Rhodri Davies is the head of “Giving Thought”, the in-house think tank of Charities Aid Foundation. He believes that, “Although philanthropy is growing in prominence, there is still a real lack of clarity about its overall role in our society” (page 7) and in Public Good by Private Means he seeks to affirm its continuing role and clarify what that role is. The result is an interesting, though provoking and readable book that could assist people who wish to provide material support for charity or wish to influence public policy. Unfortunately, however, the book suffers from a number of deficiencies, which diminish its overall impact.

The most fundamental of these deficiencies relates to the thing that Davies is analysing. He expressly declines to give a precise definition of “philanthropy” (page 8). Instead, he says that he considers “the characteristics that typify philanthropy in its modern form” (page 8) and he leaves us to absorb his understanding as we read on. He distinguishes medieval religious alms giving “where the focus was primarily on what it meant for the donor and their immortal soul” from modern philanthropy, which he regards as giving “focussed on addressing the problems of society” (page 8) and it is clear that he does not have religious motivation or giving to religious causes in mind. Furthermore, although there is some discussion of support for the arts and education (e.g. page 99ff), it is clear that he is thinking mainly of the alleviation of poverty in much of his discussion. Indeed, his focus appears to be primarily on poverty in the UK (and, to some extent, the USA) rather than in the world as a whole.

Of course, an author may define his subject as he pleases. However, it is questionable whether Davies’ restricted focus is helpful and, more seriously, his lack of precision leads to conclusions that, on their face, appear to apply to a broader range of charitable activity than is justified by his arguments.

Parts of the book are tightly argued but Davies has a tendency to make sweeping assertions that lack support. For example, he asserts that “Philanthropy, properly understood, is about trying to improve society by tackling the root causes of problems, rather than just addressing their symptoms” (page 12) and thereby, dismisses disaster relief from its ambit. Likewise, a few lines later, he asserts that “tolerance for risk is one of philanthropy’s greatest assets” and later rhetorically asks “If philanthropy is unwilling to break the bounds of convention or afraid to think beyond the status quo, then what is the point of it?” (page 173). Whilst few would deny that there is a place for risk taking and “breaking the bounds”, this dismissal of other forms of philanthropy is surprising.

More seriously, important assumptions that underlie some of the book’s statements and conclusions are never properly examined or even, in some cases, stated. The most pervasive of these is the acceptance of what might be called the “post war consensus” regarding the role of the state. Davies appears to believe that the only theoretical alternative to the state doing those things that it does at the moment is for charity to do them and he rightly regards this as being impractical. However, he never considers the possibility that some of the things that are done ought not to be done at all, since they do more harm than good.

Davies also appears to accept the view that poverty is, at least largely, “something stemming from the wider failings of society” (page 35) and to regard the view that it may result in part from the failings of an individual as being hopelessly out of date. Indeed, he appears to believe that the poor are poor because the rich are rich since he states that “While the rich might not be entirely to blame for society’s failure to distribute wealth more evenly, the very fact that they are rich while others are poor is the root of the problem” (page 158). This is a disappointingly naïve approach.

The book suffers from a disturbing schizophrenia when it comes to individual choice. Davies asserts that, “The freedom for individuals to choose where they direct their gifts lies at the heart of philanthropy and gives it much of its strength” (page 11). Yet elsewhere he suggests that “what constitutes and acceptable charitable purpose is an ongoing source of debate” (page 192) and he states that “Philanthropy poses a fundamental challenge to democracy: by offering individuals a way of furthering their own priorities outside the normal democratic process, it potentially subverts the authority of elected officials and allows a small minority of those with significant wealth to exert a disproportionate influence on the direction in which society is travelling” (page 85). This implies that society should only allow philanthropic giving in line with some centrally determined priorities, which would require authoritarian governmental interference.

In relation to this and a number of other matters, it is unclear precisely what Davies’ views are since it is unclear whether he is merely reciting the arguments of others or endorsing these arguments. Overall, however, the book has a decidedly left-wing flavour. For example, the adoption of Finlayson’s view that levels of trust in charity fell following the 1926 general strike because of the efforts of volunteers (including Oxbridge students) in “strike breaking” (page 64) is contentious. Likewise, the suggestion that “the empowerment of women through charitable activities” is something that was seen in “the experience of women during the British miners’ strike of the 1980s” (page 90) is, to say the least, a strange choice of example.

These deficiencies may leave some wondering whether the book has any value but this would be an unduly severe judgement. It places modern philanthropy firmly within an historical context and the short “case studies” inserted in the text bring the history to life. By describing approaches in past centuries and views and arguments expressed in the past, it allows the reader to consider possibilities that might be ruled out by the prevailing twenty-first century consensus. Furthermore, whatever one may think about the arguments that have been and continue to be made against philanthropy, it is essential that we understand and address these arguments.

The book also contains valuable discussions of some important policy issues. These include the perennial hot potato of the involvement of charities in political activity, the justification for tax breaks for charities and giving to charities and the question whether charities should accept money from tainted sources. As regards the first of these, Davies states that “one of the main points of this book is to argue that involvement in the ‘political’ arena through campaigning and advocacy has always been one of the most important aspects of philanthropy organisations” (page 95). However, he later criticises some Victorian philanthropists on the grounds that they “brought ideological baggage with them” and he refers to “The necessity to look beyond ideology in picking philanthropic approaches” (page 188). It is unclear how these statements are to be reconciled and one is left with the impression that Davies supports an ideological approach provided that he agrees with the ideology! Nonetheless, by laying out the issues, he has assisted the debate.

Much the same could be said for many aspects of Public Good by Private Means. One does not have to agree with Davies’ assumptions, statements or conclusions to benefit from reading it. Provided that it is read in a critical manner, it should stimulate valuable thought and discussion. That is why it deserves to be read.

“Public Good by Private Means” was published in 2015 by Alliance Publishing Trust (ISBN 978-1-907376-24-5). 207 pages (excluding bibliography and references).

Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world. 

Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.

Saving Capitalism – For the Many not the Few is the latest addition to Robert Reich’s cohort of publications. He is perhaps best known for his previous work, The Work of Nations (1992) which raised the issue of growing inequality to the public sphere. Alongside his writing, Robert Reich is also a Professor at the University of California, Berkeley, and has served in various positions under the administrations of Gerald Ford and Jimmy Carter. Most notably, he was US Secretary of Labour under the Presidency of Bill Clinton between 1993 – 1997.

At the age of 71, Reich brings a lifetime of experience in both academia and politics to the table. As a true social-democrat, Reich’s Saving Capitalism is a continuation of the themes he discusses in previous publications – some of which include: rising inequality, the not so ‘free’ marketplace, the over-concentration of political and economic power in the hands of a few, the disenchantment of the masses, and others.

As the title may suggest, Saving Capitalism is a critique of the free market structures and modern-day capitalism. Reich argues that decision-making power is increasingly concentrated in the hands of a few, at the expense of the ‘many’. The very rich get richer and more powerful, while the middle and lower classes get weaker and poorer. The entire system is rigged against the majority in favour of a concentrated few. The solution to this injustice, Reich suggests, is an “…activist government that raises taxes on the wealthy, invests the proceeds in excellent schools and other means people need to get ahead, and redistributes wealth to the needy” (page xvii).

Does this narrative sound familiar? To many it certainly will. Robert Reich’s Saving Capitalism is therefore one among numerous publications that champion the social inequality-class warfare thesis. In that sense, the book brings little to nothing new to the debate. Nonetheless, it is well-written and its use of colloquial language grapples the reader. This does however make the book read like more of a socio-political novel rather than a macroeconomic or political account. One cannot help but feel that Reich’s desire to push his own personal narrative has come at the expense of rigorous analysis.

But before jumping to any conclusions, let’s briefly touch upon the structure and content.

Saving Capitalism is comprised of three main parts. The first chapter, entitled “The Free Market” aims to show how in fact ‘free markets’, are not ‘free’ (page 85).

As you may have already guessed, Reich argues that this is due to them being controlled by a select, powerful few that both establish and control rules in which a ‘free market’ operates. He argues that there are five ‘building blocks’ of a free market: property, monopoly, contracts, bankruptcy and enforcement. Each of these require human governance and can be used to either, promote a fair and decent society or can be manipulated to benefit a select few (page 9). This first part of the book argues that the latter has occurred. The stronghold on patent laws by pharmaceutical companies, the large lobby budgets of corporations to maintain dominant market positions, the abuse of bankruptcy laws, are all cited as evidence that the entire system is rigged in favour of on elite few.

The second part of the book is dedicated to showcasing the consequences of such a rigged system. Here Reich argues that free market meritocracy is in fact, a myth. Those at the top increase their own wages whilst those at the middle and bottom see their wages stagnant and in many cases, decline (pages 134-167).

In the third and final chapter, Reich argues for a restoration of countervailing power, or in layman’s terms, bringing power back to the people. The means by which he believes this can be achieved are certainly not new: an increase in the minimum wage, amending labour laws to favour unions, and changing contract laws as to encourage employees and workers to take action against unjust employers (pages 153 – 217).

So while Robert Reich’s latest work presents a compelling critique of the challenges facing 21^st century capitalism, it brings little new to the table. Moreover, any truly impartial reader that has some basic understanding of economics would be quick to observe that Saving Capitalism is unabashedly lopsided. There is no doubt that western capitalism is at a crossroads, and the aftermath of the financial crisis has left millions feeling disenfranchised. However, Robert Reich portrays injustices within the free market (as real as they may be), as characteristic of the entire economy. It’s a bit like saying, we can’t play football anymore because one of the players faked an injury.

He also seems to portray an over-the-top form of class warfare: the elite vs. the rest. As if the classes are statutory and unitary groups with no movement or change between. The rich and powerful only stay rich and powerful while the rest suffer the consequences of their actions. We know this is simply not the case – a free market economy does indeed reward creativity and work. Whether, intentional or unintentional, Reich left out any deeper economic discussions, such as aggregate supply/demand and its impact on market meritocracy. This brings us to what is perhaps the most significant pitfall of the book, it is far to rooted in empirical storytelling rather than political or economic analysis. No matter how broad Robert Reich’s experience may be, personal examples should always be an addition to the argument and not its foundation.

Having said that, Saving Capitalism offers some captivating thoughts on the current state of free market. Provided that its rather superficial and politicised arguments are viewed through a critical lens, the book is certainly a worthwhile read.

 “Saving Capitalism: For the Many, not the Few” was published in 2016 by Icon Books Ltd. (ISBN: 9781-78578-0677). 279pp.

Andrei Rogobete is a Research Fellow with the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.

For the Least of These comprises a collection of short essays. Its purpose is clearly articulated by Arthur Brooks in the first paragraph of the Foreword: “The Christian Gospels make it abundantly clear that Jesus called on us to care for the poor. What is not at all clear, however, is the best means by which Christians living in a modern, industrial society … can and should carry out the Lord’s directive. This volume takes on the challenge of beginning to answer that question” (page 7).

The book seeks to fulfil its task through twelve chapters grouped under three headings: “A Biblical Perspective on the Poor”; “Markets and the Poor”; and “Poverty Alleviation in Practice”. As might be anticipated by those aware that its editors are Vice-Presidents of the Institute for Faith, Work & Economics, its basic thesis is that a free market economy is the best foundation for the alleviation of poverty. The authors are careful to avoid suggesting that the market automatically provides the solution or that the market is in some way an end in itself but they see it as having inherent potential. As Robert Sirico puts it in his chapter, “The price system in a free economy does not provide a moral foundation for a society. It does not remove opportunities for ill-gotten gain. What it does do is beat every form of socialism at generating moral socially beneficent options for escaping poverty” (page 179).

Negatively, the authors take issue with what Jay Richards (in the Conclusion) calls the “untutored intuition” that “if there are some rich people and some poor people, we can cure poverty by taking some of the wealth of the rich and giving it to the poor” (page 247). It is suggested that both government action (e.g. foreign aid) and some charitable activity (e.g. some gifts by churches to support people in the third world) is misconceived, if well meaning.

Positively, the promotion of trade and enterprise is advocated as the best long-term solution to poverty. For example, Brian Griffiths and Dato Kim Tan suggest that “Intentionally building a new factory close to a slum, creating jobs, and contributing to the local economy through its monthly wage bill, is far more effective in tackling poverty than all the CSR activities that companies can ever do” (page 145).

Most of the book is relatively high level. There are some interesting specific proposals for change. For example, Griffiths and Tan suggest that it is illogical to allow tax deductions for donations to charity but not to apply the same tax incentives to impact investing that builds social enterprises among the poor (page 151). However, proposals of this kind are few and far between. This is a pity since the inclusion of some more would have improved the book. In particular, the book’s suggestion that a lot of government action has produced drug like dependency cries out for proposals as to how the patient should undergo detoxification without dying in the process! On the other hand, the authors might legitimately respond that it is necessary to win the conceptual battle at the macro level before moving to the detail and that this is a small book devoted to that conceptual battle. Furthermore, by its very nature, a market based approach is likely to involve a multitude of approaches informed by general principles rather than large over-arching policies centrally implemented. That, indeed, is one of its advantages.

Of course, the essay format has some drawbacks. In particular, as might be expected in a book with fourteen different contributors, the arguments are not developed in a linear manner, the chapters overlap and not all of the arguments are consistent with one another (e.g. there are differences of view as to how bleak or otherwise the outlook for global poverty really is and different levels of optimism are expressed regarding micro-finance initiatives). In addition, some of the authors have tried to cram too much into their chapters, with the result that they are longer on assertion than argument and adopt language which, at least to UK ears, is unduly polemical (e.g. Jay Richards won’t win many friends by suggesting that Lyndon Johnson’s “War on Poverty” could just as well be called the “War on the Poor”, page 250).

Most readers will want to take issue with at least some of the arguments that are advanced, although they may not agree which arguments should be challenged! For example, David Kotter’s distinction between “wealth” and “riches” (page 60) and Robert Sirico’s suggestion that something is disordered “when it is imbalanced and disregards reason as well as the mandate of scripture” (page 176) are contentious interpretations of the bible. More generally, with the exception of Brian Griffiths, Dato Kim Tan and Richard Turnbull, all of the authors are based in the USA and the book has a clear US perspective. Indeed, some of the chapters relate almost entirely to the US experience (e.g. Anne Bradley’s chapter on Income & Equality). This US experience is important and interesting. There is much to learn from it. However, it would be good to consider other perspectives.

That said, each author contributes something worth thinking about and some of the contributions are very good: the chapters examining historic attitudes and actions in the UK and the USA (by Richard Turnbull and Mark Isaac, respectively) are particularly interesting since they allow the past to challenge contemporary attitudes; Art Lindsley’s short chapter on wealth redistribution comprises a concise demolition of superficial interpretations of the Old Testament Jubilee laws and of the practices of the New Testament Church; and Marvin Olasky’s chapter on the US welfare system, although in some respects perhaps over journalistic, raises a number of issues that deserve careful consideration.

For the Least of These is not a book for those looking for careful engagement with academic debates. Those looking for a systematic explanation of the potential of the free market to alleviate poverty should also look elsewhere. However, it is well worth reading. Few readers will come away without being challenged in some respect and the range of subjects covered should be a spur to further reading and thought.

“For the Least of These” was published in 2014 by Zondervan (ISBN – 10: 0310522994). 252 pages (excluding notes and glossary).

Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world. 

Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.

The Centre for Enterprise, Markets and Ethics (CEME) is pleased to announce the publication of Capital Markets for the Good of Society: A Christian Perspective by Lyndon Drake.

The publication can be downloaded here. Alternatively, paperback copies can be ordered by contacting CEME’s offices via email at: office@theceme.org

An event associated with this publication was held in November 2017 

About the Publication

Capital Markets for the Good of Society discusses the ethical foundations and societal benefits of capital markets from a Christian perspective, emphasizing their role in promoting human flourishing and economic fairness.

It makes the case that capital markets — despite their terrible public image — provide genuine and often overlooked benefits to society, particularly to the poor. Drake argues that public discourse is dominated by highly visible failures like the 2008 financial crisis, while the gradual, dispersed benefits of capital markets go largely unnoticed.

To assess social utility, Drake develops a framework grounded in Christian theology, using ancient Israel as a paradigm. Drawing heavily on the book of Deuteronomy and early Church thinkers like Basil of Caesarea and Clement of Alexandria, he identifies key principles: that economic structures should promote human flourishing and creativity, that justice includes a redemptive dimension (not merely punishment of wrongdoing), and that no person or group has an absolute right over capital — ownership is contingent and comes with obligations.

From these theological foundations, Drake distils four practical norms for evaluating capital markets: they should provide harmless credit for the poor, support personal economic freedom, ensure visibly fair pricing, and enable broad participation in material blessings — not just aggregate GDP growth.

He then applies these norms to specific market types — bonds, equities, commodities, currencies, money markets, and derivatives — arguing that each provides measurable social utility. Government bond markets fund public infrastructure and welfare; equity markets democratise investment access; commodity markets protect weaker participants through transparent pricing; currency markets enable vast wealth transfers to developing countries through remittances; and even derivatives, despite their complexity and risks, lower borrowing costs in ways that disproportionately benefit poorer borrowers.

Drake also addresses the real problems: harmful products like NINJA mortgages, market scandals, information asymmetry, excessive compensation, and overleveraged speculation. However, he concludes that these are reasons for better regulation and cultural reform within the industry, not for dismantling capital markets themselves. The deeper challenge, he argues, is that the benefits of capital markets are gradual and invisible while their failures are dramatic and headline-grabbing — making it easy for society to undervalue what these markets actually contribute.

About the Author

Dr. Lyndon Drake (PhD, Computer Science, York; MA, Theology, Oxon) is a research student at the University of Oxford, working on a biblical theology of capital. Until 2010, Lyndon was a Vice President at Barclays Capital, trading government bonds and interest-rate derivatives. He now chairs the Council for Business and Theology (part of the Business Coalition of the World Evangelical Alliance), and has served as pastor of a city centre church in New Zealand, as well as teaching the theology of work at seminaries and serving in regional church leadership.

This book is a collection of previously published articles and one unpublished conference paper, with a new 46 page long introduction. It is therefore not a book that develops an argument skillfully and steadily, rather it hammers away at certain themes, sometimes repetitively. Streeck acknowledges this in his Note on the Text, where he admits to an ‘occasional overlap between chapters’ (p. ix). Having read through them all I did feel that at times this repetitiveness was unfortunate, although there is undoubted value in having the various articles gathered in one place.

The organizing theme taken by Streeck is that capitalism is collapsing because of certain internal contradictions. What is more, the author believes that we are living in a period of ‘deep indeterminacy’ (p. 12) in which it is difficult to predict what will happen, and that there is nothing obvious to replace our contemporary capitalist system. Other than at two brief moments, the prophetic message given is one of doom and gloom throughout the entire book, with no real sense of hopeful possibilities. In an emotional sense, and perhaps also because of its repetitive nature, I therefore found that reading this book left me dispirited, but also with a sense that the analysis might be incomplete or flawed.

One of the recurring strands running through the book is that of the relationship between economics and sociology. This is addressed through the lenses of economic history, the nature of money and debt, the difficult relationship between capitalism and democracy, commodification and inequality, and a consideration of the class structures within society (Marx certainly gets several mentions). This is summarized admirably concisely and clearly in the final paragraph of Chapter One, which bears the same title as the book itself, and which started life as a lecture given at the British Academy on 23^rd January 2014.

At heart, although he never exactly states it in this way, Streeck presents a vision of capitalism as an epoch within history, whose time was always going to be limited, rather than accepting a view of history that must fit within a capitalistic meta-narrative. In order to sustain this argument, the author needs to describe capitalism in a certain, rather dysfunctional, way. So for example, Streeck sees innovation as something that ‘attacks and destroys in particular firms and markets that operate to everybody’s satisfaction.’ (p. 39) I was not convinced by this. It seemed to me that the author’s structuralist view of society had left little space for human creativity, and left him unable to see individuality as anything except a problem. However, prompted by Streeck’s analysis I did find myself asking about the nature of a wholesome vision of collective life within which individuals can flourish, and what kind of ‘progress’ this would mean.

The two moments, hinted at above, when Streeck himself ventures into the territory of suggestions or answers to these questions come at the end of Chapters Eight and Nine. Chapter Eight considers the troubled relationship between democracy and capitalism, taking the work of Wolfgang Merkel as a foil, but I was heartened to discover the suggestion of ‘de-globalizing capitalism’ (p. 198) and the idea that ‘restoring embedded democracy means re-embedding capitalism’ (p. 199) (italics in the original). For me, this idea offers the genesis of a new piece of work, different in tone to the current collection, and I would encourage Streeck to reflect on how this could be developed. Rather different, but equally important, is the moment at the end of Chapter Nine when Streeck feels for ‘…a non-capitalist politics capable of defining and enforcing general interests in the sustainability of human society’ (p. 225). I took this to be a call for the complex relationship between politics and economics to be re-imagined.

This brings me to another problem that I had with this book; it has in a sense been overtaken by the events of the Brexit referendum and the election of Donald Trump. The relationship between politics and economics is being re-drawn before our eyes, the old assumptions are unraveling, and faltering attempts at what could be called a ‘non-capitalist politics’ are emerging. I feel sure Streeck must now be writing something new, and I would encourage him to do so. From a Christian perspective, deep questions of identity connected to the individual and to society are very resonant with theological reflections on the nature of life itself, and the way in which societies and economies are arranged. I was therefore pleased to have been stimulated in my own thinking as I read this book. I look forward to a more cohesive, less repetitive, and post-Brexit sequel.

The book is nicely presented with a good index. The author is the Director of the Max Planck Institute for Social Research in Cologne and Professor of Sociology at the University of Cologne.

How Will Capitalism End? Essays on a Failing System – by Wolfgang Streeck, 2016, ISBN 13: 978-1-78478-401-0

Edward Carter is Vicar of St Peter Mancroft Church in Norwich, having previously been the Canon Theologian at Chelmsford Cathedral, a parish priest in Oxfordshire, a Minor Canon at St George’s Windsor and a curate in Norwich. Prior to ordination he worked for small companies and ran his own business.

He chairs the Church Investors Group, an ecumenical body that represents over £10bn of church money, and which engages with a wide range of publicly listed companies on ethical issues. His research interests include the theology of enterprise and of competition, and his hobbies include board-games, volleyball and film-making. He is married to Sarah and they have two adult sons.

The Centre for Enterprise, Markets and Ethics (CEME) is pleased to announce the publication of The Economics of the Hebrew Scriptures by Ben Cooper.

The publication can be found here.

Alternatively, for hardcopies please contact CEME’s offices via email at office@theceme.org

This is an excerpt from the The Mais Lecture: Restoring Trust in the Banking System at Cass Business School, May 24th 2017. For the full text, please click here.

It is a great honour to be invited to deliver the Mais Lecture this year, the 38th occasion on which it has been given. It is also a particular personal pleasure.

I was appointed to the Chair in Banking and International Finance at The City University in 1976. The funds for the chair had been raised by a previous Lord Mayor, Lord Mais and so out of recognition for his contribution I felt it appropriate that we establish a lecture in his honour. Hence the Mais Lecture.

The first Mais lecture was given in 1978 by Sir Gordon Richardson, the then Governor of the Bank of England, who told me that it was the first time a Governor of the Bank of England had set out in detail the design and implementation of UK monetary policy. The event was a huge success and the text of the lecture was reproduced in full the following day in The Times newspaper. The lecture has subsequently been given by central bank governors, finance ministers, prime ministers, a French president, a journalist, a chief rabbi and a number of distinguished academic economists including Frederich von Hayek and Lord Robbins. This year I’m afraid you come down to earth!

The subject I have chosen for this lecture is restoring trust in the banking system and by the banking system I mean central banks, bank regulators and commercial banks. I should make it very clear that this lecture is my own personal view and not that of Goldman Sachs, though I acknowledge a great debt to my colleagues at the firm for their valuable insights.

Since the financial crisis began in 2007 the reputation of the City, and trust in the banking system, have never been more challenged. The UK Parliamentary Commission on Banking Standards described the crisis as “a collapse of trust on an industrial scale.” Paul Tucker, a deputy governor of the Bank of England has described (with hindsight) the associated failure of regulation as “shocking, astonishing…catastrophic” which “left the credibility of financial regulation in tatters!” A review of what went wrong in one major UK commercial bank concluded that trust in commercial banks had been “decimated” by the crisis.

The pre-crisis factors which led to this loss of trust have been well documented in books and research papers and commented on in plays, novels, films and the news media by academics, journalists, novelists, playwrights and filmmakers.

Since the crisis each of the countries involved has undertaken a sweeping review of its regulatory structures, resulting in the creation of new institutions (the PRA and FCA in the UK), new regulations (covering capital, liquidity, compensation, resolution planning, governance and conduct) and more comprehensive and intensive supervision (UK Senior Managers Regime). Internationally, countries have worked together through the G-20 Financial Stability Board to facilitate harmonization and cross border regulation.

Yet ten years later and after this immense effort, trust remains low. Only 20% of the UK population think banks are well-managed, down from 80% in the 1980’s. In a recent survey in Germany only 26% of the population expressed confidence in the banking system. The independence of central banks has been challenged in the US, the Eurozone, Japan and the UK. The view of the new regulatory structures by academics and commentators is ‘could do better’.

One respected commentator concluded a recent piece on the UK claiming “the haze of mistrust continues to hang over the whole City”, while in the US context another remarked that “the world has not come to terms with the crisis of 2008. Justice has not been seen to be done. Remedies to prevent a repeat have not been seen to be applied. Dodd-Frank has failed to instill confidence.”

If a modern advanced economy is to function effectively it needs a sophisticated financial system which is trusted by the public. They must believe that it benefits society as a whole, and not just bankers. They must believe that the services sold by banks are appropriate to their needs and competitively priced. They must have faith in the competence and integrity of bank leadership, and respect for banks’ corporate cultures. The financial system must be seen as making a contribution to society, not being an island within it.

Against this background I wish to explore three challenges which I believe must be met if trust is to be restored and maintained in the banking system.

Preserving Central Bank Independence

The first challenge we face is preserving the independence of central banks from political control.

This independence has only been recently won. The independence movement began in the late 1990s with the central banks of England (1997), Japan (1997) and then Sweden (1999), along with the ECB (1999). It was a response to the Great Inflation of the 1970’s and the accompanying stagflation of low growth and rising unemployment. Central bank independence cannot be taken for granted. We forget the 1970’s too easily. In 1974 inflation in the UK averaged a staggering 27%. For short-term political reasons, control of the money supply was neglected and replaced by control of the price of credit (the interest rate) and direct controls on credit allocation to certain sectors of the economy (such as real estate and housing).

The reason the independence of central banks is important is that they alone among all the economic institutions in our society have the ability to provide stable prices. Price stability is important because it is a foundation for an efficient functioning market economy and a pre-requisite for confidence, growth and prosperity. Stable prices enable market participants to have confidence in the value of the money they use for exchange, its future value as an asset and its dependability as a unit of account.

Stable prices in turn depend on central banks setting appropriate short term interest rates to control the money stock. Any politician making such a decision will at some point succumb to short term political pressures. That is the day-to-day reality of politics in a modern democracy. But it will inevitably mean a loss of focus by politicians on maintaining medium term price stability. Independent central banks are therefore uniquely the guardians of stable prices in a democracy.

Deflation can be as serious as inflation. After the financial crisis it was this independence, along with transparency and accountability, which enabled the major central banks to confront the threat of falling prices and enable the global economy to return to a path of recovery.

Despite this success, the value of central bank independence has recently been questioned.

The Bank of England is facing political criticism for its continued policy of Quantitative Easing. After nine years it is judged as counterproductive in stimulating investment, and a cause of growing inequality by helping those on the property ladder at the expense of those who cannot afford to buy their own home. If continued it is judged a threat to its independence.

In Germany a group of economists and entrepreneurs has challenged the legitimacy of the purchase of sovereign and corporate bonds by the Bundesbank, on behalf of the European Central Bank (ECB), on the ground that it crosses the line between monetary and fiscal policy and unduly burdens the ECB with troubled government debt.

In the US the vice-chairman of the Financial Services Committee of the House of Representatives (Patrick McHenry) in a letter to the chair of the Federal Reserve (Yellen) stated that it was unacceptable for the Fed to continue negotiating financial stability rules “among global bureaucrats in foreign lands, without transparency, accountability or the authority to do so.”

These could perhaps be dismissed as the views of politicians and commentators. More difficult to dismiss however are the considered judgments of former central bank governors who are respected academic economists such as Mervyn King and Otmar Issing and the views of the central banker’s bank, the Bank for International Settlements.

In its 2016 Annual Report the BIS stated that “the extraordinary burden placed on central banking since the crisis is generating strains. During the Great Moderation, markets and the public at large came to see central banks as all-powerful. Post-crisis, they have come to expect the central banks to manage the economy, restore full employment, ensure strong growth, preserve price stability and foolproof the financial system. But in fact this is a tall order on which the central bank alone cannot deliver. The extraordinary measures taken to stimulate the global economy have sometimes tested the boundaries of the institution. As a consequence risks to its reputation, perceived legitimacy and independence have been rising.”

Facing up to these risks poses difficult as well as controversial challenges.

The most fruitful starting point I believe is to recognize that the world in which we live is best characterized by Frank Knight’s concept of true uncertainty, or Mervyn King’s radical uncertainty, rather than a world of risk, in which the outcomes of alternative decisions can be measured in a probalistic sense. In a world of radical uncertainty we simply do not know what the future will hold. We do not know with any precision the connections between banks and financial markets. Similarly we have limited knowledge of the connections between the financial sector and the real sector of the economy. Forecasting is an inherently complex business with great limitations. Because we live in a world of true uncertainty, we then shroud our ignorance by resort to expressions such as animal spirits, irrational exuberance and hubris to explain economic behavior.

It is important to emphasize that it is because of the success of central banks that parliaments around the world have given them increasing mandates. In the UK the Bank of England’s responsibilities now cover price stability, financial stability, prudential regulation, fair and effective markets as well as cyber security, fin tech and Brexit as they affect the banking system.

However these increased mandates bring with them risks.

One risk derives from the central banks’ responsibilities for delivering financial stability. To start with there is a serious debate to define what it means. Presumably it includes preventing future asset price bubbles and financial crises. However a failure to prevent a future crisis (and as sure as night follows day there will be future crises) will be perceived as a failure in judgment and execution by the central bank, which could easily undermine confidence in its ability to achieve its monetary policy objective.

Another risk is that the central bank will be perceived as designing policies impacting the distribution of income and wealth and which should properly be the preserve of elected politicians. Simply because of the need to set interest rates central banks will have an impact on the distribution of income and wealth. Over the cycle rates will rise at times and fall at other times. However a general consensus has been established that such a result is acceptable in order to achieve price stability. However targeting financial stability with direct controls (such as loan to income ratios for residential mortgages) and indirect controls (such as setting the minimum capital required to make loans to certain sectors of the economy) will lead to winners and losers, so making central banks open to the criticism that the implementation of these policies should be taken by politicians rather than unelected officials.

A further risk arises from the fact that sometimes monetary policy has been used as a cover for what is in reality fiscal policy. One example of this was the proposal by the European Central Bank (ECB) to engage in outright monetary transactions (to do “whatever it takes”) by purchasing the government bonds of countries that have not pursued prudent fiscal policies in order to keep down their cost of borrowing. Such a policy is effectively a fiscal transfer from countries that have run their public finances well to those that have not and for some this was a clear violation of the no-bail out clause of the European Treaty. The independence of the ECB has been further questioned by its participation in the design of bail out programmes along with the IMF and the European Commission.

In the light of these risks to the reputation, legitimacy and independence facing central banks, the question arises “Have central banks been overburdened by the increased mandates they now have and has it created exaggerated expectations of what they can deliver?”

This is a serious and difficult question because while central banks must be independent of political control they cannot be totally isolated from political environment they operate.

For this to be addressed I believe there needs to be greater realism and public acknowledgement about what central banks can and cannot achieve. In this regard I am always inspired in reading Otmar Issing’s work by the emphasis he places on the need for humility on the part of central banks, simply because to reduce the behavior of a modern economy with a complex financial system operating in a global environment to a set of equations is exceedingly difficult if not possible. In addition it is important that there is clarity regarding the responsibilities of central banks and those of other economic policy makers. When the Financial Policy Committee was first set up the statement made by the then Chancellor of the Exchequer was that the Bank “will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response.” This is a very broad remit indeed which in my judgment blurs the line between monetary policy, fiscal policy and structural policies and ultimately poses a risk to central bank independence.

As a result I believe there is a strong case for requiring the central bank to give priority to what only it can do; namely setting a medium term numerical target for inflation. This will come to be seen as the expected rate of inflation, and have credibility because of the central banks ability to control money supply growth. In the short term, in a world of radical uncertainty, there will be deviations in prices and output from their medium term path. Because of this central banks should have discretion over the period of adjustment in returning to the medium term target. And in all of this they should of course be held accountable for and transparent in their actions.

Regulation in a World of Radical Uncertainty

I now turn to the second aspect of restoring trust namely through ensuring that regulation can be effective in a world of radical uncertainty.

The years since the financial crisis have seen an immense increase in the extent, detail, complexity, cost and supervision of bank regulation. In the UK, the US, the EU, Japan and other G20 countries the pendulum of regulation has been allowed to swing as far as necessary so as to give the public a firm assurance that taxpayers would not have to pick up the bill for bank failures, in a future crisis.

After the last crisis regulators around the world effectively sat down with a clean sheet of paper and set about a root and branch reform of the system. A number of academic economists and commentators advocated the most radical structural change, namely ending the fractional reserve system of banking and requiring banks to hold 100% of their assets in liquid form. This proposal was originally put forward in 1933 in the US following the financial crisis of the early 1930’s. It was known as the Chicago Plan after its author Henry Simons who was a professor of economics at the University of Chicago and has subsequently been supported by some of the leading names in the economics profession including Frank Knight, Irving Fisher, Milton Friedman and James Tobin.

Their argument was that because money is a public good which is vital for the efficiency and stability of a market economy, it is important to separate the creation of money from the creation of private sector credit. Narrow banks would have their deposits matched by 100% liquid assets which would consist of deposits at the central bank and government securities. Providing the public have confidence in governments to fund future expenditures, there would never in future be a reason to have a run on banks. As Irving Fisher put it, “nationalize money but do not nationalize banking”.

However following the 2008 crisis this approach was considered a bridge too far. One reason was the disruption which such a huge change would entail as banks reorganized their activities into ‘narrow’ banks, backed only by approved liquid assets, and ‘wide’ banks which could perform activities such as corporate lending. In addition a rigid separation might well hinder beneficial innovation, including more flexible forms of borrowing or lending. Such a change would also transfer risks to non-bank financial intermediaries, with the prospect that the cost of capital of investing in real assets such as plant, machinery and houses would rise.

At the same time governments recognized that in extremis they have an ultimate responsibility to provide catastrophic insurance to support the financial system. Although a 100% reserve banking system would prevent a run on banks, if there was a shock to the economy resulting in a sharp and significant reduction in total spending, central banks and governments might still have to step in and rescue ‘wide’ banks, rather than let households and firms bear the cost of significant falls in asset prices, including those of houses.

One result of the pragmatic and piecemeal approach which governments and central banks have taken is that the banking system is far more robust today than it was in 2008. Retail depositors are ring-fenced from the complex risks undertaken by investment banks and the payments system is more stable. Banks are better capitalized, have limited leverage, and hold far more liquid assets than before. Investors are better informed about the potential risks of investing in banks. New compensation structures for bank executives reward longer-term performance and discourage short-term risk-taking, with increasing use of deferred stock awards and claw back provisions instead of cash bonuses. Resolution planning (special bankruptcy procedures) allows banks in financial difficulties to sort out their problems without disrupting their basic services to clients: in other words banks can fail but without systemic repercussions. Finally, the UK Senior Manager’s Regime holds specific senior individuals personally and directly accountable for their actions, with reckless mismanagement of a bank a criminal offence subject to a maximum of seven years in prison and a fine.

These are significant achievements which deserve to be recognized.

However despite these achievements the new regulatory structure has come in for significant criticisms.

One is the charge of complexity.

International prudential agreement among banks first started with the Basel Accord of 1988, a 30 page document. Basel II in 2004 was 347 pages. By 2010, Basel III reached 616 pages! In the US the Glass-Steagall Act of 1933 ran to 37 pages, whereas the Dodd-Frank Act of 2010 runs to 2,300 pages, not to mention the growing thousands of pages covering detailed supporting rules.

Bank capital requirements account for much of this paperwork. UK banks must hold a variety of different types of capital in proportion to their risk weighted assets including: common Tier 1 equity, additional Tier 1 equity including perpetual subordinated debt instruments, a capital conservation buffer, an additional equity buffer for internationally systemic banks, risk-specific equity, a PRA buffer and a time-varying counter cyclical capital buffer. Banks are also required to issue bail-in bonds which convert debt to equity upon certain trigger events. The measure of “risk weighted assets” which regulators use to calculate the ratios is subjective, complex to determine and can change significantly and quickly in a crisis. Banks are additionally subject to stress testing, which is highly subjective, but whose results will inform regulators in setting certain of these buffers. Equally complex calculations and reporting requirements apply to holdings of liquid assets, the structure of compensation and resolution and recovery planning.

A second criticism of the current regulatory system is the increased deadweight cost to society of the new regulation. In advanced countries regulatory bodies employ significant numbers of employees and consultants. In 1980 there was one regulator for every 11,000 people employed in the UK financial sector; by 2011 there was one regulator for every 300 people employed. This pattern is repeated in the regulatory reporting, compliance and internal audit departments of regulated firms. At my own bank we have one compliance officer for every 30 bank employees – which is not unusual for major banks. When added together the number of people engaged in regulation runs to several hundred thousand.

A further criticism of the increased regulation is that it undermines trust and moral responsibility. Under the present system the primary duty for risk managers is making sure that certain numerical targets are met. Does this undermine a sense of personal responsibility and ownership? Instead of bankers being held accountable for determining appropriate amounts of capital and liquidity which in reality are unique to the risks and nature of each business, detailed regulatory prescriptions can become a prop on which they can lean. John Kay has stated the problem succinctly “Regulation based on detailed prescriptive rules has undermined rather than enhanced ethical standards, by substituting compliance for values.”

A fourth and perhaps the most important of all of the criticisms of the present system is that it fails to address the challenges to bank regulation of an economy characterized by radical uncertainty. In a world of radical uncertainty it is not possible for regulators to determine the appropriate amount of capital or liquid assets that individual banks should hold. What might seem the right amount at one time can easily change to be inappropriate in a relatively short period of time. As a result banks should be made to think much more deeply about the way they deal with uncertainty in order to improve their management of risk.

The most comprehensive and innovative approach to reducing the complexity of current bank regulation is I believe that outlined by Mervyn King in his book, ‘The End of Alchemy’ and consists of a number of elements.

First a maximum leverage ratio, i.e. the ratio of total assets to total equity. Second a liquidity rule that ‘effective’ liquid assets should exceed effective liquid liabilities, (where effective liquid assets are holdings of bank reserves at the central bank and a collection of pre-selected short term securities which could be used, subject to a haircut agreed in advance, as collateral on which the central bank would advance funds to the bank in the event of a run on deposits: This is the central bank acting as Pawnbroker for All Seasons rather than as Lender of Last Resort (LOLR)). Third that the scheme should be implemented gradually over a period of ten to twenty years. Fourth, during the transition period existing prudential regulation and ring fencing restrictions imposed in recent regulation should be retained. Finally, the scheme should apply to all financial intermediaries, banks and shadow banks which issue unsecured debt with a maturity of less than one year (above a de minimus proportion of the balance sheet, which is an arbitrary figure and open to debate).

The benefits of this system are that it would drastically simplify regulation. Complexity would be replaced by two rules: a minimum leverage ratio and a liquidity requirement. It would dispose of detailed capital and liquidity rules and the challenge of defining what constitutes risk weighted assets. It would be introduced over a decade or two. It avoids banks having to make a choice of being either a narrow or wide bank and it enables competition among banks but at the same time limits private credit creation. Central banks would still have to make discretionary judgments over the leverage ratio and the assets which banks could hold as collateral and the haircuts which would be attached to them.

To sum up on regulation. The architecture of bank regulation which has been built up since the crisis has resulted in a better capitalized, more liquid, more long term focused and more resolvable banking system. This is no mean achievement. As a protection for tax payers facing a future financial crisis it is a distinct improvement on regulation pre-2007. However it suffers from excessive complexity and deadweight cost, and stresses managing risk to regulatory standards rather than intrinsic risk. For the longer term the challenge is to move to a system which reduces complexity and cost and is fit for purpose in a world of radical uncertainty. And so far and by far the most promising alternative is the proposal of Mervyn King.

Restoring Trust in Banks

Having considered the independence of central banks and the regulatory structure in which they operate I would now like to turn to the steps necessary to restore trust in commercial and investment banks.

First, the public must be convinced that the remorse expressed by banks regarding past failures is genuine and that they are sincere in wanting to reform.

One evidence of banks commitment is the time and resources they have devoted to strengthening their processes of control. Most if not all bank management of systemically important institutions have undertaken comprehensive reviews of their business, followed by reforms, which have then been fed back into training programmes. The compliance and internal audit functions have conducted meticulous reviews of failures in their own institutions and of the lessons which can be learnt from publicly reported failures in others.

The numerous and sizeable fines imposed on banks in recent years has regrettably only served to reinforce the perception of a lack of remorse. Some fines relate to legacy issues which go back many years. Others which relate to more recent violations in the Libor and FX markets and anti-money laundering only increase the challenge banks have in convincing the public of their commitment to change. Until however the public sees results from bank reforms – such as an extended period of time with few if any major regulatory problems, the public will remain sceptical.

Next in order to restore trust the public must be convinced that what banks do is of value to society and not just themselves and their shareholders. The social value of retail banks is readily understood by the public through ATM machines, debit and credit cards, cheque books, on-line banking, loans and mortgages. By contrast the social value of investment banks is not well understood. Their clients are not the general public. Their financial products and services are complex. The clients of investment banks are other banks, asset managers, large public and private companies, governments and public sector bodies but not the general public. Many of the products and services the investment banks provide, such as interest-rate derivatives, credit default swaps and structured finance are complex, involving private, innovative and highly specialized markets of which most people have no understanding at all. However, these banks are of value to society because they raise funding for companies and governments and allocate capital to its most productive uses either through lending directly or through the capital markets in which risk is competitively priced.

A third step in restoring trust in banks is that if banks are to be trusted they themselves must demonstrate that they are trustworthy institutions.

Trustworthiness has a number of elements. One is competence. Basic to competence are the skills, knowledge and experience of those working in banks to undertake the business. Along with competence, consistency in delivering a first class service is important. Competence and consistency together mean that banks can be considered reliable in the services they provide and the transactions they execute for clients. In providing these services they will incur certain obligations to clients, which they and their clients need to be clear about, and when necessary fully documented. Both individuals and the institutions for which they work must accept accountability for their performance.

For banks to be trusted, bank culture is important. We know that poor cultures have resulted in large fines.

James Heskett, Professor Emeritus at Harvard Business School spent more than four decades, researching the relationship between business culture and business performance both in the field and through case studies. On the basis of his research he claims that an effective culture can explain as much as half of the difference in operating profit between companies in the same business sector. By an effective culture, he means one that unifies those who work in a bank in achieving its goals, whilst promoting a supportive work environment. The reason the relationship is not simple is that the strength of a culture by itself is not enough to guarantee improved performance. It must be accompanied by effective leadership, an openness to adapt to change and new ideas, continuous quality improvement and by benchmarking the company against the world’s best. When these are present a strong culture has maximum impact. An effective culture can be a source of competitive advantage because of higher job satisfaction, higher retention rates of staff, a reduction in hiring costs due to employee referrals, employee ownership, increased productivity and improved relationships with customers.

Culture is important for reasons other than performance. A good corporate culture is a good in itself. The culture of any business is an expression of the purpose of the organization. A business is a community of people who need to feel that what they do day after day serves a greater purpose. People come to work not just to earn money. They want to believe that what they do matters, that it is valued by society and that the organization for which they work is a force for good in the world. People take pride in their work. They need to feel that the services they offer have a quality tag attached to them. They need to feel at home in the institution in which they work. They expect that throughout their career it will help them develop as persons. Effective cultures create great places in which to work. They want the bank for which they work to be regarded as more than a profitable money machine.

If an organization is to serve a greater purpose it is not enough simply to maximize profit within the law. Client’s interests must come first, relevant information must be disclosed, conflicts of interest must be managed and the commercial activities of the bank must be seen as contributing to society. Because of this, when discussing a piece of potential business, bankers must ask themselves key questions. Is this piece of business legal? Is it commercial? But also is it the right thing to do? Put differently, not only can we do this piece of business? But also, should we do this piece of business?

In the years leading to the crisis banks recognized the importance of culture in their organizations. All major banks, including those which failed and those which were subsequently rescued, already had comprehensive statements of business principles: “the highest personal standards of integrity at all levels”, “complying with the spirit and the letter of the laws and regulations,” “trusted-acting with the highest integrity to retain the trust of customers, external shareholders and colleagues”, “to be a great place for our customers to do business”, “we regard every day as a new chance to earn your trust. It demands hard work, integrity and transparency, but that’s what we do”.

These statements were held out as being the moral compass set by bank executives to guide them in making business decisions. They were the ideals banks set for themselves and the culture of their organizations. They were as far removed from a ‘cesspit’, “casino” or even ‘vampire squid’ as it was possible to be. As a result bank customers and the public came to expect certain standards of banks; competence, prudence, integrity, responsibility. One reason the public have become so disillusioned and angry is their perception that the moral compass they were led to believe guided senior management was in fact broken. Prudence, competence and integrity had given way to recklessness, greed and dishonesty.

Business principles are the standard to which a bank aspires. A culture is what happens in practice. It is the way a bank does business day by day. What the financial crisis exposed was a glaring divide in some banks between high ideals and daily practice. In the euphoria of the boom years, the principles and values which bank leadership publicly espoused, were not sufficiently robust to prevent bank management sailing too close to the wind and ultimately out of control. In the build-up to the crisis bad decisions and poor judgments resulted from bank cultures in which the pursuit of profit and personal reward became too dominant. Sadly we have seen more examples in recent years.

Building a culture, maintaining a culture and changing a culture are far from easy. All take time and need to be attended to each day in countless small decisions. There are no easy levers to pull but the decisions management must take day in day out, week in week out, month in month out, will in time serve to either strengthen a culture or undermine it.

One area which is important is recruitment, especially recruitment from other financial institutions and businesses. Competence, credibility, commitment, the ability to work in a team and the ambition to do well are important: but the ability to earn revenue should never be at the cost of the character of those hired. Criteria for promotion are similarly important. A person who is promoted because of the business he or she has built but who lacks integrity will diminish a culture. By integrity I mean being totally open and honest about business selection, the state of the books, valuation procedures, resolution of conflicts of interest, respect for compliance issues, commitment to developing people and concern to ensure that the values enshrined by the company are lived out day by day.

Along with recruitment and promotion another important area is compensation. If compensation is primarily based on earned revenue, regardless of the way executives behave, this will be the strongest possible signal to employees of the real values of the company. Compensation must take into account less tangible qualities, such as reinforcing the culture of the firm and the development of people. In the case of wrongdoing compensation must be impacted. Individuals must be reprimanded, and deductions made in their compensation with the most serious issues requiring the most difficult decision, namely dismissal. At the same time, good conduct judged by people being role models for the values of the institution and taking ownership for the development of those who report to them should also be rewarded.

In all areas training is important. It is key to ensuring that the values of the business are understood by everyone involved and the ways in which they are critical to its success. Training must not be sterile recitations of rules and regulations, but embody real life examples from which employees can draw, in thinking how to act in their day-to-day jobs.

Before we move on from the subject of culture we should recognize that the culture of an individual institution cannot be easily separated from the more general culture in which it is embedded. As traditional banking has become far more competitive and integrated with securities so it has brought with it a different culture emphasizing trading and risk taking. In the 1970’s Daniel Bell who was a professor of sociology at Harvard wrote about the cultural contradictions of capitalism, namely the change which has occurred from a bourgeois matter of fact world view based on rationalism, functionality and optimism to one of unfettered freedom, hedonism and boundless experimentation. Gordon Gekko celebrating the virtues of greed in the film Wall Street is about as far removed from the asceticism of Richard Baxter quoted in Max Weber’s The Protestant Ethic and the Spirit of Capitalism as one could imagine. A contrast which has only become more marked through the growth of social media and the technology revolution.

Culture and Leadership

In creating, sustaining and, if necessary, changing a culture the role of leadership is crucial. Leadership has the responsibility to articulate the values of a bank. Leadership is about setting out a vision and inspiring the staff. It is about defining the purpose of the business, the standards which are expected, and setting the right example. Leaders are the trustees of the values of a company. Leaders must establish the values, communicate the values, take ownership of the values and then — most crucially — live the values.

Perhaps the most important element of the culture of any financial institution is the tone from the top. People in an organization will judge how serious leadership is about its culture not by what leaders say but the decisions they take. Who in the business do they reward? And for what? Who do they promote? Would they remove senior executives whom they knew were damaging the business by behaving inappropriately? Most important of all, do they themselves practice what they preach? One of the founders of a US company quoted on the NYSE ServiceMaster, on whose board I sat for fifteen years, was known for his remark, “if you don’t live it, you don’t believe it.”

Leaders have a responsibility to ensure that the tone from the top reaches down to all levels of the organization especially the middle area which a former regulator described as the “permafrost” within an organization. A recent survey of over 28,000 individuals working in banks and building societies across the UK conducted by the Banking Standards Board found that only 65% of employees agreed with the statement that there was no conflict between their firms stated values and the way the firm did business.

Leadership within a bank exists at all levels so that it includes not just the CEO and senior management. This means that leaders at all levels throughout the organization must own the values, communicate the values and most important of all live out the values.

Crucial to the tone from the top is the role of the board. One of the key responsibilities of boards is their role as trustees of the culture of the organization. This involves supporting management in its efforts to build the right culture. It also involves when necessary challenging management. A banks culture is not easy to assess and many boards do not have a structured process for reviewing a firm’s culture in the way they do for risk, audit, governance, nominations and compensation. It is a current challenge many banks are grappling with. For banks the issue is how to recruit, promote and nurture first class, competent leadership which recognize the importance of character and values as essential to implementing business principles.

Performance and Character

In this lecture I have sought to argue that restoring trust in the banking system depends on maintaining the independence of central banks from political control with the overriding priority to maintain a low and stable rate of inflation; the importance of regulation for the banking sector but also ways it might be reformed to reduce complexity, cost and managing in order just to meet numerical targets; and within banks the need to set out the purpose of the institution, its business principles, the obligations which doing business entails and the role of leadership in establishing and maintaining an effective culture. Key to this is the personal responsibility of each individual working in the bank which is built ultimately on character and values.

In view of this let me conclude with a personal story. Some years ago I gave a lecture at Claremont College, California on “The Business of Values” to which Peter Drucker gave a response. He described my lecture as the case for business as ethics in action. He stressed that the values of a business are a commitment to action not preachments which are at best only good intentions. The most decisive, unambiguous and visible actions he suggested were those regarding people. Regardless of what the CEO may say in his speech at the annual meeting, what he does in rewarding, placing or punishing people are the values the whole organization sees and takes seriously. He then concluded with a personal story.

“Many, many years ago, at the very beginning of my working life, I had the good fortune to work for a short year for a man of rare integrity and great wisdom. I had tremendous respect for him; and so I was quite shocked when he did not promote an older colleague – let’s call him Tom – who had clearly done an outstanding job. I was so troubled that I took my courage in my hands and went and asked the boss why he had so pointedly passed over our department’s top performer. He looked at me with a smile and said “I know you are too young to have a son but I understand you have a younger brother.” Yes I did. “Would you”, he then asked, “want to have this younger brother work for two or three years under Tom and try to become like Tom? You are right” he continued, “Tom has the performance; but does he have the character?”

It is when an organization asks this question and takes it seriously that its values become action”.

Lord Griffiths is the Chairman of CEME. For more information please click here.

How much of modern Western social and economic policy is based on properly interpreted factual evidence and how much on unexamined assumptions and ideology? In Wealth, Poverty and Politics, Thomas Sowell, the venerable Senior Fellow at the Hoover Institution at Stanford University, sets out to demonstrate that rather more than is healthy is based on the latter.

Sowell divides opinion. He shuns labels but he is a hero of those on the right who favour small government and free market policies. Conversely, he is castigated as a villain by those on the left, although since he is black and was brought up in poverty in North Carolina in the days of segregation, he is a rather unusual villain!

Wealth, Poverty and Politics is unlikely to lessen this division of opinion. It largely repeats things that Sowell has been saying for decades and sets out to slay a number of liberal sacred cows, ranging from affirmative action, through the welfare state to foreign aid.

Sowell’s starting proposition is that, because the humanitarian goals underlying many policy proposals are important, “it is crucial that these proposals be based on an understanding of the actual facts about the causes and consequences of economic inequalities” (page v). He then considers the role of geography, cultural factors, social factors and political factors, recognising that they overlap and interact with one another .

At a high level of generality, all of this is unexceptional. It is when Sowell begins to consider its implications that the radical nature of what he is saying becomes clear. He takes issue with those who start with the premise that “the poor are poor because they are exploited by the rich” (page 257), a view that he demonstrates failed to die when Communism collapsed a generation ago. He takes issue with those, such as Professor Angus Deaton and the late Professor John Rawls, who equate equal prospects of success with equal opportunity, suggesting that Angus Deaton’s statement that there would be no correlation between the earnings of parents and their children in a society with perfect equality of opportunity “is in defiance of both heredity and environment” (page 180). He points out that, even in a society with perfect equality of opportunity, the factors that he identifies are likely to prevent an equality of outcomes.

Specifically, he points out that all cultures are not of equal economic value: “different groups living in the same external environment can have very different productivity if their internal cultural values produce very different priorities as to what they want to do, and at what sacrifices of other things” (page 97). He draws attention to differences in attitudes to learning (provocatively noting that, in the USA black parents in the highest socio-economic quintile have slightly fewer books in their homes than white parents in the lowest socio-economic quintile), differences in attitudes to work (noting that whole societies, such as Spain in the 16^th to 18^th centuries and the Southern States of the USA until recent times, have regarded work as degrading) and differences in ambition (noting that some social groups, including some white groups in the UK, lack ambition). Perhaps most controversially of all, he suggests that some groups have greater mental capacity than others, although he is careful to stress that the evidence suggests that this is not to do with genetic pre-conditioning but cultural and social factors.

Sowell suggests that “the ultimate wealth of a society does not consist of its tangible output, as such, but the ability – the human capital – to produce that tangible output” (page 413) and that the failure to recognise this leads policy in the wrong direction: efforts to advance economically lagging groups should be directed not so much at correcting society and its institutions as “getting members of lagging groups to reorientate themselves towards acquiring more human capital” (page 181).  This is perhaps best summed up in Henry Hazlitt’s statement that “The real problem of poverty is not a problem of distribution but of production” (page 8).

On this basis, Sowell attacks modern liberal economic and social policy. He lays into US welfare policy, suggesting that it produces counter-productive lifestyles that reduce the need to develop essential human capital and that “having promised progress towards ‘social justice’” it has “delivered instead retrogressions towards barbarism” (page 305). Foreign aid, affirmative action and identity politics are dealt with in a similarly robust manner (e.g. he suggests that multi-culturalism “has often been carried to the point of encouraging lagging groups to proudly cling to their own culture, or even resurrect it in some cases, with little concern that these groups’ economic and educational lacks might be – at least in part – a result of the cultures that they were being encouraged to cling to”, page 166).

Wealth, Poverty and Politics has significant defects. Its argument does not develop in a clear linear manner and it would benefit from severe editing, since many points are made on more than one occasion and some on multiple occasions (e.g. Sowell’s point regarding the lower I.Q.’s of mountain based people). It would also benefit from the inclusion of positive suggestions for policy that interact with the moral issues raised by poverty.

These issues are annoying but Sowell writes in an engaging manner. He has a penchant for quotable quotes and, more importantly, an ability to provide thought provoking illustrations of the points that he is making drawn from a variety of different places around the world and a variety of different periods and contexts in the past 1000 years. This results in interesting comparisons (e.g. between some black communities in the USA and low-income white communities in the UK and between early modern Spain and the contemporary Middle East). Furthermore, his use of statistics is sufficient to back up his arguments without overwhelming the reader and the addition of a number of personal anecdotes adds a human dimension.

The result is a readable book aimed at the intelligent non-specialist that raises issues of critical importance in the West today. Many on the left will want to take issue with what Sowell says but they will need to demonstrate why he is wrong. Many on the right will agree with much of what is said but even they will need to ask themselves whether their policy prescriptions might be counter-productive.

The revised and expanded edition of “Wealth, Poverty and Politics” was published in 2016 by Basic Books (ISBN-10:0465096763). 565 pp.

Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world. 

Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.

Carbon Trading – Unethical, Unjust and Ineffective? by Cameron Hepburn was presented at the “Green Markets, Sustainable Business” conference on Thursday 2^nd March 2017, at One Great George Street, London.

In 1987 ICI, one of the leading chemical conglomerates at the time, described its purpose as follows:

ICI aims to be the world’s leading chemical company serving customers internationally through the innovative and responsible application of chemistry and related science. Through the achievement of our aim we will enhance the wealth and well-being of shareholders, employees, customers, and communities which we serve and in which we operate.

In 1994 the company objective had changed to:

Our objective is to maximise value for our shareholders by focussing on businesses where we have market leadership, a technological edge, and a world competitive cost base.

So, what changed? What changed so that ICI no longer aimed to be the world’s leading chemical company? What changed such that ICI’s application of science was no longer to be the innovative and responsible application of chemistry and related science, but only that in which they had a technological edge? What happened to the employees, customers, and communities which we serve, to be replaced by to maximise value for our shareholders?

The answer requires a book rather than a blog but the case of ICI is illustrative of the way in which business has become separated from ethics, values and a truly holistic purpose which historically served the economy and society well.

The Quakers represented, in 1850, no more than one half a percent of the population. Thus it is even more extraordinary just how many of our household names had Quaker origins – not least in financial services – Barclays, Lloyds, Friends Provident, Cadbury, Rowntree, Clarks (as in shoes), Huntley and Palmer (biscuits). The successful iron smelting that formed the basis of the Industrial Revolution came from a Quaker family, the Darbys.

I am not suggesting that the solution to the problems of business purpose and intent today is solved if we all became Quakers! However, what I am saying is that by understanding the key reasons why the Quakers were successful (mostly) in business can inform our contemporary debates in a helpful manner.

There were four key reasons behind Quaker business success, all of which have wider application today.

Understanding the culture shapes purpose and identity

Entrepreneurs do not flourish alone. Professor Mark Casson of Henley Business School has argued that the quality of entrepreneurship depends upon the quality of business culture. A strong culture is built upon trust, confidence integrity and quality. The strength of the Quaker culture had a direct impact upon their business success. The Quakers – among others – had by 1800 faced around 150 years of oppression, crucially including exclusion from the Universities. Hence many Quakers turned their minds to business. This persecution made them close-knit communities and it was within this setting that apprenticeships were developed, trust and confidence built as the major families all knew each other, with dishonesty and especially bankruptcy viewed in highly negative terms due to the impact on Quaker reputation. A strong culture which enhanced positive behaviour of honesty and integrity (quality products at fixed prices) and discouraged negative behaviour.

A willingness to talk and act morally

A major complexity today is that we have become so individualistic that moral behaviour is reduced also to the behaviour of each individual. We need to recover not ‘moralising’ but ‘moral character’ and ‘moral action.’ The reality is that much of the Quakers integrity derived from their spiritual principles. Their moral codes included injunctions against overtrading, honesty, payment of debts, caution over indebtedness, transparent and accurate accounts and understanding of the business. These principles derive from the Quaker ‘Advices’ and ‘Queries’ on trade issued between 1675 and 1793. Many Quakers became wealthy, but often had to endure the long and patient wait of the entrepreneur for success. As a result, they were not ostentatious with their wealth and certainly exercised personal discipline and frugality in the wait for a return. There are clear lessons for us today and we must become more willing to talk about moral values.

The central role of the family business

Generally speaking, negative views of business are aimed at the big corporates and more positive views of business related to smaller, local and family businesses (SMEs). All the successful Quaker businesses began as family businesses. Indeed, most involved the capital of the founders and owners being placed at risk. The opposite of limited liability. Growth inevitably led to a dilution of the family business and the need for capital ultimately led the leading Quaker businesses to adopt limited liability. However, the idea of the family business lay at the heart of the Quaker vision. The business was seen as part of the family and as a result concern for both quality products and the employees – so, everything from sport, to societies, savings clubs but also pension funds, sick pay and even bonus schemes.

Understanding the wider responsibilities of business and capital

The compartmentalisation of business from society is disastrous. The Quaker businesses had a much more holistic view of their purpose. Profitability was essential, but so were reputation, customers and the society of which they were part. The days of company’s building model villages providing housing – not charitable, but commercial – as well as ensuring community green space, fresh air and light may be over but the principles still provide lessons. Social purpose and commercial profitability and success are not mutually exclusive. Real relationships – between owners and managers, managers and workers, companies and customers and so on – are infinitely more purposeful than the remoteness and the contractual nature of so many business relationships.

How far we have come. Without a sense of ethical responsibility, disciplined moral behaviour and character and a recognition that capital and its economic return carry responsibilities as well as rewards, we will continue to increase the divide of business and society. However, we must also recognise that all of this can only be achieved in the context of a free economy where wealth creation is celebrated rather than despised and where the limits of government are recognised to be as significant as its regulatory and redistributive roles. A concern for society and the responsibilities of wealth do not need to be separated from a wealth-creating, efficient business enterprise. Profit is virtuous, but does not need to be maximised at the expense of all other demands.

Culture, ethics, family relationships, purpose, values, employees, responsibility – for all these things we can thank, at least in part, the Quaker businesses. All of those things are essential in restoring confidence in business today.

Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.

The Centre for Enterprise, Markets & Ethics (CEME) held a conference on ‘Green Markets, Sustainable Business’. Hosted by CEME and sponsored by CCLA Investment Management, the event focused on the green economy, investment trends in sustainable energy, and the environment.

It proved to be a terrific debate with passionate engagements from both the speakers and the audience. The distinguished panel of speakers included: Michael Liebreich (Chairman, Advisory Board, Bloomberg New Energy Finance), Rt Revd James Jones (Bishop of Liverpool 1998-2013), Baroness Bryony Worthington (Former spokesperson for Energy & Climate Change, Executive Director – Environmental Defence Fund Europe), Prof. David Vines (Ethics & Economics, University of Oxford), Andy Darrell, (Chief of Strategy, Environmental Defence Fund), Kingsmill Bond (Energy Strategist, Trusted Sources), and others.

The event took place on Thursday 2^nd March 2017, at One Great George Street, London SW1P 3AA.

Conference Resources:

Andy Darrell – Investor Confidence

Michael Liebreich – Green Markets, Sustainable Business

Kingsmill Bond – The New Energy Revolution – From Morality to Market

Cameron Hepburn – Carbon Trading: Unethical, Unjust and Ineffective?

Erin Priddle – Environmental Defense Fund – EDF Oceans

Picture Gallery: