ABSTRACT
There are two ways for governments to get organizations to do what they think is in the public interest. One is telling them what to do. This can mean prescribing the outcome, prescribing the process, or even both together. These are forms of regulation. The other is explicitly to recognize that organizations are run by people, not by automata waiting passively to be told what to do. That recognition suggests that rather than simply issuing instructions one should organize incentive structures such that these rational individuals, out of their own self-interest, do what the government wishes. The latter course can best be described as governance. The aim of this chapter is to contrast regulation and governance. First, brief definitions of regulation and of governance are proposed. Then three examples, from different areas of finance, are considered, and it is suggested on the basis of these that in general governance is better than regulation in two ways. First, it is more likely to achieve the desired result. Second, it is likely to be effective for longer.
