The bi-partisan Financial Crisis Inquiry Commission has been studying no less than 22 contributing causes of the financial crisis. At the risk of oversimplifying matters, Jed Emerson of Blended Value Proposition, believes he knows the root cause. It all boils down to values, Emerson told participants at the Economist’s recent 2010 Corporate Citizenship Conference “Doing Well by Doing Good.”
“We experienced a bifurcation of values,” declared Emerson. “In much of our society, how you live life on Monday through Friday has become different from life on Saturday and Sunday.”
Rape, pillage and … philanthropy
The mentality in much of corporate America has become “rape, pillage and philanthropy,” quipped Emerson. Many executives and companies knowingly tolerate gross inconsistencies between destructive business practices and corporate philanthropy because they artificially disassociate these values. Putting your philanthropic arm in a silo can salve the conscience of those in the core business units who feel they can act with impunity because their company engages in “do good” endeavors completely detached from its day-to-day activities. That mentality misses the point, Emerson maintained.
“What is the purpose of capital?” queried Emerson, who spoke on a panel about restoring trust in the financial markets. “Today, business schools teach that the purpose of capital is to pursue its own highest and best use of generating the greatest financial return, with no regard for returns on social, environmental, or other dimensions. It has become a very ingrained attitude in the financial sector that the only criteria of value is financial performance. The economic crisis calls that assumption into question.”
“Our perception of value translates into practice and that practice will lead you down a road,” added noted co-panelist Diana Taylor, Managing Director of Wolfensohn & Co., an investment and advisory firm focused on emerging market conditions.
Eat what you kill
Fellow panelist Mark Standish of RBC Capital Markets concurred, noting that many financial institutions focused too heavily on driving profits to the detriment of their client franchise. And, poorly-structured compensation practices generated an “eat what you kill” ethos.
With a twinge of pride, Standish noted that Canada managed to largely avoid the economic turmoil experienced in the US residential mortgage market. That happened because Canadian financial institutions achieve balance in meeting the needs of all their stakeholders, not just shareholders. Nearly 70 percent of home mortgage loans in Canada stay on the books of the originator, noted Standish.
A crisis of virtue and values
“This is not a recession. It’s a reset,” declared John Hope Bryant, Founder, Chairman and CEO of Operation HOPE, the first non-profit social investment banking organization in the United States.
“It is a crisis of virtue and values. It is a failure of greed, not a failure of capitalism. We are all complicit,” scolded Bryant, citing greedy bankers, lax regulators, insatiable consumers and ignorant mortgage loan borrowers.
“Borrowers need to stop using their homes as ATM machines,” Emerson chided.
“Financial literacy is the new civil rights issue,” continued Bryant. “If you don’t understand the language of money and have a bank account, you are an economic slave. Fifty percent of urban kids drop out of high school. If we are not careful, the next set of under-performing assets in this nation will be our children.”
The markets deliver better results when consumers make informed choices, stated Taylor, Superintendent of New York State Banks from 2003-2007, a position responsible for overseeing regulation of 3,500 financial institutions with assets totaling over $1.5 trillion. She noted the need for both smart, effective regulation as well as a “responsible, financially literate public.”
Taylor recommends robust investment in financial education, citing the example of New York City’s 16 Financial Empowerment Centers at which trained professionals teach money management basics and offer financial counseling to low income New Yorkers.
Hope expanded on this proposal, advocating a sweeping financial literacy agenda including financial literacy education from kindergarten through 12th grade, issuing bank account cards at birth and requiring all guaranteed student loan holders to complete a course in financial literacy.
“We need to re-imagine who we want to be. We can embrace a more humble, caring, inclusive way to live,” Hope concluded.