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

Ethical behavior also makes good business sense because losing public trust leads to adverse financial consequences such as higher borrowing costs and reduced lending. The Group of Thirty agrees and posits a value-driven culture and appropriate conduct as a competitive advan-tage.62 Indeed, there is evidence that there is “return on character”: Highly principled leaders with a strong character who do the right things achieve better business performance.63

Vice Chairman of the Federal Reserve Stanley Fischer warns that “regulators should not be tempted to think that Wall Street would one day be clean. . . . This is not a battle that can be won. . . . Even in the best barrels, there will always be bad apples, so we must keep up that fight.”64

Incentives

Finance’s quasi “monopoly power” has also contributed to a sense of entitlement, excessive compensation, and flawed incentives as its culture has focused on profit as the only metric of success. Any other considerations, such as ethics and the common good, have fallen by the wayside. By some estimates, financial sector employees were overpaid by as much as 50 percent relative to skill, often without creating genuine value, as the result of greater risk taking underwritten by the government.65 In Warren Buffett’s opinion, Wall Street “makes a lot of money relative to the number of people involved, relative to the IQ and relative to the energy expended.” In a rather unorthodox fashion, he argues that bosses and their spouses should lose everything if a bank is bailed out, because spouses would presumably “do better policing than the regulator.”66 This would be particularly expedient considering that fines lack deterrent power as they are not paid by individuals but by banks with other people’s money. When Elizabeth Warren expressed her concern that JPMorgan might be breaking the law with regard to a certain provision, Jamie Dimon just smiled and replied, “So hit me with a fine. We can afford it.”67

For change to gain momentum, all segments of society must participate: company boards, prominent business leaders, superhubs of all spheres, the media, and members of the community. And feedback from the public—such as recognition and shaming—can help because, as we have seen earlier, people tend to value social standing and respect more highly than monetary rewards.

A Sense of Purpose: Creating Value for Society

Subordinates in hierarchical institutions typically adapt to the rules set at the top, and people at the top adapt to the rules of the system while concurrently influencing them. In line with the system’s overall purpose—growth—executives strive for growth, profits, and shareholder value at the expense of everything else, when companies should really benefit all stakeholders of the larger community beyond just shareholders. The purpose of the upper layers of the hierarchy is to serve the purposes of the lower layers, and WEF founder Klaus Schwab thinks that all companies—as both economic and social entities—have a duty to consider the common good. Next to “hard power,” firms also need the “soft power” of public trust and acceptance as a license to operate, which also creates long-term value for shareholders.68

Past crises have demonstrated that rather than focus on short-term gains, we should think longer-term and aim for a culture that attributes greater value to societal contributions. “Since in the long-term, no business can succeed in a society that fails,” as the Archbishop of Westminster notes, finance should allow for a more inclusive capitalism, more equal access to opportunities, and a fairer distribution of wealth.69 In Christine Lagarde’s opinion, “the goal of the financial sector must be not only to maximize the wealth of its shareholders . . . but to enrich society by supporting economic activity and creating value and jobs—to ultimately improve the well-being of people.”70

Boards must support CEOs in their efforts to govern with more social responsibility. Although boards have become more independent, their members are almost always part of tight-knit superhub networks, with roughly 85 percent still made up of white men.71 Since research has shown the indispensability of diversity for a system’s resilience, and since supervision in this incestuous milieu has not been terribly effective, a good first step would be to encourage drastic diversification in the upper ranks. Diverse systems are better equipped to adapt to suddenly changing environments than homogeneous ones. In addition, they create significantly better business results, as we’ve seen in Chapter 9. Therefore, institutions should be incentivized to recruit from a wider range of socioeconomic, educational, cultural, and ethnic backgrounds. The integration of women and other minorities with different viewpoints and strengths will help balance and fortify the system.

An “Evolving Revolution”

As mutually exacerbating clashes of classes and cultures continue to unfold worldwide, the risk of a sudden and uncontrolled systemic unraveling becomes ever more likely. Most experts within the IMF and the CIA failed to predict unexpected historic turning points—such as the 2008 financial crisis, the fall of the Soviet Union, and the Arab Spring—and how these events would unfold. Given the danger of other impending but unpredictable crises it is high time to act. To transform the system gradually—the preferable alternative—the biggest changes must be instituted at the top, yet the pressure on the top must come from the bottom. Hierarchies naturally oppose change in order to preserve their existence; accordingly superhubs are inclined to protect their vested interests and perpetuate the dynamics that propelled them to their positions. Larry Summers of all people acknowledged to noted Wall Street critic Elizabeth Warren that his choice was to either ben an insider or outsider: “Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People—powerful people—listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.”72

In such monocultures, the winners are those who operate best in the system, and they exclude others who could potentially reform it from within.73 Evolutionary patterns, learned behaviors, and resulting reflexive tendencies—which have so far ensured the players’ survival—are difficult to change.

Particularly for this reason, politicians must apply pressure to the superhubs, because even though market forces shape inequality, government policies shape market forces.74 Since we are all nodes, who drive the system with our individual actions and the resulting cause-and-effect feedback loops, we must all actively contribute to change. Hopefully, in a concerted effort we will succeed in changing the monopolistic structure of networks to create a more diverse, equitable, and sustainable system that benefits all.

* * *

The fundamental challenges threatening the integrity of our financial system, our economy, and society are too complex for this book to offer a master plan. But by connecting the dots and providing a 360-degree meta-level view, it aims to give the reader with a better understanding, heightened awareness, and factual basis for an informed, critical, and constructive discussion regarding our shared future.

Acknowledgments

$ UPERHUBS DOESN’T JUST TELL the story of networks, it is also the result of my own personal networks. A project that started out as merely one more professional task, over time evolved into a labor of love. Ignorance was bliss, for I’m not sure I would have taken on the challenge had I known how it would gradually take over my life. This enriching, at times arduous and occasionally frustrating experience would not have been possible without of the support of the “superhubs” of my own life.