Session Title:
Government Regulation & Public-Private Partnerships

Date of talk or publication:
2005

Speaker Name / Title:
Bruce Scott, Robert Tucker & Thomas Mondschean

Organization:
Harvard Business School, Standard Bank of S. Africa & DePaul University

Description:
In August 2002, the South African Banking Council, facing the threat of government imposition of a mandatory charter of black empowerment and repeated protest demonstrations in front of its offices, decided to negotiate directly with black employee and community representatives under the auspices of the government and thereby avert a series of meetings in which it would inevitably be in a defensive and largely adversarial position. Ten months later it had reached an agreement on a set of principles for a voluntary affirmative action charter covering the financial services sector. The charter, which creates an addition to the market framework for the financial services sector through which banks can compete with one another to gain competitive advantage by addressing societal concerns not previously included in the market framework, differs significantly from charters imposed by the government on six other sectors and, unlike the U.S. CRA legislation, which sets targets and penalties for compliance failure, establishes rewards for superior performance that offer the possibility that it will harness the competitive energies of the various financial institutions.

The charter has nothing whatsoever to do with macroeconomics, being, in effect, a supplementary set of regulations that brings within the market framework certain positive externalities. It now includes, for example, certain public benefits for which private clients are not normally willing to pay such as having more black employees in a bank or providing more services to black communities. These modifications in the market frameworks for financial services help align private incentives with societal costs and benefits. The primary direct beneficiaries will be black, predominantly poor, people. The charter is thus a way to adjust the market framework so as to harness the energy of the private sector to achieve societal goals. By changing the frameworks, it makes provisions to reward firms that implement affirmative action programs and punish those that do not. The most serious punishment is expected to be loss of business-to-business transactions inasmuch as low charter (affirmative action) scores will induce suppliers and customers to take their business to a bank with a higher score. By the same token, banks will be looking to buy from suppliers with good scores. This should produce a virtuous spiral for the more enterprising firms. A charter council created as a supplementary regulatory authority to monitor progress under these regulations is to evaluate and certify differences in the performance of the firms. Appointed directly by the government, reporting to the government, and presumably backed by the full authority of the government, the charter council represents an approach to inducing business to serve the poor as a business proposition by changing the market frameworks in which business operates instead of waiting for firms to take a more enlightened position on their own.