April 23, 2024
Finance

Martin Luther King’s Lessons for a Wayward Finance Industry


About the author: Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy adviser in the Obama administration.

This Martin Luther King Jr. holiday falls on the day the civil rights leader would have turned 95, which raises countless questions about the world, had he lived past age 39. Would he have accomplished much more, or would his voice have been lost in a cacophony of cable news and TikTok? Would he have been pleased by unquestionable progress on civil rights or dismayed that inequality remains so deeply embedded in American life?

Or what if he had taken a different path in life, say, choosing a career in finance over the ministry? It’s a less frivolous question than it might seem, because he clearly had a keen eye on the importance of financial empowerment. While he was a harsh critic of a capitalist system that reinforced the racial inequality he was fighting, the boycotts that were central to nonviolent resistance revealed his keen sense of how economic relationships create leverage in both directions.

But with banks and financial institutions held in such dismal regard in polls, movies, and song, a better question today may be what lessons an industry so often derided as immoral might draw from one of America’s most important moral leaders?

Those of us who work as lenders, investors, and market strategists can certainly handle the opprobrium that comes with these careers, if only because they are often well-compensated. But it isn’t healthy for such an important part of the economy to be held in continuing disrepute. We need talented decent young people in finance, almost as much as we need them in medicine, education, and, yes, ministry. We also need voters and politicians to better understand the importance of balancing tough financial regulation with the freedom to take risk.

Advertisement – Scroll to Continue


Markets bring people together to trade goods, services, and money. As we have known since Adam Smith, the collective activity of individuals looking out for themselves tests innovation, rewards creativity, and leaves us all better off. Bankers, meanwhile, allow businesses and families to buy today what they might never afford, while insurers protect them against unforeseen catastrophe.

If banking and investing bring out the best in people, however, they also bring out the worst.

Because time is, in fact, money, the system rewards short-term thinking over the long term. Incentives abound to test limits and cut corners, and when the corner-cutters become criminals in an industry where pay is so extravagant, the crimes of the Charles Ponzis and Bernie Madoffs look especially contemptible.

Advertisement – Scroll to Continue


Moreover, if you want to make money, it’s easier to hang out with people who have money, which creates powerful incentives that reinforce inequality of education, opportunity, and class. Diversity in finance has improved, but decision makers remain overwhelmingly white and male. The system also likes predictability, which means it naturally cultivates warm ties with government to ensure that whatever new rules must come will disrupt things as little as possible.

Perhaps the greatest sin of bankers and investors, though, is the incentive to look away when something looks wrong. Excessive focus on “shareholder value” or “fiduciary responsibility” makes it easier to ignore troubling questions about child labor in the supply chain, suspicious off-balance sheet activity, and expanding carbon footprints.

Here, King’s words are especially haunting for an industry that hates to stray from its lane. “We will have to repent in this generation not merely for the hateful words and actions of the bad people,” he wrote in his 1963 Letter from Birmingham Jail. “But for the appalling silence of the good people.”

Advertisement – Scroll to Continue


This isn’t a call for financial professionals to quit their day jobs in favor of community organizing or for banks to wade into politics. But on this national holiday, all of us should be asking what more we can do to help what King called “the arc of the moral universe” as it “bends toward justice.”

A shortlist might include supporting better pay for financial regulators, so that the rules that keep the industry healthy and transparent can keep up with both the innovators and the crooks. Industry leaders might back a tiny assessment on bank profits for financial literacy classes, because banks need clients and voters who understand the value of their services.

There could be still greater efforts to recruit more-diverse staff, not just because it’s the right thing to do but because it delivers better investment decisions. Finally, while environmental, social, and corporate governance guidelines alone won’t save the world, why shouldn’t investors insist that company managers explain practices that may be legal but still harm people and the planet?

Most banks and financial institutions have generous charitable and community service programs that are worth celebrating today. But King would surely ask them to do much more. An industry that prides itself on helping people improve their lives, in spite of its selfish reputation, should always be thinking of how to break the “appalling silence.”

Guest commentaries like this one are written by authors outside the Barron’s and MarketWatch newsroom. They reflect the perspective and opinions of the authors. Submit commentary proposals and other feedback to ideas@barrons.com.



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *