Regulatory impact and disposition to comply: Regulatees’ perceptions of the legitimacy of flexible regulatory codes

Over the past decade or more, regulators have been under pressure to develop a flexible approach to regulation while also improving outcomes for consumers. During this period there has been a discernible shift from rules to principles and, relatedly, a focus on the use of soft law instruments such as codes. On the other hand, the financial crisis has led to calls for stronger, and indeed statutory, regulation. If regulatory flexibility is to be retained we need to have a better understanding of how and in what circumstances it works. Drawing on legitimacy theory we examine regulatees’ perceptions of the legitimacy of regulation by code, focusing in particular on what may be described as the ultimate in flexible regulation, the ‘comply-or-explain’ principle, where noncompliance can be compliant – providing key regulating monitors agree. From interviews with directors and senior managers of large firms in Germany and the UK we find the former, perhaps surprisingly, were less positive about the use of codes than their ‘shareholder-value’ focused British counterparts. The latter were also more disposed to comply. We conclude that regulatees’ approaches to compliance with codes depend not only on the extent to which the content - the rules - make sense to regulatees, but also on familiarity with the form of regulation, in this case, voluntaristic codes. It is not however a simple picture. The extent to which codes produce outcomes consistent with broader social values, and/or confer private benefits, also influences attitudes to code compliance.