(photo credit: Courtesy)
The impressive natural-gas finds off Israel’s coast have set off a frenzy of
international interest. Early this week, there was more encouraging news as
optimistic projections of the field’s potential were reconfirmed by subsequent
tests. The finds will likely have an immense impact on the Israeli economic
landscape, but in the meantime, they raise a number of interesting ethical
In a recent column I discussed the question of changing the
royalties demanded from energy firms. When a sovereign country signs a contract,
there can be a conflict between its role as a signatory, for whom reneging on
the contract is ethically improper, and its role as sovereign, for whom
establishing an equitable taxation policy is an ethical obligation.
additional question relates to the conduct of energy companies and their
regulation. Any time there is a new and promising investment horizon, it creates
an opportunity for copycat firms to attract naive investors by stating, hinting
or implying that they provide a way to buy in to the craze.
in the “tron” craze four decades ago, when firms went out of the way to include
those magic letters in the firm name to ride on the coattails of the electronics
revolution; it occurred during the “dot.com” craze, when firms tried to give
names that indicated they were part of the Internet boom; and it is evidently
happening now in the Israeli energy sector.
“We saw new players – and
these skeleton entities that had nothing to do with oil, had no experience or
know-how – buying and trading leases, making baseless claims,” The Wall Street
quoted National Infrastructures Minister Uzi Landau as saying. “We
decided we had to stop this crazy atmosphere engulfing the
Officials at the Israel Securities Authority expressed concern
about “an ongoing pattern in which small energy companies publish vague or
misleading reports that cause their share prices to skyrocket, and often to
plummet later,” the Journal
An example would be to buy up
worthless leases in areas where no gas is presumed to be hiding and to wave the
leases in the faces of star-struck investors.
Is there a basis for
regulators intervening in the market in cases like this? Fraud is certainly a
basis for action, as is the desire to prevent fraud. But to what extent are
regulators obligated to prevent a fool and his money from being soon parted?
There are two basic justifications for such action, and the relationship between
them is instructive. One is the paternalistic justification. Markets are
effective when market participants are rational and fully informed. But when
they are swept away by sentiment or confused by the news, then it is time for
government to play concerned parent and step in to protect investors from
This attitude views security regulation as a divergence from
But an equally compelling motivation is the signaling
motivation. Whenever there is asymmetric information, firms and individuals like
to tell the consumer they are the “real thing”: they have a quality product,
reliable books, excellent prospects, etc. The problem is that talk is cheap, and
in a free market, low-quality competitors can trumpet their supposed advantages.
In this case, the firm would like to be able to prove to the consumer that it
has its money where its mouth is, and it would like to make a binding commitment
to keep its word.
Reputable firms will be motivated to seek out a
hard-nosed regulator who will keep all its clients in line. In our example,
reputable firms will prefer to be listed on a stock exchange that makes
stringent ethical demands on member companies and to be located in countries
that have a reputation for careful oversight.
This point is sometimes
lost on naive free-market advocates.
The claim is often heard that there
is no need for government agencies such as the Consumer Protection Agency; i.e.,
if there really is a demand for oversight of consumer products, the market will
create one – something along the lines of Underwriters Laboratories in the
United States, a private organization that is in some ways parallel to the
Standards Institute in Israel.
One answer to this claim is that the
market did create one: the Consumer Protection Agency. When firms want to
establish a regulatory body, it is in their own interest to establish one with
real teeth so that their claims of quality are credible. The government has a
“competitive advantage” in regulation due to its sovereign
“Paternalistic” legislation is often justified on free-market
grounds. People are often rational about their lack of rationality and prefer to
take part in a marketplace they know will help protect them from
themselves.[email protected] Asher Meir is research director at
the Business Ethics Center of Jerusalem, an independent institute in the
Jerusalem College of Technology (Machon Lev).