BANKS’EGO, And the Era Beyond Greed
The 2008 financial crisis shook the very foundations of capital markets, bringing the global economy to the brink of collapse. The meltdown triggered long needed reflection about the morality of markets. Since then, politicians and the public have come to interpret “greed” as a principle culprit in the fiasco.
On the surface, unregulated speculation and distorted organizational goals by banks gave way to unethical lending practices and behavior. Their economic action was governed by their biggest interest: creating maximum profits, leading to the crisis which emerged as a worldwide collapse of shareholder values and trust. More than four years later, our economy has not recovered fully and it is questionable whether any lessons were learned.
This summer has been riddled with numerous financial scandals, serving as a valuable reminder to us all, that big banks will stop at nothing for increased profits. As top-tier banking officials admit to their fraudulent mistakes and operational mal-practices, it is impossible not to question the ethics and culture to which these banks subscribe to. It appears that these banks, which had not been affected by the first round of bankruptcies and scandals in 2008, did not take the harm caused to the economy and community by the crisis a few years earlier that serious. It is also a gentle reminder that no financial institution will get away with this kind of behavior and that they must look beyond the era of greed to a future built on sound ethical and cultural principles.
“The Summer of Scandals”
Indeed, a look at the wave of scandals that the financial sector has presented to us in the last few months include most big names in banking: Barclays for market fixing, HSBC for laundering Mexican drug money, JP Morgan Chase’s trading loss, Standard Chartered’s violation of sanctions against Iran, Goldman Sachs, and there are many more banks waiting to be investigated. A common denominator amongst these banks is that they manipulated each other, co-workers, and the public, in an attempt to save their names and reputations, the full consequences of which are yet to be felt. European countries have also seen their fair share of the economic crisis this year and it is close to reaching a tipping point.
The Greek Tragedy
Five countries are in bailout mode, two of which have been receiving particular attention in the last few months. Greece, whose financial situation has been a turbulent journey, has taken the lead and its future is uncertain. A closer look at the country’s expenditures in the last decade reveals a spending spree on infrastructure, services and public sector wages, while incoming taxes decreased.
The social fabric has been hit the hardest; especially the young generations who have lost trust in their government. Spain is not too far away from finding itself in a similar situation: all the symptoms are there. A series of events in the 1990’s turned Spain inside out. Spurred by a fall in interest rates from 14% to 4% in only a few weeks (due to exchange rate fluctuations) and the passing of a law that significantly increased the amount of land for development, real estate development hit the roof. Developers accumulated wealth, selling the idea that property would always go up in value. Spain is now a country with a million unsold properties; hundreds of housing developments left unfinished; 4.7 million people unemployed and an unemployment rate of 24.5% overall, and 50% in the 18–25 age bracket.
So Long Trust, For Now
As a result of the situation in Europe, people from all over the continent can be seen demonstrating in the streets, voicing their disappointment in their countries and their countries’ financial institutions, whose policies and greed allowed such a meltdown. A study by Ernst & Young’s recent Global Consumer Banking Study show a 40% global decline in customer confidence in the banking industry, with declines of 72% in Italy and 76% in Spain. Prior to the crisis, the public trusted Banks to deal with its money. Formerly the existence of a bank was to safeguard and economize money.
However, the last few decades has seen a shift in organizational goals to maximum profits that awarded high risks with maximum returns. As a result, attitudes amongst bankers changed dramatically. The Economist in its 7th-11th July issue which extensively covered the Barclays scandal coined the term “Banksters”, a fusion of banker and gangster, mirroring the collective public attitude towards the banking sector. Even banking professionals themselves have little trust in the banking industry a recent informal survey of 314 global finance professionals by the London-based Chartered Institute for Securities & Investment found. It states: two-thirds have little or no trust in the British banking industry and only 2% rated the banks totally trustworthy.
Recapturing Social Capital
The recent developments have led to a major debate about business ethics (round two). Earlier this year, Geithner, Treasury secretary of the United States of America, who was head of the New York Federal Reserve during the Bush administration when the 2008 financial crisis hit, told an audience that “Most financial crises are caused by a mix of stupidity and greed and recklessness and risk-taking and hope.” America’s President Barack Obama, at the historic inaugural in Washington DC, also blamed the economic crisis on an era “of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age.”
But when the causes are a complex combination of attitudinal misdemeanors, how can a crisis ever be prevented? Times of crisis are good for asking the right questions. An important question, that the financial crisis raised was, to whom are banks responsible? How can Trust be rebuilt? And how can the loss of trust be avoided from happening in the future all together?
The answer to all these questions rests in social capital at which trust is at its nexus. Although, even the motto of the London stock exchange reads: “My Word is my Bond”, emphasize the importance of trust, this has been overlooked for a very long time. Social capital is not just vital in times of financial downturn; it can play an essential role in avoiding such a problem all together. Financial institutions are responsible foremost to their communities. Fundamentally therefore, the development of strong mutual relationships is paramount for the conduct of business. Alan Greenspan’s words come to mind: “When trust is lost, a nation’s ability to transact business is palpably undermined. …”. Trust, for Greenspan is at the motor of this market, however even he has admitted that this alone can’t work as the experiences of the last few years have shown: trust must be paired with transparency.
Beyond the Era of Greed
In this post-crisis- era whose most recent memories include the loss of trust, respect and reputation, a culture of integrity is essential and transparency plays an unequivocal role. Nations, policy-makers and politicians are expressing their concerns louder than ever before. The Chairman of the Bank of China, for example, recently acknowledged the pivotal role that organizational culture and integrity play within in the banking system. It is a good sign that society is moving up in the priorities set by economies the world over, however it is up to concrete actions to follow suit that show just how serious they take social responsibility.
Many international experts insist that CSR provides a platform for professionals from all fields to begin this journey of transformation. “Robust measures of social capital, incorporating trust, listening and promise-keeping, and lessons in stakeholder engagement, strong corporate governance and the holistic building and maintaining of a social license to operate are all means through which the CSR profession can play a vital and enduring role in reinstating fractured trust in financial markets,” writes Dr. Sara Bice, Senior Consultant with ACCSR, in a blog recently about the opportunity CSR has to engage in the solution.
Starting at the Top
Should banks really have economic health and community’s wellbeing at heart, they have the responsibility to put economy and society first. A CEOs’ principal function is ‘creating, monitoring, and adjusting the corporation’s incentive structures which are critical in shaping the behavior for its officers and employees’. In a healthy economy, CEO’s are urged to begin by basing incentives on sound cultural and ethical foundations.
The ongoing financial turbulences show, that we must look for still deeper causes in trying to prevent crisis. Greed has been identified by many international experts as the common, but rather than look into the past at what is to blame, we must look ahead at the solutions. Of course it is especially in times of financial downturn that issues of trust and social responsibility come to the forefront.
A fundamental change in these times however, is that they have been accompanied by technological and social media advancements that have encouraged critical questions about accountability, a trend that will continue to demand more honesty on the part of financial institutions.
Source: Responsible Business Magazine