee-jerk reaction to defend their turf, fight to keep systems closed and inaccessible, try to increase the complexity of systems, and create and sustain non-transparent institutions.
  2. The enlightened response to focus on long-term survival by aligning itself with the interests of the consumer and industry they serve.

The knee jerk reaction causes frustration among customers and clients. This leaves the profession vulnerable to being side-lined by cost-driven innovations in the economy. An example of this is the rise of Legal Process Out-sourcing (LPO), which has allowed clients to access a broad range of legal services without hiring expensive lawyers. Worse, a profession can spiral into a vicious cycle of defensive and unethical behaviour, in which members to put the interests of the profession above those of their clients and customers, and in which standards of competence and conduct begin to suffer. In extreme cases, persistent self-interested or indisciplined conduct can invite a devastating response from the political establishment, as occurred when the Government took over management of the Medical Council of India in 2010.

By contrast, an enlightened response to a changing environment would try to preempt such crises and focus on the long-term survival of the profession. In the long-term, the profession will only survive if its interests are aligned with those of its clients, and if it provides a useful service to society at large. Strategically, it would make sense for the profession to focus on those roles in which it is truly irreplaceable, re-focussing its attention on its highest value services. And institutionally, the profession's governing body should move from being a ``club'' to being a ``state''.

The way forward


The state model recognises that modern professional organisations are like regulators, in that they incorporate the broad functions of the modern state: legislative, executive and judicial. As such, they ought to be designed with the same internal safeguards and processes as the modern state. These include, most critically, defining and separating out these functions. A good SRO will carry out its legislative functions by making codes of conduct and defining conditions of entry into the profession. It will carry out its executive functions by holding exams to restrict entry into the profession to qualified individuals, and by investigating complaints against its members. And it will carry out the judicial function of disciplining its members.

The record on performance of these functions in India is mixed. We have sometimes been successful in defining codes of conduct and entry conditions, sometimes not. In terms of executive functions, Indian SROs have paid extreme attention to maintaining entry barriers, often at the cost of efforts to investigate complaints against the profession. In terms of the judicial function, Indian SROs are highly averse to disciplining their members in public, fearing that this will be seen as a sign of failure of the SRO. It is possible to bolster each of these functions, and ensuring the long-term survival of the profession requires that this be done.

In order to exercise its legislative function effectively, a modern SRO must:

  • make detailed codes of conduct;
  • make these codes of conduct available to the public;
  • make these codes of conduct readable and comprehensible, through plain English guidance notes, FAQ pages, etc.;
  • provide information about how grievances can be addressed.

In order to exercise its executive functions effectively, a modern SRO must:

  • ensure that the entrance exams it runs are performing their function correctly. This requires analysis of test results and periodic review of the design and content of the tests, to ensure that they are relevant and of an appropriate level of difficulty;
  • engage in continuing professional education of its members, as opposed to voluntary and occasional seminars, and ensure that this continuing education reflects the rigour of the selection process for entry;
  • ensure that complaints against the profession are taken seriously, and investigated, and that the investigations are time-bound, and that the complainants are informed about the status of the investigation.

Too often in India, entrance tests are just a reflection of the person taking the exam and not the person who organised the exam. We do not bother to think whether the exam was fair. A recent data analysis of ICSE and ISC exams (high school exams) shows statistical evidence of poor exam design and manipulation of marks.

In a ``club'', standards of conduct are enforced by norms, not rules. Those norms are flexible, and defaulters are treated kindly. Clubs work well for small groups of professionals, who must rely on each other in an uncertain and unpredictable environment, which itself must be managed with a high degree of flexibility and discretion. A club is thus an appropriate model for a SRO in an early stage of its development. But as the environment changes, as processes become technologised and standardised, and customers become empowered, the club model will have to give way to a ``state'' model, which is less discretionary, less cosy, and less forgiving to defaulters.

Regarding the judicial function of a modern SRO, the organisation must:

  1. have an impartial and effective judiciary;
  2. have a fair system for addressing complaints;
  3. have a detailed procedure for adjudication;
  4. make rules allowing the complainant to participate;
  5. ensure that adjudication proceedings are time bound.

Achieving this requires three ingredients: The first is a law, which will clearly set the bounds within which the SRO will operate. This law should be ``anti-professional'' in that it must be designed to protect the interests of society rather than the interests of the profession. Punishments should not only be meted out but publicly shown to have been meted out. In 2012, the New York city Disciplinary Committee publicly disciplined 65 lawyers (See pg. 32) which include 13 disbarments. Many jurisdictions even go to individual practitioner level information about disciplinary actions. We rarely see any comparable level of disciplinary actions against professionals in India. The ones that do happen are usually after a big `scandal' like the Satyam failure and soon die out of public memory. No comparable data is publicly available for Indian professional organisations. They seem to hide the data about disciplinary actions and therefore should be presumed to have not carried out much.
India is going through an interesting time. The nature of the state is changing. RTI, Lokpal, E-governance, etc., are just examples of a move to a more perfect republic. SRO's have a choice, get in the way or join the change.

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