Tuesday, November 10, 2009

Financial Market Social Responsibility

Late this past summer, I spent an evening at an exclusive rooftop bar in New York City drinking Prosecco with elite lawyers employed by top, top white shoe law firms. Fuelled by liquid courage, I floated my whole responsibility idea for them to critique. I suggested that they might have some responsibility for the global financial crisis since many of them helped create the agreements for banks and financial institutions that made credit default swaps possible. They actually helped invent CDOs. I suggested that the damage done was global and that their responsibility extended beyond the tiny island of Manhattan, across many oceans.

The best way to describe their responses is to refer to an episode from the original Star Trek television show called The Cloud Minders. Each elite lawyer was convinced they were from Stratos and I was a Troglyte. I was an inebriated, insane Troglyte with sub-standard reasoning skills. They were contracted to do a job, which they did-full stop.

I did not expect much else but I was impressed with the uniformity and vigour of the response. Context is everything. No responsible thought other than one motivated by profit is capable of being conceived in the world’s financial capitals. Change must come from elsewhere which causes dismay since their arms, financial firms, are very long. Regardless, I continue to think my thoughts and irritate whomever I can with them. Insanity is trying the same thing over and over and expecting a different result………uh oh.

IESE Business School at the University of Navarra has suggested that, along the same lines as Corporate Social Responsibility (CSR), financial firms need to begin to embrace responsibility for their actions and the consequences of those actions. (See endnote) This would not be a responsibility that resides only at the corporate level. All professional participants in the financial market would be responsible players. The paper locates the idea in CSR rather than ethics because it is more palatable.

CSR is extremely popular and people embrace it because it has high look good factor and low do something factor. That does not mean it is useless. It just means that it is diluted. However, it has a tremendous amount of literature supporting and describing it. This has value.

There is a large normative dimension to the global financial crisis. It is prevalent mostly in terms of moral hazard discussions. This is helpful from a theoretical standpoint but decisions continue to be made to save those firms that made ‘bad’ decisions. (See Citigroup) Having said that, the whole discussion continues to be infused with a moral dimension which is some kind of step forward.

This kind of thinking can inform the financial reforms currently being considered in some legislatures. The White Paper in the US is considering imposing a fiduciary duty on stock brokers which is a movement forward. The reforms will need to go further and consider the affect that the financial crisis has had on the developing world. Here is where the reliance on CSR becomes less tenable.

There are other examples of making firms more responsible global citizens. The commitment of private industry to the Millennium Development Goals (MDGs) is one such example. http://www.mdgasiapacific.org/node/167 For awhile, when times were good, firms such as Goldman Sachs signed on to support efforts to achieve the MDGs. As part of that initiative, private financial firms consider how their actions affect the MDGs. Private firms, regardless of whether they are multi-national, participate in the global financial community and should take responsibility for that. The inclusion of private industry in the MDG global initiative recognizes the role powerful firms play.

Additionally, concepts of sustainability, preserving the future for our future earth inhabitants, are pervasive in the same dialogue and can extend responsibility from solely domestic to international quickly. The global recession has jeopardised sustainability. Poverty has increased and vulnerable countries have suffered the most.

These ideas are value laden and increasingly the discussion surrounding then includes private industry. Financial Market Social Responsibility simple specifies a particular industry and asks it to be responsible.

I hope to give a Post-Graduate seminar on this at the University of Warwick in England in a few weeks. As I prepare for that I will elaborate here.

http://ssrn.com/abstract=1392762 Antonio ArgandoƱa, Can Corporate Social Responsibility Help us understand the credit crisis?

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