Public Policy and Policy Formulation

David L. Rainey, Ph.D., Acting Dean

Rensselaer Polytechnic Institute
275 Windsor Street, Hartford, CT 06120
Tel: (860) 548-2401 / Fax: (860) 548-2427; E-mail: rained@rpi.edu

Abstract

This article pertains to how public policy sets the agenda for policy formulation for businesses when developing new technologies and establishing the related business ventures. Public policy, political and legal systems, and a myriad of forces shaping the social-political environment shape regulatory mandates and prescribe the realm of what acceptable solutions are. They are generally intended to provide governance, stability, and security. They are usually based on the internationally recognized concepts of sovereignty and rule of law.

Policy formulation focuses on value creation and sustainable success. It supports the purpose of a company/business unit and is used to guide them to their desired outcomes. Policy formulation involves decision making that orchestrates the transition and transformation of the organization into what it wants to be in the future. It involves what should be done and articulates the strategic and operational approaches.

Introduction

The business environment is the broad context that includes the external forces impinging upon businesses and the market spaces providing opportunities for new systems and solutions. The business environment is a more comprehensive perspective of the external dimensions than the more well-known, but less precise notion of the macro-environment. It includes the social, political, ethical, economic, technological, environmental, and market forces. The macro-environment generally pertains to the broad aspects of economic forces and market structures. Historically, business leaders were primarily interested in the economic drivers for the products and services they produced and delivered. However, in a fast-paced business world, reality must be viewed more broadly, especially involving the social and political dimensions. The social dimension encompasses all of the social factors pertaining to people, their human rights, and the prevailing conditions and trends. It includes demographics, people's economic circumstances, cultures, lifestyles, the makeup of local, regional, and global communities, and the concerns and perceptions of stakeholders and people in general. It also includes the political dimension, since the political aspects relate to people.

The political dimension is about people, civil society, and the common good. It is complex as there are many forms of national governments, political subdivisions, and political systems and structures. The political dimension deals with governance of people, the affairs of governments and political leaders, and public policy, especially through laws and regulations. Governance in this context is about the systems, structures, and management of governments and public affairs. It involves making good policy decisions for the greater good of society and ensuring fair treatment for all. It involves enacting laws and promulgating regulations to protect the well-being of people, to control and punish deviant actions and behaviors, and to provide fairness and a level playing field for individuals and entities. It also includes providing guidance and stability to social, economic, technological, and environmental dimensions. However, these aspects and the interactions thereof are complex and vary considerable in the real world from basic oversight to various forms of command and control.

Most business opportunities depend on the social and political factors and their implications. Without connections to people, businesses and their solutions are irrelevant. Understanding the breath and depths of the social and political dimensions allows business leaders to develop comprehensive policies and standards for linking their businesses with the market spaces and the business opportunities and challenges. It gives them insights about reality and the expected changes that may help set strategic direction. Business leaders not only have to track the needs and expectations of their markets, but they have to understand public policy as well.

Astute business leaders realize that they have self-interests in having balanced public policy and stable laws and appropriate and unbiased regulations. Smart strategic leaders help promote the common good and engage in dialogue with political leaders to orchestrate proper public policy. While there are numerous theories about how business leaders work with political leaders to provide for the stable and proper functioning governments, in simple terms, business leaders have a duty to be ethical and just in dealing with the public sector. Business leaders have a duty to help develop public policies for industry and business in general, to set standards for proper performance and generally acceptable behaviors and mechanisms, and to determine appropriate reporting requirements and information disclosures. Good public policy seeks a balance between incentives for businesses and needs for society. For instance, government agencies provide protocols and standards for determining the acceptability of products like airplanes, automobiles, electrical devices, pharmaceuticals, and a myriad of others. In some cases, it articulates disincentives in the form of fees and penalties.

Business leaders often view regulations as having negative effects or involving adverse controls on their companies. While there are situations in which regulations make doing business more costly and some regulations are overly broad and poorly articulated, appropriate regulations also stabilize the business environment and make it easier for well-intentioned, honest companies to deal with not-so-honest and ill-behaving businesses. Regulations raise the standards of acceptable practices and behaviors and make it more difficult for negative elements to survive. They provide control mechanisms for certain business operations and assure the health and safety of the public and workers.

Political Dimension

Governments are theoretically established to protect the common good and provide administration and control of public policy for a political unit such as a country, province or state, a city, town, or village. There are many forms of government from a pure democracy to a dictatorship. Whatever the political system, government plays a significant role in the exercise of social, economic, and political freedom and success. However, depending on the political system, the outcomes may be positive or negative. Governments in developed countries tend to be stable with power being shared among political parties, politicians, advocacies, citizens, and other parties and individuals. The sharing of power, whether through constitutional provisions as in the U.S. or parliamentary processes as in the U.K., seems to be a critical factor for maintaining stability, fairness, and successful transitions in leadership. While many governmental leaders focus on new programs and directing the economy of their country or political entity, their most important role is really to maintain stability and assure equality within the political unit for the people and with its dealings with external parties. Governments enact laws and promulgate regulations to protect and preserve the interests of citizens and to maintain the fairness and appropriateness of interactions among individuals, political units, businesses, and various political and economic groups.

Most countries and political units possess a well-defined legal system that establishes the rules and requirements for rights, privileges, duties, and actions. There are many variations. The legal system plays a vital role by codifying rights, responsibilities, and obligations. It determines and articulates what is legal and illegal. It defines how people and legal entities must behave with respect to others and what they must do to be in compliance with the laws and regulations. The legal system is intended to maintain balance and control over the population through law enforcement and the adjudication of those accused of breaking the laws. Moreover, the legal system often resolves civil conflicts between individuals or parties, protects intellectual property, and addresses questions regarding the interpretation of laws and regulations. A main component of the legal system is the regulatory milieu, which is discussed in the next section.

Strategic leaders must understand the political system in the countries in which they operate and those with whom they do business. They must know the mandates and understand how the legal system works. It is imperative to comply with all of the mandates set forth by the various political units within a country or region like the EU. If leaders cannot comply with the laws and regulations of a country, or if the requirements are contrary to the fundamentals of human rights, dignity, and fairness, companies should avoid doing business in such locations. This is particularly true if there is rampant corruption among government officials and/or business leaders.

The Public Policy Agenda

During early industrialization of the developed countries, public policy promoted the rapid development, exploration, and utilization of natural resources and the expansion of industry. Economic incentives and the lack of regulatory constraints motivated businesses to exploit natural resources without any significant concerns about depletion or the effects of the waste streams that were generated. Industrialization took precedence over social concerns, broader economic factors, and environmental problems. There appeared to be unlimited resources, and the impacts of wastes were believed to be inconsequential. Industrial growth took top priority because it was for the "social good," providing employment opportunities for workers and new products for consumers. The industrialists and producers who owned and operated the corporations wielded the political power. Labor and consumers, in contrast, held little influence. Public pressure to affect political solutions for the broad array of social, economic, and environmental concerns that developed were generally ineffective. Labor groups focused their efforts on obtaining fair compensation, better work conditions, adequate health care, quality housing, and the like. Many of the laws and regulations pertaining to social, economic, and environmental considerations addressed needs that industries, corporations, and their leadership had neglected.

Public policy views changed dramatically between the 1960s and 1990s. The failure of private sector entities to anticipate and understand the ramifications of the social, economic, and environmental problems they created led to public outcry for solutions through government actions. For example, as the quantities of wastes being generated and discarded escalated beyond the capabilities of the established waste management infrastructure and industries failed to assume responsibilities for their direct and indirect actions, governments became more involved. Events such as Union Carbide's hazardous chemical release at Bhopal, India that killed several thousand people; Exxon's crude oil spill from the supertanker Valdez; Shell Oil's problems at Brent Spar; and numerous others spurred a huge increase in the number and scope of environmental laws and regulations. Various interest groups typically led the charge. Such groups include environmentalists, trade unions, women's groups, and many others. Some groups advocate for certain issues like gun control while others, like the National Rifle Association (NRA), argue against controls. Most groups use whatever political clout they have to force political entities and politicians to become aware of their issues and enact legislation or take other actions favorable to their causes.

The regulatory milieu consists of regulations that mandate specific protocols to be followed during the conduct of business operations and other elements of the social world. Laws and regulations are mandates that must be complied with. Mandates that pertain to businesses represent the needs of social-political forces to balance the interests of business with those of society. Regulations are usually codified, documented, and readily accessible to practitioners. There are four broad categories of regulation: (1) mandated policies and practices within an industry; (2) standards for performance and outcomes; (3) reporting and information disclosure requirements; and (4) incentives and disincentives. The first category pertains to the specific rules and requirements related to business processes and practices within an industry such as safety standards and codes. For instance, international codes specify that the airline industry uses English as the official language. The second category pertains to requirements that affect all industries such as minimum wage standards, rules about working conditions for employees, and safety requirements. The third category involves the disclosure of information such as telling employees about their work environment; providing product information to customers; and social and environmental reporting about operations under community right-to-know requirements. The fourth category involves the governmental subsidies for products and processes that are deemed to promote the public interest such as hybrid cars and electric vehicles that have the potential to improve fuel efficiency and reduce pollution. It also includes levying of taxes and fees on products and processes that are viewed to have undesirable impacts, like those having high carbon dioxide emissions. Most businesses view regulations as negatives, but in many cases regulations provide stability and control.

Regulations and regulatory changes typically force corporations to take actions that significantly impact their flexibility. In many cases, regulations specifically define and prescribe acceptable solutions or processes. The following are some examples of how regulations can affect product and process specifications:

  • Specific product features and functions can be required to ensure safety, effective use, and longevity. Automatic shutoff devices on consumer household products like steam irons and coffee makers provide fail-safe provisions to mitigate the potential for human error.
  • Product instructions and information can provide customers and users with the knowledge necessary for the safe and wise use of products and processes. Right-to-know mandates are intended to support and enhance the effective use and longevity of products.
  • Process specifications are mandated in many industries to ensure that development cycles have included the necessary and appropriate testing and validation steps. The trails of documented clinical testing that are required to prove the efficacy and safety of pharmaceutical products fit into this category.
  • Restrictions and prohibitions can affect the strategies of corporations with respect to technologies, products, and processes. Regulations often set the "rules of the game," establishing the structure and/or boundaries of the competitive arena of the industry.

While certain regulations are necessary to provide oversight or maintain a level playing field between the rich and the poor, the large and the small, or the old and the new, corporations might view most regulations as their failure to anticipate, understand, and mitigate impacts and consequences of their operations. Regulatory changes are typically the result of needs and requirements of customers, stakeholders, employees, and other constituencies that have not been met. Most laws and regulations are a response to events, situations, and/or long-standing problems that were ignored or deemed to be unimportant by businesses. For instance, the disaster at Bhopal which led to "community-right-to-know" legislation in many developed countries was not the first such accident; nor was the Exxon Valdez the first supertanker oil spill.

There has been a trend over the last several decades, however, to deregulate industries, de-emphasize government rulemaking, and address public policy concerns through internal or industry-based standards. In a fast-paced world of technological innovations and globalization, it is becoming increasingly difficult for the government of a single country to promulgate regulations that cannot be circumvented by simply moving production to another country. Such actions can significantly undermine the intent of the regulatory processes, making them ineffective and actually detrimental to maintaining an effective industrial base in the regulated country.

Nonetheless, the regulatory arena remains regimented. Regulations are usually codified, documented, and readily accessible to practitioners. However, they are usually written in the language of regulators and enforcement officers and lawyers, making it difficult for the untrained practitioner to understand and follow the mandates. Uncertainty about the precise meaning of provisions is a major concern for many corporations. The degree of uncertainty varies depending on the laws and the regulatory agencies, but for many global corporations, the implications of noncompliance are great, and the precise interpretation of what is required is therefore very important. It may be as simple as looking at the quantity of products that are produced. If a small manufacturer produces ten products that are defective from a regulatory perspective, the fix may take only a few days to correct at a relatively low cost. However, if millions of products have been produced over several decades, it may take years and millions of dollars, Euros, pounds, etc., to rectify, if it can be done at all. For example, lead was used in the production of personal computers. When personal computers were first introduced, it would have been relatively easy to rectify a systemic problem. Today, after manufacturers around the world have produced hundreds of millions of personal computers, it will be extremely costly to handle the lead problem. Today, there are special concerns about the proper disposal of obsolete computers. For instance there are new directives in the European Union that mandate the proper disposal of used electrical and electronic equipment. Moreover, there are also directives on the prohibition of the use of certain heavy metals, like lead.

Regulations are typically viewed as having controlling effects on corporations. While it is easy to understand such thinking, regulations also provide opportunities. One of the main premises of sustainable development is that superior products and processes provide a means to differentiate the corporation from its competitors. By rising to and even exceeding the challenges of the regulatory mandates, leading global corporations can eliminate the need for and/or effects of certain regulations. The quest to avoid regulatory restrictions and costs can actually provide opportunities for new, cleaner technologies, products, and processes. Over the last twenty years, whole new industries have emerged that take advantage of the need to prevent pollution, to handle and dispose of waste streams, to abate air emissions, and to treat wastewater effluent.

Corporate Policy and Policy Formulation

Corporate policies are the high-level guidelines and prescribed courses of actions for implementation and execution. They delineate rules for engagement, limitations on actions, and codes for proper behaviors. Policies are the mechanisms used to communicate across the entire organization on what is acceptable and what is not. Policies are multifaceted and include those that pertain to the whole company (corporate) or those that affect only the business unit. Strategic leaders of business units, at least in decentralized organizations, usually have the authority to set policy as long as they do not contradict corporate policy. The scope of the policies is often limited to the affairs of the business unit. Policies can also be directives that facilitate decision making by lower-level operational managers. Such policies standardize routine decisions at functional levels. Lower-level management obtains some level of autonomy to make certain decisions without higher level approval. Thus, such polices function both as tools for flexibility and of control. Policies ensure that fairness is exercised across the organization since everyone is expected to follow the same rules.

Well-written policies can have the effect of accelerating decision making on routine matters, since the rules are clearly spelled out. Policies provide a sense of acceptable behavior. Policies should enhance, not restrict. They guide people, but should be flexible enough to allow adaptive approaches. Uncertainty is reduced through the use of standard approaches and well-understood protocols, principles, and ethics.

Policies are established by a broad group of leaders and officials representing various parts of the organization. Diverse participation provides opportunities to introduce insights into the discussions and facilitate implementation. It also offers better approaches for handling control and accountability. Overly stringent policies may reduce freedom of action and the ability to respond to pressing situations. Too little may undermine the proper governance and proper conduct; too much may stifle creativity and flexibility. The theory is that people are more likely to accept the final decisions (policies), if they understand the underlying logic and had a chance to contribute whether or not the outcomes are exactly what they wanted.

In most organizations, policies are intended to endure over time and pertain to everyone. They are occasionally modified to reflect organizational changes but are usually broad enough that they are not tied to the prevailing situation, but rather the underpinnings. For instance, the principles, values, and acceptable behaviors of a business unit usually do not change if there are changes in strategies and direction. Most of the underpinnings are timeless and help to establish the foundation of the organization.

Policy formulation is a complex, vibrant element of the strategic management process. It involves exploring options, determining the mission, selecting objectives, and crafting strategies and action plans. The strategic leaders discuss, analyze, and objectively consider all of their strategic options as they engage in strategic formulation. Strategic formulation is at the heart and soul of the strategic management process. Policy formulation involves the intellectual exercises and process elements to examine how businesses can create extraordinary value in good times and bad. This includes those times with positive opportunities or diminishing circumstances. Policy formulation explores how the company can achieve sustainable success even in situations where there are significant deficiencies.

As part of policy formulation, strategic leaders and their professional staffs examine the overall strategic position of their corporations and determine what strategies, solutions, actions, initiatives, and strategic innovations are necessary to assure success. Essentially, they explore what has to be added to, changed, or eliminated to realize the corporate goals. While there are numerous options, the main corporate approaches are mergers and acquisitions, strategic alliances and joint ventures (external), and strategic innovations. External actions and initiatives have the allure of high-profile, concrete assets, known attractiveness (positions) and tangible substance. However, there are many potential difficulties that may offset the advantages. The main concerns are hidden problems that may impact the business value obtained in the transaction. For instance, the company may be buying liabilities instead of assets.

Strategic innovations are the broad category of internal initiatives and development programs taken by the corporation to plug the gaps or develop new businesses. There are a myriad of such innovations from new business ventures involving new-to-the-world technologies to developing new business units in new lines of business or in new market spaces. Strategic innovations also include high-level initiatives to transform the corporations into a significantly more capable and sophisticated entity. When developing innovations or new ventures, strategic leaders have to create or follow acceptable technical standards.

Standards and codes are the internal and external overarching criteria that have to be met to have a qualified product or service. They are established by government agencies and/or by industry or independent third parties that oversee the specifications and certifications of products and services. They assure that all products and services are of the kind and quality required in terms of the criteria set forth. Standards facilitate determining the baseline requirements the company must achieve or the degree of improvement that is required. Baselines can be constructed for the management system, the products, and/or the processes, depending upon what kinds of information must be compared. In this way, they can link the present and future expectations. Baselines may be set by regulatory requirements, industry standards, or by the prevailing situation. They are often expressed using the amount of production in the base year. For instance, if the waste generated per unit of production is improved (reduced) by fifty percent, the corporation may claim significant achievement even if the overall waste generated by the corporation increased due to higher volumes of outputs. An easy way to establish baselines is to continuously report on the social, economic, and environmental implications of the company and make such information available on an ongoing basis. Such practices are especially beneficial if the corporation is making improvements and achievements that are being documented over time. This approach encourages constituents to focus on improvements. Such openness allows practitioners and others to easily make comparisons. In certain cases, baselines are based on "best-in-class" or "best-in-world" performers.

Reflections

Public policy involves ensuring that the well-being of people, businesses, the social world, and the natural environment are protected and enhanced. It involves protecting the assets and know-how, and assuring that the people continue to be successful in the future. The concept of governance and the notion of sustainable success are inexorably linked. They are clearly interrelated and are critical responsibilities. Governance is also the most important duty of business leaders and government officials.

Business leaders have the duty to ensure that the organization and all of its units, subsidiaries, ventures, and other formal partnerships are in compliance with all of the laws, regulations, and directives in the political units and countries in which the company operates and/or conducts business. This includes meeting the provisions set forth in the laws and regulations of the company's home country as well as meeting all legal mandates from financial reporting and paying taxes to protect the well-being of people and the natural environment. Many of these responsibilities can be delegated to professionals and participants within the organizations but senior managers still have the duty to provide oversight and ensure compliance.

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Updated: 2016-05-16, 15:31