Designing Agile Governance as an Enabler of Innovative Society
AUTHOR
Hiroki Habuka
Deputy Director for Digital Governance
Ministry of Economy, Trade & Industry of Japan (METI)
1. Why we need innovation in Governance?
The world we live faces a multitude of difficult challenges, ranging from COVID-19 pandemic, rapid climate change, environmental destruction, to expanding income disparities and declining birthrates to name but a few. Cutting-edge technologies such as IoT, Big Data, AI and 5G communication have the great potential to help us overcome these issues.
On the other hand, these new technologies have raised a lot of concerns, including privacy, system safety, cyber security, transparency, allocation of responsibilities, threat to democracy and environment and so on. After great number of discussions to tackle with these issues, one of the most important findings seems to be that we cannot solve those complex and fast-changing challenges with traditional governance approaches.
Based on this understanding, Japan recently issued a report called “GOVERNANCE INNOVATION Ver.2: A guide to Designing and Implementing Agile Governance” (the “Report”) 2. This report provides a new framework for innovation governance in various layers, including regulatory, corporate, infrastructure, market and social governance. This article aims to introduce the basic concept of agile governance suggested in the Report and explain what it means for businesses and regulators.
2. How our society and goals are changing?
(1) Changes in society
Before we discuss the actual governance model, we should analyze how our society is changing due to implementation of CPSs (cyber-physical systems). CPSs have at least the following characteristics:
i) Digitalization: Large-scale collection of a greater variety and scope of data
ii) Data analytics: More sophisticated data analysis through AI
iii) Actuation: The outcome of data analysis affects not only cyber space but also physical space
iv) Interoperability: Connectivity between systems equipped by different stakeholders
v) Augmentation: Systems are easy to transcend geographical restraints and industry sectors
iv) Adaptability: Systems are constantly reconfigurable depending on external conditions
Reflecting these characteristics of CPSs, our societies will undergo the following changes.
These characteristics pose difficulties for the traditional governance model which is based on the idea that “the objectives of governance can be accomplished by defining certain rules and procedures in advance.” Instead, it will be necessary to take approaches where certain goals are shared among stakeholders, and flexible solutions are implemented to achieve these goals.
(2) Changes in goals
Then, what are the goals of governance that should be shared by stakeholders? There may be a hierarchy in the goals of governance as follows.
The key perspective is that these “goals” change constantly under the influence of technological and social changes. For example, “liberty” should continue to be positioned as an “ultimate goal” of governance, but it should go beyond the traditional “negative liberty” to include a state of being able to proactively choose the nature of technological influences under which we choose to pursue our happiness.
In light of these changes in societies and goals, the governance model for Society 5.0 must be one where solutions are constantly revised to ensure their optimality based on conditions and goals that constantly change. In other words, we need a governance model which continues to look at the “moving targets”, which are, constantly changing society and goals.
3. What is “Agile Governance” framework?
Then, how should we design the governance model? The Report suggests a model called “agile governance”. Below is the basic concept of agile governance.
(i) Analysis of conditions and risks: To constantly analyze external conditions and the risk landscapes.
(ii) Goal setting: To constantly define and re-define goals in accordance with changes in external conditions and technological impacts.
(iii) Governance system design: To design systems to achieve defined goals through designing of technological systems, organizational systems and their applicable rules.
(iv) Implementation: To continuously monitor the status of the system and fulfill accountability to stakeholders.
Further, the governing actor should implement both processes s described below.
(v) Evaluation (elliptical cycle in the bottom half): To evaluate whether the initially defined goals have been accomplished. The system is re-designed if these defined goals are not being met.
(vi) Re-analysis of conditions and risks (outer, circular cycle): To continuously analyze whether there have been any changes in the conditions or risk landscape. This agile governance framework should be implemented in a variety of governance mechanisms. In the following section, as the most relevant governance mechanisms to businesses, we discuss (i) agile corporate governance and (ii) agile regulatory governance.
4. Agile Corporate Governance
Businesses are the main actors who design and operate CPSs. Corporate activities are becoming increasingly sophisticated, complex and global, making it increasingly difficult for third parties, including governments, to comprehend and monitor them in detail. Therefore, businesses are expected to take the main role in implementing agile governance on services and systems they provide.
Businesses should analyze the conditions they operate under, define the goals that their services and systems are going to accomplish, and design their technological and organizational governance systems to achieve these goals. They should then monitor the results of implementation in real-time, carry out evaluations and make improvements if any problems arise, and revise their goals accordingly if there are any changes to the conditions they operate under. With respect to this series of governance operations, they are expected to provide explanations to their stakeholders that are easy to understand, in order to ensure that the whole governance process is conducted appropriately (“comply and explain”).
Appropriate incentives should be designed in order to encourage businesses to implement agile governance. To ensure this, it will be critical for stakeholders (e.g., regulators or self-regulatory organizations) to establish disclosure systems and to provide compliance guidelines to help companies, including SMEs, to implement agile governance. It is also important to revise corporate sanction regimes in a way that focus on risk management and future improvement of systems, rather than on mere outcomes.
5. Agile Regulatory Governance
To adopt agility in regulatory governance, traditional rule- based regulations should be redesigned to be based on goals on a per-function basis (goal-based regulation). Based on this, it will be important that government and the private sector work together to establish standards, guidelines and other soft laws to bolster businesses’ efforts to achieve the goals provided by regulations.
Furthermore, it would be important to encourage experiments that utilize the “regulatory sandbox system” to redesign laws and regulations based on findings from these tests. Laws, regulations, standards, and guidelines should be continuously evaluated based on data.
In addition, it is especially important for both the public sector and the private sector to design a blueprint for governance as a whole which defines how we are to combine multiple governance systems to achieve our goals, e.g., regulations, corporate governance, market mechanisms and infrastructure (“governance of governance”).
6. Global Collaboration towards Agile Governance
These governance reforms can only be achieved through cooperation between a diverse range of stakeholders from all over the world, including businesses, governments and communities/individuals. Some nations have already started an initiative to collaborate in agile governance to unlock the potential of emerging technologies. Dialogues for redesigning models of governance based on shared visions becomes essential more than ever in this extremely complex and exciting time.
1. Deputy Director for Global Digital Governance, Ministry of Economy, Trade and Industry Japan (METI) / Attorney at law (Japan and New York State) / Visiting Lecturer at University of Tokyo Graduate School of Public Policy.
2. https://www.meti.go.jp/english/press/2021/pdf/0219_004a.pdf
3. Please note that this article will NOT provide a specific solution for a specific set of issues (e.g., privacy, security, competition). Rather, it intends to give readers a design framework to think about what governance mechanism should be appropriate to solve challenging issues which arise one after another in a complex way.
4. It should be also noted that these “goals” can be interpreted and understood in various ways, and in most cases, there are multiple “goals” for a single system that are in the relation of trade-off (e.g., increasing the transparency of systems that handle privacy information may increase the risk to privacy.).
Published 2021