Heeding the Outsider in Market Reform
Every year in mid-October, I get together with a group of girlfriends to celebrate another anniversary of “The Crash.” Surely, as women now well into the “Red Hat” stage of life, we could find more meaningful anniversaries to mark than October 19, 1987. But we don’t.We love celebrating Black Monday, the day the Dow Jones Industrial Average dropped 508 points.
Way back when, a sisterhood was impossible to avoid in the financial world: we were four of the pitifully few women recruited by our venerable Wall Street firm in the early 1980s. To our more seasoned male peers, our approach to the serious business of Wall Street was naïve. Along with the usual financial credentials, we brought other skills too, like new ideas of service. We believed service should mean asking about our clients’ needs before introducing a great new product – a notion that was considered ever so quaint.
In many ways the four of us had very different perspectives on life. We did not share a common political point of view or one particular faith tradition. There was a twenty-year range, a generation in fact, in our ages. We seemed to defy the usual predictors of friendship. Yet we were united in our belief that we could thrive and prosper in this strange new world. We came to the work with self-consciously different values from our male colleagues, and we enjoyed the freedom of outcasts. The dominant culture in the office was transaction-driven, which sometime led to service. Our focus, and what ultimately linked us together, was to be of service to clients, which sometimes led to transactions.
Puritans and Profits
At the New Haven branch, the office spaces reserved for the firm’s highest producers looked out on the town green, which was completed in 1638. The Puritans were said to have designed the green large
enough to hold the 100,000 people who would be spared when Christ returned for the Second Coming. In the blessed world of high finance, however, we ladies were not exactly among the anointed. On good days we were frequently reprimanded for sounding like “Girl Scouts” – and reminded that “Girl Scouts would never make any money.” On the not-so-good days, our colleagues would condescendingly suggest a career change: we should consider taking religious vows. They thought our penchant for service might be better suited for religious life, remarking, “Nuns worked in schools and hospitals, not in brokerage firms.”
In 1999, after considerable lobbying by the financial services industry, the Glass-Steagall Act was repealed, and the wall fell that separated the activities
In the blessed world of high finance, we ladies were not exactly among the anointed.
of investment banks from those of commercial banks. The industry began consolidating, and my firm was well on its way to becoming an institution “too big to fail.” The speed and complexity of the market’s new technologies made it harder and harder to maintain any spirit of personal service to clients. Now in New York, I decided to leave the industry and my office in the World Trade Center in June of 2001.
All in all I spent seventeen years on Wall Street, building a roster of individual and institutional clients and ending my career as a “Large Cap Value” investment manager. By the time I left “the Street,” nearly all my clients were churches or other organizations in the business of social justice. Six years later I joined the Interfaith Center on Corporate Responsibility (ICCR) as its executive director, with offices on New York’s Upper West Side.
Founded in 1971, the ICCR is today both the oldest and the largest coalition of global faith-based institutional investors. For four decades, ICCR and member religious investors – including major Protestant denominations, a wide range of pension funds, Roman Catholic orders, and Jewish foundations – have been the driving force of the Corporate Social Responsibility (CSR) movement. Viewing their role as both financial fiduciaries and people of faith, ICCR members manage their investments with an aim to building a more just and sustainable corporate world.
Apartheid and Beyond
The ICCR grew out of resistance to one of the twentieth century’s great social evils: South African apartheid. In 1971 the Episcopal Church Executive Council
Had the faith-based investors been heeded, the issues they flagged could have been addressed sooner at a far, far lower cost to investors, taxpayers, and society.
asked General Motors to withdraw its business interest in South Africa. Anti-apartheid efforts gained momentum through the efforts of the Rev. Leon Sullivan, a member of the board of General Motors, the largest corporation in the world at the time. More than 100 companies eventually adopted the “Sullivan Principles,” a code of conduct for human rights and equal opportunity in South Africa, and company after company chose to withdraw completely from the country. When apartheid finally ended in 1994, both Bishop Desmond Tutu and President Nelson Mandela acknowledged the role played by faith-based investors.
What started as the Project on Corporate Responsibility under the auspices of the Episcopal Church developed into the ICCR. Today with over 300 members representing well over $100 billion in invested assets, ICCR’s members view their actions as fiduciaries with a very long-term focus. As people of faith it might even be said that ICCR members are investors with the longest possible actuarial assumptions: they extend to eternity.
Peering beyond the horizon is something all financial fiduciaries must do; a focus on corporate social responsibility ensures a certain sort of ethical alertness. The CSR movement has increased corporate transparency and accountability on a range of issues. Faith-based investors have been way ahead on several major issues – among them environ- mental protection, human trafficking, and predatory lending – about which ICCR members were warning financial services companies a dozen years before the economic crisis began.
Ignoring the Plea
The word “prophetic” is not exactly a term you hear every day in the investment world, but faith-based investors clearly acted as an early warning system for financial services companies, identifying the need for full disclosure of lending risk five years before this most recent crisis. ICCR was involved in sixteen actions to address such concerns at Lehman Brothers from 2001 until its eventual bankruptcy in 2008. Since 1993, faith-based investors have led more than 450 actions warning of financial abuses that would eventually destabilize global capital markets to the point of near-collapse in 2008.
Had the faith-based investors been heeded, the issues they flagged could have been addressed sooner at a far, far lower cost to investors, taxpayers, and society in general.
Faith-based investors’ early historic relationship with GM didn’t end with the Sullivan era. ICCR members were actively warning against automotive practices that foreshadowed yet another sector-wide collapse. In 1992, faith-based investors asked GM and other auto companies to investigate improving the fuel economy of their fleet of vehicles. Both as a matter of environmental stewardship and as a practical business model, energy efficiency made sense. Yet most sectors of the American auto industry ignored the plea, and car companies now have entire product lines that are unmarketable. Only one U.S. auto company took our advice, agreeing to rigorous reductions in fleet emission standards in April 2008 – Ford Motor Company, the same company that needed no taxpayer bailout funds in the most recent economic downturn.
Today, Lehman Brothers is bankrupt. GM is struggling to survive. Our venerable Wall Street firm no longer exists. And yet investors who viewed the future through the lens of faith stood at the van- guard of a visionary corporate strategy.
Is there a link? I believe there is. The most successful investors never lose sight of the underlying value of the assets they own. The best investors make judgments regarding how the intrinsic value of assets might change in the future. It is clear that the notion of “value” evaporated in the flurry of transactions taking place in the derivatives markets in recent years. With an incentive structure that is based neither on increased value nor on service but rather strictly on transactions, poor choices are rewarded and then exacerbated in short order. Clearly the moral and structural questions posed over and over again by faith-based investors since 1993 did not persuade the CEO who famously said, “As long as the music’s playing, you’ve got to get up and dance.”1
The best investors understand that human beings run markets. And human beings haven’t changed much since the earliest stories were told. One need not look further than the Old Testament or Qur’an to be reminded of our common and immutable humanity. The ancient stories remind us of the importance of the outsider’s perspective, the importance of seeing “value” from a different point of view.
From humanity’s very beginnings, religious faith and practice arose from posing questions. Where did we come from? Why are we here? Over the millennia, our faith traditions grew out of the stories we told in our attempts to explain the inexplicable. And
Can the voice of faith bring accountability to a system that is clearly flawed?
at pivotal times, just when it seemed that everyone was echoing the same story, an outsider would arrive – Abraham, the prophets, Jesus, Paul – and challenge the prevailing narrative.
It is no surprise that faith-based investors have seen what the larger public missed. Both an outsider’s perspective and attention to the stories that shape human behavior are essential to under- standing value past, present, and future. The best investors understand the role of transparency and accountability in restoring trust. They learn as much from raising questions as they do from hearing explanations from the corporate executives charged with leading their companies. It is the “asking” that matters most.
Grail, not Greed
One old story in particular – the story of Percival and the search for the Holy Grail during the time of King Arthur – might offer insight. In the earliest versions of the thousand-year-old Grail myth, Percival must mature before he can understand that he and the king need each other so they can fulfill their destinies and seek the Grail. To discover God’s grace, symbolized by the Grail, Percival must be brave enough to approach the king, recognize their mutual dependence, and learn that he too can serve the greater quest. People of faith – Percivals of commerce – must do their part as investors by questioning the kings who run the companies and realizing their potential to generate value as fiduciaries.
How then can the “outsider” power of faith institutions be deployed in dismantling the system that brought us to financial crisis? Considering the role churches played in dismantling apartheid, will congregations once again raise a collective voice of outrage to ensure that financial reform will lead to a more just and sustainable marketplace? Can the voice of faith bring accountability to a system that is clearly flawed?
The ICCR and its members are using their voices as asset owners to set new standards for account- ability. Working collaboratively with like-minded organizations, we challenge ourselves and our allies to call for real reform – reform that can bring transparency to the dark corners of financial markets. Through the ICCR, communities of faith act as a beacon, seeking accountability across global capital markets. We remind policymakers and our fellow asset owners that in addition to making profits, the capital markets were developed to enhance human experience and strengthen the global community. The question now is: are institutions of faith ready to question the cultural and economic excesses that led to our financial ills?
This October, the Crash girls will meet again, still grateful for the lessons we learned in 1987. We learned to value service above sheer transaction. We learned the subtle power of the outsider’s voice. As our political leaders and prophets of finance offer plans to reshape and reform the global economy, perhaps they need to reflect on some version of the questions posed by Percival a thousand years ago: “What ails the marketplace? How can our leaders help? And whom does the Grail of capitalism serve?”
Laura Berry, a native of Detroit, worked as a chemical engineer before starting her Wall Street career. After seventeen years as a portfolio manager, she eventually worked at the Community Foundation for Greater New Haven as a vice president. In 2007, she became executive director of the Interfaith Center on Corporate Responsibility.
1 See: http://dealbook.blogs.nytimes. com/2007/07/10/citi-chief-on-buyout-loans-were- still-dancing/