'The White Swan Formula - Rebuilding Business and Finance for the Common Good'

Introduction

The economic tsunami of recent months has knocked the tiller out of our hands. We are only now beginning to pick ourselves back up. As we do so, we are left wondering whether the tiller we had been holding had been connected to the rudder. We are questioning the direction in which we should now be headed, and we are wondering how we should now trim our sails.

A dialogue has started, and it is my hope that this paper will contribute to the discussion.

We can, and must, regain our intellectual confidence that ideas matter, and that through ideas which are good, we can bring about change for the better.

For me, one key lies within the concept of 'business for the common good', based on a clear and shared set of common values, worked out and applied in practice by all of us.

This paper argues the case for 'business for the common good', and suggests some values around which a new consensus might now be built.

We know we should not go back to how things were before, although the danger remains that we will. Let us be honest enough to examine the personal shortcomings and structural difficulties that had locked us into a system that did not deliver. We can no longer allow the system to drive our values. Our values must now drive the system.

Good business will not answer the world's problems, but we will struggle to solve the problems of the world without it.

Let us be courageous enough to change.

1. A Humbled Model

The Western economic model stands humbled by events.

Seldom have our financial markets been so close to collapse, or our institutions lost so much value and trust. Seldom have so many individuals and businesses faced such an uncertain financial future. Seldom have our Governments had to borrow such vast sums to fight the fear of an economic depression. There are widespread redundancies in China and the rest of South East Asia as demand for manufacturing dries up. And we know that amongst all the technicalities, there is significant and real personal pain.

The World Bank estimates that the credit crunch will lead to a 50% cut in capital flows to the developing world, and a dramatic increase in infant mortality. The Millennium Development Goals have never looked so in jeopardy. According to some sources, financial assets worldwide have fallen in value by an extraordinary $50,000 billion, and this is before one counts the cost of what the coming years will bring. Huge and prolonged fiscal deficits, a worldwide recession, a resurgence in inflation and unhelpful protectionism are all now on the agenda.

Who knows what strategic global challenges will follow from a weakened United States, a reverse in economic liberalisation in China, a correction in trading imbalances between East and West, and a variety of failing states continuing to be locked in poverty?

Not surprisingly, we want to know who is to blame. In fact, few of us are immune from responsibility and it is a mistake to pick out one sector of society as a convenient scapegoat.

Businesses and consumers, particularly in the US and the UK, have indulged in a spending spree of unprecedented proportions on the back of borrowed money we could not afford. To give one example, the amount of UK mortgage borrowing used for purposes other than home buying more than doubled between 2001 and 2007, and by the end of that year stood at significantly more than the total amount used for buying homes. In other words, we have been mortgaging our homes to consume and to speculate on buy-to-let properties.

Political careers have advanced on the promise of never-ending growth. Institutional and retail investors have demanded impossible returns without regard to the consequences of doing so. Fund managers have not been diligent. Credit rating agencies have not been fit for purpose. Accountants have judged form rather than substance. Lawyers have not seen the wood for the trees. Regulators have missed the ships passing in the night. Banks have fuelled irresponsibility on a breathtaking scale.

It is true that our personal and national finances have been buffeted before. Stock market crashes are nothing new, and certainly in the UK we have survived a boom and bust economy many times in the past.

There is a feeling though that this time something is different. It is not often that quite so many of us have failed to make the right choices, and seldom have so many failed - quite so comprehensively - the test of both character and competence.

But in addition to counting the cost, we also need to look ahead. We need to consider the lessons arising from the crisis, and we need to decide how we are now best going to build a prosperous and sustainable future for all of us.

2. Lessons

We have learnt some important lessons. Together, these are a profound shock to the philosophical and economic assumptions that have underpinned the West for the last 25 years.

1. We are more prone to temptation than we thought. If left to our own devices, we often do not behave either rationally or well. Deregulation has proved unwise.

2. However, regulation alone is not sufficient. Passing more laws does not deliver responsible behaviour any more than it delivers profitable business.

3. We are not as clever as we thought. We have created structures we do not understand and cannot control, and we have realised that the future is more uncertain than we imagined.

4. The prosperity of each of us is more connected to the well-being of others than we thought.

5. Maximisation of shareholder value as a strategy for business has contributed to the problem, not solved it.

6. The market does not protect us from disaster and, when economic shocks do occur, the market will not save us.

These lessons have left us in uncharted waters with no reliable means of navigation. They have ignited, for the first time in a generation, real interest in discussing the best principles upon which to base national and international business and finance.

The UK's Financial Services Authority has recently published the Turner Review, its regulatory response to the global banking crisis. The report openly questions the fundamental theoretical basis of global capital markets along similar lines, and deliberately leaves these questions unanswered.

3. The case for Values

It is clear that we need regulation that is more shrewd, nationally and on a globally co-ordinated basis, and we certainly need strong and flexible public and private institutions.

It is my conviction, however, that our problems are in reality human, not technical. They are philosophical and psychological, not regulatory or economic. Both the reason for our past difficulties and the solution for the way forward can, in my view, be found in one simple word: values.

It is my belief that it will only be through rediscovering our time-honoured values that we will rebuild our confidence in doing business with each other; and that it will only be through rediscovering our ancient paths that we will rebuild not only our own prosperity, but also the prosperity of those who depend on us.

It is no longer enough - as so many may have been doing for so long - merely for us to operate honestly within a system that has lost its direction. We now need to mould the system itself so that it increasingly reflects the values to which we aspire. It will be tough to achieve this. No-one is in doubt about the size of the challenge. The danger is that we return to our old habits of asking the Government to solve our problems, or not truly learning from any of the other lessons mentioned above, including that regulation is ineffective and costly, and restricts, rather than encourages, helpful innovation.

Values, on the other hand, do two things.

First - over the long-term - the economy of a country whose business is based on sound values will be significantly more healthy than the economy of a country whose business lacks a strong, values-based approach. Through positive values, the fairness, sustainability and communal well-being of a country is enhanced.

Second - over the long-term - business is more profitable if it takes a values-based approach to setting its objectives and managing its operations.

More rigorous recognition and avoidance of conflicts of interest would have delivered better alignment of risk and reward. More courage would have enabled more challenges to conventional herd-like thinking. Less aggression would have permitted managers to listen more attentively to contrary views. More humility would have produced better risk management. Better perspective would have assessed risk with more clarity. More restraint would have led to better investment decisions. A longer-term view would have delivered less volatility.

At the end of the day, risk is a decision; it is not a mathematical formula, and it is a decision best not taken by the arrogant.

All of these are, fundamentally, human factors. It is values which are the birthplace of good judgement, and to regain these values, we will need to rediscover something of our humanity.

There are those who believe that it is only leadership that brings about change. And there are those who believe that it is only grass-roots movements which in the end endure. We surely need both. All of us need to adopt in our personal and in our business lives a new set of values of which we can be proud.

There will always be cynics who prefer pragmatism to principle; who will assess short-term income and not long-term value; and for whom personal and business finance is no place for ideals. That is their choice.

I am reminded, though, of a man named Samuel Budgett who, in the early part of the 19th Century, became known as 'The Successful Merchant', having built one of the largest businesses in Britain. After he died, a biography was written of his life, charting the way in which he had applied his values to both his business and his personal life. Samuel Budgett had learnt that good values were good for business, allowing him to follow the encouragement of that great Methodist John Wesley to 'earn a great deal, save a great deal and give a great deal'. The book became a best seller, and helped change the way in which the Victorians did business. We in Britain still live in the light of that inheritance.

However, before we look at what some of these positive values might be, let us first consider six wrong-headed notions that have grown and confused us over the last 25 years.

4. Wrong-headed Notions

The first is the myth that the market provides a substitute for morality.

The credit crunch has proved that in fact the opposite is true. The market cannot function if not based on mutual honesty and trust. Banks do not lend to other banks they do not trust. Take another example: the securitisation market. This market has become so overly complex in terms of information and structure that it is now well nigh impossible for an investor to judge either the risks he is taking, or where he should place his trust for particular aspects of the transaction. This is why the securitisation market has now all but ceased to exist.

Neither Government regulation nor commercial contracts can span the chasm caused by a gap in values. The market needs morality.

The second misunderstanding is that since business depends on profit, and profit depends on self-interest, morality is the enemy, and not the friend, of business.

This mistakes both the moral nature of self-interest and the moral nature of profit. The choice between profit and service is a false one.

All of us, including those in the public sector, work for a profit to provide for ourselves and our families. In doing so, we contribute to our society by paying taxes, and by providing our communities with services and products. And we relieve the state from the burden of our care. There is everything moral in that exchange.

In addition, it is clear that the mere redistribution of existing wealth is no long-term answer to the poverty that still besets the three billion people, almost half the world, who live on less than $2.50 a day. As the Pope said in his recent New Year message on the importance of economic development in creating peace, 'The creation of wealth is an inescapable moral duty'. So, a wrong response to the credit crunch is to decry business in general, or finance in particular.

The creation of wealth is for many in the West both a duty and a pleasure. For many elsewhere, it is a pressing necessity. The investment of capital or labour to earn a reward is one of the bedrocks of creating a civil society. We can celebrate those who take entrepreneurial risks in order to build successful businesses. Life would be the duller, and we would all be the poorer, without those whose passion it is to create wealth. And a dynamic and thriving financial services sector - including an element of merely financial trading in order to provide liquidity - is an essential part of a dynamic and thriving economy.

The third wrong-headed notion is the myth that obeying the law is a substitute for morality.

We may prefer legal compliance, since that absolves us from responsibility. Compliance then becomes the only limitation on conduct and therefore on conscience.

But legal compliance is not enough. We have been making the same mistake with credit control. We have been assuming that any business that passes the credit risk test is good business. Business is not profitable or healthy just because it is allowed.

Values, on the other hand, operate as an ever-present plumb line, reminding us of dead centre. Values do not legitimise a creeping movement from precedent to precedent as one drifts away from true north.

Values are the spirit, not the text, of the law. Values inhabit the space that lies between the regulations.

Fourth, business has become increasingly de-personalised, and when relationships are de-personalised, values appear to be less important. Appearances, however, are often deceptive.

The efficiencies of scale and depth provided by modern capital markets are undeniable. But the limited liability company, the move to screen-based trading, and the selling of consumer and corporate debt across national boundaries have made it difficult to keep in mind the human beings at the end of these long chains of commitments.

We should remember that a business has no real existence. A company is only a construct of convenience of creative imaginations and legal propositions. In reality, there are only human beings, trading with each other, albeit at a distance.

Indeed, recent events have given us an object lesson in the correlation of risk. We had assumed that we could diversify risk by diversifying our investments. To our shock we have discovered that all of our investments, and indeed all of our livelihoods, are in fact connected. We can now see that all of us are neighbours of each other.

It is no longer enough to say that a lawful trade between consenting adults is only their affair. We can now see that an accumulation of lawful trades can in fact add up to systemic risk, and unforeseen consequences, that endanger all of us. And we have seen that the money we lend wrecks lives if we do not lend responsibly.

I may not be my brother's keeper, but he is my neighbour.

Fifth, we have forgotten that good values are good for business.

The evidence demonstrates that it is quality goods and services, at reasonable prices, that deliver a continuation in sales, and that it is inspirational leadership and positive management that releases the creative energy of employees and builds a culture of loyalty. These values deliver immediate and tangible benefits to the bottom line.

Lastly, we have accepted the wrong-headed argument that economic growth must silence all other voices.

But only a moment's reflection tells us that a life based solely on the accumulation of money is a life not worth living. In fact, research demonstrates that despite our huge economic growth since the Second World War, happiness in the UK has not risen, and that our children are some of the unhappiest in the Western world.

We are familiar with the concept that medical ethics needs to keep pace with advances in medicine. Put simply, the quality of our economic and business values has not kept pace with the sophistication of our finance.

5. Which Values?

What are these time-honoured values on the back of which we can build business for the common good?

Let me mention a number, and no doubt many more can be added.

Some of them are so obvious one may wonder why they need to be mentioned. But as we pause and reflect on where we have been over the last 10 years, we will quickly realise how far we drifted away from them - and the size of the challenge we now face in returning to them.

It may be helpful, as we consider the list, to evaluate how far we put these into practice ourselves, in our own business lives, how far they are adhered to by the organisations for which we work, and how far they are adopted by the businesses in which we invest.

The bullet list at the end of this paper provides some detail, but the crucial values can be summarised under the following six headings:

- Service
- Stewardship
- Relationships
- Integrity
- Responsibility
- Endeavour

When a business is too big to be managed on the basis of these and similar values, it is time for a demerger.

This is not just soft-focus idealism. Abandoning these values produces very real and hard-edged costs. And, in the long run, it is no kindness to the individual, to his or her employer or to the tax payer to ignore them.

The following provides some examples.

It was the drive to produce immediate yield, in order to boost share prices, that drove many banks to prioritise short-term revenue generation over long-term asset value. And it was their desire to extract profits, rather than serve their customers, that has destroyed the trust that we previously placed in their hands.

A business that looks first to serve its own interests will not endure; and a business that imagines it operates in a vacuum, separated from the well-being of its customers, will sooner or later meet its nemesis. Commerce that seeks to extract maximum advantage, leaving no profit for others, eventually becomes self-defeating. It neither serves nor promotes the advancement of those upon whom, in the end, it depends.

So let us set aside any financial services business model that uses the real economy merely as a source of funds for its own endeavours, and let us recreate an industry that serves the creation of wealth in the real economy.

The strong individualistic culture within our financial institutions, in place of a culture of mutuality, contributed significantly to their troubles. Traders traded against their employer, rather than just the market, in order to earn bonuses. Their motivation was individual, not mutual. We need to redress the balance of interests between the individual and the group, and give up our faith in targets as the only appropriate way to motivate and encourage.

We need to place a high value on individuals, not stoop to utilitarian human resource management. For a while, one of the top European banks had as its strap line 'Success demands more'. That produced a relentless and aggressive management culture. A culture that could not learn from mistakes, because mistakes could not be discussed; a culture that had no judgement because it was too over-confident that it could model the future; and a culture that had no perspective because it was simply exhausted.

Having a high value of people must be the overriding value that determines relationships between us. We must deal with each other, even in the tough times, with respect and kindness and with a real regard to the advancement and happiness of individuals, their family and their communities.

If we reduce these relationships down merely to the commercial bargain of wages for labour, we treat each other merely as machines. If men and women see themselves as used, but not appreciated; employed, but not encouraged; required, but not wanted, neither they nor their employer will in the end flourish or contribute to the common good.

We must maintain the critical distinction between resources and employees. Resources may be assets, but employees are fellow human beings, brothers and sisters for a while on this earth, who have a claim on the best of our attention.

Not all business is good business; and it is not only unjust, but also in the end costly, for investors to demand profits delivered by murderous hours.

There is a price to pay for ignoring values.

6. Engaging with Values

The problem with values is that they offer no tidy prescription to heal our woes. They provide no neat, ordered system. Values seldom provide absolutes, often compete and usually need to be prioritised. Values do not tell us what to do. Instead, values leave us with the responsibility of making choices between alternatives.

Values can be elusive. They require effort and creativity in how one interprets them. Values provide direction and momentum, not answers or solutions. They have an edge that dissects complexity, and reveals reality.

Values require personal engagement if one is to understand their meaning and appreciate their worth. Values are rarely understood properly until first applied personally. They need to be practised in the small things in life if they are then to be trusted in more difficult times. Values often involve swimming against the tide. Values do not pander to pleasure, nor do they avoid pain. Values need courage, and often require a sacrifice of short-term reward in favour of long-term benefit.

But values do provide purpose, meaning and inspiration.
In the end, though, values are not about what you do. They are about who you are, and who you will become.

7. Promoting Values

How do we promote these values to which we aspire?

The following makes seven practical suggestions.

First, let us not rush past the moment in which we now stand. We will not learn lessons unless we engage fully with the consequences of our mistakes. A key part of that is a proper engagement with the pain caused by our shortcomings.

For too long, for example, the financial community has denied responsibility for the effects of the capital that it raises and allocates. So let us pause, and recognise the personal and financial pain, close at hand and further afield, caused by this crisis.

Second, we must determine to understand and apply these values ourselves. Unless we personally seek to serve, rather than be served, we will simply be hypocrites, and our arguments will remain hollow. Each of us needs to believe that these values work in practice for us individually, as well as for others, and then act accordingly. We need, quite literally, to put our money where our mouth is.

Third, we can join the debate and make our contribution. Everywhere the question is being asked, 'What sort of economy do we want?' Let us engage in the discussion. We must not be satisfied with conventional wisdom that says change cannot happen. It is better to blow the trumpet beforehand than reach for the whistle afterwards. Let us be for something, not just against something. One can never tell when the tipping point of opinion will be reached, and without the last straw the camel's back remains intact. The discussion is needed on multiple levels, whether in tackling global issues, or the culture within our local workplaces.

Fourth, we can support policies and practices, no matter what their origin may be, that reinforce our values, and we can challenge those which do not. We can critically examine our culture, our systems and our products, and discard those elements found to be wanting. For example, a credit default swap can have some bizarre and unintended effects. It can encourage a lending bank to force its customer into insolvency, since more is to be gained from collecting on the CDS than from staying with the loan. If the cost to society of the CDS market outweighs its benefit, let us be bold enough to limit it to its original purpose.

Fifth, we can encourage and invest in alternative models of doing business that are more aligned with good values, even if they have not yet become the dominant form. It is often the small models that speak volumes to their larger rivals. We can use our resources to build the capacity of others and increase the wealth of society, rather than seeing our wealth merely as a storehouse for ourselves.

Sixth, we can be radically, but thoughtfully, generous. Justice has always required that we keep before us the objective of promoting a society that provides opportunity for the hard working; consequences for the idle; and support for the needy. This is a tricky balancing act, even at the best of times. The ancient Israelites were given some interesting instructions to assist with this timeless conundrum. Mostly these were to do with preventative justice, to stop economic unfairness before it occurred.

However, the instructions also recognised that, once in a while, something more radical would be needed to deal with the cumulative misfortunes that would inevitably build up over time and consign succeeding generations to inescapable hopelessness. Some element of corrective justice, of collective and targeted generosity, was required for the long-term common good of society as a whole.

Let us, similarly, now be radical with our giving and structural reforms, not through easy donations to celebrity causes or unthinking aid that simply reinforces donor dependency. Instead, let us unselfishly change those wealth structures that work against the interests of the poor, and let us invest our giving in building long-term capacity.

Finally, we can challenge and change our addiction to debt. There is no doubt that debt can be beneficial. The discipline of debt produces efficiencies and cost reductions from which we can all benefit. And it is marvellously efficient at allocating capital and financing innovation. But debt has some challenging consequences individually, corporately and nationally.

Debt feeds the desire for now and finances impatience. It allows growth that is not matched by maturity and gives us permission to live beyond our means. It makes possible an unhealthy level of consumerism and leaves our children with the burden of paying for our excesses.

Debt reinforces poverty for those unable to make repayments, results in a transfer of wealth, from poor to rich, when justice might require payment flows in the opposite direction Debt fuels the unsatisfying spiral of anxiety and consumption. It increases economic instability, a storm that can be weathered by the rich, but not by the poor, and is inherently inflationary.

Debt is a hard task master at the best of times, but in times such as these, it provides ample space for extortion and profiting from the misfortune of others, as loan sharks move in on individuals, or businesses face unreasonable fee and margin increases to renew their credit lines, assuming that finance is made available at all.

Unlike equity, debt will insist on its pound of flesh. Equity, by its nature, shares risk and reward. Debt insists on repayment, even when mercy would dictate otherwise. Debt narrows relationships down to mathematics rather than shared endeavour. And by not sharing risk, at least not intentionally, debt does not help to build mutually constructive, two-way relationships, based on track record, trust or common purpose.

Let us re-examine the social cost of debt, and discuss some more appropriate limits.

In the meantime, let us rid ourselves of our own personal debt mountains.

Let us also look long and hard at solutions to the current crisis that simply try to return things to how they were, at least for those of us in the West, by borrowing more and saddling the next generation with the burden of paying the price that we decided not to bear ourselves.

8. Conclusion

Laissez-faire capitalism, riding the wave of deregulation, looks to have been badly damaged beneath the water-line, despite the undeniable benefits that it has delivered for millions.

A conversation has begun about the best form of capitalism to pull us out of our current doldrums and set us on a new course for the future. Maybe many new forms will emerge and co-exist.

In the UK, we already have much to be thankful for. We remain one of the richest, best educated and creative nations in the world. Let us now discover how best to deliver business for the common good; business that prospers through focussing on service rather than self, based on mutuality not individualism, and on creativity not speculation.

G20 summits and increased regulation cannot, and will not, deliver business for the common good. The personal decisions of each of us can.

There is no given path for what happens next. We have no divine right to a comfortable future. The future is what we, with God's grace, choose to make of it. We can, as individuals and as businesses, continue to choose the road of self that, as we have seen, eventually leads to nowhere. Or we can together engage in business for the common good.

On the foundation of the values that underpin business for the common good, we can have a hope that is not misplaced optimism.

Business for the Common Good (List of Values)

• Service before self
• Long-term value before short-term share price
• Real economy before financial economy
• Substance before sales
• Mutuality not individuality
• Stewardship not exploitation
• Profit not plunder
• Fulfilling duties before limiting liabilities
• Responsible conduct not over-trading
• Accept responsibility not avoiding consequences
• Investment before speculation
• Relationships before rights
• Rhythm of success not ratchet of demand
• Honesty not conformity
• Respect for individuals not utilitarian human resource management
• Effort before reward
• Loyalty before mobility
• Reward aligned with risk
• Humility not over-confidence
• Thrift before ostentation
• Consistency between private and public lives
• Probity before philanthropy
• Integrity not legalism
• Saving before spending
• Equity before debt
• Maturity before growth
• Competition not aggression
• Support for recovery not profiting from misfortune
• Community before conflict
• Fair reward not inflated demand
• Truth not equivocation
• Clarity as well as transparency
• Perspective not immediacy
• Collegiate wisdom not ego satisfaction
• Courage not passivity
• Restraint not greed
• Shrewdness not naivety
• Character before ambition

Join the Discussion

If you would like to comment on this paper, or debate the issues raised by it, you can do so below.

We would particularly welcome your thoughts on:

• the values needed to shape business for the common good
• the specifics of how these values might be applied in practice
• the structural problems that we need to overcome in order to deliver business for the common good

James Featherby

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