CHAPTER 9

The New Names of the Game

During this reset of finance, the temptation to be prescriptive is natural. The hope to resolve everything through regulation is inevitable at times. But it would be regrettable if we were to discharge financial players of their responsibility. The perception that this was happening, particularly during the bank bailouts, was a significant contributing factor to the diminution of trust in the system. The challenge we face is how best to realign incentives and consequences.

Reestablishing a Culture of Responsibility

The issue of bankers’ remuneration is a textbook question. I remember having had a debate on this topic in 2008 with reputable consultants. I felt that the problem of financiers was not so much their total compensation package as the manner in which the compensation was structured, particularly the habit of linking short-term measured performance to bonuses: it was an invitation to commit crimes! The consultants laughed in my face and told me I was naïve, that there was no way to change that. I replied, with some seriousness, that if we were unable to impose sound limits ourselves, then legislators would eventually get involved—and that’s precisely what happened. Bankers have become probably the only professionals to have their compensation set by European directive! And Americans are so infuriated by the impunity that Wall Street decision makers seem to enjoy that the topic was brought up during the presidential campaign; first steps toward fixing this are quietly being put into place. It’s a shame we had to get to this point and that financial professionals did not find it in themselves to self-regulate. It will be interesting to see how things develop now that the mood has changed.

This responsibility is a fundamental cultural concern. Although regulatory changes were undoubtedly necessary, they are in no way sufficient, because all they do is to codify procedures with only superficial changes to behaviors. Rekindling a love for finance requires that we reestablish a culture of accountability and responsibility among all the players in the game.

The Great Moderation that occurred in the years leading up to 2007, by establishing the idea that subdividing, redistributing, and insuring risks was a guarantee of the viability of the system, developed a culture of comfort in which decisions are detached from accountability because risk is distributed in an increasingly far-flung manner. No one is left responsible for participating in anything in this globalized machine spinning on its own. To get back to the fundamentals of finance will also mean renewing the spirit of capitalism as Henry Ford and others conceived it: capitalism that can exist and grow only with rigorous respect for ethics. This same thought occupied the ministers of finance and central banks of the G7 in May 2015 at their meeting in Dresden: how could they formulate a code for the banking profession, drafted as a collection of voluntary commitments for which the guiding ethical principles were rooted in the conscious understanding that finance is not an end unto itself but rather a means to serve the real economy and society, a means to promote investment, growth, and prosperity for all?

This call must also be heard throughout colleges and universities where ethics should be taught compulsorily and in the most practical manner. The way business cases became the norm decades ago, ethical cases should also become references in any curriculum.

No Longer Ignoring Ethical Fault Lines

On the question of financial ethics, we would benefit by listening to the wise voices of various religions. Through my involvement in the Semaines sociales de France, a hundred-year-old association dedicated to Christian social thought, I have long stood behind the Catholic social doctrine of a common good, grassroots participation in society, and a preferential option for the poor.¹ I have also attended several seminars at the Vatican, particularly an international seminar on the economy and the common good organized in July 2014 by the Pontifical Council for Justice and Peace, presided over by Cardinal Turkson, archbishop of Accra in Ghana. We debated the issue of sharing growth and making it inclusive, creating social and territorial cohesion, and maximizing the number of people served by finance. Religions have valuable messages for us on these topics. During one day of our seminar, Pope Francis joined us for lunch and warned us about the “anthropological reductionism” marking our era, denouncing an economic system dominated by the “culture of waste.”² For all the leaders gathered together on that day, this call, along with the Pontifical exhortation in 2013 to fight against the “globalization of indifference” from the Italian island of Lampedusa, was a lifesaving wake-up call and a stimulus to act. In another meeting in 2017, Pope Francis said,

Those who cause or allow others to be discarded—whether refugees, children who are abused or enslaved, or the poor who die on our streets in cold weather—become themselves like soulless machines. For they implicitly accept the principle that they too, sooner or later, will be discarded, when they no longer prove useful to a society that has made Mammon, the god of money, the center of its attention. . . . We need to learn compassion. . . . This compassion will enable those with responsibilities in the worlds of finance and politics to use their intelligence and their resources not merely to control and monitor the effects of globalization but . . . also to correct its orientation whenever is necessary.³

Making Finance Intelligible for All

Into this culture of accountability that is to inform the reinvention of the system, we must integrate the needs of education. Finance has too often hidden behind the sophistication of its instruments, but its fundamental mechanisms are simple if you just take the time to explain them. Finance has tried for too long to make discussions unintelligible, sometimes through complacency, sometimes through bad faith or dishonesty. It may have seemed disdainful of the populations who nonetheless, through their money, fed into it. It is time for the players involved to commit to explaining systematically what they are doing. While access to finance is a determining factor of individual freedom, this freedom can be exercised only with a minimum level of knowledge. Every citizen of the world must be able to understand what it means to save, lend, and invest, and what these activities contribute to the economy. Without that, we will never be able to rebuild communities’ trust in finance. The Dodd-Frank Act took a noteworthy step in this direction by creating a bureau of financial education and consumer protection, which is responsible for informing the public and analyzing the products provided to them. The European Union has put effort into its own online education tool, the Consumer Classroom,⁴ to improve consumer awareness of financial matters and credit. These efforts naturally involve an attempt to answer more technical questions, including some of the least understood, such as those on accounting. They must, however, go beyond these first steps, and I would expect the education system to integrate more of these aspects in the curriculum.

We also have to start questioning the way financials are presented. The current accounting system, based on the so-called mark-to-market approach, in reality a liquidation value approach, is certainly consistent, but it has significant consequences in terms of economic reasoning: when you systematically reckon in market value or in replacement value, you affect the manner in which you think about the whole. To avoid this bias, you have to encourage integrated reporting efforts that aim to boil down a company’s entire strategy into a few intelligible pages, rather than the 500-plus-page annual reports that get published. It is more important and necessary to be able to report in plain English on what a company is doing and with which objective than it is to just pile up pages in an opaque manner.

All financial professionals, all business and global institution leaders, must be able to contribute to such efforts and ensure that these efforts meet expectations without creating a new layer of complexity. A fundamental responsibility of our democracies is to remain accessible to the public, to allow citizens and employees to understand the larger goals of a government or a company, to provide these reform strategies, and to assist humankind in grasping the complexity of the world without oversimplifying.

Building a Balanced “Triangle of Governance”

We won’t be able to reenchant finance with the flick of a magic wand. We have a lot of work to do. We will naturally need to start with regulatory changes, to the banking sector and beyond, integrating the entire financial sphere. And this necessary transformation is not enough on its own: we also have to reframe the behaviors of the actors involved, without relying too much on an ideal scenario in which they change on their own, suddenly “enlightened” with a sense of what is right.

The changes we make must include a realization that, despite growing doubts, better educated or more conscientious thought leaders can change practices or initiate the necessary changes—along the lines of the speeches that have been made recently supporting better accountability in finance by such renowned figures as Mark Carney, governor of the Bank of England and president of the FSB; Larry Fink, CEO of BlackRock; and Ronald Cohen, founder of the Big Society Capital project. In addition to these guiding voices, the most demanding investors and consumers will also exert pressure. Finance is equally influenced by changes to the fiscal parameters linked to compensation and attention given to externalities like the price of carbon. Although the rise in power of institutional investors (among them, a small number of influential actors), can be perceived as a risk, it can also represent an opportunity to reconstruct the financial world with more heart. International organizations, particularly development banks, will have an eminent responsibility in promoting, evaluating, and testing innovations and changes.

The combination of three forces—regulation; the role of financial actors, including the largest of them; and commitment of international organizations—could prove powerful and likely holds one of the keys of reform. Reform would also benefit from social pressures and the pioneering role of certain multinational companies like Unilever, Mars, and Danone, to name a few. In a sense, we are seeing this “triangle of governance” that the water group described in our book Eau, in which “public authorities, private interests (industrial, agricultural, commercial), and civil society comprising consumers and users rub shoulders.”⁵ There are three main distinctions to make among these three powers:

Public authorities (which are neither suppressed nor replaced but included in the system of governance) send legislative and regulatory messages to civil society, which is meant to comply with them. . . . Governance creates balance within these regulations through the user’s “best practices.” . . .

A second equilibrium is established between private, industrial, and commercial interests, and public powers. The latter admit the laws of the market: transparency of information, competition, a balance of price and quantity between supply and demand. . . . The rules of liberal economy are tempered by regulation (not rules) that public powers exert over private business. . . .

A third equilibrium, between civil society and private interests, between businesses and their clients, affects the quality of services offered (price included) and the nature of demands expressed by society. Clients can be users or members of the public; companies can be government bodies and public services; these semantics don’t change the issue. There is always a producer side, and a consumer side. . . . This final equilibrium is a matter of submission of the economic side to the personal side.

Each point of the triangle of governance attempts to control the proper functioning of the equilibriums in opposition.⁶

If we are to reenchant finance and regain control of this unparalleled but hard to tame tool we will have to continually seek to strike a balance between these points.

Conjuring the Tragedy of Horizons

Another imperative that should guide our reset of the financial system is putting an end to the tyranny of the short term in order to give better consideration to the long term in our collective actions and decisions.

Living “on the inside” during the 2007–2008 crisis and in the years that followed was a revelation for me in this respect. Being in charge of the finances of two of the largest banks in the world, I had to juggle two different depths of perception: thinking about the present moment so that the bank didn’t hit an iceberg, and thinking 10 years into the future to determine how to rebuild in order to survive that long. In other words, “I had to be both an emergency responder and a scout to figure out the formula I should use at the right time.”⁷ The different time frames collided with one another.

The task for financial players, and more broadly politicians and technocrats, is to take into account all these different time frames. Mark Carney taught this lesson to the insurers at Lloyd’s of London. In his speech “Breaking the Tragedy of the Horizon,” a tragedy in which Carney includes climate change, he refers to the economic phenomenon of the tragedy of the commons. He shows how far removed is the climate problem (15 to 20 years out) from trading (one minute ahead), the issues of banking (the next quarter or year out), and the issues handled by the head of the central bank (three to five years out). In short, there is no single financial player in our current state of affairs who has an incentive to think about climate. As Mark Carney put it,

We don’t need an army of actuaries to tell us that the catastrophic impacts of climate change will be felt beyond the traditional horizons of most actors—imposing a cost on future generations that the current generation has no direct incentive to fix. That means beyond the business cycle, the political cycle, and the horizon of technocratic authorities, like central banks, who are bound by their mandates. The horizon for monetary policy extends out to 2–3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle—about a decade. In other words, once climate change becomes a defining issue for financial stability, it may already be too late.⁸

It is the responsibility of financiers to work their magic on this tragedy of horizons, to make it understandable for all parties involved, in a simple and intelligible manner, that “the more we invest with foresight, the less we will regret in hindsight.”

Moving Away from the Tyranny of Short-Termism

Larry Fink delivered another lesson to us in April 2016. In a letter addressed to the directors of the largest American and European businesses, this CEO of the global leader in asset management, BlackRock, urged businesses to get past the “culture of quarterly earnings hysteria,” to detach from the immediate demands of investors to give new perspective to their strategies. Despite repeated calls for CEOs to embrace a long-term vision, “many companies continue to engage in practices that may undermine their ability to invest for the future.” Systematizing the redistribution of profits to shareholders, warns Fink, is to act “at the expense of long-term value.” This clearly threatens the survival of these companies, in a world in which “over the long-term, environmental, social and governance (ESG) issues—ranging from climate change to diversity to board effective-ness—have real and quantifiable financial impacts.”⁹

The good news is that this letter appears to have received a warm welcome by its recipients. When you manage $5 trillion, you can have an undeniable influence on market practices!

These various calls for action are not seeking to eliminate finance, simply to reform it. We want to use it for what it can do: pushing out our horizon instead of simply accepting fate. Jean Favier, one of the most respected historians of our time, offers that lesson:

Whatever man does is the future: the fate of peaks and swells, what we see and what we guess, the earthbound and our dreams. The horizon shows each of us the level and limits of our needs and abilities. There are horizons we accept and those that recede. One is sterile, the other exists. The other is only an idea, and it is fertile. One and the other have a relativity of spirit and instance. By encircling them, they define men and things, resources and partners. Intelligence knows how to expand the circle. It requires the will to create, which could be called audacity, or the spirit of enterprise. It also requires the immediate knowledge of realities that create the possibility, the distance of the desirable. Thus the horizon invents itself, within the confines of need and ambition.¹⁰

This was the miracle of the Age of Discovery: Europeans expanded their horizons in an extraordinary way when they stopped accepting the limits of the known world. It all began with Henry the Navigator, prince of Portugal, who decided one day to pay his sailors to attempt to navigate Cape Bojador, the southernmost point of the African coast known to Europe at the time, which until then had been considered impassable due to sea monsters. The first expedition was turned back, as was the second, but the third made it through and showed that there was nothing there to fear.¹¹ In a way, it was money that allowed these explorers to face their fears and move forward!

As I’ve said before, as long as finance is used well, it is our best tool to manage the long-term and unknown areas of our future. Imagine what would be possible if we could finally mobilize all our intelligence and energy with that perspective in mind! This requires a change in mind-set, a different way of thinking about finance and how we can all be smarter about changing behaviors. The good news is that this mobilization has already started and is taking the shape of a silent revolution.