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Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?

By Harvard Law School Program on Corporate Governance

As regulators increasingly embrace cooperative approaches to governance, voluntary public-private partnerships and self-regulation programs have proliferated. However, because few of these partnerships and programs have been subjected to robust evaluation, little is known about their effects. In my paper with Mike Toffel, ?Coming Clean and Cleaning Up: Is Voluntary Disclosure a Signal of Effective Self-Policing?? we ask whether and in what ways self-regulatory practices at a subset of regulated facilities enhance the effectiveness of the regulatory scheme.

In the context of a program sponsored by the U.S. Environmental Protection Agency that encourages regulated entities to voluntarily self-police and self-disclose regulatory violations, we analyze whether such voluntary disclosures are a good signal of a facility?s effective self-policing practices. There are two components to this question. First, do facilities that send the self-regulation signal outperform those that do not? Second, what is the agency?s response to the signal? Are regulators effectively sorting the good facilities from the bad, and are they leveraging this information in a way that enhances the effectiveness of their enforcement efforts?

We find that, on average, self-policing facilities improved their environmental performance, as measured by a decline in the number and probability of abnormal events resulting in toxic pollution. However, upon closer examination, we find this effect to be significant only among ?good apples,? or facilities with clean past compliance records. We find no evidence of improvement among facilities with more problematic compliance histories. In other words, it appears that voluntary disclosure is an effective signal for distinguishing the ?great? apples from the merely ?good? apples, but not for determining whether a ?bad? apple has turned good.

With respect to the behavior of the regulatory agency, we find that regulators are interpreting these signals with a high degree of accuracy and responding accordingly. Our analysis shows that regulators significantly reduced their scrutiny of self-disclosers that were ?good apples? (or those that improved their environmental performance) but continued to keep a watchful eye on the ?bad apples? (who did not improve).

Taken together, these findings support the theoretical promise of meaningful self-policing practices and suggest that voluntary disclosure can serve as a reliable signal of future compliance under certain circumstances. But, at the same time, they highlight the way in which self-regulation outcomes are contingent on the organizational contexts into which self-regulatory practices are adopted. Our analysis also highlights the possibilities for gaming that self-regulation introduces into the regulatory system, but we demonstrate that, at least in this context, regulators do not appear to be fooled.

The full paper is available for download here.

Full post as published by The Harvard Law School Corporate Governance Blog on June 27, 2008 (boomark / email).