The business world today is well regulated and structured in its functions, duties and responsibilities to to various laws and governmental regulations. Still the debate on whether there should be more regulations or not is very active since the beginning of the last year’s financial crisis and credit crunch. Different actions have been taken by part of the government in the United States in this respect. The Credit Card Act of 2009 is the latest example of government dealing with regulatory risks and business torts made by companies.
First, let us define our terms. A ‘regulatory risk’ means that there can be “a change in laws and regulations will materially impact a security, business, sector or market. A change in laws or regulations made by the government or a regulatory body” (‘Regulatory Risk’, 2009). But regulatory risks have their positive and negative impact as well. For example they do influence the increase of business operational costs, influence negatively the attractiveness of an investment and even impact on changing the competitive landscape of the market. On the other hand we have torts, in our case business torts. They are torts that “provide the common law rules on liability for the infliction of pure economic loss, such as interference with economic or business relationships” (‘Economic Tort’, 2009).
Thus the regulatory risk and business tort measures are designed to protect the market and consumers from harmful speculations, scam companies or any other fraud related business transactions. The forms of fraud and torts are many and this is why companies have to adopt certain preventive and detective measures along with corrective ones.
The case of Alumina Inc. can be taken as an example for the measures we are discussing. A couple of years ago, EPA (the Environmental Protection Agency) found during one of their routine audits that Alumina Inc. had violated the environmental discharge standards (‘university of Phoenix’, 2008). After the evaluation report, the company quickly corrected the matter and in the next report everything was found to be within the standards. But once they were again in compliance with the regulations the company failed to design and implement a plan to prevent this type of regulatory risk to happen again.
This opened the road to future tort liabilities which would damage the company. In fact, the current action of not taking adequate preventive measures and detection ones was itself transformed into a tort, the tort of environmental negligence. Kelly Bates accused Alumina that the illness of her child was caused by the repeated water contaminations of Lake Dira. She pretended that her daughter developed leukemia because of the consumption of water from that contaminated lake (University of Phoenix, 2008).
But the reality was quite the contrary. After the violation report from EPA the company invested in purchasing new technologies for the cleanup of the water. Because of this new technology Alumina’s system was in reality below the required PaH contamination levels. This move was one of the best prevention measures a company can make. By investing in better technology in order to fulfill the required parameters you have given your company a positive advantage and the ability to correct fast any tort that may arise or better. But again, this measure is mainly a preventive one, meaning that it diminishes the possibility for torts to happen again.
It also functions as a correction measure for the tort you are actually dealing, but it is not that efficient in detection any tort or risk. There are two basic detection measures that a company can use to detect risks and torts, and that Alumina should have used: self-investigations and self-reporting (University of Phoenix, 2008).
The self-investigation measure would provide the company with documented data of their status in different moments of time. It is like a scanner you make at a certain moment at the company to see how it is functioning. These internal evaluations can be done every six months, or even every quarter. This self-investigation should be accompanied with detailed published reports. The company should publish a yearly report to stockholders informing them about the present situation and future liabilities of the company. The effect will be that stockholders and investors will be more secure about the future of the company.
This published report can be used for internal use or the company can even undertake an information campaign informing the public about the facts of their status. This public information campaigns will ultimately benefit the company. With them the public will acknowledge the efforts of the company in preserving security and will help create a positive perception of that company among the consumers. This way they will have nothing new to fear off from any Environmental Protection Agency evaluation report, or any other auditing agency, like in the case of Alumina. If Alumina had performed routine internal evaluations and reported the findings to the public then they could have avoided the negative impact of the claims of Kelly Bates regarding the health status of her daughter.
For example, from the results of this internal evaluations Alumina would have five years of documented data proving that their emission rate is below the required levels. But even if any derogatory information would have been found during these evaluations the company would have had all the necessary time to implement corrective measures (University of Phoenix, 2008).
In conclusion, I can say that companies should pay much more attention to risk and tort prevention. Risk management should be one of the core instruments of the decision making for a company if it wants to become successful. But even if regulatory risks and tort liabilities occur, the company should be ready to manage the risk. The reason is because the public is very sensitive to this issues and a non-adequate, non-prompt response would harm the brand recognition of that company. But not only should the response be adequate but even the ‘plan of action’ should be in place. In the case of Alumina the company reacted promptly to the situation but it lacked a plan of action and this damaged its perception among the consumers.
Furthermore, companies should not be afraid to communicate with the public for potential liabilities and the measures they are taking, or plan to take, to eliminate these liabilities. By being open with the public the company will increase their confidence and reinforce its brand recognition. This situation will act as an attraction for investors to put their money in company’s projects.
References
(2009). Regulatory Risk. Investopedia Online.
(2009). Economic Tort. Investopedia Online. Web.
University of Phoenix. (2008). Week Two material: Business regulation simulation.