Regulation and law: the role of corporate, competition and tax law

Society’s primary challenge today is to cope with the effects of accelerated innovation and the disruptive technologies it generates. This paper focuses on the ways in which business law (comprising corporate, competition and tax law) can be moulded to both facilitate innovation and assuage emergent societal risks.

It considers means of enhancing investment in research and development and optimising corporate organisation, but also the risks associated with, for example, the use of technology to exploit consumers, manipulate markets or – unwittingly or not – distort the political process.

Artificial intelligence, algorithms, platforms and distributed ledger technologies are changing the scope of business activity and leading to greater substitutability of firms. Policymakers can use business law to promote innovation but also deter the use of exclusionary or exploitative technology.

The authors consider the challenges for law and regulation associated with financing innovation-focused businesses. Competition may increase the incremental profit from innovating but may also reduce innovation incentives for laggards. The trend towards concentration in many key sectors of the economy affects not only levels of innovation, but also its nature. Increased market concentration is correlated with significant increases in mark-ups between prices and marginal costs.

With business success and consumer welfare ever more dependent on innovation and R&D, the focus of corporate governance, antitrust and taxation must shift to account for this new reality. The paper suggests a potential role for public subsidies for R&D, raising finance for innovative projects and the impact of changes in corporate ownership on innovation. An increasing number of countries incentivise R&D activity through the tax system.

Businesses also have to respond to increasing digitalisation, the rise of ‘smart contracts as an alternative to the corporate form, and the associated potential for regulatory arbitrage. Digitalisation is set to have a major impact on the incidence of agency costs within firms. New technologies have implications for external regulation and corporate compliance, the implementation of systems of internal control, and the international corporate tax system.

Two possible, interlocking solutions to the currently weak incentives to invest corporate resources in compliance would be to lengthen the vesting period for managerial compensation and institute personal compensation clawbacks and/or personal liability for compliance. Mandating disclosure on compliance programmes would also immediately remove the fear of creating an adverse signal by voluntary disclosure, and permit greater scrutiny of a firm’s activities.

To address the fact that, in a time of rapid technological change, regulation lags the emergence of actual risks, the authors propose a dynamic system of forward compliance, where the firm focuses not just on applicable rules, but also their potential trajectory. Firms therefore start to act in terms of ethics and compliance, rather than compliance alone, and lead rather than follow regulatory guidance.

The paper considers the ways in which the environment for business law reform is subject to new political risks, following the threats to the liberal order coming from populism and the rising power of dominant technology companies. New technologies have spurred globalisation and made migration easier by reducing the risks of moving away from home. Cross border trade has raised living standards in lower income countries but also concentrated wealth in high income countries.

Political dynamics may change in directions that are hard to predict, with profound implications for the ability of policymakers to implement any programme of reforms. Intellectual and regulatory capture is another force that may distort lawmakers’ and policymakers’ priorities and preferences.

For further information please contact the Project Manager on [email protected].

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