Signs of a sea-change in the culture of financial services

16/11/2011
Mike Smith

Can the City of London become the conscience of the financial world, asks Michael Smith

What does the City of London stand for in the world? It provides thousands of jobs, pays the UK Treasury £54 billion in taxes each year and represents nine per cent of UK GDP. It is the world’s leading financial centre. Yet there remains a deep public mistrust of bankers and banking around the world, exacerbated by the Greek and Italian sovereign debt crises. Ordinary people, from public sector workers to pensioners and the unemployed, feel they are paying the price in reduced living standards for banking excesses. The police may have cleared the so-called anti-capitalist demonstrators from Wall Street. But there has been a surprising degree of public support for them and those in the tented village outside St Paul’s Cathedral.

Are there signs that the culture of banking and business is changing? Are we seeing the beginning of a sea-change in the values that drive financial services?

At a recent conference on restoring trust in the City of London, the mood music, the rhetoric, hit all the right notes. It was hosted in the Mansion House by Lord Mayor Alderman Michael Bear, the outgoing Lord Mayor of London. In his opening remarks he emphasised the need to ‘get the regulation right’ but this was no substitute for ‘getting the right values and behaviours in the City’, to regain the public’s trust.

Richard Sermon, chairman of the Lord Mayor’s advisory board for restoring trust in the City, emphasised leadership, culture and good behaviour: ‘attitudinal change rather than just behavioural compliance’. Man cannot live by regulation alone, he said. ‘People need to feel proud of what they do. The integrity of individuals is integral to the success of enterprises. We have outsourced integrity in decision-making to the regulators.’ He called for a ‘common purpose of instilling trust and values into our businesses. Integrity is not just the highest moral principles but also soundness, unity and wholeness.’

The investment banker Ken Costa, Chairman of Lazard International from 2007 until 2011, who heads the Church of England’s enquiry into restoring ethics to the City, acknowledged a ‘widespread perception that banking is an amoral or immoral profession. We have broken from our moorings.’ Seventy per cent of those polled sympathised with the demonstrators outside St Paul’s. Financial markets, he said, ‘have drifted from the ethical basis on which they are based. We are at a tipping point.’ A cloud of public anger and frustration was growing.

Costa claimed it was impossible to legislate out bad practice. ‘The only viable solution lies within us: to reconnect the financial and the ethical.’ Quoting from Adam Smith’s Theory of Moral Sentiments, he called for ‘a pervasive moral spirit in which the desire to do well is nurtured by the desire to do good. The causes [of the economic crisis] are at root moral’. We needed to ‘relearn the grammar of morality. We should be more comfortable about talking about values in public. The cost of economic freedom is moral vigilance, not an ossified code of do’s and don’ts. The general public is far more comfortable about talking about values than we [in the City] are.’

Costa emphasised that this was a leadership issue: ‘business leaders need to be comfortable about talking about integrity, honesty, trust and respect.’

So the good rhetoric was there. But while the Lord Mayor’s conference called for ‘behavioural change’, what this means in practice was hardly spelt out. Interventions from the floor suggested ‘the abolition of boardroom reward for failure’ and a cap on undeserved bonuses, still seen as excessive. Someone said that Gordon Gekko’s infamous phrase from the film Wall Street, ‘Greed is good’, should be changed to ‘Profit is good. Greed is bad.’

Lady Susan Rice, Managing Director of Lloyds TSB in Scotland, said that the nine leading UK banks will launch a new Chartered Bankers Professional Standards Board, aiming to turn financial service from an industry to a profession, with all the implications that holds for upholding the highest ethical standards of probity. And Philippa Foster-Back, Director of the Institute of Business Ethics, announced IBE’s new joint-initiative with the Chartered Institute for Securities and Investment for ‘Investing in Integrity’, to be launched in January (www.investinginintegrity.org.uk).

Stephen Timms MP, Labour’s Shadow Minister for Employment, spelt out just how much things still need to change, when he spoke two weeks later on ‘honesty in the City’, at St Lawrence Jewry Church in the City.

The gap between lowest and highest paid in organisations needs to be closed, he said. The pay of the heads of FTSE 100 companies is 145 times that of average salaries, according to the UK's High Pay Commission. ‘Polarization on such an enormous scale—growing affluence for a few and increasing hardship for the many—is not sustainable. And it isn’t an honest assessment of different peoples’ contributions. Could we put ordinary employees on remuneration committees, to apply some common sense to these decisions?’

Secondly, companies needed to be honest about their tax bills. All but two FTSE 100 companies have subsidiaries in tax havens, largely to reduce parent companies’ tax bills. The system was surrounded in secrecy, he said. He called for ‘country-by-country’ reporting of companies’ profits in each country they operate and how much tax they pay there.

Thirdly, the need to tackle bribery and corruption. He cited the Swedish construction company Skanska as a model. It refuses to do business in countries which demand corrupt payments. As a result, ‘Countries that really want to make a break with endemic corruption are asking Skanska to come in and help.’

Speaking alongside Timms, Paul Moore, former head of group regulatory risk at Halifax Bank of Scotland (now part of Lloyds TSB), said that such changes needed to be supported by legislation.There was a need to reform company law to show that ethical considerations had been taken into account in decision-making. ‘The vast majority of people who work in the City are good and honest people who have been caught up in a system of which they are not proud. They want to be part of the change too,’ he said. ‘Ultimately, it is the responsibility of the leaders of financial institutions – not their regulators, shareholders or other stakeholders – to create, oversee and imbue their organizations with an enlightened culture based on professionalism and integrity.’

So, given good leadership, cultures can change. It may be a long, hard road. But could the City of London, and the business world it represents, yet become the conscience of the global economy? After all, as David Cameron told the World Economic Forum, ‘it is time to place the market within a moral framework.’

Michael Smith is a freelance journalist and head of communications for Initiatives of Change, UK.  

NOTE: Individuals of many cultures, nationalities, religions, and beliefs are actively involved with Initiatives of Change. These commentaries represent the views of the writer and not necessarily those of Initiatives of Change as a whole.

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Dear Francis Given your

Submitted by Peter Challen on Mon, 28/11/2011 - 11:02.

Dear Francis
Given your points about the difficulties of this medium of exchange, I warmly appreciate your time taken to respond. I’d value a meeting and offer my email that that might be arranged, if London is a possible venue. [ peterchallen@gmail.com]
I tried to make clear in small compass that my reason for using the terms theological and philosophical was as an introduction to claiming that the solutions need to be universal , based in the primary understanding that all life is gift and therefore that financial arrangements created by humans have to be rethought in a world-centric, not nation-centric, mindset, seeking to serve all people and a fragile planet in the ways of those high values the article highlighted.
I also raised the issue of the institutional drag of powerful, embedded and often legally protected structures that work against the implementation of those values, in the apparently good service of vested interests, but with inadequate account of external costs. Values themselves represent different emphases under either a world-centric or a nation-centric mindset.
I implied that new money creation needs to be a transparent State responsibility, not a government or a commercial bank monopoly, though both agents then have their parts in its just distribution for productive trading and public provision.
But all these points, that I would continue to argue are theologically and philosophically concerned with our search for public truth, need gentle and time demanding dialogue; there is so much confusion to unravel and new mutual understandings to rebuild.
I am about to propose the involvement of Initiatives for ChangeUK in a series of seminars in May next year that will examine these issues in greater depth.

Good but not fundamental enough

Submitted by Peter Challen on Thu, 17/11/2011 - 11:47.

It is a good article in terms of secondary theology and philosophy, but ignores the major global fault lines that require primary theology and philosophy - that is, to be set in a universal context - namely designing a finance system that serves planet and people.

Prof Tim Gorringe (Theology- University of Exeter) gave the Operation Noah lecture last Monday.

He ended a seriously strong challenge of the faith roots of radical change, as we teeter towards major tipping points, on the note that a 'Status Confessionis' at this crucial time required three fundamentals:

1. Our carbon footstep as part of our personal witness;

2. We must challenge the driver of finance capitalism, usurious money creation. Endless growth is an aberration;

3. We must be repentant for complicity and set our own house in order.

The Church of England report, 'Church and Capitalism' came out this same week. I find it, likewise, utilising secondary theology at best, with primary theology noticeably absent. It too had no serious reference to embedded structures that have trapped us for a long period doing exponential harm in the last few decades.

To end exploitation, and especially a] its financial form of 'usury' on money bearing compound interest issued by commercial banks, and b] the passing of location value to rentiers rather than to the community that created it, certain basic aspects of restructuring in the financial system are required.

The first principle is that ‘the benefits of any financial system must be universal, that is, serving the interests of all people and the planet.’

To develop that principle, some major systemic changes are needed, urgently:

- Return to 'publicly created money' - end issuance of new money bearing interest by commercial banks;

- Return location value created by the community to the community - not to rentiers;

- Introduce forms of inclusive distribution of material wealth - so that consumers and producers are the same people;

- Respond to the mantra that 'the first call on a nation’s wealth should be a basic income for all citizens';

- Rescind laws creating ‘corporate personhood’ and the primacy of returns to directors and shareholders;

- Educate people to understand that Commons are more fundamental than commodities;

- Renew the priority of investing before all else in human capital;

- Democratise the Corporation of the City of London.

Behind these brief indicators serious studies and proposals are available for intra-disciplinary appraisal.

A final note on law: "Law is no longer what it was intended to be - a set of rules equally binding everyone to ensure that outcome inequalities are at least legitimate - and instead has become the opposite: a tool used by the politically and financially powerful to entrench their own power and control the society. That's how and why the law now destroys equality and protects the powerful." —Glenn Greenwald, author of With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful

Peter Challen

Christian Council for Monetary Justice

Markets and morality

Submitted by Francis Evans on Sat, 26/11/2011 - 21:03.

Dear Peter,

We haven’t met and so conducting a debate on a website such as this is fraught with the usual dangers of misinterpretation and over-analysis of other contributors’ comments. In responding to your words, please take it from the outset that I am doing so in good faith and with genuine goodwill and appreciation for your article and the time you took to write it. Perhaps one day we may have the chance to meet and debate these issues in a more congenial setting.

It seems to me that many of the propositions you advance are not, of themselves, based in theology or religious values. For example removing the ability of banks to increase the money supply (by lending out more than they themselves have borrowed from depositors) would certainly be a radical step, with a devastating effect on the supply of finance to businesses and individuals. It is not obvious why governments should have a monopoly over the creation of money and why politicians are more to be trusted than bankers. But more to the point, it is not clear either why this proposition is rooted in ‘primary theology’ when those of the original article are not.

Similarly, the idea that 'the first call on a nation’s wealth should be a basic income for all citizens' is, as you say, a mantra rather than a theological principle. Only the very wealthiest nations see it as their duty to provide a universal basic income - and even then, there are conditions and limitations. I would say that the first duty of the state is to protect the integrity of its borders, and the second to protect its citizens from harm and maintain the rule of law. Walter Bagehot thought that it was ‘to insure the security of that industry which is the condition of social life and civilised cultivation’ (in other words, the protection of trade).

Either way, this is not a theological debate. The state is a human construct and theology does not tell us how it is to be ordered. The same goes for the limited company as a legal personality, capturing the location value of property and the other issues that you raise.

It seems to me that the principles underlying the original article are fundamental moral values: honesty, justice, trust, integrity and responsibility. Each of us can decide where we stand in relation to those – and for those with a faith, theology can help with that decision.

As you note in your article – and this I do agree – we must each be prepared to set our own house in order. There is a sense in which our society has got the banking and financial system that it deserved. Put another way, the collapse of the financial system in 2007/08 needed not only the greed of Goldman Sachs and the wilful blindness of the ratings agencies, but also the complicity of thousands of ordinary people, deliberately lying on their mortgage application forms to obtain loans that they could not afford and never had a hope of repaying.

You may have heard the radio series aired this week in which Ian Hislop interviewed a number of experts about the financial crisis and how bankers could redeem themselves and regain acceptance. As one listened, it became clear that the solutions were in fact very straightforward. ‘We should behave better’ said Lord Rothschild ‘and give more’. Amen to that.

good article!

Submitted by Kenneth Noble on Wed, 16/11/2011 - 18:13.

 An interesting article. Well done to the author.

I look forward to seeing evidence that those at the top in the financial world are interested in giving the leadership that will be required "to place the market within a moral framework". The best leadership usually involves leading by example. At the moment, I get the feeling that a lot of 'leadership' is falling short. I don't want to libel anyone, but I feel that there is much scope for improvement in leadership in the media that allows phone hacking 'on their watch'; or in the civil service departments that preside over collosal over-spends and inflated expense claims. The City used to epitomise what I believe is still the motto of the stock exchange: 'my word is my bond'. Observing that, combined with a greater concern for those who are less well off, would go a long way towards restoring integrity in the City.

Of course, it is easy to point the finger. As the old song says, there may be three more pointing back at me! Am I sure that greed and materialism do not govern my life?