Nancy Fijan MBA(FS) Class of 2013 sent in a question to Dr. Rick Nason: We all have pressure and noise in our lives, and in business, sometimes it manifests itself in rash decision making by executives. And for publicly traded companies, this can be costly – for example, the recent $40 million SEC settlement that Elon Musk paid for his tweet about going private. In addition to this $20 million civil penalty and $20 million fine imposed on Tesla, he had to give up his role as chairman of the board for at least three years. Is this a lesson about the risk of being too transparent? Or is the complexity of business running up against outdated regulations created before the social media age?
In the third installment of striving for success in 2019, Dr. Rick Nason discusses transparency, and how risk is ever-evolving in the age of social media.
Dr. Rick Nason:
Elon Musk had sanctions imposed upon him by regulators after tweeting some of his thoughts on the prospects for his company Tesla. The question is: Is this a lesson about the risk of being too transparent? Or is the complexity of business running up against outdated regulations created before the social media age?
I am going to slightly (hopefully only slightly) reframe this question to “is regulation adequately adopting to changes in complexity and transparency brought about by social media?” The answer is “NO!” in my opinion.
Regulation is in place in large part to manage downside risk. For those who have taken a class from me or read any of my books, knows that I believe that risk is the “possibility that bad or good things may happen.” Thus, simply managing downside risk is about as intelligent and practical as chewing your food with only your upper teeth. From the outset, regulation is missing half of the equation. Sometimes half of the equation is all the equation – again, see example of eating with only your top teeth.
Social media is changing business is many ways; some obvious, and some less obvious. The less obvious way is that social media is increasing complexity. Social media is creating the data for artificial intelligence to diminish the human value of complicated thinking and analysis by doing it quicker and more accurately. (This would be a great discussion for a future blog – so stay tuned).
Regulators, in large part, miss both of these important consequences of social media and thus appear as out of touch as characters from Downton Abby showing up to the latest university Cuban spring break beach party. Regulations operate on the assumption that the world is complicated; that the world works by a command and control mechanism. The reality is that increasingly business and governmental affairs are complex. (Editor’s Note: We highly recommend Dr. Nason’s book, It’s Not Complicated: The Art and Science of Complexity in Business, which discusses the difference between complicated and complex systems.)
Social media increases the connectedness of individuals and groups. Furthermore, developing technologies are focused on expanding the momentum of that connectedness. This, in turn, leads to increased speed and magnitude of adaptiveness. Both effects increase complexity.
Complex systems cannot be solved; they at best can be managed. Regulation is set up with the implicit assumption that it will solve or prevent problems. Orgel’s Law, which argues that evolution is smarter than you are, is a fundamental consequence of complexity and its resultant emergence that illustrates the folly of much regulation.
This is not to say that regulation is worthless or not required. Unfortunately, the nature of humanity and markets is that we need regulation for the collective good. However, prescriptive regulation is only effective for complicated systems. Too much regulation is based on “letter of the law”, while “spirit of the law” is a much sounder principle, especially so in the presence of complexity. Regulation based on spirit of the law, which also applies context specific judgment, helps in the implementation of “manage; not solve”.
Regrettably, the legal system, particularly in the United States, will prevent this from being the mode of operation for at least as long as I am taking up space and oxygen on this planet. So, the answer of whether regulation is keeping up with the increasing complexity caused by social media is an emphatic “No!”.
Before concluding however, I would like to point out that it is incumbent upon each of us to also realize and react appropriately to the increasing complexity in society. Ironically, the increasing complexity is escalating the expectations that we, individually and collectively, seem to have of government; and by extension, regulation. As we have higher expectations for governmental solutions, we need to appreciate the paradox that complexity in society is diminishing the ability of government, and regulators, to “command and control”.
Trying to control a complex system with complicated thinking leads to many unintended consequences. One of the unintended consequences is frustration. I believe in part this mismatch between complicated thinking / complex reality, and ineffective governmental and regulatory control is leading to increasing voter frustration which manifests itself as increased partisan politics, and potentially a more fractured society. Social media brings us together, but the complexity is entails may be also ripping us apart.