Chapter 4: How to Make Finance Serve the Common Good
Today, insurance companies and pension funds manage more than 100 trillion dollars of savings. These flows are not directed to long-term investments in low-carbon infrastructure and other sustainable development projects, but are fuelling financial bubbles; shareholders who lack investment opportunities in the context of a deepening crisis of the real economy are collecting increasingly disproportionate dividends, becoming sources of economic instability and social inequality. It is important to find a strategy for training financial analysts, and more generally managers, to ensure that they are neither clones nor chameleons. This strategy needs to meet professional and deontological standards that are indispensable to the economy and finance, and must take into account the economic and societal changes to be made. There have been many dramatic events in financial markets since 2007. The subprime crisis was followed by successive bank failures and numerous scandals (Madoff, Kerviel, UBS, Offshore Leaks, China Leaks, Luxembourg Leaks etc.). More generally, collusion between public and private interests, as well as the public discredit of elites generated by different scandals worldwide, have underlined the necessity of looking at the type of training that needs to be promoted in order to fight against fraudulent practices that undermine social ties. Such training also needs to take into account today’s energy and ecological concerns.
The bankruptcy of Lehman Brothers
The bankruptcy of Lehman Brothers was declared on 15 September 2008, and was linked to the subprime crisis. The bank was facing important write-downs of its real estate investments and because it was unable to find a buyer, had to file for bankruptcy. It was an emblematic bankruptcy, which the US authorities wanted. But it was not alone. The implosion of the US financial system began with the near collapse of New Century Financial (April 2007). It led among other things to the buyout of Bear Stearns by J. P. Morgan, with support from the authorities (in March 2008), the refinancing of Fannie Mae and Freddie Mac (during the summer of 2008), the purchase of Merrill Lynch by the Bank of America (September 2008), the bankruptcies of the insurance giant AIG, followed by that of the Japanese insurer Yamato Life (October 2008), the Royal Bank of Scotland (end 2008), the restructuring of UBS and the bankruptcy of the Irish State in the wake of Irish bank nationalisations, and so on.
This failure of financial institutions had both systemic causes but also very often resulted from the accumulation of risks that were not correctly controlled. The banks piled up commitments and investments, notably in the form of derivative products and securitised loans, which are little-regulated, ‘sensitive’ financial instruments. As a result they were carrying ever greater risks that could not be sufficiently ‘reinsured’ in the markets, even if the overall characteristics of such products did not stop them obtaining satisfactory assessments by the credit-rating agencies. It may therefore legitimately be asked whether risk control by such institutions really did seek to manage real commitments, rather than merely checking in a formal manner that banks’ activities respected standardised procedures: for example, not buying stocks with at least a minimal rating.
The Kerviel scandal
In January 2008, news broke out in France that a trader in the banking, finance and investment division of the Société Générale had lost the bank €5 billion by speculating in stock markets. As with any trader negotiating futures contracts on stock indexes, Kerviel was operating under strict limits concerning his risk exposure, responsible to an ad hoc team whose function was to alert traders and their superiors about any breaching of limits. The aim was to ensure that positions taken were covered by symmetrical positions at the least, in order to return to risk levels permitted by the bank.
Several points may be noted. At the time, operating in the derivative markets was of strategic importance to Société Générale. People operating in these products had a not inconsiderable influence within the bank. By definition such traders are exposed: their transactions involve large sums that have little relationship to reality (Kerviel had mobilised around €50 billion in his positions). Such traders live in a virtual world. Their pay is linked to profits. They are also subject to social pressures: a bank’s networks, the atmosphere in the trading room, competition between market floors and even within a bank’s trading room. Their egos are very strongly expressed. As a result, management of such traders is very important. However, the turnover that can be observed among ‘heads’ of teams of traders, who may switch from one bank to another, may lead to carelessness. This raises the issue of governance for each bank.
Do all these financial actors actually master technically the sophisticated products they use? Has their human formation prepared them for such situations? Do the departments of control and management of financial risks within banks have the natural authority and technical competence to control traders’ activities? How are those persons who use sophisticated products trained? What are the criteria for recruiting and selecting supervisors and traders? What criteria are used in organising their professional development?
Ethics training in business schools and universities
It should be noted that the initial academic training of bank managers over 50 today, who are in positions of responsibility, did not include theoretical teaching of the most sophisticated market techniques used now, and implemented by teams that report to them. They have therefore to be surrounded by department or unit heads who are younger and correctly trained in banking and insurance. They must also ensure that their teams have sufficient cultural diversity.
It also needs to be noted that present training in finance, mathematics and econometrics involves very little questioning of the social effects of the techniques put into place. It is, however, legitimate to subject practices that have developed over the last 30 years to critical examination of their wider social role. Yet the references of our societies are clearly changing. The issue of compensation reflects the change in paradigm. Income spreads between top and bottom earners that used to be seen as indecent are now justified as compensation for specific talent, for mastery of business or simply as chance. But how is it possible to justify from any ethical point of view income spreads of 1 to 400, or even 1 to 1,000 and 2,000, spreads that are scarcely affected by taxation? For market-driven finance, these issues are aggravated by the complexity of instruments used and the speed with which financiers invent procedures to circumvent regulatory constraints, and hence raise their chances of rapid winnings. The examples concerning the pathologies of finance are quite clear. Since the work carried out in 2009 relating to abusive securitisation practices, and the destabilising role of over-the-counter markets, new practices have emerged, such as high-frequency trading, dark pools and shadow banking. These were all accepted by an EU MiFID (Markets in Financial Instruments) Directive of 2007, which reduces possibilities of controlling markets even more. For the person in the street, the concerned citizen who is not a specialist, all of this amounts to no more than a series of damaging inventions, and the discussion about the so-called benefits of these practices demonstrates very clearly their social harmfulness. The justification does indeed seem to be limited to greed and the unbounded search for personal wealth by some. Yet when it comes to criticising such financial innovations and simply banning them, the silence is deafening on the part of financial market experts, while politicians are very reticent in their declarations. From this point of view, the banning of naked credit default swaps (CDSs) by the European Parliament in the autumn of 2011 was a real, though isolated, step forward. And it was outdated, given the permanent inventiveness of operators. This raises the question of how to get experts, financial operators and politicians to enter into a dialogue. How can practitioners be trained to be incisively critical of the malfunctioning and pathologies of the system? The issue of how to regulate finance must be accompanied by a collective questioning of its basic soundness, and this has to be done in classrooms, within financial institutions themselves and in the public domain.
However, apart from training in finance, the whole direction of education in business professions needs to be re-examined. In general, actual training continues to be provided without systematically including any of the extra-financial concerns described in the previous proposals. A symptom of the gap between needs and dominant practices is the development in management schools of international associations (such as Net Impact or AIESEC), which seek to put strong emphasis on training in ethics and companies’ social responsibilities. Such training, which students who are members of these associations are calling for, is not simply an afterthought or marginal. Instead, it strives to design whole curricula from a social and ethical point of view.
Business ethics as it is taught in certain programmes is very insufficient and partial, for several reasons. First, such training tends to be optional, reflecting its marginal character. Thus there is every chance that it only gets through to the ‘converted’. Second, most theorists of business ethics are led to wanting to demonstrate the short- and long-term advantages of management that respects certain ethical practices, as well as the diverging interests of ‘stakeholders’. They draw on case studies of ethical behaviour, which show that companies have everything to gain from acting morally. Yet such an instrumental perspective is seriously limited. On the one hand, in the short term there seems to be no clear link between a company’s social and societal commitments and its financial performance.[1] Grounding the arguments for business ethics on its potential profitability is likely to lead only to limited mobilisation by companies and managers in favour of the unconditional respect of certain norms. It therefore seems necessary to present an applied ethics approach in companies from a different point of view. Different rationales and opposing, or even contradictory, interests exist in companies. An approach based on ethics involves highlighting these differences and seeking ways of moving to their resolution, subject to criteria that need to be specified, such as the social utility of an activity, the refusal to do harm and so on.[2]
The teaching of business ethics, as we have seen, is marginal in courses taken by students. To be sure, things have evolved a little. A recent attempt is based on getting all actors in a firm’s business activities to adopt a win–win perspective. The aim is to show how companies that target populations at the bottom of the social pyramid could increase both their market shares and be profitable, by allowing poor populations to have access to quality goods and services.[3] The ambiguities of such an approach are numerous and it is important to analyse case-by-case who really gains from a firm’s social innovations. The aim is not to deny the efforts of certain groups striving to make business activity more civic, but to stress the limits of these strategies. For example, when the quality of a product made by a multinational is not really superior to a local product, then to what extent is it legitimate for the multinational to penetrate the new market, if this leads to a weakening of small local producers? In many cases, students at business schools would benefit from extending their learning to the ethical and political issues linked to their practices. This is not done in most cases.
The limits of the predominant referral to ethics in businesses
A further important fact to stress is the recurring difficulty that training in business and finance faces, in dealing with ethics, in both business schools and companies. Ethics tends to be associated with the compliance by individuals or organisations with existing standards and regulations. In the first instance, this means promoting respect for rules, and indeed many problems could have been avoided in certain banks had traders not taken positions that exceeded their authority. However, personal or even collective integrity in respecting the law should not be identified with morality. Actions that are legal are not necessarily legitimate. Many business and engineering schools and universities have a tendency to let themselves be trapped by what could be called ‘the good student syndrome’: the habit of obeying the rules of the game in education and then in work.[4] This may lead to a successful but conformist career, with little scope for thinking critically, for identifying and challenging factors that generate inequality and exclusion or for commitment to fairer and more humanising practices.
The instrumentalisation of ethics is also strongly sustained in companies themselves in order to promote adherence by employees. There is a growing public questioning about the supposed virtues of companies’ business, tax and civic practices and so on. In response, companies are seeking to develop stronger ethics internally, based on charters and codes of ethics. However, most of the time such an ethics-through-charters approach focuses on individual behaviour and not on the behaviour of companies as social organisations. In other words, this approach limits discussion of practices within companies to the issue of individual behaviour, as though legitimate questions could not be raised about the consequences of companies’ behaviour as a whole. From this point of view it is important to recognise that explicit references to the Universal Declaration of Human Rights, the Principles of the ILO and the OECD Principles represents significant progress.
Furthermore, the proliferation of ethics charters leads to what very much looks like a partitioning of analysis. Charters have a tendency to refer all substantive issues an employee may consider as their responsibility to a third party, an expert within the company on this question: ‘above all, our company must respect the law, and for any tax issue that you may face, any questions which you may be asked by representatives of government, you should first refer to the tax department, and so on’. The same is true about issues relating to communication, the environment and any other sensitive questions, so that ultimately the ability of individual employees to think about problems and discuss them with others is limited. To deal with this, some companies do set up ethics committees that allow certain issues to be discussed, at the behest of employees. This is more about transmitting information and appealing for arbitration, rather than reflecting on issues collectively.
The partitioning of analysis is also driven by the growing specialisation of profiles. In the name of the continual need to acquire high-level skills, there is a strong tendency among human resource personnel – such as recruiting firms – to select employees who have the identical profile to their future superior, and who have identical training and experience to the requirements of the jobs offered. Such HR policies lead to a partitioning of professions, as well as a partitioning of individuals and their views about their work. In other words, no one has legitimacy when expressing views on work that does not relate exactly to the core of their own activity.
Thus a sales manager, whose job is exclusively to sell, has no legitimacy in commenting, for example, on the ethics of a firm’s advertising, because views about this are the sole responsibility of the marketing and communication manager. To be sure, organisational efficiency means that not everyone can be involved in everything. However, it is argued here that concern for ethics is probably one of the subjects that could and should stand more at the crossroads of different functions within the company.
This partitioning of analysis and thinking is maintained by recruitment, which generally focuses on technical competencies at the expense of the ability to think more generally, and a general culture, as shown for instance by the limited recruitment of graduates in humanities (sociology, philosophy etc.). Moreover, it is often difficult to move from one function to another within the company. For all these reasons, though ‘vertical’ ambition is accepted, mobility from profession to profession is de facto complicated. Yet if all accountants do not necessarily have the temperament to work in sales, nothing prevents some of them from having relational qualities that could allow them to carry out jobs not strictly limited to financial techniques.
A greater permeability of professions to outsiders, as well as to non-specialist training, would surely help in promoting company consideration and analysis of ethics. Therefore there should be generalised training in ethics in higher education. To foster a critical perspective among students and professionals in the business and financial worlds, in order to make progress towards equitable and sustainable practices, there should be:
– a generalised and compulsory course in moral and political philosophy in each curriculum;
– systematic incorporation of work on codes of good conduct and professional ethics in all programmes;
– mandatory blue-collar traineeships and immersion in a developing country in all educational tracks;
– support for continuing training of managers in ethics and alternative experiences (solidarity leave etc.).
It must be stressed that if the training of financial operators and analysts is better organised, including training in economics and social ethics, as well as internships in a company, then this will only be beneficial if clear professional ethics are adopted in institutions that recruit employees and manage their careers.
Finally, to move to a sustainable economy it is important to favour technical training relating to the energy and climate transition, within generalist or specialist teaching tracks in economics, management and finance.
The reasons for training in ethics
At present, training ethics is limited to a minimum: in France, students who prepare for entrance exams into grandes écoles in literature and business do indeed study some philosophy. However, this discipline is not taught subsequently, other than in exceptional cases (courses in ‘philosophy and commerce’ or ‘business ethics’ are usually optional and are only chosen by a small minority of students). Most other training courses, high-level technical training for engineers or education in universities do not include philosophy classes.
So what are the reasons for teaching ethics and politics? The behaviour described above in relation to recent scandals indicates that a rift separates the world of finance from the rest of society. At the same time, irresponsible individual behaviour is predominant, with insufficient control and little regard by professional practices for social questions in general. It is therefore important to promote the acquisition of a culture that allows the overall effects of the present form of capitalism to be analysed, that permits moral consideration, both individually and collectively, and that may then help shape criteria for action.
How should this training in ethics be undertaken? It could be argued that in response to the proposal of teaching moral and political philosophy systematically via courses, there is still the danger of formatting students according to the dominant libertarian view of the world. It is precisely this that makes it important to move beyond simply promoting codes of conduct relative to a particular discipline or professional activity, even if such an approach is important. The whole point of drawing on a philosophical approach is precisely to train students in the ability to reason critically, to recognise the presuppositions of any point of view, and to stand back and analyse any form of ‘turnkey’ evidence or argument – the doxa. The aim is to promote students’ freedom of thought and judgement, and to favour free and balanced intellectual choices. It is possible to put forward deeper study of the main thinkers in moral philosophy, including both classical (e.g. Plato, Aristotle, Aquinas, Kant) and contemporary thinkers (e.g. Weil, Ricoeur, Walzer,[5] Nussbaum[6]), along with philosophy that takes into consideration relations between human beings and the cosmos, as well as the consequences of human actions on ecosystems (e.g. John Baird Callicott, Hans Jonas, Simon Caney, Henry Shue). All of these ideas should be discussed specifically, as should the means of integrating the concerns of future generations into the policy-making process.[7] This list is obviously not exhaustive. Work by sociologists that looks at companies and the evolution of liberal societies could also be beneficial.[8] The idea is specifically not to give answers or put forward a single line of analysis, but to recognise that ethics can, and undoubtedly should, express itself in all human activity.[9] From this point of view, references to spiritual sources and different religious traditions are especially precious in supporting the ethical dimension of economic and financial activity. For example, the social thinking of the Catholic Church could lead to research into justice and the common good as the criteria for founding any entrepreneurial project.[10] For its part, Islamic banking provides material for examining criteria of justice relating to finance.
Is business ethics sufficient? We have seen how business ethics as taught in management programmes is limited in scope and is instrumental. To be sure, efforts to take into account different ‘stakeholders’ within a company, in order to offset the power granted to ‘shareholders’ (according to the economic theory of agency), does allow steps to be taken towards a form of economic activity that respects the just distribution of value added.[11] Similarly, recent calls by apologists of liberal management – such as Professor Michael Porter of Harvard Business School – for ‘shared value’ are significant in terms of the shift to more cooperative forms of governance and the distribution of profits.[12] However, it is important to go further, in order to look at the distribution of value throughout the production chain – value that is defined in economic, social, and environmental terms.
For these reasons, any analysis of ethics needs to be applied at a macro level and also at a micro, company level. It is important to look at the political weight of economic actors, and especially tax and accounting issues linked to the presence of multinationals in various legal environments (tax havens and other favourable areas). It is also important to set out ethical issues in all specialised curricula: for example, in the teaching of communication, advertising, negotiation and strategy as well as in training in finance, marketing, human resource management and management control. From this point of view the development of social entrepreneurship curricula and ‘alternative management’ teaching in business schools is a good thing. The aim here is to make such teaching available to all. It would be possible to have ‘company role-plays’, which are often provided to each new group of students in business schools as learning tools, that seek to identify other rationales for business than the dominant finance one.[13]
In engineering and advanced technical schools, the acquisition of theoretical tools for ethical considerations will directly affect both scientific and technical innovation as well as the economic and financial dimension of companies’ activities and their methods of management. These tools should be a priority. To accelerate the shift to a sustainable economy, it is also appropriate to favour generalist training as much as technical training with regard to the energy transition and climate change.
Theoretical consideration is vital, but it is improbable that it is enough to lead to clear awareness by students. If it is not accompanied by the integration of beliefs and values, how will it possibly lead to creating a desire to direct work and professional activity towards an economy that is embedded in society and in the cosmos, which are both clearly seen as meaningful? Students should be given experiences of situations that will help them view reality through different glasses and with different references from those they are used to. For this reason it is suggested here that students should undertake blue-collar training and immersion training in a developing country.
Finally, along with providing initial training to students in ethics and politics, the same interest should be shown in continuing education. Organisations and professional clubs already exist in which the extra-financial dimensions of business are stressed. Religious associations for managers could also be mentioned. Again, the question is how these places of analysis and discussion can contribute to debate in the public arena, thus favouring the formulation of standards and policies covering finance and the economy as a whole. In France, the Grenelle 2 Accords on the Environment marked the beginnings, albeit insufficient, of such an approach. At a global level, the Sustainable Development Goals (SDG), adopted in September 2015, express the willingness of the states to tackle development issues, together with the private sector and civil society. SDG 17 highlights the importance of redirecting private and public resources in order to promote long-term investments, particularly in developing countries.
As expressed by Pope Francis, the current economic and ecological crisis is first ethical and spiritual. Will we succeed in mobilising these ethical resources to promote an inclusive economy?
Notes to Chapter 4
[1] David Vogel, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, Washington, DC: Brookings Institution, 2005.
[2] Cécile Renouard, La Responsabilité éthique des multinationales, Paris: Presses Universitaires de France, 2007; ‘The Private Sector and the Fight Against Poverty’, Field Actions Science Reports, Special Issue 4, 2012, http://factsreports.revues.org/1573.
[3] Erik Simanis, ‘Reality Check at the Bottom of the Pyramid’, Harvard Business Review, June 2012.
[4] Cécile Renouard, Éthique et Entreprise, Ivry-sur-Seine: Editions de l’Atelier, 2015.
[5] Michaël Walzer, Spheres of Justice: A Defense of Pluralism and Equality, New York: Basic Books, 1983; Thick and Thin: Moral Argument at Home and Abroad, Notre Dame, IN: University of Notre Dame Press, 1994.
[6] Martha C. Nussbaum, Women and Human Development: The Capabilities Approach, Cambridge and New York: Cambridge University Press, 2000. This American philosopher has formulated the capabilities approach in connection with Amartya Sen and social science researchers. This is a criticism of development focused on GDP growth. It is based on a holistic and pluralist conception of human development and insists on the political conditions of such development.
[7] See in particular the work of Dominique Bourg and Kerry Whiteside.
[8] For example, Luc Boltanski and Eve Chiapello, The New Spirit of Capitalism, London and New York: Verso, 2005.
[9] Cécile Renouard, ‘Corporate Social Responsibility, Utilitarianism, and the Capabilities Approach’, Journal of Business Ethics 98:1, 2011, pp. 85–97.
[10] Benedict XVI, Caritas in Veritate, 2009; Pope Francis, Laudato si’, 2015.
[11] R. Edward Freeman and David L. Reed, ‘Stockholders and Stakeholders: A New Perspective on Corporate Governance’, California Management Review 25:3, 1983, pp. 88–106.
[12] Michael E. Porter and Mark R. Kramer, ‘Creating Shared Value’, Harvard Business Review, January 2011.
[13] For example, Cécile Renouard, Pierre-Louis Corteel, Grégory Flipo and Ludovic Rouvier, ‘Grameen Danone in Bangladesh: Building, Rebuilding and Sustaining the Social Business’, ESSEC Business Case, ESSEC Business School Publishing, April 2011.