There is a lot of thinking going on in the City of London. If you were to walk around the Square Mile and attend meetings at the various market groups, thinktanks and at Gresham College, you would be pleasantly surprised at what is being discussed. As well as ritualised complaints about victimisation on bonuses and regulation a new theme is starting to emerge, for a long time fledgling but one that is now starting to fly above the other topics – it is the issue of ethics and values. Last year Charles Moore questioned capitalism and now some of the bankers themselves are viewing it in a new light. Whatever next?
In March, Stephen Green, former chair of HSBC and now minister for trade and investment gave a Gresham Colleglecture entitled ‘Values and Value’ and suggested that capitalism was still ‘on trial’. In its defence he suggested that profitability and social responsibility weren’t mutually exclusive and neither were shareholder value and ethical values in conflict. He commented on the truism that there is a new generation emerging from university that believes that it is right to question the corporate ethics of the organisation they may work for.
A week earlier Merrill Lynch hosted the spring conference for the City’s Long Finance thinktank which discussed ‘into the folly of value – reforming sustainable finance’. The keynote speaker, economist and former Bank of England committee member Professor Charles Goodhart, spoke of the pro-cyclical nature of regulation. He noted that after the South Sea Bubble crisis in 1711 it was decided that such a crash should never be allowed to happen again so they regulated and outlawed limited liability companies (which remained broadly banned until 1844).
Goodhart noted that consensus about the current crisis was centring on it being a failure of regulation and supervision and the reaction was for more regulation. But he argued that regulation is not so important because at present the market has no appetite for risk or lending. He noted a tendency both to regulate and deregulate at the wrong times: after the 1929 crash, the response in the US was the introduction of the Glass-Steagall Act which separated out retail banking from investment banking. By 1999 it was decided that the act had been inhibiting growth so it was dismantled.
For the future, Goodhart suggested a gradual implementation of regulation as the market grows combined with changes in governance to transfer it from managers and shareholders to stakeholders. He suggested that we should rely on governance for the future as regulation is, as demonstrated, pro-cyclical particularly for the larger banks. To me it follows that the larger a bank becomes the more socially responsible and accountable it needs to become to the community at large because, as the last crisis showed, it was the community that ultimately stood surety for them.
Since then we have had the Libor crisis and, if ever there was a crisis about ethics and values, then this must be it. The irony is that Barclays was founded as a Quaker bank but Bob Diamond when asked by Treasury select committee member John Mann did not know what the founding ethical principles of the bank were (honesty, integrity and plain dealing). At the recent Tomorrow’s Finance conference David Pitt-Watson in part called for a return to the principles of Alfred Marshall – one of the founders of economics – which was that success came through ‘honesty and uprightness’. Ethics and values are not a new or quaint idea, or a product of wishful thinking, but were what our financial system was original built from. The City is starting to recall that.
But it is hard to say how long this reflective mood will last. The jury is still out, as the debate about what it is that the finance does, how it does it and why it does it continues. The lead argument is that shareholder value and social ethics and values, and profit and corporate social responsibility, can be married together in a combination of both regulations and ethics. Perhaps good regulation and accountable corporate governance can be the glue that marries these partners together and the offspring will be a more prosperous and fairer society, and a financial system that works for the benefit of us all.