The global financial crisis is the latest, if most catastrophic, in recent times, in a series of boom-bust-regulate-deregulate-boom-bust cycles. As the impact moves progressively and decisively from the financial into the real economy, the enormous political, conceptual and socio-economic costs associated with a failure to address the question of the role of the corporation and markets more generally in society come into clear view.

Moreover, the extent of government intervention required to stabilise financial markets has fundamentally transformed conceptual and practical dynamics. The power and influence of government within the regulatory matrix has been augmented considerably. The unresolved question is what it will do with this power.

Justin O'Brien is a Research Professor in the Faculty of Law and Faculty of Business at QUT

The political wrangling in the United States over executive pay suggests, rhetorically at least, a much more interventionist approach to corporate governance design. More encouragingly, perhaps, in his inaugural address, President Obama emphasised the need for the inculcation of a new "ethics of responsibility". This echoes earlier calls by British Prime Minister Gordon Brown, for moral restraint within financial centres (if only for instrumental reasons).

Beyond London and New York, however, the extent to which the crisis has metastasised with such ferocity has substantially strengthened calls for an integrated response to nullify what Australian Prime Minister Kevin Rudd has called "extreme capitalism". Although many would disagree with the polemical framing, there can be no question that we have reached an inflexion point for both the theory and practice of regulation.

There is recognition that reform requires much greater co-ordination and integration at the global level, if only for protection of national self-interest. The G-20 Summit in London in April 2009 has begun to lay the foundations for a new international regulatory architecture. One covering all systemically important financial institutions and markets (including, significantly, hedge funds which, through judicious structuring, have to date been effectively unregulated) as well as systemically important financial instruments (such as securitisation and credit derivatives).

Similarly, the European Union has proposed the establishment of what is described as a European Systemic Risk Council, headed by the president of the European Central Bank. This would be buttressed by a European System of Financial Supervisors. Although detail on the governance structure and enforcement powers remains scant, the European Commission President, Jose Barraso, maintains that "better supervision of cross-border financial markets is crucial for ethical and economic reasons".

Barasso makes a fundamental point. Although there has been criminal activity on the margins, the global financial crisis is the result of "perfectly legal" - if ethically questionable - strategies.

After taking into account specific national factors, three inter-linked global phenomena are at play: flawed governance mechanisms, including remuneration incentives skewed in favour of short-term profit-taking and leverage; flawed models of financing, including, in particular, the dominant originate-and-distribute model of securitisation, which promoted a moral hazard-culture; and regulatory structures predicated on risk reduction which created incentives for risk capital arbitrage and paid insufficient attention to credit risk. Each combined to create an architectural blueprint for economic growth in which innovation trumped security. Financial engineering, in turn, created fiendishly complex mechanisms that, ultimately, lacked structural and ethical integrity.

Take, for example, the collateralised debt obligation and credit default swap market, which generated enormous fee income for the investment bank that structured or distributed the instruments.

This raises real doubts as to whether the bank in question acted in an ethical manner, even where there had been formal compliance with legal obligations. Those doubts have also been raised in relation to other participants in these types of transactions, including accountants, lawyers and ratings agencies. Asymmetric information flow, variable capacity - or willingness - to use internal management systems, market mechanisms or regulatory enforcement tools, led to a profound misunderstanding of national and international risks associated with the rapid expansion of structured finance products such as securitisation. Deepening market integration ensured that risk, while diversified geographically, remained undiluted.

The unrelenting focus on the punishment of individual malefactors serves to obscure a much more fundamental problem: corporate malfeasance and misfeasance on the scale witnessed cannot be readily explained by individual turpitude. Moreover, a retreat to rules will not necessarily guarantee better ethical practice or inculcate higher standards of probity. Indeed the passage of rules may itself constitute a serious problem. It creates the illusion of change.

Given the fact that much of what occurred was legal, if irresponsible, it is essential to recalibrate the theory and practice of corporate governance, regulation and business ethics.

While the policy response to scandal has traditionally been to emphasise personal character, much less attention has been placed on how corporate, professional, regulatory and political cultures inform, enhance or restrain particular character traits.

There is a dynamic interplay between the culpability of individual actors and the cultural and ideational factors that not only tacitly condoned but also actively encouraged the elevation of short-term considerations over longer-term interests. This requires that we expand our focus beyond formal rules (which can be transacted around) or principles (that lack the definitional clarity to be enforceable).

It is essential to evaluate how these rules and principles are interpreted within specific corporate, professional or regulatory practice. Notwithstanding the certainty of former chairman of the Federal Reserve Alan Greenspan, that it is impossible to have a perfect model of risk, or in an earlier speech that it is difficult to legislate for ethics, it has become essential that the integrity deficit in regulatory frameworks be addressed.

The policy challenge is to build corporate governance and financial regulation in ways that emphasise duties and responsibilities as well as corporate rights. The appropriate first-order question, therefore, is not "How so we regulate?" but "For what specific purpose?"

Justin O'Brien is a Research Professor in the Faculty of Law and Faculty of Business at the Queensland University of Technology. His book on the credit crisis, Engineering a Financial Bloodbath: How Securitization Destroyed the Legitimacy of Financial Capitalism, has just been published by Imperial College Press.