For companies in many nations, regulatory policy increasingly shapes the structure and conduct of industries and sets in motion major shifts in economic value. In network industries such as airlines, electricity, railways, and telecommunications, as well as in banking, pharmaceuticals, retailing, and many other businesses, regulation is the single biggest uncertainty affecting capital expenditure decisions, corporate image, and risk management.

In the electric-power industry, for example, the smallest price revisions can have a dramatic impact on corporate profits. So can the structural transformations, brought on by liberalization, that have created new markets for independent power producers and retailers. In pharmaceuticals, new US Medicare rules are forcing drug companies to rethink their product and pricing strategies; in the food industry, pressure to regulate fast-food advertising aimed at children is influencing the marketing strategies of producers, retailers, and restaurant chains.

In many respects, regulation reflects an explicit, formal contract between business and society. Even in the absence of laws and regulations, informal agreements may call upon companies to meet certain social responsibilities. As the food industry is learning, the failure to fulfill these obligations—or new ones created by a change in society's needs or priorities—can propel a shift from self-regulation toward explicit...