Monday, April 5, 2010

Financial reform bill suggest CSR failures

If CSR is about self-regulation, then industries that face regulation should view government regulation as a function of their own failure to preempt laws with socially responsible market behavior. After all, if corporations were considering the public interest, if they were acting responsibly, there wouldn’t be a need for consumer protection laws at all. However, there was (and still is) insufficient consideration of corporate responsibility as it relates to financial transactions in financial sector operations. The financial sector must move from “Greed is good” to “Serving customers is good”, and perhaps then to “Acting responsibly towards the economy is good”.

Financial sector must focus on adding value

The financial sector’s problem began when finance stopped being about providing a product to customers. Instead, finance became about figuring out ways to make the most money possible as quickly as possible. The maximum profit goal is only occasionally related to the need to serve customers. In fact, based on the data, customers of active managers may end up losing money when the money manager doesn’t make enough gains to cancel out inflation and the fees they deduct from client funds.

The data also indicates that, on the whole, investors will do just as well by investing in passive funds, like ETFs, that just let money grow with the market naturally. Indeed, statistics show that even top managers only “win” in the market around 50% of the time; that is to say, managers whose investment decisions are 50/50 are prized. Most investors can make financial choices that benefit them 50% of the time; one does not need a financial professional to do that. The value of money managers – to society- is thus debatable.

Financial sector should bear higher fiduciary duties

The financial crisis showed that the souring of risky investment choices for firms, often with their own money, had a serious ripple effect of detriment on the entire economy, and on a national and international scale. In this way, participants in the financial sector must realize that they not only bear the burden of adding value to customers’ portfolios, but they also are each playing a role in safeguarding the entire economy. In the same way that a careless foodworker can poison and kill hundreds of people, a careless financier can do as much damage to life savings, retirement, college funds, etc.

Further, disturbances in the economy has a much stronger tendency to continue to ripple- to continue to cause more and more effects. So where a foodworker’s negligence may lead to harm, etc, those deaths won’t (usually) cause more harm. Whereas in the financial sector, one harmful event triggers a chain of harm.

No lessons learned- firms that caused crises fighting reforms

Thus although the very financial firms that caused (and profited from) the financial crisis are now fighting reform, there is no alternative when firms so obviously lack the discipline to be socially responsible on their own. One day, perhaps we will have a financial sector that again serves and facilitates the economy rather than manipulating it.

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