The Calm Before the Storm?

It’s awfully quiet out there. With all the expansion and proposed expansion of gaming, all the new and ever more complicated technology, and all the pressures of a down economy, you’d expect more buzz about serious regulatory issues and actions. Yet, our usually sensitive antennae have been remarkably silent. In our experience, this is the time when regulators should be nervous.

Don’t get us wrong—we like smooth sailing as much as the next mariner. And we’re not in the habit of storm chasing. But everything was also serene on the investment front before Enron and Bernie Maddoff. All we are saying is that regulators need to keep a weather eye.

We’ve often said that a regulator’s life is comprised of long stretches of boredom punctuated by moments of sheer panic. So what can a regulator do to get out in front of the next crisis? Well, we suggest asking some simple questions.

Have We Become Complacent?
Complacency does not necessarily mean laziness. Regulators can always find lots of routine activities to fill their days. We’re also not referring to the disinterest of a few individuals that can be found in most regulatory agencies. Instead, the issue concerns the imperceptible spread of a general malaise throughout the organization.

Stagnation develops when there is a general consensus that the agency has met all of its really important challenges and has developed a “been there, done that” sort of know-it-all arrogance. Basically, the agency switches on a collective autopilot and loses focus. Employees become more interested in surfing the web, tracking their 401(k)s or planning the next office social event than learning about the latest game technology or licensee management changes.

The main symptom of this development is the decline of curiosity. Unlike our feline friends, for whom it may be fatal, curiosity is the lifeblood of regulatory success. Regulators need to constantly ask lots of questions and relentlessly pursue anything that “just doesn’t look right” to avoid the unpleasant surprises that prompt the public to ask, “Where were the regulators?”

Our experience is that complacency by regulators subtly communicates itself directly to licensees. Some licensees may still strive for a high level of compliance without regulator prodding, but many will adjust the level of their vigilance to the perceived interest of the regulators. If the regulators don’t seem to care, licensees will tend to redirect resources to other, more commercially profitable efforts.

The antidote to regulatory apathy is the encouragement of creativity. The agency needs to challenge itself and its employees to find better ways of doing the job. A constant process of evaluation, evolution and re-evaluation is one way to ensure that no one can become too comfortable with the status quo. It’s not necessary to adopt a fancy improvement methodology like Six Sigma or to engage in pep talk-style cheerleading. The goal is rather to get people excited about what they are doing—the opposite of apathy is emotion. And it can be as simple as asking, “How can we do this better?”

Have We Let Our Guard Down?
Closely related to complacency is the tendency to relax verification efforts when everything seems to be going well. It’s entirely natural to believe that if a certain requirement has always been met in the past, compliance will continue into the future. Repeatedly confirming relatively routine behaviors will began to appear unnecessary at some point. The danger, of course, lies in the implicit assumption that licensees will invariably continue compliance even in the absence of regulatory vigilence. It’s comparable to assuming that drivers will abide by speed limits even if they know there are no patrol cars on the road.

Of necessity, regulators must rely on licensees to self-report problems and instances of non-compliance. Regulators are also entitled to place a certain degree of reliance on information generated by automated systems and received from proven credible sources. Regulators, however, need to regard all the information they process with a healthy skepticism. No matter how reliable the source, no representations should be accepted uncritically.

Have We Become Too Friendly?
We’ve found that an adversarial approach to regulation more often than not promotes barriers to compliance. Amicable working relationships between regulators and licensees thus are not only desirable, but also, quite simply, make life more bearable for all concerned. However, acting in a friendly and cooperative manner is one thing; developing relationships with licensees that compromises sound judgment is another. There is a fine line between cooperation and cooption.

Such behavior can range from outright fraternization to far more subtle forms of cooption. Many licensees are quite skilled at insinuating their ideas or courses of actions into the regulator’s mind, which can ultimately result in gaining favorable treatment. Once a friendship is established on a basis such as a shared interest or hobby, it is a short step to transfer that camaraderie to regulatory matters. For example, it becomes much easier to invoke an informal, buddy-buddy approach to jointly assessing the seriousness of an observed regulatory infraction—Oh, come on, you know that’s no big deal. It happens everywhere. By the way, how about those Knicks? Quite a game last night! The conversation then drifts to other matters, and the regulatory issue is either forgotten or somehow seems less important. We have actually heard similar dialogues between regulatory staff and licensees on a number of occasions. It’s simply human nature to want to avoid confrontation or unpleasantness when friends are involved.

For this reason, back during our management lives, we constantly reminded our employees to avoid any socializing with licensees and to remain vigilant against becoming overly familiar.

Where Are We Headed?
Aimless drift is a common problem in any bureaucracy. Many projects and programs, and even the agency itself, may launch with considerable zeal. After a period of time, the enthusiasm diminishes and, like a rudderless ship, the regulator just drifts with the wind or current.

For years, we’ve had a small plaque on our desk as a constant reminder that all projects—however noble and well intentioned—face a continual challenge to avoid the seemingly inevitable descent into oblivion. The plaque lists the six phases of a project:

1) Enthusiasm
2) Disillusionment
3) Panic
4) Search for the Guilty
5) Punishment of the Innocent
6) Praise and Honors for the Non-participants

OK, so maybe it doesn’t really fit our sailing metaphor, but it’s still humorous—and true! But the point is that the challenge for regulators is to constantly reinvent what they’re doing so that they stay perpetually at phase one. This can’t be accomplished with fancy-sounding mission statements or gaudy, self-congratulatory annual reports. The agency must constantly remind its collective self that its work is necessary, important and valuable. There is no simple formula for avoiding complacency, relaxation or cooption. But awareness of these problems is a major first step in avoiding their negative influences.

Final Thoughts
To appropriate Thomas Paine’s famous observation about government: Regulation, even in its best state, is but a necessary evil; in its worst state, an intolerable one.

As regulators, we certainly object to being deemed “evil.” However, we have seen the impact of “intolerable” regulation. Unreasonable and unnecessary regulation can result in a mass revolt by the licensees, a total disruption of regulatory effort, and frequently, an embarrassment to all involved. But we have also witnessed the effect of little or no regulation. In some ways, a lack of regulation, however caused, is potentially more devastating in its impact, because it creates a false sense of security and permits serious weaknesses to go undetected and uncorrected until serious consequences ensue.

Regulators need to embrace their necessity and strive continually for the “best state.” Part of this effort lies in recognition and avoidance of the internal shoals that can sink the ship.

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