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; think tanks 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 a 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 the bankers themselves are viewing it in a new light. Whatever next?
Last week Lord Stephen Green, former chairman of HSBC and now DTi Minister for Trade and Investment gave a Gresham College lecture titled ‘Values and Value’. He suggested that profitability and social responsibility weren’t mutually exclusive and that nor 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.
In the Q&A session a questioner declared everything that Lord Green had said to be bunkum and argued in favour of the economic laws of Herbert Spencer. (Spencer had been the first to coin the phrase ‘survival of the fittest’ and linked Darwinism to economic theory which was basically the principle of unrestrained competition). The suggestion was that made at the meeting that ethics and values have no place in the market place and subvert Spencer’s economic laws.
The audience answered that the growth of the fair trade movement and noted that it is built upon the ethical premise that people don’t want their prosperity built upon the suffering of others.
A week earlier Merrill Lynch hosted the spring conference for the City’s Long Finance think tank which discussed 'into the folly of value – reforming sustainable finance’. Key note speaker the economist and former Bank of England committee member Professor Charles Goodhart spoke of the pro-cyclical nature of regulation. For instance after the South Sea Bubble crisis in 1711 it was decided that this should never be allowed to happen again so they out-lawed limited liability companies, (which remained broadly banned until 1844). Modern commerce is based on the premise of having stock companies.
The reaction against the current crisis is that it was a failure of regulation and supervision and the solution is now more regulation. Goodhart argued that regulation isn’t that important at the present because the present market has no appetite for risk or lending. He noted there is a tendency to both regulate and deregulate at the wrong times.
After the 1929 crash the US response 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. Now there is fresh talk about reinstating it both here and in the US. For the future he 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.
After the 1929 crash the US response 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. Now there is fresh talk about reinstating it both here and in the US. For the future he 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.
The conference also saw debate about the role of money, which may seem a surprising topic to discuss but a speaker from Brazilian National Bank talk about the use of local currencies combined with participatory budgeting. In Switzerland there is the WIR currency which is local currency used for the trading of goods and services. The use of local currencies has been highlighted as a foundation stone for producing strong and sustainable communities by the new Garden City Movement.
There is a reflective mood in the City. Lord Green said that ‘capitalism is on trial’. Judgements about where we go next are still being made hence the current debate about what it is that the finance does, how it does it and why it does it. The argument is that shareholder value and social ethics and values and profit and corporate social responsibility can be married together. My view is that regulation and corporate governance should be the glue that marries these partners together and hopefully the offspring will be a more prosperous and fairer society.
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