A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism
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A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism
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Overview
After the crisis of 2008, the social contract between the financial industry and everyone else was badly broken-perhaps, it seemed, irrevocably. Since then, banks have paid out billion-dollar settlements and Congress has passed some new laws, but a deeper rapprochement is still missing. John Taft has gathered some of the greatest financial minds of our time to explore how Wall Street can harness the same creative energy that invented credit default swaps and channel it towards the public good- in the form of a stable retirement system, investment strategies that protect the environment and reward responsible corporate behavior, and a financial industry with a culture of ethics, integrity and client focus. These perspectives, from a who's who of leaders in the field, offer a blueprint for a new kind of responsible finance and banking that secures the future for everyone. Contributors include:
* Robert Shiller on financial capitalism and innovation
*Charles D. Ellis on restoring ethical standards
*Sheila Bair on regulatory reform
*John C. Bogle and Mary Schapiro on rebuilding investor trust
*Judd Gregg on long-term fiscal imbalances
*Barbara Novick on the retirement savings gap
*David Blood on sustainable finance.
With so much brainpower in the financial sector, the potential for change is limitless. A Force for Good is the call to action the industry sorely needs.
Product Details
| ISBN-13: | 9781466879423 |
|---|---|
| Publisher: | St. Martin's Publishing Group |
| Publication date: | 03/17/2015 |
| Sold by: | Macmillan |
| Format: | eBook |
| Pages: | 320 |
| File size: | 2 MB |
About the Author
Read an Excerpt
A Force for Good
How Enlightened Finance Can Restore Faith in Capitalism
By John G. Taft
Palgrave Macmillan
Copyright © 2015 John G. TaftAll rights reserved.
ISBN: 978-1-4668-7942-3
CHAPTER 1
CORPORATE RESPONSIBILITY IN AMERICA
TWO CENTURIES OF EVOLUTION
Ron James
President and CEO, Center for Ethical Business Cultures
Kenneth E. Goodpaster
Senior Academic Fellow, Center for Ethical Business Cultures Professor Emeritus, Opus College of Business, University of St. Thomas
David H. Rodbourne
Vice President, Center for Ethical Business Cultures
Rooted in the early nineteenth century, the corporation, as an idea and a legally constituted institution, has provoked continuous questions that challenge the purpose and role of business in American society. Among the most important is this: "To whom, and for what, is the modern corporation responsible?"
This question elicits yet more questions. Is the sole purpose of the corporation to generate profits for its shareholders? Or does it have certain obligations to those who have—explicitly or implicitly—given it a license to operate? What are the consequences and future implications of a failure to live up to the expectations of those who have accepted, trusted, endorsed and supported business? Are there lessons to be learned from the past that may help future business leaders?
These questions framed the research for the landmark book produced by the Center for Ethical Business Cultures at the University of St. Thomas—Corporate Responsibility: The American Experience (hereafter CRAE). It explored the corporate form over 200 years of American history, charting the ever-shifting roles and responsibilities of business in society.
The invention and proliferation of the corporation was crucial to the rise of the American economy. "Corporations—capitalism's dominant organizational form—are very efficient mechanisms for producing wealth, meeting consumer needs, and building industries that employ millions." But with this power comes responsibility and accountability to others. Business operates not within a vacuum, but as a part of an interdependent set of systems that address societal needs. A business's license to operate, or social contract, is highly dependent on how it participates in these systems.
Over two centuries the social contract with the economic or business system evolved in relation to two other systems: the political and the moral-cultural. (See figure 1.1.)
The Economic System:The system that brings together those with capital seeking to invest for a fair return, those seeking capital to build businesses that provide goods and services for a profit, and those who seek to consume the goods and services for a price. In economic life, corporations have three defining characteristics: They can raise large sums of money enabling them to meet societal and consumer needs; as limited liability entities, they can sell shares that permit investors to make investments that carry risk reward potential; and they can endure over an unlimited lifetime. Corporations also employ millions of individuals who, along with the corporations, pay taxes to sustain a way of life in the community.
The Political System:The system that represents the citizenry and governs by establishing laws, rules and regulations intended to serve the common good. In political life, corporations wield considerable power and influence, raising the question of whether they are used to further their own agendas or to participate in the democratic process of addressing societal needs. Numerous attempts have been made to curb corporate influence in the political process, generally falling short.
The Moral-Cultural System:The system that shapes society's ethics, values and acceptable standards of behavior consisting of the family, formal education, media, religious traditions and nongovernmental organizations (NGOs). In our cultural lives, the corporation plays an important role through voluntarism and philanthropy. The corporation provides financial and human volunteer resources to increase the capacity of organizations that improve the quality of life in the local communities. Corporations also lend their business expertise to enhance the ability of social organizations to provide their services. Moreover, social organizations create jobs and pay wages, both of which contribute to local communities. Whether in the arts, education, health care, social services or other areas, corporations have been a positive contributor to the cultural landscape of the community. Their contributions include supporting communities through philanthropy and employee voluntarism, and treating the environment with the respect it deserves.
Within and across these three systems, corporations also engage in the marketplace of ideas, taking positions in debates over values and social arrangements, advocating for ideas about economic arrangements and structures, and articulating and defending ideas about appropriate legal frameworks to sustain a free enterprise economy. For two centuries corporations have worked to persuade Americans that capitalism as a system and the corporation as an institution deserve public support. Depending on corporate behavior, this message has been met with both receptivity and rejection.
THREE PROPOSITIONS
The book's research supports three propositions that frame the evolution of corporate responsibility over the last two centuries: (1) businesses have encountered financial and moral expectations from society; (2) where moral expectations for corporate responsibility have not been met, society has imposed laws, regulations and nongovernmental guidelines, which may be necessary but never will be sufficient; and (3) corporate responsibility must derive from within business organizations, not from outside of them. Let's examine each proposition a little more closely.
PROPOSITION 1
Institutions making up the economic sector (corporations and smaller business entities) have all along encountered moral expectations in addition to financial expectations. Sometimes these moral expectations have been communicated through moral-cultural institutions in the public square (e.g., consumer movements, labor unions, churches and the media), and sometimes they have been communicated through laws and regulations (e.g., antitrust, civil rights and environmental protection). And while the scope of these moral expectations has been a matter of debate (minimal versus maximal), there is no question that in the American experience, an expectation of ethical responsiveness has gone hand in hand with an expectation of market responsiveness. Business institutions must never lose sight of their moral foundations.
Again and again, we have witnessed this pattern: appeals by citizens and civic associations in the public square for business leadership and accountability, and when those fail, appeals in legislatures and courtrooms for curbs on business behavior and punishment for past wrongdoing. Americans presume that the corporation, despite its preoccupations with efficiency, profitability and competitiveness, and despite its need to comply with governmental imperatives, can and should be responsive to individual rights and to the common good.
Evolving Moral Expectations of Business
Moral considerations have propelled many if not all of the challenges faced by business over the past 150 years. Battles about wage rates, working conditions, child labor, health and safety, unfair competition, fraudulent advertising, product safety, accountability to investors, corporate political power and environmental impacts were fired by moral indignation as well as the pure economics of any particular practice or activity. Very often these were not quiet intellectual debates, but rather social upheavals and violent confrontations. Some issues were crystallized for the public and for business by a catastrophic disaster such as the Triangle Shirtwaist Fire of 1911 and the Ludlow Massacre in 1914. (See box.)
Alexis de Tocqueville's 1835 observation about the proclivity of Americans to form groups and associations provides a clue to the voices that emerged early to push back against aspects of the economic system and business conduct. Abolitionists in the pre–Civil War period, labor unions in the second half of the nineteenth century, a National Consumers League founded in 1899, organizers of institutions like Hull House, politicians of various stripes, farmer-labor groups, religious groups and even business groups (e.g., the formation of the Better Business Bureau in 1912) are just a few examples in the more distant past. Echoes in the mid-twentieth century are the civil rights movement, the women's movement, the consumer protection movement (recall Ralph Nader's Unsafe at Any Speed) and the environmental movement (marked notably by the first Earth Day in 1970). Today we experience these voices and demands for change in the form of NGOs that address issues such as the environment, human rights, consumer protection and world peace.
Clarifying Corporate Responsibility
Two centuries of change, conflict and debate have gradually led us to a better understanding of the expectations and responsibilities of business. Over that time the nomenclature associated with these ideas has shifted frequently. In 1916, J. M. Clark called for an "economics of responsibility." Since then, others have called for business leaders to assume the role of stewards or trustees. Eventually, the language of "social responsibility" emerged, then "corporate social responsibility," "business ethics," "corporate citizenship," "shared value" and "sustainability." As discussed in CRAE, we use the phrase corporate responsibility as the umbrella term that captures the essential meaning across time.
The precise content of the term corporate responsibility has been difficult to pin down because circumstances and expectations have been in flux. Yet some aspects have become clearer over time. In his 2008 study, Alexander Dahlsrud identified these five dimensions of corporate responsibility:
1. The environmental dimension, including the "natural environment," "a cleaner environment," "environmental stewardship" and "environmental concerns in business operations";
2. the social dimension, including "contribution to a better society," the "relationship between business and society," "integrating social concerns in business operations" and "considering the full scope of their impact on communities";
3. the economic dimension, including socioeconomic or financial "contribution to economic development," including "preserving profitability," CSR [corporate social responsibility] in a firm's "business operations";
4. the stakeholder dimension, including firms' "interactions with their stakeholder groups" or "how organizations interact with their employees, suppliers, customers and communities"; and
5. the voluntariness dimension, including "actions not prescribed by law," "based on ethical values" or actions "beyond legal requirements."
That these dimensions compose a broadly shared view is evident from the fact that they are reflected in a wide range of international and industry frameworks, among them: the UN Global Compact, ISO 26000 Guidelines on Corporate Social Responsibility, The Minnesota Principles, the Caux Round Table Principles for Business and numerous other norms and statements of principles developed over the past two decades.
PROPOSITION 2
Compliance with laws, regulations and nongovernmental guidelines may be necessary but never will be sufficient for corporate responsibility. Rules are inevitably lagging indicators of responsible behavior. The Sarbanes-Oxley Act of 2002, the Dodd-Frank Act of 2010, the Sherman Antitrust Act of 1890 and the Securities Exchange Act of 1934 are significant pieces of legislation but were enacted subsequent to corporate scandals that most would argue should and would never have happened if businesses had been ethically responsible. "The corporation can and must develop an ethical response system, not just an economic and a legal response system."
Given the challenges to corporations indicated above, two things become clear:
• The sources of the challenges have in common that they represent forces external to the corporation, for example, forces emanating from either the political sector (legislation, regulation) or the moral-cultural sector (media and NGO pressures, union activities, technological changes), and
• They are insufficient, even if they might be necessary, for achieving corporate responsibility.
Many businesses seek to respond to society's rising expectations. But they often fall short by placing their own economic interests ahead of the interests and rights of a broader set of stakeholders.
Debates about legitimacy provide important lessons for business executives and societal leaders of the twenty-first century as they discuss the role of business in society. There is an important tension between public expectations and corporate power. Sometimes this tension is resolved by economic market forces, other times by political forces. Sometimes it is resolved when business earns respect and public understanding because of how it treats its customers, employees, investors and other stakeholders. Societal expectations, given voice by various stakeholders, have had the effect (in the United States at least) of shifting the seat of corporate responsibility—the moral compass of the business—from outside to inside:
It is, of course, one thing to say that since ethics is on the agenda of those with whom a company interacts, the company had better pay attention; it is quite another to say that ethics is on the company's own agenda, part of the way that its management looks at the world. In both cases, attention is paid to ethics. But there is a difference in the way the attention is paid. In the first case, ethics is an environmental constraint that is only indirectly part of the decision-making process. In the second case, ethics is something that is brought to the environment. Making decisions that have ethical implications is not optional. What is optional is whether those ethical implications will be considered outside forces or made part of the internal decision process itself. It is the latter option that I believe management must undertake when I use the phrase "moral agenda."
Corporations can be a force for good because certain workplace or community practices are mandated by the law; because interest groups demand good behavior; or because competitive pressures lead to changes in behavior. All of these, however, represent external or systemic pressures, which can shift and change without much warning. In "The Rock," T. S. Eliot writes that men frequently dream "of systems so perfect that no one will need to be good." The only true guarantee of corporate responsibility is to internalize it.
PROPOSITION 3
Finally, in view of propositions 1 and 2 above, corporate responsibility must ultimately derive from within business organizations, not from outside of them. It is to the principle-driven leadership and the governance of the modern corporation that we must look for responsibility. The moral character of the corporation is an "inside deal" as the Federal Sentencing Guidelines for Organizations (FSGO 1991, revised in 2004) make clear. In November of 2004, the revised FSGO introduced explicit new requirements calling (among other things) for corporate cultures that encourage ethical conduct, ]IT Lnot simply observance of law. The business scandals of 2001 and 2002 had clearly indicated the prior influence of a firm's ethical values on its compliance culture.
In the end, it is the tone at the top—leadership—that provides the internal moral compass of the corporation. Leaders of financial institutions must exhibit statesmanship—and lead with a vision beyond compliance. And they must collaborate with the public and the moral-cultural sectors when problems are present that call for multisector solutions.
Corporate Responsibility—from the Inside Out
That progress has come with responsibilities is ably expressed by General Mills CEO Ken Powell in the foreword to CRAE:
Shareholders, customers, employees and host communities today increasingly demand responsible, even enlightened, engagement that goes well beyond a corporation's earnings of the last quarter. I believe this interest is driven by a yearning for principled behavior—for clear and strong values—in all American institutions including business. Stockholders still want to know about sales and earnings of course. But today they also want to know that a Corporation is committed to "doing the right thing" as we say at General Mills. They want to know how we treat our employees and how we are improving the health and safety of our products. They want to know our commitment to the sustainable use of resources in our products and about our engagement and support of the communities where we reside. They correctly see corporations as large and powerful institutions that should be engaged in the right behavior with respect to all of these issues. And they expect us to do the right thing all the time.
(Continues...)
Excerpted from A Force for Good by John G. Taft. Copyright © 2015 John G. Taft. Excerpted by permission of Palgrave Macmillan.
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Table of Contents
Introduction by John Taft
PART I: REFRAMING SOCIETY;S CONTRACT WITH FINANCE
1. Corporate Responsibility in America: Two Centuries of Evolution; Ron James, Kenneth E. Goodpaster, David H. Rodourne
2. A Better Social Contract for Financial Intermediaries; Stephen Young
3. Finance and the Good Society; Robert Shiller
PART II: COMPLETING FINANCIAL REGULATORY REFORM
4. The Progress, Pitfalls and Persistent Challenges of Recent Financial Regulatory Reform; Sheila Bair, Richard Delfin
5. Big Banks Aren't the Only Problem; Karen Shaw Petrou
PART III: RESTORING TRUST, INTEGRITY AND CLIENT FOCUS TO THE FINANCIAL SYSTEM
6. Restoring Trust; Doug Hodge
7. What It Takes: Success Challenged; Charles D. Ellis
8. The Fiduciary Principle: No Man Can Serve Two Masters; John C. Bogle
9. Trust Depends on Authentic Leadership, Stewardship and Governance: Why We Must Go Beyond Compliance; Donald Trone
PART IV: RESTORING CONFIDENCE IN EQUITY MARKETS
10. Equity Market Development and Corporate Governance in Emerging Markets; Mary Schapiro
11. Get Real: How to Recover Authenticity in our Financial System; Roger Martin
PART V: ACHIEVING FISCAL AND MONETARY POLICY EQUILIBRIUM
12. The Issue is Debt; Judd Gregg
13. Real-time Experiments in Monetary Policy; Brian Walsh
PART VI: UNFINISHED BUSINESS: RETIREMENT SAVING AND HOUSING FINANCE
14. Addressing America's Retirement Needs: Longevity Challenge Requires Action; Barbara Novick
15. To Guarantee or Not to Guarantee--That is the Question; Jeremy Diamond
PART VII: THE TRANSFORMATIONAL IMPACT OF LONG-TERM INVESTORS
16. The Dawn of Fiduciary Capitalism; John Rogers
17. Focusing Capital on the Long Term; Dominic Barton
PART VIII: RETOOLING THE FINANCIAL SYSTEM FOR SUSTAINABILITY
18. Sustainable Capitalism; David Blood
19. Real Investment in the Anthropocene; John Fullerton
PART IX: THE FINANCE AGREEMENTS
20. The Finance Agreements: A Working Philosophy for the Future; Vikram Mansharamani