Strategic CSR - Value

The article in the url below is a radio interview, held a decade after the 2008 Financial Crisis, with the author of a book that had just been released, The Value of Everything: Making and Taking in the Global Economy (2018). The author's goal in writing the book, and why I found it interesting, was to redefine (or perhaps 'recapture' is more accurate) what we understand to constitute value.

To summarize: In calling for a broader theory of value in a wide ranging discussion (in the interview), the author draws a distinction between value determining price (previously) and price determining value (today) – a change she argues has occurred over the last couple of hundred years. In other words, previously, the more we valued the way something was produced, the more we would be willing to pay for it (emphasizing trades people and artisanal skills). This compares to today, where the author argues we now have it backwards because we interpret the price itself as determining how much we should value the product or service – in other words, things that are expensive are, by definition, more valuable to us than things that are cheaper. This same logic can be extended to resources such as labor, which is today valued by wage levels (generally determined at the intersection of demand and supply), rather than necessarily the nature of the work that is performed. In other words, we reward rarity, simply for the sake of being rare, rather than rewarding the work that delivers the most happiness or social value, or some other metric, which we used to do and the author thinks is a more commonsensical understanding of what we should value.

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (6e)

© Sage Publications, 2023

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A New Way to Calculate Economic Value

The Brian Lehrer Show

September 10, 2018

WYNC

https://www.wnyc.org/story/new-way-calculate-economic-value/

 

Strategic CSR - Bubbles

The article in the url below draws a fascinating distinction between investment bubbles that are "hugely destructive" and those that are "socially useful." While the housing bubble that led to the financial crisis a decade ago falls into the former category, the current inflated stock price of Tesla and associated bubble around green energy are (according to the author) examples of the latter category:

"Whether investors one day regret paying so much for Tesla Inc. stock, they have done the planet a favor. Their enthusiasm enabled the company to raise enough money to stay afloat until it could profitably mass produce electric cars while accelerating other manufacturers' rollouts."

The bubble these investments have created is partly due to fascination with individual personalities, such as Elon Musk (Tesla is currently "trading at more than 1,000 times trailing earnings"), but is also partly due to the increased interest with ESG funds (and the younger retail investors driving their growth). And this fascination seems to be growing, irrespective of whether the firms themselves are profitable:

"From the end of 2019 through Tuesday, a fund that tracks a Nasdaq clean energy index had risen 191% compared with the broad market's 15%. It trades at 52 times trailing earnings, nearly double the overall market's already-historically high multiple. More than a third of its 44 constituents are losing money. On Wednesday afternoon it was up 7% on expectations Democratic control of the Senate would lead to more support for renewable energy."

The rapid growth in investments flowing into these funds is apparent from the chart accompanying the article:

 

 

Although elements of these investments may be irrational, as the article notes, that does not mean the resulting bubble does not have any redeeming features:

"Stupid, however, isn't the same as useless. Some bubbles can be hugely destructive, as we saw with housing 13 years ago. Others are socially useful. Private markets generally provide too little incentive for risky innovation because shareholders only capture a small part of an innovation's benefit; most goes to consumers (think of a life-saving drug). A bubble can overcome that market failure as investors shower capital on countless new ventures they hope will be the next Microsoft Corp. or Amgen Inc. Even as most of those ventures fail, they extend the technological frontier."

This is true of elements of the dotcom bubble around the turn of the century. Similarly, it is true of a number of unicorns in recent years, and the green energy bubble today. The competition that leads to the failure of (most) companies will also produce the (much fewer) success stories that define the future:

"In the late 1990s and early 2000s, investors snapped up the stocks and bonds of money-losing technology, media and telecom companies. The mania financed a glut of fiber optic that drove the price of bandwidth down enough to bankrupt many telecom companies while allowing countless new businesses to emerge. It also enabled Amazon.com Inc. to raise enough money to keep growing until it had proven its business model could work. Green energy faces obstacles the dot-com boom didn't. It mostly does what fossil fuels already do—just with less carbon dioxide emissions, a benefit that accrues to the entire world rather than producers or consumers."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

© Sage Publications, 2020

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e 

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Market Euphoria Helps Fuel Green Energy

By Greg Ip

January 7, 2021

The Wall Street Journal

Late Edition – Final

A8

https://www.wsj.com/articles/green-euphoria-may-cost-investors-but-planet-says-thank-you-11609949560

Strategic CSR - Economics

The article in the url below is a review of a book titled, Cents and Sensibility: What Economics Can Learn from the Humanities. As the subtitle suggests, the goal of the book is to point out that economics (the study of human exchange) loses much of its predictive value without an understanding of the humans it is trying to study:

 

"Covering such topics as university admissions, child-rearing, organ harvesting and economic development, the chapters each analyze public questions first through economics, and then through literature. The conclusion is that economics—a hugely influential approach to studying human societies—isn't worth all that much without first understanding what it means to be human."

 

This duality is demonstrated excellently by Adam Smith's massive contribution to the field of economics:

 

"They exhort students of economics to grasp that the author of The Wealth of Nations also wrote The Theory of Moral Sentiments. The real Smith observes that human beings summon qualities of sympathy balanced with their self-interest. People are not merely economic maximizers: They are ethical creatures from the get-go."

 

An excellent example illustrates the intuitive nature of the book's argument:

 

"You can't measure gross domestic product or unemployment without first saying what they are, qualitatively, as categories of interest to humans. If we were to decide that a society were best judged using the number of houses of worship erected—or, for that matter, the number of M&M candies consumed—such a measure, not dollar-value output, is what we would study. There is no God-term telling us from the outside what categories humans care about. Economics, physics, biology, history—all need the first, humanistic, categorizing step."

 

The book's authors build on this fundamental point to critique the current focus of education in many Western societies. Concerned about the West's declining prowess in math and science subjects, reformists are calling for the pendulum to swing too far in the opposite direction:

 

"… most of what actually goes on in STEM's 'M' and 'S'—and even a good deal of the 'E'—is, like the humanities, an inquiry into the artistic or intellectual products of humans."

 

The message here is great, I think. The Financial Crisis of 2008 shows us many things, not least of which is that an over-reliance on economic models that incorporate unrealistic assumptions about human behavior are destined to lead to poor public policy decisions. While this is very true, however, the opposite is also true—there is much that the humanities and social sciences can learn from economics. Models of corporate social responsibility that make unrealistic assumptions about human behavior have little of value to offer contemporary debates about economic and social life. As this book reveals, it is essential to incorporate ideas from across the intellectual spectrum in order to have a mature discussion of where we are and how we got here and, of course, set a reasonable path to changing the situation (if that is what we decide to do).

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

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A Human Face For Economics

By Deirdre N. McCloskey

September 14, 2017

The Wall Street Journal

Late Edition – Final

A15

https://www.wsj.com/articles/economics-with-a-human-face-1505343242

 

Strategic CSR - Stock options

The article in the url below presents further evidence to suggest that stock options are not as effective a performance incentive as their proponents would like to believe:

 

"Boards of directors use large packages of stock options to encourage chief executives to attempt bold initiatives with big potential upside for investors. But those options may be spurring CEOs to take excessive risks, according to new research … which linked the size of CEO stock-option grants to the number of product-safety recalls at the chief's company."

 

The effect is substantial:

 

"[The researchers found that] increasing the makeup of CEO pay from 25% options to 75% options raises the probability of a subsequent product recall by 35%."

 

The reason offered is that stock options present executives with a no-lose situation. They constitute a moral hazard in the same way individual traders within the finance industry are encouraged to take risks – the gains are privatized (accruing to the individual and a narrow set of stakeholders) while the risks are socialized (borne by the firm's broader set of stakeholders and, in the last resort, society as a whole):

 

"Unlike stock grants, in which executives lose money when initiatives fall flat, option grants carry little downside for executives. CEOs stand to make a lot of money by exercising stock options if a big bet like a new drug or product pays off. Yet if that bet fails, executives are no worse off."

 

The article also contains a potentially more important finding from the study. It is buried in the final paragraph, but is perhaps more instructive for Boards looking to appoint executives who are least likely to endanger the organization:

 

"The researchers also found that CEOs with tenures of 10 years or more didn't seem to be affected by higher levels of stock-option grants."

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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Big Stock Options Lead to High Recall Probability

By Rachel Emma Silverman

September 23, 2015

The Wall Street Journal

Late Edition – Final

B7

http://www.wsj.com/articles/study-big-stock-options-lead-to-high-recall-probability-1442965822

 

 

 

Strategic CSR - Perceived risk

There is plenty of research out there to show that humans are very bad at assessing risk. We worry more about shark attacks (which are extremely rare), for example, than we do about car crashes (which are extremely common). One of the main reasons offered for this is the extent to which we feel we have control over the situation (e.g., as a driver of a car instead of a swimmer in the sea). Whatever the reason, it is highly irrational (which is to say it is highly human).

 

Climate change is also something that we have difficulty assessing, partly because the effects are perceived to be global (rather than local) and distant (in spite of all the evidence to the contrary). We are much more sensitive to threats that we feel are direct and immediate, rather than indirect and delayed. That is why concern about climate change dropped during the financial crisis and subsequent recession – essentially, people had more immediate and personal concerns to worry about. According to the article in the url below, however, that is now changing as the economy begins to recover:

 

"About 69 percent of adults say that global warming is either a 'very serious' or 'somewhat serious' problem, according to a new Pew Research Center poll, up from 63 percent in 2010. The level of concern has still not returned to that of a decade ago; in 2006, 79 percent of adults called global warming serious. … Other polls, including by Gallup and The New York Times and Stanford University, have similarly shown that concern about climate change fell sometime after 2008 and has since risen."

 

As the Catholic Church inserts itself more directly into the debate with the publication of the Pope's encyclical on the issue (Laudato Si) in an attempt to influence the negotiations for a global climate accord in Paris next month, it will be interesting to see how the political establishment responds. At least the topic is moving marginally closer to center stage, with more people willing to talk about the science (rather than their beliefs) to make the argument that this is an issue for this generation, not the next:

 

"The percentage of Americans who agree with the scientific consensus — that global warming is occurring and caused by human activity — has also bounced back in the last few years. Sixty-eight percent of Americans also say there is 'solid evidence of warming,' up from 57 percent in 2009."

 

Have a good weekend.

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Americans' Concern Over Climate Change Is Again on the Rise

By David Leonhardt

June 17, 2015

The New York Times

Late Edition – Final

A6

http://www.nytimes.com/2015/06/17/upshot/americans-are-again-getting-more-worried-about-the-climate.html

 

Strategic CSR - Business schools

The article in the url below questions the social value currently being created by business schools. It does so in terms of the extent to which business school graduates are being trained to enter the finance industry:

 

"Nearly 30 percent of undergraduates majoring in business at U.S. colleges were planning to go into finance in 2014, according to a Bloomberg Business survey of 28,000 students. Interest in finance far outstripped desire for jobs in consulting, the second-most attractive industry, which drew just 11 percent of undergrad business majors."

 

In short:

 

"Business schools, despite broadening their curriculum recently to encourage entrepreneurship and socially responsible careers, still basically amount to banker factories."

 

This is important because of the growing size of the finance industry as a percentage of the overall economy, and the effect a larger finance industry has on national productivity, according to a study quoted in the article:

 

"When finance sucks talented young workers away from other industries, we all suffer, a new report shows. … once a country's finance industry grows beyond a certain point, national gross domestic product per worker declines. That conclusion comes from a 2012 study in which they looked at economic output in 21 countries from 2005 to 2009 and saw productivity decline as soon as the finance sector hired more than 3.9 percent of all workers."

 

Essentially, therefore, the article concludes that the more business schools support and enable a vibrant finance industry, the more the economy as a whole suffers:

 

"So where does that leave business schools, where people go to figure out what kind of industrious businessperson they'd like to be? By routing large swaths of young workers into finance, business programs are probably not powering economic growth."

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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Is Business School Gutting the Economy?

By Natalie Kitroeff

February 26, 2015

Bloomberg Businessweek

http://www.bloomberg.com/news/articles/2015-02-26/is-business-school-gutting-the-economy-

 

Strategic CSR - Executive pay

Something that has always struck me as weird about executive compensation is the idea of performance-related pay. I find this weird because the common way to describe how this works in practice is, as the article in the url below repeats, to say that executives should be paid:

 

"… according to their performance."

 

In reality, the executive is not paid according to his/her performance, but according to the performance of the firm. That is, what the executive actually does is not measured, but it is how the firm performs that is measured. This is primarily because it is easier to measure firm performance using one of the narrow accounting measures that exist and very hard to measure how effective an executive actually is. The assumption is, of course, that the performance of the firm is highly correlated with the performance of the executive. This arrangement is therefore very convenient for the executive because a great deal of research in this area suggests that they tend not to make much difference to the firm's performance. At a minimum, the firm's performance is determined by a large number of factors, some of which the executive is responsible for, but many of which s/he is not.

 

While the article in the url below does not focus on this distinction, it does do a good job of highlighting how ineffective many executives are and how, as a result, the idea of pay for performance is somewhat ridiculous on closer inspection:

 

"It is easy to get steamed up about how much executives earn. Some pay packets are ridiculously large: Tim Cook, Apple's boss, was paid $378m in 2011. Some are quite out of line with achievement: Martin Sullivan was paid $47m when he left AIG, despite the fact that, on his watch, the company's share price declined by 98% and the American taxpayer had to lend it $180 billion to keep it from collapsing."

 

In the process, the article, which is a review of a book titled Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It, also provides a bit of context in which to place the relatively recent introduction of performance related pay:

 

"During the glory years of the country's capitalism, from the late 1940s to the late 1960s, American bosses were paid salaries like other professionals (performance-related pay was for the lower classes). They were also paid about as much at the end of the period as at the beginning: about $1m a year (in inflation-adjusted dollars) for the heads of America's 50 biggest companies."

 

In the end, however, The Economist favors the overall effect of massive financial incentives (a dynamic economy with the world's best companies), rather than linger on any obscene anomalies, even if the relationship between what the CEO does and how the firm performs remains somewhat murky:

 

"Mr Dorff offers lots of examples of performance-related pay gone wrong. But what about pay that ignores performance? Professions that stick with rigid salary structures lose talent to more flexible ones: one reason why America's school system is in such a parlous state is that high-flyers refuse to join a profession in which the only way to get ahead is to get older. Public companies are already in a war for talent with more flexible entities, such as private companies or hedge funds. It would be an odd world if you could get seriously rich working for a private-equity company but not as the boss of General Electric."

 

Take care
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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Moneybags

October 25, 2014

The Economist

87

http://www.economist.com/news/business-books-quarterly/21627553-should-ceos-really-be-paid-less-moneybags

 

Strategic CSR - Hippocratic Oath

Building on the idea of an oath for graduating MBA students (http://mbaoath.org/) and a general oath for executives (see: Strategic CSR – Executive oath), the article in the url below proposes a Hippocratic oath for the financial sector. The stated need for such an oath is that:

 

"… despite five years of reform the public retains its distrust for bankers and the services provided fail to meet the diverse financial needs of society."

 

The reason, it is argued, is that the focus of reform was misplaced—falling more heavily on the symptoms of the problem, rather than the cause:

 

"A focus on financial stability alone fails to address the root cause of the crisis, which we believe lies in the inherent lack of virtue among our banking institutions and subsequent ethos. This led to a self-serving culture that influenced the behaviour of bankers."

 

It therefore follows, the authors argue, that a more effective response targets the underlying culture of the finance/investor industry. Rather than trying to impose a "rigid moral regime" to all, however, the authors instead apply what they refer to as the "theory of virtue":

 

"Applying this theory to banking reform means that our banks should, to the best of their abilities, attempt to meet people's diverse financial needs, and should not simply focus on self-enrichment or basic transactional services."

 

In essence, an ethical responsibility that is larger than the individual – a professional responsibility. More specifically:

 

"One way this can be achieved is by requiring all members of the banking profession to affirm a Hippocratic-style oath, where employees publicly voice their commitment to behave in a manner that prioritises customers and recognises that the abuse of their position can have dramatic consequences for society."

 

It is argued that such an oath would reform the culture of the profession, as a whole, as a result of focusing more on the social value banking adds, rather than a personal route to financial success. It would also reposition the image of bankers in the eyes of the wider public:

 

"Lawyers, doctors and architects all hold a professional motive to not only do the best for their client but also adhere to the well established principles of that profession. In medicine, the Hippocratic oath provides a centre-piece for personal responsibility in the profession and their overarching principles. Banking is no different and in the post-crash era, should strive towards professionalism."

 

Take care
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Bankers should take a Hippocratic oath to restore virtue to the financial sector

By David Fagleman

July 28, 2014

The Guardian

http://www.theguardian.com/sustainable-business/banking-reform-bankers-hippocratic-oath-report

 

Strategic CSR - HSBC

The article in the url below contains a staggering statistic:

 

"HSBC Holdings PLC's third quarter earnings call brought the striking revelation that nearly 25,000 of its 258,000 employees, almost 10%, work in compliance. Compliance was a major driver in the 5% increase in operating expenses reported, and management left no doubt that higher compliance costs would not go away soon, if ever."

 

That statistic (10% of all employees work in compliance) is a function of operating in a highly regulated industry. These regulations, however, are a function of past behavior that ignores the interests of a broad range of stakeholders. The result of such a narrow operational perspective is to invite additional scrutiny from the regulatory authorities. Banks have no one to blame but themselves for the increased costs that come from having to comply with that scrutiny.

 

Have a good weekend.
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

HSBC Costs Illustrate New Cost of Banking

By Gregory J. Millman

November 4, 2014

The Wall Street Journal

http://blogs.wsj.com/riskandcompliance/2014/11/04/the-morning-risk-report-hsbc-costs-illustrate-new-cost-of-banking/

 

Strategic CSR - Financial Crisis

The accusation that the U.S. government has been reluctant to punish the instigators of the Financial Crisis is not as convincing as it once was. There is some evidence that they have been willing to attribute blame, as the article in the url below suggests. In particular, the article contains a graphic that lists the 10 largest settlements by banks with U.S. authorities. Notably, all ten settlements have been announced since February, 2012 and all but two of them are directly related to the Financial Crisis:

 

1. JPMorgan Chase:        $13 bn.

2. Bank of America:         $11.8 bn.

3. Bank of America:         $11.6 bn.

4. Bank of America:         $9.3 bn.

5. BNP Paribus:               $8.9 bn.

6. Wells Fargo:                $5.3 bn.

7. JPMorgan Chase:        $5.3 bn.

8. JPMorgan Chase:        $5.1 bn.

9. Bank of America:         $2.9 bn.

10. Credit Suisse:             $2.6 bn.

 

Now, whether the fines are big enough and whether individual executives should also have been punished, are separate questions that remain.

 

Have a good weekend.
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

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Capital Punishment

July 5, 2014

The Economist

58

http://www.economist.com/news/finance-and-economics/21606321-frances-largest-bank-gets-fined-evading-american-sanctions-capital-punishment

 

Strategic CSR - HFTs

The article in the url below from The Atlantic is a great riff on cheating that, in the process, puts high-frequency traders (HFTs) in their place (sorry, I meant in the correct context):

 

"It's Wall Street at its most socially useless. HFT funds aren't allocating capital to where they think it'll be most productive. HFT funds are allocating capital to where they think other people will put it 50 milliseconds from now. It's a tax on everybody else. And it's a tax that has basically no benefit. Sure, HFT funds defend themselves by saying they're increasing liquidity, but increasing liquidity is the last refuge of bullshitters. … Economist Paul Samuelson had it right all the way back in 1957: knowing (or trading) something one second before everyone else is personally profitable and socially pointless."

As everyone now knows, thanks to Michael Lewis' book, Flash Boys, the way HFTs make money is by front-running the market:

 

"The Wall Street Journal reports that HFT funds buy early access to data from third-party distributors—everything from corporate earnings to the Philadelphia Fed's manufacturing survey. They're getting the numbers just fractions of a second early, but that's more than enough in the world of high-frequency trading. … The private sector isn't paying for the creation of a public good when it buys a sneak peek at them. The private sector is just profiting off existing public goods. If a company sold hedge funds an early look at their earnings, it'd be insider trading. But when a third-party like Business Wire sells hedge funds an early, albeit split-second, look at corporate earnings, it's perfectly legal. It's nuts."

 

Of course, the important questions is: Who are the bigger idiots—the HFTs for doing what they are doing, or us for letting them get away with it?

 

Have a good weekend.
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

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High-Speed Trading Isn't About Efficiency—It's About Cheating

By Matthew O'Brien

February 8, 2014

The Atlantic

http://www.theatlantic.com/business/archive/2014/02/high-speed-trading-isnt-about-efficiency-its-about-cheating/283677/

Strategic CSR - Financial Crisis

Some quotes from the article in the url below that should be of concern to anyone hoping that we had learned from the Financial Crisis:

 

“Five years after the system was held at gunpoint by a massively interconnected and over-risked Wall Street, the country’s six biggest banks—JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—are now 37 percent larger than they were in the depths of the financial crisis. These institutions make more than four out of every 10 loans and tote two-thirds of the banking system’s $14.4 trillion in assets.”

 

“The total roster of U.S. banks is at all-time record low. In 1985, there were more than 18,000, compared with 6,891 now. … ‘The federal government has been keeping track of the number of banks since 1934 and this year is the very first time that the number has fallen below 7,000.’ [writes economics author and blogger Michael Snyder].”

 

“JPMorgan Chase is about the size of the entire British economy and holds 12 percent of all cash in the U.S.”

 

“Four U.S. banks now lug total derivatives exposure well north of $40 trillion, or more than the combined value of U.S. gross domestic product and the national debt.”

 

Too big to fail is not only alive and well, it is the global financial system! The graphic that accompanies the article demonstrates clearly how the banking industry has consolidated over the last two decades:

 

http://images.bwbx.io/cms/2013-12-09/1209-bank-popup-6301.jpg

 

Have a good weekend.
David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Is Wall Street Now Too Big to Care?

By Roben Farzad

December 10, 2013

Bloomberg Businessweek

http://www.businessweek.com/articles/2013-12-10/is-todays-wall-street-now-too-big-to-care

 

Strategic CSR - Financial Crisis

Some quotes from a recent article in The New York Times by Gordon Brown, who was Prime Minster of the UK during the most recent Financial Crisis:

 

“Already, we have forgotten the basic lesson of the crash: Global problems need global solutions. And because we failed to learn from the last crisis, the world’s bankers are carrying us toward the next one.”

 

“… most of the problems that caused the 2008 crisis — excessive borrowing, shadow banking and reckless lending — have not gone away. Too-big-to-fail banks have not shrunk; they’ve grown bigger. Huge bonuses that encourage reckless risk-taking by bankers remain the norm. Meanwhile, shadow banking … has expanded in value to $71 trillion, from $59 trillion in 2008.”

 

“In the patterns of borrowing today, we can already detect parallels with the pre-crisis credit boom.”

 

“China’s total domestic credit has more than doubled to $23 trillion, from $9 trillion in 2008 — as big an increase as if it had added the entire United States commercial banking sector. … And China’s banking system may not be Asia’s most vulnerable.”

 

Ultimately, Brown’s criticism is not focused on different laws and regulations put in place by individual country legislatures, but with the failure to act on a global scale. Because big banks have become bigger (more multinational), the need for consistency across borders is paramount:

 

“The Volcker Rule, now approved by American regulators, illustrates the initial boldness and ultimate weakness of our post-2008 response. This element of the Dodd-Frank financial reform law of 2010 forbids deposit-taking banks in the United States from engaging in short-term, proprietary trading. But these practices are still allowed in Europe. Controls are even weaker in Latin America and Asia. International rules are needed for international banks.”

 

“In short, precisely what world leaders sought to avoid — a global financial free-for-all, enabled by ad hoc, unilateral actions — is what has happened. Political expediency, a failure to think and act globally, and a lack of courage to take on vested interests are pushing us inexorably toward the next crash.”

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/


Heading Toward Another Crash

By Gordon Brown

December 20, 2013

The New York Times

Late Edition – Final

A27

http://www.nytimes.com/2013/12/19/opinion/gordon-brown-stumbling-toward-the-next-crash.html

 

Strategic CSR - Financial Crisis

The article in the url below provides an update on the cost of the recent Financial Crisis:

 

“Wall Street could pay nearly $50 billion to buy peace from federal authorities who are taking aim at the banks over their role in the mortgage crisis, according to interviews and a confidential analysis of the industry’s potential legal exposure. … The $50 billion figure does not include JPMorgan’s $13 billion payout, which means the ultimate industry tab could exceed $60 billion, according to the analysis.”

 

The basis for these estimates is the $13 billion settlement announced at the end of last year between the government and JP Morgan. Based on the relative amounts of mortgages issued by each of the largest banks from 2005-2008 (see accompanying graphic) and comparing to the JP Morgan settlement, the article arrives at estimates for each of the banks, individually:

 

“The analysis, which lawyers prepared for one of the financial institutions and which was reviewed by The New York Times, indicates that Bank of America could ultimately settle for $11.7 billion in penalties, with an additional $5 billion in relief to homeowners. Morgan Stanley’s combined tally, the analysis shows, could be around $3 billion, with roughly a third going to consumer relief, while Goldman Sachs’s total could come to roughly $3.4 billion. For the Royal Bank of Scotland, the total price could be around $10 billion, which might prompt an outcry in Britain, where the government owns a majority stake in the bank. Citigroup could pay roughly $1 billion, the analysis shows. The potential penalties for other banks are under $1 billion, the analysis shows.”

 

It is encouraging to see the government act as a concerned stakeholder … at last. Of course, all pain is relative:

 

“A payment of $50 billion, made up of a string of separate deals, would amount to roughly half the total annual profit of large American banks in 2012.”

 

Have a good weekend

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Wall Street Predicts $50 Billion Bill to Settle U.S. Mortgage Suits

By Jessica Silver-Greenberg and Peter Eavis

January 10, 2014

The New York Times

Late Edition – Final

A1

http://dealbook.nytimes.com/2014/01/09/wall-street-predicts-50-billion-bill-to-settle-u-s-mortgage-suits/

 

Strategic CSR - Compliance Officers

According to the article in the first url below, Compliance Officers are “hot” on Wall Street!

 

“The kings of Wall Street used to be the traders and investment bankers who said yes to big deals and big trades, but today's power brokers increasingly are the compliance officers who quite often say no to risky proposals.”

 

I have seen a number of articles in the mainstream national business press in recent weeks, all with the same story line—there are insufficient qualified applicants for the number of compliance openings available. As noted in the article in the second url below, both JP Morgan and HSBC are reacting to increasing government oversight and enforcement (having suffered significant fines recently for past misdeeds):

 

“The Wall Street Journal previously reported that J.P. Morgan would spend $4 billion and commit 5,000 people to risk and compliance efforts and that HSBC added 1,600 compliance jobs in the first half of the year. But there is even more demand for compliance. The Institute of Internal Auditors shared with Risk & Compliance Journal some preliminary findings from its Pulse of the Profession survey, expected to be made public in November, which found 67% of internal auditors believe that audit committees see compliance as one of the top five risk areas, up from 59% at the same time last year.”

 

As the first article points out, although long in the making, the focus on compliance has gathered pace in recent years as the consequences of non-compliance become increasingly apparent:

 

“[Much of] Wall Street's focus on compliance … dates back to October 2003, when a provision of the Patriot Act that required financial institutions to verify the identities of certain customers went into effect. Banks were then forced to bolster so-called AML (anti-money laundering) compliance departments to monitor their customers and transactions. But it was only in recent years – after the 2008-2009 financial crisis – that regulators and prosecutors have intensified a crackdown on the flow of money tied to suspected terrorist activity, drug lords and tax evaders. Enforcement actions have stacked up across the industry, with anti-money laundering settlements, including some sanctions violations, spiking to total $3.5 billion in 2012, from $26.6 million in 2011, according to the Association of Certified Anti-Money Laundering Specialists. That jump includes last year's $1.9 billion blockbuster fine on HSBC for its failures to stop hundreds of millions of dollars of drug money routed through it from Mexico.”

 

Clearly, there is a market for business schools and organizations such as the Ethics & Compliance Officers Association (ECOA, http://www.theecoa.org/) that are training students with the necessary skills to conduct this work:

 

“There are no specialized degrees required for compliance officials, who were typically repurposed from other divisions of a bank. But as demand picked up, candidates with degrees from reputable law schools started moving into the field, recruiters say. At a bank or broker-dealer, a compliance employee with a couple years of experience might make between $65,000 and $85,000 plus a bonus; five to 10 years of experience generally commands a base salary of up to $150,000 per year; and top professionals can expect $1 million or more.”

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/


Wall Street’s Hot Trade: Compliance Officers

By Aruna Viswanatha

October 9, 2013

Reuters

http://www.reuters.com/article/2013/10/09/us-usa-banks-compliance-idUSBRE9980EE20131009

Help Wanted in Compliance, No Experience Needed

By Gregory J. Millman

October 22, 2013

The Wall Street Journal

http://blogs.wsj.com/riskandcompliance/2013/10/22/help-wanted-in-compliance-no-experience-necessary/
 

Strategic CSR - Financial crisis

The article in the url below presents a pretty compelling argument in favor of CSR:

 

“The six biggest U.S. banks, led by JPMorgan Chase & Co. (JPM) and Bank of America Corp., have piled up $103 billion in legal costs since the financial crisis, more than all dividends paid to shareholders in the past five years. That’s the amount allotted to lawyers and litigation, as well as for settling claims about shoddy mortgages and foreclosures, according to data compiled by Bloomberg. The sum, equivalent to spending $51 million a day, is enough to erase everything the banks earned for 2012.”

 

Amazingly:

 

“JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports. JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks, filings show.”

 

Numbers like that represent either a lot of wrongdoing or overpaid lawyers (or both). Either way, it does not suggest well-run organizations that are structured around meeting the needs of their stakeholders, broadly defined. Don’t you just hate it when the statute of limitations will not come round fast enough?

 

“The legal process could be extended if the U.S. attorney general brings more cases and unearths information that can be used in new lawsuits. While some cases have a five-year statute of limitations, those involving bank frauds have a deadline that’s twice as long. The Financial Institutions Reform, Recovery and Enforcement Act, known as FIRREA, has a 10-year limit, and the U.S. used the law against JPMorgan and Bank of America.”

 

Have a good weekend.

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

U.S. Bank Legal Bills Exceed $100 Billion

By Donal Griffin & Dakin Campbell

August 28, 2013

Bloomberg

http://www.bloomberg.com/news/2013-08-28/u-s-bank-legal-bills-exceed-100-billion.html

 

Strategic CSR - Washington

The article in the url below discusses something that vaguely resembles an effective political process. I had forgotten what that looks like in Washington, so was taken aback as I began to read it:

 

“In July of last year, senators David Vitter and Sherrod Brown noticed each other across a crowded room. Ben Bernanke, chairman of the Federal Reserve Board of Governors, was testifying to the Senate Banking Committee. Vitter, a conservative Louisiana Republican, and Brown, a liberal Ohio Democrat, were asking the same questions about capital ratios. ‘We were surprised by that,’ says Vitter, ‘so we started comparing notes.’ The notes led to a weekly schedule of direct conversations and staff meeting between their offices. By the end of the summer, Brown and Vitter had co-signed an eight-page letter to Bernanke.”

 

Genuine, bipartisan cooperation:

 

“Now the romance has borne a bill, the Terminating Bailouts for Taxpayer Fairness Act. It’s short. It’s simple. Its 24 printed pages, if ever passed into law, would have far greater consequences for the money-center banks than the 848 pages of Dodd-Frank. Banks with assets greater than $500 billion would have to hold equity capital of at least 15 percent. There’s no cheating allowed: Equity-like instruments such as contingent capital won’t count. And the complicated, modeled assessments of different assets known as ‘risk-weighting’ won’t count, either. A dollar at risk will be a dollar at risk. … The bill marks a departure from Basel III, which allows contingent capital and risk weighting, and asks for equity capital of 4.5 percent.”

 

Not only bipartisan cooperation, but global leadership:

 

“Asked whether this means pulling out of the Basel negotiations completely, Vitter says ‘Yes, and trying to lead the world … we think Basel II and Basel III are hopelessly complicated. And risk weighting, it’s too easy to be gamed, certainly the versions I’ve seen.’”

 

Not only bipartisan cooperation and global leadership, but taking a stand against the well-financed lobbyists that often prevent effective legislation from being crafted:

 

“It’s hard to overstate how significant this is. Large banks got much of what they wanted out of both Dodd Frank and the Basel III negotiations. Complexity in bank regulation favors large organizations, which can pay to throw lawyers at problems. And since the crisis, regulators both in the U.S. and internationally have continued to use banks’ internal models to assess risk. The Brown-Vitter approach does away with the models entirely. A large bank can arrange its risks however it pleases, so long as it holds 15 percent equity.”

 

As the article’s author concludes (equally shocked):

 

“This bill is so good and so unambiguous that it’s hard to imagine it becoming law.”

 

Have a good weekend.

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Ditch Basel Bank Rules, Just Raise Capital, Vitter Says

By Brendan Greeley

May 1, 2013

Bloomberg Businessweek

http://www.businessweek.com/articles/2013-05-01/ditch-basel-bank-rules-just-raise-capital-vitter-says