The prevailing philosophy of the U.S. criminal justice system is that it is better to have 1,000 guilty people go free than it is to jail a single innocent one.
In Sweden 300 or so years ago, the king allegedly took the view that it is better that the innocent perish than the guilty survive. American business regulation tends to take both views: first one, then the other, then back again, depending on who's yelling loudest.
Savings and loans, for example, were regulated into near extinction, deregulated into chaos, and now have regulators watching their every move.
Pension plans are suffering the same fate. All but unregulated a generation ago, traditional pension plans now must comply with so many rules that many businesses have gladly shifted to alternatives that place most of the risk on the worker.
The reason for these swings isn't hard to divine. It's human nature, or at least capitalist human nature. Whichever side has the advantage will abuse it.
Abuse is not universal. In most industries, it's not a majority, or even close to it. But there are always enough cases to create a political backlash, complete with horror stories of how families were ruined or the taxpayers' pockets were picked.
For years, many American industries promised their workers gold-plated pensions, but some didn't put aside the money to fund the pensions. Today, many of these unfunded liabilities belong to the government, and ultimately the taxpayers. In other cases, where the pensions were well funded, corporate raiders have swooped down and scooped up the "excess" cash.
So now there is a boatload of regulations that companies must comply with, good guys as well as bad, and it may be that many workers who otherwise would have had secure retirement incomes now will not.
All this has relevance for small business because one of its major forms -- franchising -- is now at a similar kind of crossroads. Growing at a rate of one new outlet every 20 minutes, by some estimates, franchising already plays a role in about a third of all retail transactions, and that figure may soon reach half.
Franchising has made a lot of people rich, franchisees -- the folks who own the outlets -- and franchisors alike. The system has allowed modest businesses with a good product or service to expand into national powers. It has allowed inexperienced people to own their own businesses and reap the rewards of hard work and success.
Over the years, though, there has been a steady undertone of complaints by franchisees that some franchisors cheat or abuse them. Federal disclosure rules addressed complaints of those who felt they were misled when they bought their outlets.
But today new questions are being raised. There is what Debra Bollinger of the North American Securities Administrators Association called "a dark side of franchising."
Much of it has to do with the growth of low-budget franchises that can be run out of the franchisee's home. It comes at a time when the economy is slowing and more people are likely to find themselves unemployed, perhaps with a severance check in their pockets and a dream of entrepreneurship in their heads.
"As franchisors reach down into the ranks of less and less financially sophisticated consumers, we are deeply concerned that those least able to afford it now will be the targets of unscrupulous operators promoting low-budget franchises," Bollinger told the House Small Business Committee last week.
At the same time, the committee's own staff, in a report completed earlier this year, noted that franchisee-franchisor contracts are heavily tilted in favor of the franchisor, giving the franchisor the power to force expensive upgrades, terminate the franchise or prevent the franchisee from selling to the buyer of his choice.
The House committee, under Chairman John J. LaFalce (D-N.Y.), is looking at these and other issues, wondering if the system of limited federal and spotty state regulation is adequate. "I am troubled by the increasing number of reports that document serious and continuing problems," LaFalce said.
The International Franchise Association, a trade group based here, strongly defends current practices as essential to successful franchising. And much of what the group says is correct. Franchises depend on uniformity. A traveler who stops at a McDonald's in Buffalo wants to know that the Big Mac will taste the same as one in Philadelphia. And McDonald's goes to great lengths to make sure that it will.
"The success of business-format franchising lies in its careful balance of business interests," the association's Neil A. Simon told the panel. This balance, when properly maintained, keeps the franchisee and franchisor in alliance, working for their mutual success.
Although the contracts do give franchisors wide powers, the industry contends they are infrequently used. Simon cited industry figures indicating only a small fraction of contracts are not renewed, and most sales of outlets by franchisees are approved.
The industry's general position remains that more regulation is not necessary and that imposing it could well stifle a major engine of economic growth. But it would do well to give more than lip service to its expressed willingness to work with Congress on the issues.
Attorney Rupert M. Barkoff, who has represented clients on both sides, noted that "franchising, on the whole, has been quite successful." But he also chided the industry for "looking selfishly and myopically at our own immediate interests," with the result that much of it "is in a mess, and it may get worse, not better."
"Overreaching" franchise contracts have already led to "unreasonable laws," he said, and more may be forthcoming.
The industry's best course at this point it to admit its problems, at least privately, and work toward a solution. By accepting a greater burden now and working with government to clean up problem areas as they emerge, perhaps it can achieve something truly novel in American commerce -- a system where the innocent are protected and the guilty get what's coming to them.