The Financial Values Crisis – is the World Economic Forum the place to begin fixing it?

A new study from the World Economic Forum has found:

* Over two-thirds of people believe the current economic crisis is also a crisis of ethics and values.
* The poll results point to a trust deficit regarding values in the business world.
* Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, said the report underlines the need for a set of values around which our global economic institutions and mechanisms of international cooperation must be built: “Our present system fails to meet its obligations to as many as 3 billion people in the world.

The first thing to understand are the values that are already embedded in our current money systems, credit ratings, and corporate governance frameworks. The following is excerpted from Lifeworth’s last annual review.

“Credit ratings agencies took some heat for an apparent lack of rigour in their valuation of complex derivatives. Developments in accounting, with the introduction of mark-to-market or ‘fair value’ approaches, facilitated a global-market group-think of ‘it is valuable because many of us think that many other people think it is valuable’. The credit ratings agencies are involved in a process that sociologists call ‘social construction’, i.e. where assumptions, beliefs and norms are constructed by people and organisations in society. The larger and more famous the ratings agencies, the more authoritative their ratings are and the greater impact on perceptions and thus of the market price of what they value. Thus within the current system there is an implicit value in play—that might is right. The socially constructed nature of financial markets was discussed at length by financier George Soros. Yet he did not articulate a value basis from which such processes could be more accurate and beneficial. Sociologists and stakeholder dialogue experts have different views on how a socially constructed concept of something’s nature or worth can be made legitimate and effective, with some advocating forms of ‘communicative action’ in the process as a way to achieve a participatory and intelligent view of phenomena. There is no such ‘communicative action’ in the valuing of assets in the financial markets.

Perhaps the underlying reason for this situation is a lack of sociological and political-historical understanding within the financial services sector and its regulators. Finance services professionals, like most people, are naturally competent in objectivist or positivist approaches to understanding reality, and so, when they work in fields that are relativist in their nature, they are not at ease with exploring how we might wish to shape the ways in which we decide what the value of something is, and so just fall back on mob rule—where something is valued according to the sum of the views of the most powerful. If we are explicit about values, then we might seek a credit ratings system that allows new entrants, balances views, moderates the influence of strategic commercial self-interest and seeks to arrive at socially beneficial forms of valuation, such as using a five-capitals model of valuation.28 In this way the financial system might be able to learn something from the corporate responsibility community. A lack of political-historical understanding also contributed to the problem, according to Harvard historian Niall Ferguson. He said that most people in the industry and its regulators do not have memories stretching back before the 1980s, so they do not understand how financial systems have evolved over time and how they can collapse.29…

….At a time of crisis it is natural to look for a quick fix. Yet, once the gold dust settles, it is clear that deeper questions must be asked, and discussed by a broader range of people than international financial institutions and the finance ministers of powerful nations. Any economic historian will tell you that ‘moral sentiments’ precede ‘the wealth of nations’. We should be considering what values we want to further through the design of financial systems. Being clearer about the values embedded within and furthered by the current financial system, and whether that’s suitable for this century, would be a good start. Steve Waddell, of the Global Finance Initiative (GFI), said, ‘although stability is clearly the major concern, there are also significant concerns about the social and environmental impacts of finance. Indeed, increasingly there are suggestions that stability cannot be realized without more categorically considering these broader impacts. There is no formal, open and inclusive public space to develop a global strategy to address these concerns.’42 Along with the Network for Sustainable Financial Markets,43 the GFI is one of a number of initiatives of progressive professionals thinking big on the future of finance.”

The World Economic Forum has played a useful role in raising this debate. But is it the one to convene it? This from the last annual review from Lifeworth:

“The World Economic Forum (WEF) likes to think it is the leading intellectual forum on the world of business. As the financial system unravelled, their minor mea culpas mixed with ‘told you so’ was particularly revealing. In interviews with Bloomberg, leading staff at the WEF said ‘chief executive officers who gathered in Davos, Switzerland, over the last five years didn’t listen to warnings from their peers. Davos organizers also say they failed to play tough with the financial-industry bosses, opting to accept their funding and let them turn Davos into a rave-up for Wall Street excesses.’62

Leaders of the Forum have been putting their failure down to excess, rather than principle. ‘We let it get out of control, and attention was taken away from the speed and complexity of how the world’s challenges built up,’ said its founder Klaus Schwab. If not as much money had been taken from Wall Street speakers at Davos, would the WEF really have been much smarter? Hardly. The lesson is that an institution that pays its bills by convening the world’s largest companies to entertain them at high-powered meetings will be beset by systemic sycophancy. Some WEF staff complained that delegates did not listen seriously to helpful sessions on emerging bubbles. But what do they expect when you are in the Alps and Angelina Jolie might be at the bar? The hubris of the Forum is that they see themselves as an emerging power in global governance as significant as the UN. Yet it would be a truly crazy planet if the world’s largest corporations would be able to set the agenda for policies across the world.

A Davos delegate for seven years, the World Bank Director of Governance and Anti-corruption, Daniel Kaufmann, warned finance bosses ‘about global risk and the abusive nature of their actions, but they had no incentive to change . . . why should they have listened to us? I see it with my 10-year-old daughter, who scolds me because I don’t put the garbage in the correct bin. Let’s not delude ourselves. It’s impossible to teach old dogs and investment bankers new tricks unless you change the incentive structure.’63 This implies that if one is truly committed to improving the state of the world then one must reach out beyond the old dogs and fat cats. More than that, you must seek to be accountable to others. Perhaps if the WEF had listened to the protesters outside their luxury hotels, rather than their hand-picked corporate-sponsored NGO leaders, they might have developed a better sense of the state of the world. The WEF staff mistakenly thought such protests were about specific social and environmental concerns, which they could then effectively incorporate into the agenda. Other staff realised that the criticisms were of an economic kind, particularly as the alternative World Social Forum developed. They thought it was a disagreement about which economic theory was best to encourage social development. But the protesters do not challenge what the WEF delegates believe in, but rather their legitimacy to decide for others.

That message has not sunk in. For 2009, Schwab says his goal is to transform Davos into the ‘Bretton Woods of the new millennium’,64 a meeting targeted at establishing a fresh set of global rules for commercial and financial relations, much as the original Bretton Woods conference in New Hampshire did in the summer of 1944. Doing that in their current form, with their current membership, is bound to cause deep concern across civil society. The World Economic Forum might soon find that not only were they the greatest fans of the Emperor’s new clothes: they were those clothes. For the WEF to avoid being an intellectually insubstantial adornment to power, it will need to reconsider its membership structure and its approach to dialogue. This will become even more important if its Global Agenda Councils, which met for the first time in 2008, are to play a useful role in informing how we tackle global challenges.

Sections excerpted from Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines.
References and page numbers are available in the pdf download and hardcopy.
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An article on WEF’s study is at Article Link:

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