Despite Negative Perceptions, Financial Institutions Can Contribute to the Public Good
Written by Timothy L Fort, PhD, JD
Another day, another scandal. Federal authorities are now investigating Citigroup’s Mexican unit. The only surprise is that such a story still makes the front page. Haven’t we seen one banking scandal after another for, well… a long time? Last year, it was the widening of the Libor scandal. The year before that, Greg Smith publicly resigned from a Goldman Sachs that he said tried to cheat their clients more than help them. Interspersed with those were many others, and other scandals before them. Sure, there are automotive recalls and other business misfires—to put it gently—but why do financial services seem so prone to such things and what do we do about it?
Two years ago, I served as the professor who organized and co-taught then Federal Reserve Chairman Ben Bernanke’s class at George Washington University on the history of the Fed. Although admittedly biased in the excitement of such an event—it’s not every day that I have to walk through bomb-sniffing dogs to get to my class—I thought Bernanke did a terrific job of explaining the history of the Fed and the rationale for many of its policies during his leadership. At the end of the class, though, a student commented that while much had been done to demystify the Fed, there remained a disconnect between it and Main Street. Indeed, as we later discussed in the class, there remains a disconnect between the highest levels of the entire banking industry and Main Street. It doesn’t have to be that way; then again, getting to the point where it is not that way is no easy task.
Before I became a professor, I was a country lawyer in the rural Midwest. I represented several banks who were as Main Street as they come. Indeed, they were on Main Street in their towns. Since banks have the money, there will always be some snide remarks about rich bankers, but these community banks were deeply entwined with their communities. There was little choice. The bank president, after all, might be the richest person in town, but his daughter might also be coached in Little League by the teller. The President might sit behind the janitor in church. The cook at the greasy spoon might be on the Board of Directors. Such relational ties make a difference.
Without those ties, any business can become single-mindedly greedy with little concern for anyone else. That’s even more the case when it is hard to take pride in the product itself. Banks don’t produce something of aesthetic value, as even a car company might. Banks trade in a commodity. Marry liquid markets that value short-term profits, artless commodities and numeric scorekeeping in place of flesh-and-blood humans, and one has a recipe for cultures that provide no aspiration for good nor conscience for guilt.
Regulation can be very helpful and, in light of the past few years, increased oversight is essential. Market modifications that increase the value of long-term holdings over short-term manipulations would help as well. Corporate governance that actually looks out for—and gives voice to—key relational constituents (shareholders, customers and employees) might make banks more aware of their missteps before they are taken, and reorient psychological biases to factor in something other than one’s own wallet.
Accompanying those constraints, we need global aspirations that aim at moral goods that can capture the imagination of our bankers and buffer the avarice that leads to yet another scandal and investigation.
Is the notion of aspirational public good possible today? The answer is yes. With some dissent, environmental sustainability stands as a good that at least makes recycling a habit for most people today and prompts companies to boast of their greenness. Public health has made tremendous progress in both policy circles and the behaviors that animate daily life. Without claiming that either of these have allowed a modern-day Sisyphus to finally get that rock on top of the mountain, the progress each of these has made suggests that there are ways to identify public goods that individuals, companies, and governments all see as aims to achieve.
Perhaps then banks, as well as the rest of us, might also consider the ways in which their behaviors can contribute to notions of peace and stability. Stealing money causes backlashes, even revolutions. Economic deprivation has spawned many a dictator. The inability to trust banks directly harms confidence in markets and the governments that allow them to get away with scandal.
While the International Chamber of Commerce and Rotary International have long aligned themselves with peace building, there was not a great deal of academic or institutional advocacy for the ways in which businesses can contribute to peace. That has changed in the past 15 years. There are robust efforts from NGOs, in governments, and in academic circles that directly provide guidance and research on how businesses can foster peaceful societies. Corporate behaviors that avoid corruption, follow the rule of law, support gender equity, give stakeholders a voice, and yes, provide economic development that counters poverty all have been found to support peace building. Or to put it otherwise, these behaviors are also generally accepted ethical business practices; what researchers have found is that these good business ethics contribute to peace.
Banks are in a terrific position to contribute directly to these efforts and such aims might also direct financial institutions to embrace an objective that would make for quite a different scandal-reporting headline. No, I am not suggesting that an ethical bank will make Vladmir Putin withdraw from Crimea, but it will connect with a set of Main Street values that foster a better sense of harmony, trustworthiness and stability that would do the banks, the markets and the world some real good.
