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Can Wall Street Be a Force for Social Good?
In his new book, JC de Swaan proves finance careers can succeed while keeping the collective interests of society in mind.
If you’ve ever watched a Hollywood movie about finance — like The Wolf of Wall Street or The Big Short — you’ve seen plenty of corrupt, money-hungry bankers and brokers. Those stereotypes exist for a reason, particularly after the Great Recession. But in his new book — Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry from Cambridge University Press — de Swaan, a partner at Cornwall Capital and lecturer at Princeton University, provides a framework for a more virtuous financial industry, where banking and investing are “a tool to address social and economic problems.”
Wall Street has earned a poor reputation for many Americans. Why do you think that is?
“I would start by saying that finance is a force for good in society in that it fulfills a fundamental role in our economy and it has various positive indirect impacts, such as boosting economic growth (up to a certain level), promoting entrepreneurship, and accelerating the rate of innovation.”
“But it’s also the case that it has earned a bad name over the years by moving away from its client-serving mission and from its singular focus on supporting the real economy. That is not true of all of the industry – in fact, I would argue that much of the industry is on the right side of the ledger, but there’s a large part of the industry for which it’s a question mark.”
“The relentless focus on short-term profits is at odds with the patient, solicitous handling of customers that is necessary to foster long-term, customer-centric relationships. There is also a fundamental conundrum that the industry doesn’t reflect on enough: that financial firms can serve their customers well, and thus fulfill their primary professional mandate well, but do so by extracting value from the rest of society.”
What is your definition of a virtuous finance professional?
“In a nutshell, they serve their customers’ interest faithfully, even when no one is looking; they avoid extracting value from society, even if it would have contributed to advancing their customers’ interests; they treat their colleagues with dignity, help develop them, and promote diversity within their organization and the industry; and they use the skill set and networks they acquired as finance professionals to contribute to society outside of their professional mandate.”
Why did you write this book for your students?
“Dividing my time between working in an investment fund and teaching, I’ve found that most of my students are keen to work in finance but concerned about being corrupted the minute they walk into their first job. I created a course on ethics in finance that seeks to address these issues.”
“Halfway through the first semester, one of the students asked me why we focused so much on unethical rather than constructive behavior. She was right! So in addition to parsing out the drivers of the industry’s conflicts of interests and excesses, I set out to identify remarkable individuals who counter the narrative of badly behaving, self-serving finance professionals, and the project turned into a book.”
Are you optimistic that finance will become more virtuous in the future?
“Younger people have the benefit of using the book’s framework to pick their spot in the industry so that their desire to contribute to society is most naturally aligned with their chosen firm’s goals. While more established professionals will already be ensconced in a part of the industry, they might benefit from having developed a skill set and track-record that gives them internal credibility to question norms or to devote part of their time to activities that either move their firm in the right direction or advance one of the firm’s pro-social goals.”
Are any financial institutions already operating virtuously?
“Vanguard stands out in my mind. Since its founding by the late John Bogle, it has had a singular impact on the industry, moving individual savers away from high-priced actively managed funds to low-cost, passively managed funds, while putting pressure on the entire industry to reduce its costs as an intermediary.”
“Many other investment firms merit our attention – for instance, Dodge & Cox, a San Francisco-based asset manager which has foregone marketing to devote its resources to its investment function and reduce the costs it passes on to its customers.”
“At times, virtue is defined by what a firm decides not to do – for instance, Minneapolis-based US Bancorp stood out in the run-up to the global financial crisis by going against the grain of the US banking sector at a time of exuberance and high growth, US Bancorp chose to maintain relatively conservative leverage and to forego pursuing opportunities in the subprime loan market.”
What is the relationship between virtue and success in finance?
“I wish I could say that being more virtuous will make you more successful in the industry, but I don’t know that to be the case. There is some evidence, from Wharton’s Adam Grant, that business people who reciprocate by helping others without expecting anything in return can do better than those who simply look to match what help others provide or those who try to extract more than they give.”
“But there is also plenty of evidence that many of those who rise to the top are self-serving. My contention is that you can succeed while contributing to society and maintaining your humanistic values. I also believe that the younger generation of finance professionals, who have been marked by the Global Financial Crisis, have shown greater interest in harnessing the power of finance to remedy society’s ills and affect the dynamics of success for the better.”