Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

The superhubs and their elite networks thrive in our system because of the significant role that money and wealth play in our society. Like every system, our society organizes itself around rules. Those rules are reflected in our culture in the form of our commonly accepted values, norms, objectives, and modes of behavior. Therefore, our culture acts as the operating system of our society. In recent decades, Wall Street has celebrated the self-indulgent glamour and desirability of greed, wealth, and excess, just as society has glorified the financial world’s unbridled capitalism, often on TV, in glossy magazines, in Hollywood blockbusters such as Wall Street, and best-selling novels like Liar’s Poker. Wall Street’s excessive compensation to some extent is also a manifestation of our society’s values. Surgeons don’t get paid bonuses if they save lives, and policemen make a fraction of bankers’ salaries even though they put their own lives at risk for the benefit of others. This compensation gap implies that our society assigns greater value to making money than it does to preserving lives.

The scandals that have unfolded in the aftermath of the crisis have significantly tainted the financial world’s reputation and prestige. In a 2009 speech, President Obama criticized the attitude on Wall Street “that valued wealth over work, selfishness over sacrifice, and greed over responsibil-ity.”50 Meanwhile, Wall Street legitimized its push for ever greater profits as part of their fiduciary duty to investors. Shareholders and lawmakers allowed boards to get away with outsized growth targets and outrageous compensation even as performance dramatically declined.51

RECALIBRATING THE SYSTEM: REVOLUTION OR EVOLUTION?

Inequality and social corrosion are not force majeure but the result of self-imposed paradigms and behaviors. All of us have participated in our system as it has evolved, be it through a mortgage, a checking account, or a bank-sponsored civic event. This system is now on a trajectory towards failure if we only cure the symptoms and don’t address the underlying causes of system deficiencies. There is no panacea to effect the requisite changes, and a discussion of the many measures necessary would exceed the scope of this book. Nevertheless, I will subsequently touch on some relevant considerations to the human angle on which this book focuses.

The Law and Ethics

Governor of the Bank of England Mark Carney, who promotes an ethical business culture, called the pre- and postcrisis years “the age of irresponsibility,” where unethical behavior went unchecked and became the norm.52 These behaviors, which have aggravated the increasing wealth gap and social stratification, have fundamentally shaken society’s trust in our system. That is problematic, because trust serves as one the fundamental pillars of society and is a precondition for cooperation among its various segments.

Stricter laws, regulation, and supervision can provide valuable guidelines for human action. Yet, it is important to keep in mind that laws are limited in their effectiveness, as by their very nature they are subject to rule-beating behavior and attempted circumvention, which creates new distortions. Also, it is impossible to regulate all nuances of human relationships and to control every interaction of people who are close to one another.

We should also keep in mind that, as economist John Kay puts it, “too many safeguards may actually increase the risk of failure.”53 In a fast-changing, ever more complex world, rules must remain somewhat flexible and adaptable. Rigid norms may make the system even less stable; by the time they kick in, the system may already have changed, and outdated rules applied to a different set of facts may cause more harm than good. That is why in complex, nonlinear systems, oblique—indirect and gradual—actions based on constant reevaluation and adaptation may be more effective than stern and inflexible approaches.54

Legal norms should be underpinned with ethical standards to prevent harmful actions that may be legal, but which should be avoided with the right moral compass. The Group of Thirty also recognizes “grey zones, in which conduct is a matter of judgment, not necessarily the law,” as a challenge.55

Since the regulation and supervision of ethical standards is difficult, personal and professional responsibility should be stressed, just as doctors must take an oath and lawyers must take regular ethics classes. Andreas Dombret, an executive board member of Bundesbank, suggests the stipulation of an ethics code. None of these measures by themselves will cure the problem, but they can contribute to establishing standards and raising awareness.

Corporate Culture: Psychological Detachment and Willful Blindness

Culture as the foundation for ethical behavior also plays an important role. The Group of Thirty in 2015 released a report titled Banking Conduct and Culture, which criticized poor cultural foundations, unhealthy cultural norms, and significant cultural failures. The report asserts that “restoring trust in banking is a public trust and economic imperative, as it is the bedrock of a safe and effective financial system.”56

A study by economists at the University of Zürich suggests that the culture in the banking industry undermines honesty.57 The lines between what’s inappropriate, unethical, and illegal are also blurred by the fact that bankers have become increasingly more detached from their clients because of the complexity of their products and the corresponding greater division of labor. Financial engineers who created the computer models for collateralized debt obligations were, for the most part, unaware of the robo-signing of subprime mortgages that took place further down the production chain half a world away. The resulting moral inertia encouraged a “catch me if you can” culture in which everything not explicitly prohibited was allowed, and executives pushed the boundaries to see what they could get away with. Under performance pressure and incentivized by short-term rewards, people rationalized their actions by working within the rules and abdicating responsibility to a system that rarely held them accountable.

In fact, researchers found that bankers severely disassociate themselves from their work in order to cope with their demanding environments. In what has been coined “teflonic identity maneuvering,” financial executives rationalize their detachment with their high remuneration.58 Another study demonstrates that willful ignorance often serves as an excuse for selfish behavior. Most people are willing to sacrifice personal benefits if they are known to come at the expense of others, yet when given the choice, they often insulate themselves from negative information to protect their self-image and avoid harsh judgments by others.59 In her book Willful Blindness, Margret Heffernan elaborates how competitive environments exacerbate mutually reinforcing conformity. In choosing to stick with the crowd, we steadily blind ourselves to individual values and doubts.60

And then there is, of course, the more explicit problem of an organizational culture that tolerates and encourages unethical or even illegal behavior. After the Volkswagen emissions scandal broke in 2015, managers described a culture of fear and a corporate mind-set that tolerated rule breaking. The carmaker is, in a sense, also a financial services company, as over 40 percent of VW’s balance sheet consists of financial services.

CEOs and other top executives must be role models and lead by example. The Group of Thirty argues that values and conduct should be evident in tone from the top, and the voices of middle managers should be heard in an echo from the bottom.61