Abstract
Once the collapse of Lehman Brothers in September, 2008, dramatized the scale and scope of the global financial crisis, the momentum already building for reform in the investment and banking industries achieved not only a sense of greater urgency through popular protests like Occupy Wall Street (OWS), but also a clearer focus on the role of investors and bankers in making reform a reality. Two important indications of their seriousness about reform are the renewed discussion of an Investor Bill of Rights (IBOR) and the success of innovative efforts to create and sustain ethical banking practices. In this case study, we will be exploring proposals for an IBOR, starting with an open letter that Tom Myers—a highly respected forensic accountant and CEO of the China Trade Institute—wrote in response to the OWS protests, and then the innovative practices of banking institutions that have made ethics central to their mission, such as Banca Popolare Etica in Italy, the Grameen Bank in Bangladesh, the E. Sun Bank of Taiwan, as well as the various efforts at banking reform undertaken in China by various banks in cooperation with the PRC government. While these promising efforts are no guarantee that the investment and banking industries will never again engage in the kind of reckless activities that provoked the global financial crisis, they do suggest that reform is sustainable, particularly if commercial banks, large and small, renew their efforts to serve the needs of all their stakeholders and that appropriate laws are developed.
“Respecting your colleagues is the smartest investment you can make.” (Stephan Rothlin, Eighteen Rules for Becoming a Top Notch Player, 2004)
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Notes
- 1.
The Occupy Central movement of 2011–2012 is distinct from, but indirectly related to the Occupy Central movement now ongoing in Hong Kong. While both are dedicated to the cause of advancing social and economic justice for the citizens of Hong Kong, the relatively small encampment of 2011–2012 was focused on addressing alleged misconduct among the big banks in Hong Kong, especially in their dealings with small investors. By contrast, the 2014 Occupy Central is a mass movement focused on the struggle over the policies and procedures that will govern electoral reform, particularly, the requirements to be used to screen candidates for the office of the HKSAR Chief Executive. The struggle for economic justice remains a major concern in the 2014 movement since Hong Kong politicians of every stripe recognize that were the “One Man, One Vote” standard of democracy to be enforced, the expanded electorate would likely support economic and social reforms meant to assure greater prosperity and security for all of the HKSAR’s citizens. For a reliable account of the Occupy Central 2014 movement, following all its vicissitudes since it began on September 26th, see the archive available at the South China Morning Post (SCMP 2015). Since the Occupy Central 2014 movement involves issues well beyond our focus on international business ethics and financial reform, we will make no further comment on it. All statements concerning Occupy Central and other efforts related to the OWS movement refer to the events of 2011–2012, and should not be misconstrued one way or another as referring to the 2014 movement in Hong Kong.
- 2.
The so-called “Tobin Tax,” named after the American economist James Tobin (1918–2002) who originally suggested it, “was developed with the intention of penalizing short-term currency speculation, and to place a tax on all spot conversions of currency. Rather than a consumption tax paid by consumers, the Tobin tax was meant to apply to financial sector participants as a means of controlling the stability of a given country’s currency” (Investopedia 2014b). Tobin tax proposals remain controversial because, in the opinion of its opponents, “it would eliminate any profit potential for currency markets. Proponents state that the tax would help stabilize currency and interest rates” (Investopedia 2014b). A brief history of Tobin tax proposals is available from The Financial Times (Sandbu 2011), while further information on efforts to have it enacted into law is available from the Center for Environmental Economic Development (CEED)’s advocacy website on the “Tobin Tax Initiative” (CEED/IIRP n.d.).
- 3.
On July 29, 2009, Verret gave testimony, “The Misdirection of Current Corporate Governance Proposals,” before the Senate hearing on “Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance” (Verret 2009). It contains a concise statement of the six major factors contributing to the global financial crisis of 2008, used as a benchmark for assessing the merits of some proposals for corporate governance reform under consideration as part of the Dodd-Frank legislation, then pending before the U.S. Congress. Verret was particularly concerned to caution against proposed regulatory requirements that would actually “leave no room for investors to design corporate governance structures appropriate for their particular circumstances.” His testimony is relevant here because it confirms that an IBOR should serve as a basis for more effective self-regulation in the banking and investment industry, rather than far-reaching and possibly excessive changes to the existing regulatory framework.
- 4.
- 5.
When a follow-up study of the same name was published in 2008, conspicuously absent was HSBC, which reportedly was involved in “completely restructuring its microfinance activities” (ING 2008: 11). A search of HSBC websites, however, reveals that in India HSBC, in addition to “a lending program for small MFIs …has started offering commercial loan products to Large Microfinance Institutions (MFIs)… In 2008, we have put in place a microfinance strategy, with the objective of increasing our presence in this segment and building around a lending portfolio, a host of services which can facilitate capacity building, improve operational efficiency and bring the best practices of a transactional banking business to the microfinance domain” (HSBC India 2014b). The information about HSBC’s microfinance involvement, interestingly enough, is presented as one of a series of initiatives—specifically, one focused on “financial inclusion”—illustrating its commitment to “corporate sustainability.” Here is the bank’s explanation: “At HSBC, sustainability means managing our business responsibly and sensitively, and ensuring we include social, economic and environmental factors in the decisions we make to ensure long-term business success. We believe it is our duty to our customers, investors and employees to foster an ethical, responsible and sustainable corporate philosophy. Our goal is to be one of the world’s leading brands in corporate sustainability” (2014a).
- 6.
Basel III refers to “a comprehensive set of reform measures designed to improve the regulation, supervision and risk management within the banking sector” (Investopedia 2014a). The Basel III reforms are to be phased in over five years, and are meant to address basic issues in banking and investment risk management, by “strengthen[ing] “microprudential regulation and supervision, and add[ing] a macroprudential overlay that includes capital buffers” (BIS 2011). For detailed descriptioins of Basel III provisions, consult the Bank for International Settlements website (BIS 2011); see also the constructive analysis provided by the international accounting firm, Klynveld Peat Marwick Goerdeler (KPMG 2011).
- 7.
In June 2013, to cite another example, the Singaporean government proposed a new regulatory framework for financial benchmarks (Monetary Authority of Singapore 2013) This proposal was in light of the MAS’ recent investigations to Singapore’s banking industry, having found 20 banks deficient in the governance, risk management, internal controls, and surveillance systems for their involvement in benchmark submissions. A total of 133 traders were also accused of engaging in several attempts to inappropriately influence the benchmarks. The MAS is looking to revise its framework and introduce specific criminal and civil sanctions for those engaging in illegal activities. Also, new regulations will be imposed on financial institutions regulated by the benchmarks, such as a tighter regulatory regime, better corporate governance, and a strict adherence to their Code of Conduct. These actions could be seen as a preventive measure enabling the financial industry in Singapore to learn from the mistakes that contributed to the Wall Street disaster in 2008.
- 8.
In an essay, “What is the Difference Between Gambling and Investing?,” Thomas Murcko criticizes dichotomies contrasting the two, showing the ways in which they often overlap in reality. Nevertheless, in his view, there are systematic differences which he summarizes as follows: “Investing: ‘Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): sufficient research has been conducted; the odds are favorable; the behavior is risk-averse; a systematic approach is being taken; emotions such as greed and fear play no role; the activity is ongoing and done as part of a long-term plan; the activity is not motivated solely by entertainment or compulsion; ownership of something tangible is involved; a net positive economic effect results.’ Gambling: ‘Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following (in approximately descending order of importance): little or no research has been conducted; the odds are unfavorable; the behavior is risk-seeking; an unsystematic approach is being taken; emotions such as greed and fear play a role; the activity is a discrete event or series of discrete events not done as part of a long-term plan; the activity is significantly motivated by entertainment or compulsion; ownership of something tangible is not involved; no net economic effect results’” (Murcko 2013). The difference, in short, consists in the way investment decisions are made. The closer they approximate rational analysis, based on reliable information and expertise, the less they resemble a gambler’s betting strategies at a casino.
- 9.
The World Bank’s ten environmental and social standards cover the following concerns: (1) Assessment and Management of Environmental and Social Risks and Impacts; (2): Labor and Working Conditions; (3): Resource Efficiency and Pollution Prevention; (4): Community Health and Safety; (5): Land Acquisition, Restrictions on Land Use and Involuntary Resettlement; (6): Biodiversity Conservation and Sustainable Management of Living Natural Resources; (7): Indigenous Peoples; (8): Cultural Heritage; (9): Financial Intermediaries; and (10): Information Disclosure and Stakeholder Engagement. These standards go beyond the general specification of development goals and toward the determination of specific procedures for organizing the information to be reported and reviewed in any World Bank decision regarding the funding and assessment of the projects its supports. Since it was proposed for consultation, the document has been criticized for the relative weakness of its standard on “Labor and Working Conditions” (ITUC 2014) and for its comparative neglect of “governance” issues, the third element in the ESG formulary (Jarvis 2013).
- 10.
The challenges involved in achieving a broad consensus about the substantive meaning of the common good are analyzed in Dennis P. McCann’s essay, “The Good to be Pursued in Common” (McCann 1987). Later on McCann examined the tradition of Catholic social teaching in order to trace the history of its diverse formulations of what, in practice, the common good requires, in an essay. “The Common Good in Catholic Social Teaching: A Case Study in Modernization” (McCann 2005). While it is unlikely that there will emerge any definitive consensus on what all is entailed in the common good, the term remains useful and relevant for categorizing and comparing various practical agendas, such as the “ESG” proposals reviewed in this chapter.
- 11.
Catholic Social Teaching offers an impressive defense of the priority of labor over capital, which has inspired our own efforts in international business ethics. The most comprehensive and rigorous analysis of this idea is to be found in Pope John Paul II’s encyclical letter, “Laborem Exercens” (John Paul II 1981).
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Rothlin, S., McCann, D. (2016). Investors: Ethics and Finance. In: International Business Ethics. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-47434-1_11
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