Changing the way financial organizations run will require more than calculations and complicated regulation
We reside in an age of big data and cold and hot running metrics. Everywhere, at all times, we are counting things– our productivity, our buddies and followers on social media sites, how many steps we take per day. But is everything getting us closer to truth and genuine understanding? I have actually been considering this a lot in the wake of a great conference I attended this week on “finance and society” co-sponsored by the Institute for New Economic Thinking.
There was lots of new and creative thinking. On a panel I moderated where Margaret Heffernan, a company expert and author of the book Willful Loss of sight, made some actually essential points about why culture is just as essential as numbers, especially when it comes to problems like financial reform and business governance. As Heffernan amounts it up fairly appropriately in her new book on the subject of business culture, Beyond Measure, “numbers are reassuring … however when we’re confronted by amazing success or failure, everyone from the CEO to the janitor points in the same direction: the culture.”
That’s at the core of a huge dispute in Washington and on Wall Street today about ways to alter the financial system and guarantee that it’s a help, instead of a hindrance, to the genuine economy. Everybody from Fed chair Janet Yellen to IMF head Christine Lagarde to Senator Elizabeth Warren– all of whom spoke at the INET conference; other big wigs like Fed vice chair Stanley Fischer and FDIC vice-chair Tom Hoenig were in the audience– agree more have to be done to put banking back in service to society.
But a lot of the discussion about the best ways to do that hinges on complex and technocratic debates about incomprehensible (to lots of people anyway) things like “tier-1 capital” and “risk-weighted possession calculations.” Not just does that rapidly narrow the conversation to one where just “experts,” numerous of whom are beholden to fund or political interests, can take part, however it also leaves regulatory authorities and policy makers attempting to combat the last war. No matter how creative the metrics are that we apply to policy, the only tip we understand for sure is that the next financial crisis won’t look at all like the last one. And, it will probably originate from some unforeseen location of the industry, an increasing part of which falls into the unregulated “shadow banking” area.
That’s why changing the culture of finance and of business is basic is so vital. There’s a long way to go there: In one telling study by the whistle blower’s law firm Labaton Sucharow, which talked to 500 senior financial executives in the United States and the UK, 26 % of respondents said they had actually observed or had firsthand understanding of misdeed in the work environment, while 24 % stated they thought they may have to engage in unethical or illegal conduct to be successful. Sixteen percent of participants stated they would dedicate insider trading if they might get away with it, and 30 % stated their compensation plans developed pressure to compromise ethical standards or breach the law.
How to change this? For beginners, more collaboration– as Heffernan points out, economic research study shows that successful organizations are usually those that equip groups, instead of people. Yet in finance, as in much of corporate America, the folklore of the heroic individual sticks around. Star traders or CEOs get big incomes (and typically take huge dangers), while their success is unavoidably a team effort. Undoubtedly, the argument that people, rather than teams, should get all the magnificence or blame is frequently utilized perversely by the monetary market itself to obtain around guidelines and regulations. SEC Commissioner Kara Stein has actually been waging a one-woman war to attempt to prevent big banks that have currently been found guilty of numerous kinds of impropriety to obtain “waiver” exceptions from numerous filing rules by claiming that just a few individuals in the company were responsible for bad habits.
Getting more “outsiders” involved in the conversation will certainly assist change culture too. In fact, that’s one factor INET president Rob Johnson wanted to welcome all women to the Finance and Society panel. “When society is established around men’s power and control, females are cast as outsiders whether you like it or not,” he says. Research programs, obviously, that outsiders are far more likely to call attention to issues within companies, because not being welcomed to the power party implies they aren’t as prone to cognitive capture by powerful interests.
For more on the conference and the dispute over how to reform banking, look into the latest episode of WNYC’s Cash Talking, where I discussed the problem on the fifth anniversary of the “Flash Crash,” with Charlie Herman and Mashable business editor, Heidi Moore.