Ethical Performance
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editorial

Corporate social responsibility and the global financial crisis

October 2008

The credit crunch has exposed one of the greatest pieces of corporate social irresponsibility ever. It has revealed flaws not only in the banks, regulators and other actors directly involved, but in the entire financial system and threatening the wider economy. Laid bare are issues at the heart of business practice.

Accountability – who bears responsibility for the crisis? Governance – what procedures would minimize the risk of it happening again? Regulation – what is its role in the oversight of financial institutions? Transparency – the crisis owes its magnitude to the fact that almost no one understood the nature of the investment products being traded, not even their originators.

Demands for more regulation are unsurprising in these circumstances. To what extent regulation can enforce greater corporate responsibility is another matter. Regulation is intrinsically inimical to CSR, which is essentially a voluntary activity, and regulation doesn’t have a good record for effectiveness in complex areas. What’s more, regulation is informed by what has already been experienced; legislating for what is around the next bend is far trickier. All that can safely be said at this stage is that however much regulation increases, there also has to be more self-regulation. It cannot just be one or the other.

This is not to say that the voluntary approach always works. Take executive remuneration. Various schemes, from share options to deferred bonus arrangements, have sought to align the interests of owners and managers on a voluntary basis. All have their problems. But hard-and-fast rules on, say, bonuses are no solution. Remuneration consultants are as ingenious as the creators of structured investment vehicles and will devise novel reward packages to evade legal obstacles. It’s primarily up to investors to watch out, as they must on other governance issues.

Clearly there needs to be much greater oversight of financial services companies. Yet new laws alone, no matter how draconian, are unlikely to have the desired effect. Much better to maintain, where possible, principles-based regulation on a comply-and-explain basis.

Comprehensible explanations are central to accountability. The credit crisis arose in large part because the financial instruments devised were so fiendishly complex that they amounted, in the words of one commentator, to instruments of deception. Their lack of transparency played a key role in the collapse of markets. That vital ingredient of good business – straightforwardness – was absent. However, you cannot coerce people into being straightforward. It requires cultural change within organizations – an area in which corporate responsibility practitioners have particular expertise.

For now, attention is focused on resolving the immediate crisis. Long-term and even more profound challenges, notably climate change and the poverty gap, recede into the background. And as one of the effects of the crisis, cost-cutting becomes the order of the day. All activities feel the pinch, including CSR departments. But when the crisis eases and fundamental issues return to the fore, the debate will take place in an atmosphere of deep distrust of business. At that point, CSR expertise and experience will be needed. The credit crunch has put the accountability of business in the spotlight as never before.




Peter Mason | Global | Financial Crisis

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