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A Global Publication for Financial Service and Banking Professionals Advancing Moral Capitalism

A Caux Round Table and Convention of Independent Financial Advisers Initiative

Table of Contents Publishers’ Comments 2 Stephen B. Young Global Executive Director, Caux Round Table Jean-Pierre Diserens General Director, Convention of Independent Financial Advisers

Money and Ethical Dysfunction 3 Stephen B. Young Global Executive Director, Caux Round Table

10th International CIFA Forum 5 Convention of Independent Financial Advisors April 2012 Centesimus Annus: 6 What a 1991 Papal encyclical has to tell us today Dr. Thomas A. Bausch Dean Emeritus, College of Business Administration, Marquette University

Good Luck or Good Measure: 11 How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table

Why Can’t We Talk About 16 It? Ethical Discourse as A Leadership Imperative

Credits Publishers

Stephen B. Young Jean-Pierre Diserens


Richard Broderick


Shawn Donahue

John C. Knapp, Ph.D. Mann Family Professor of Ethics and Leadership, Stamford University Fellow of the Caux Round Table

Pathways A Publication Advancing Global Capitalism


Publishers’ Comments Jean-Pierre Diserens General Director Convention of Independent Financial Advisers The Convention of Independent Financial Advisers (CIFA) came into being to provide an intellectual and policy counter-weight to financial firms that had become “too big to fail.” CIFA members perceived a need to succor and support those who own capital and invest it. After all, it is the owners of capital who provide the essential life force for capitalism – liquid funds. If private capital is not protected and rewarded, global economic growth will suffer. Thus, CIFA drafted and deposited with the Economic and Social Council of the United Nations the Charter of Investors Rights. CIFA now believes that financial intermediaries must consider what standards and practices are most needed to restore growth to the global economy. The answers are not obvious but private capital must be released to play its vital role in funding economic development. Thus, CIFA has joined with the Caux Round Table to launch this new quarterly journal. CIFA seeks new ideas, sound old ideas which have been overlooked in recent years of concentrating financial power in a relatively few firms, and provocative essays which will stimulate debate and enhance decisionmaking. CIFA encourages a robust debate unhindered by either fear or favor.

Stephen B. Young Global Executive Director Caux Round Table The collapse of credit markets in the fall of 2008 brought to an end an era of excessive faith in the rationality of markets and the management of price volatility through statistical algorithms. The Caux Round Table recognizes that new, more complex understandings of finance and markets are needed, understandings that embrace a range of intangible asset enhancements. But in the four years since the collapse of credit markets, few such new understandings are being proposed by academics, regulators, politicians, practitioners. This new journal Pathways, a quarterly, has been launched to stimulate a conversation that will facilitate the emergence of needed theory and management metrics for finance and the businesses that arise from financial investments. The Caux Round Table believes that corporate social responsibility, with its emphasis on sustainable engagement with stakeholders for long-term profitability, will no doubt provide important insights into the reformulation of free market practices.


Pathways A Publication Advancing Global Capitalism

Money and Ethical Dysfunction Especially in Politics Stephen B. Young Global Executive Director Caux Round Table

The current presidential election cycle in the United States has brought to the forefront concern and comment about the role of money in American politics. The reason is not hard to find; with the ever accelerating decline of political parties as vehicles for mobilization of voters and political opinion, money is stepping in to the vacuum so that special interests and ideological sub-cultures gain more and more influence over who gets elected. This trend got a big boost from the Citizens United Supreme Court decision clearing the way for Super-Political Action Committees. This decision has brought millionaires into the political fray, enabling a very few to achieve disproportionate media presence and influence public choices by spending a lot of money on their favorite candidates and causes. In the worlds of Occupy Wall Street, it’s the 1% lording it over the 99% in shaping political outcomes. Mitt Romney’s supporters used such super-PAC money to effectively campaign against a series of more socially conservative opponents. President Obama has likewise decided to go the super-PAC route and raise perhaps as much as a billion dollars to gain re-election. It has been estimated that this year, 2012, Americans will spend up to $6 billion in all their elections. The perfectly predictable result? Ordinary citizens are being priced out of local political competition as the costs of campaigning rise and rise, mostly for television ads and the experts who fine-tune their emotional appeal. Parties, which provided the mechanism for compromise and coalition building for nearly two centuries, are becoming anachronisms so that gridlock and recalcitrance have come to dominate policy making. Is it just American politics in a new, post-industrial, form, or does money have an existential aspect that always breeds dysfunction? Money has long been associated with self-seeking, short-sightedness, unethical imposition of risk and loss on others, and immoral behavior. In business, the complaint seems to be universal and eternal:

• Big money speaks loudest in the public sphere, minimizing the voices of ordinary citizens • Money is necessary for anyone to extend his or her voice • How can we balance the necessity for money against the corrupting nature it has? chasing gain that becomes cash in the hand gives rise to bias and distortion in judgment. In politics, money is associated with corruption, abuse of power, favoritism, despotism, and the undermining of idealism and the common good. Money becomes an instrument of power because we love what it can do for us. Money is a very effective and efficient form of power. Its reach in our hands is wide indeed. We can use it to buy many things and play on many emotions and desires. It is readily at hand and convenient to exchange for goods and services. It gives us control and draws people to us. Power has always been problematic in politics and governance. It needs restraint and a bridle if it is not to destabilize our life together. Unchecked, it breeds conflict and abuse and fear. Ethical systems of politics and governance seek to moralize power by turning it toward stewardship or some similar form of service to the common weal. Putting checks on power is the essence of constitutionalism. This ethical ideal is at the core of the CRT Principles for Government. But money has its own magnetism that side-steps and out-maneuvers legal provisions for checks and balances. Money goes to the heart of ambition and self-assertion.

“Parties, which provided the mechanism for compromise and coalition building for nearly two centuries, are becoming anachronisms so that gridlock and recalcitrance have come to dominate policy making.” Pathways A Publication Advancing Global Capitalism



Money and Ethical Dysfunction Especially in Politics (continued)

Stephen B. Young Global Executive Director Caux Round Table

It empowers us as few things can do. With money, we become more influential, less vulnerable, more attractive to others who too seek a share of power for themselves. Lots of money gives us charisma, just as possession of any great source of power does. At the same time, money, like every other form of private property, provides of us with stature and significance. Our voice becomes more influential if we can support our words with deeds and make our preferences effectual for others. To deny us access to money in politics subordinates us to the will of others. Our human dignity would be hard to come by if we had no means of taking action. Spending money is an extension of our personality, our will, our morality into the world around us.

Frankel’s idea has its drawbacks – fringe and hateful candidates (consider a Hitler) would be given exposure they otherwise might not be able to afford. But a response from Frankel might point out that error can be tolerated where freedom of speech is robust to contest it. If enough money is made available for many points of view, competition in ideas and emotions would level all opinions to some common denominator sustained by sound facts and decent ethics. The analogy would be to a free market in goods and services which, over time, drives out substandard offerings, fraud, and negligence. Money is not going away, either in economics or politics; and human nature is not going to change. The challenge of balancing power with restraint, therefore, will also remain before us.

So here is the conundrum: how can we square a circle? How can we use money to promote the good within us out of respect for our individual dignity but not have it promote what is dysfunctional and invidious to the common good, from which we stand to benefit as well? In the United States we may need to amend the Constitution so that we can still spend money in politics, but under some constraints that would provide fitting checks and balances. To cite just one example of a way to check money’s role, at least in American politics, Max Frankel, a former editor of the New York Times, proposes that money spent for political advertising be put into competitive harness: double the price of campaign commercials and give half the money to an opponent for free airtime. Frankel suggests that such a rule would turn campaigns cautious in spending their money. They would think twice before making a big buy of TV time as they would be spending money to put opposing thoughts and emotions out before the public. They would shift to less expensive and more time-consuming ways of influencing voter attitudes and behaviors.


Pathways A Publication Advancing Global Capitalism

Stephen B. Young wrote Moral Capitalism, published by BerrettKoehler. He was an Assistant Dean of the Harvard Law School and Dean and Professor of Law at the Hamline University School of Law. His commentaries have been published in the Wall Street Journal, the New York Times, and the Washington Post. He has published numerous scholarly articles on law and business ethics. His writings on corporate social responsibility have been published internationally. Young has recently translated a long novel, The Zenith, from Vietnamese for Viking Penguin.


10th International CIFA Forum Convention of Independent Financial Advisors April 2012 The 10th Annual CIFA Forum makes the following recommendations: because there can be no growth without financial 1 First, investment, our global financial markets must - above all else - facilitate and encourage the movement of liquid funds into the productive sector of the economy.

those who provide investment funds and those 2 Second, who provide financial services must be rewarded,

but only in proportion to their contributions to real economic growth. Compensation for use of funds and for services related to financial investments should vary with the quality of what is brought to market. Shoddy services and harmful products deserve no reward.

3 Third, national governments have a responsibility to

maximize the capacity of financial markets to promote equitable growth. Sovereign states have a responsibility to promote economic growth. They are trustees for those under their authority.

“Just as governments have a responsibility to regulate for the common good, so too do private individuals and firms have responsibilities to avoid harmful outcomes for those who must rely on their prudence and good will.”

financial intermediaries carry out their 4 Fourth, responsibilities to their clients in the private sector

beyond the reach of many government rules and regulations. Their unregulated private behavior can facilitate or can hinder achieving positive outcomes of prosperity with justice. Just as governments have a responsibility to regulate for the common good, so too do private individuals and firms have responsibilities to avoid harmful outcomes for those who must rely on their prudence and good will. Financial intermediation is a profession, not just a business. Financial intermediaries would complement prudential public regulation by living up to an equivalent of the Hippocratic Oath: “I will make recommendations for the good of my clients according to my ability and my judgment and never do harm to anyone.” Such professionalism will moralize financial markets.

information and informed judgments about 5 Fifth, financial products are public goods which shape

sustainable and responsible markets. Financial market regulation and financial industry best practice standards must promote sustainable valuations of financial instruments. Financial intermediaries must not promote investment in fictitious estimates of value. The information provided by rating agencies about financial products should not be subject to conflicts of interest or superficial methodologies. CIFA endorses the recommendation of the Bertlesmann Foundation to endow a not-for-profit rating agency using new criteria to assess sovereign debt obligations. In addition, CIFA calls for research into new methodologies of sustainable valuation and the formation of new rating companies offering valuation assessments according to such innovative criteria.

Pathways A Publication Advancing Global Capitalism



Centesimus Annus

What a 1991 Papal encyclical has to tell us today Dr. Thomas A. Bausch Dean Emeritus College of Business Administration Marquette University In 1991, to reflect back and recognize and honor the hundredth anniversary of Leo XIII’s great encyclical, “Rerum Novarum,” Pope John Paul II issued his own encyclical “Centesimus Annus” (CA) This was not the first time a Pope had reflected upon this seminal document on the anniversary of its appearance, as with “Quadragesimo Anno” in 1931, “Mater et Magistra” in 1961 and “Octogesima Adveniens” in 1971. But at the same time he offered a celebration of the earlier encyclical, Pope John Paul was also proposing a vision of the economy in the aftermath of the collapse of communism in Eastern Europe and the end of the cold war conflicts in the Third World. As we shall see, that combination of reflecting on the past and looking forward toward the future is characteristic of the encyclical and gives it continued relevance even now, nearly a quarter century after the fall of the Berlin Wall.

Near the end of his encyclical John Paul wrote, “The present Encyclical has looked at the past, but above all it is directed to the future. Like ‘Rerum Novarum,’ it comes almost at the threshold of a new century, and its intention, with God’s help, is to prepare for that moment.” What, then, are the critical points raised by Leo XIII and emphasized again by John Paul II, along with new issues raised in “Centisimus Annus?” Are they truly prophetic? How have governments, other institutions, and individuals responded to them? For a social encyclical is not meant to be a highly technical and prescriptive document. It is intended to lay out first principles and a vision to guide us in the professions as we direct technology, knowledge and other resources to the service of the human person. This broad base of first principles always holds the danger of being interpreted in many ways. And so it was after Centisimus was published.

Within the Catholic Church “Rerum Novarum” was, and is, held in special esteem for it was the beginning of the development of an extensive and very rich body of social doctrine elaborated in numerous encyclicals and other documents by later popes and the Vatican, not to mention statements issued by many different conferences of bishops.

One interprets as one desires to interpret Though “Centisimus Annus” has had a broad base of acceptance, it seems to have been placed on a procrustean bed, forced to fit many needs and preconceived ideas. In an article published earlier this year, Matthew Schadle found three broad categories of interpretation.

Although all of these are written within the context of Catholic theology and culture they have had an impact on other faiths; although the early encyclicals were addressed primarily to Catholics many of the more recent encyclicals have been addressed not only to Catholics but also to “all the Christian Faithful and to all men and women of good will.”

“Perhaps the most eager interpreters of the encyclical have been the neoconservatives, who see the encyclical as a qualified endorsement of the free market economy. The second interpretation of the encyclical is that of the progressives, which claims that the encyclical offers a greater role to the state in regulating the economy than is recognized by the neoconservatives, and that the encyclical is largely consistent with the earlier social encyclicals as well as the United States bishops 1986 Economic Justice for All. The third interpretation is, for lack of a better term, communitarian, arguing that far from endorsing capitalism, CA presents a radical redefinition of the “free” economy as centered on gift giving rather than self-interested exchange.” 1

Over the years these encyclicals have had an effect through various channels. Priests across the United States had an impact on the labor movement. Franklin Delano Roosevelt himself was influenced by Msgr. John Ryan, one of the great advocates of social justice in his day. My own first exposure to Catholic Social Thought was in a course taught by one of the men who organized the steel mills in Buffalo, New York. The US bishops’ pastoral letter, “Economic Justice for All,” was required reading in some of our leading business schools; Harvard is a good example. Even popular culture has been affected by movies drawing on Catholic Social Thought like “On the Waterfront” and “Romero.”


Pathways A Publication Advancing Global Capitalism

Matthew Shadle, Twenty Years of Interpreting Centesimus Annus, Journal of Catholic Social Thought, Vol 9, Number 1, Winter 2012. 1


Centesimus Annus

What a 1991 Papal encyclical has to tell us today Dr. Thomas A. Bausch Dean Emeritus College of Business Administration Marquette University And yet there’s little purpose served by approaching the encyclicals in search of support for one or another system of political or economic theory. Nor is Catholic Social Thought a “third way.” Rather, the encyclicals provide fundamental principles and authentic vision for direct human action. The neoconservative interpretation In 1993 Michael Novak wrote, “We are all capitalist now, even the Pope.” While the neoconservatives went too far in claiming “Centisimus Annus” as their own, there are points made by John Paul II that echo their thinking. As Novak notes, creativity is a fundamental aspect of the human person -- as John Paul wrote, “besides the earth, man’s principle resource is man himself.” The encyclical also demonstrates a carefully articulated distinction between the “assistance state,” which can destroy the spirit of the individual and the “welfare state” which, properly organized, can humanize a person. “Centisimus” also promotes the need to develop and maintain intermediate organizations. The decline of these organizations, be they churches, volunteer fire departments, or service organizations, is well documented by scholars like Robert Putnam and Robert Bellah. John Paul gave great emphasis in the document on the role of culture, simply because there is no possibility for a healthy society without a healthy culture. This, in turn, raises many issues such as, is a healthy culture and society possible with the work demands we place on people in today’s society? Possibly the most troublesome aspect of the neoconservative analysis of the encyclical is the way neoconservatives fail to recognize the continuity of John Paul’s message with the century of Church documents that preceded it. Certainly there was evolution and change in Catholic thinking over that time, but it seems impossible to dispute “Centisimus Annus’s” continuity on first principles and in the vision of the conditions necessary for the human person to flourish and achieve the fullness of his or her dignity

recognize the value of subsidiarity – the Catholic principle that matters should be handled by the lowest, most centralized competent level of authority -- progressives call for a greater role for government in society than do the neoconservatives and find that their position is justified by John Paul’s analysis. John Paul certainly reaffirms the principles of the universal destination of goods, solidarity and the common good. It can be argued, in fact, that these three principles are more important today than they were 1991. Why? Because the ideological conflict between neoconservatives and the progressives is at the absolute core of the political debates in the USA, both nationally, in the presidential race, and locally, as in the recent recall attempt in Wisconsin. Neoconservatives are not concerned by huge income disparities created by advances in science and technology. The thought of a progressive tax code is abhorrent to them. The impact of ownership of a skybox in the local football stadium is never considered. However, John Paul was certainly aware of the impact of technology, knowledge capital and the importance of community, with Centisimus stressing culture as the matrix into which community is embedded. The communitarians Community appears to be the bedrock of the communitarian interpretation of the encyclical. Shadle captures some of the key concepts of the communitarian approach as follows: “A proper understanding of CA, according to the communitarians, shows that the moral-cultural sphere, and specifically the church, must not only provide limits for the economic sphere, but must in fact give economic life a concrete form based on a proper understanding of the human person as first of all a being whose existence is a gift from God. This interpretation of CA leads at least some communitarians to propose a radical re-visioning of the free economy as an economy of gift.” 2

The Progressive Take Progressives, on the other hand, read the encyclical as a statement in continuity with the past Church documents on matters of social and economic justice. Although they

Although many of the concepts developed in “Centisimus” are consistent with the full communitarian model it does not appear in any way to be “the” model proposed by 2

Ibid, page 183

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Centesimus Annus Retrospect and Prospect Dr. Thomas A. Bausch Dean Emeritus College of Business Administration Marquette University John Paul II. There are examples, such as Mondragon, the workers cooperative in the Basque region, and Focalare, a global movement headquartered in Italy that promotes universal fraternity, of the communitarian model thriving, perhaps because of some characteristic of the local or national culture. One common theme of all of such movements is an emphasis on human dignity that reflects the ideas set forth in John Paul’s most profound works, beginning with The Acting Person, written years before he became pope.

Human Dignity While John Paul places “Centisimus Annus” in the context of the other social encyclicals as well as within the greater context of Catholic Social Thought he praises those individuals and “various groups, associations, and organizations … a great movement for the defense of the human person and the safeguarding of human dignity.” This movement has contributed to the building up of a more just society or at least the curbing of injustice.” John Paul was fully aware of the human dignity issues of his day and addressed most of them in the documents he authored. Twenty years later, can we still make a claim to advancing human dignity? Yes, there are, in fact, more groups — religious, civic/volunteer, NGO, and governmental — than ever before in the field serving the cause of human dignity. The growth of groups like the Caux Round Table enables one to be optimistic. The increase in the visibility of documents like the Universal Code of Human Rights is important.

“The technological and other changes of this era are bringing immense benefits. But are the poor adequately sharing in these benefits? Why is the chasm between rich and poor growing?”


Pathways A Publication Advancing Global Capitalism

On the other hand the use of drones and other forms of impersonal and indiscriminate military weapons, the rapid growth of human trafficking, especially sex trafficking, the impersonalization that accompanies much of technology, the drug culture, the decline of the labor movement, and the growing objectification of women are just some examples of attacks on human dignity in our era. One can argue that the rapid growth of the slums in the cities of the Third World, as well as ever greater dehumanization of the poor areas of cities in the West, certainly are destructive of human dignity. The agenda of issues to address is endless and there are no easy answers. Some, such as sex trafficking, must be addressed on a global level. Others are best addressed on the local level. The resources needed will be huge in this era of seemingly ever greater scarcity. Possibly the issues most important to address are education and developing the will to act. Educational institutions at all levels must teach an authentic understanding of the human person, one that goes beyond what the behavioral sciences have to offer, and of human dignity. This must then be translated into the desire, the will, to act. This can be part of the education we offer our students, but it also calls for action by our various civic and professional groups. Finally, as noted above the principle of subsidiarity must be applied. The sex trade is a global action calling for a global response. Teaching children not to be bullies calls for action by parents and teachers in the local school.


Centesimus Annus

What a 1991 Papal encyclical has to tell us today Dr. Thomas A. Bausch Dean Emeritus College of Business Administration Marquette University The Developing chasm between the classes John Paul reviewed several of the key points made in “Rerum Novarum” and the vast changes, in his words, “in the historical process, that had been taking place for some years in society, state, and authority,” but with a particular emphasis on economics and science. “In the sphere of economics, in which scientific discoveries and their practical application come together, new structures for the production of consumer gods had progressively taken shape. A new form of property had appeared – capital, and a new form of labor – labor for wages, characterized by high rates of production which lacked due regard for sex, age or family situation, and were determined solely by efficiency, with a view to increasing profits.” In the eyes of Leo, labor had become a commodity with the worker not even being assured that he or she would be able to sell that commodity. Of course, in the late nineteenth any form of social security or a safety net was rare. Looking back from the vantage point of 2012 the key point made by Leo may be “The result of this transformation was a society ‘divided into two classes, separated by a deep chasm.’” Although great progress had been made in developing a middle class, thanks in part to the messages of Rerum Novarum, we are now in a period in Western countries where this chasm is growing and destroying families and societies. And although some third world countries may be developing a middle class, the majority are not. John Paul knew that he was writing his encyclical, as was true for Leo XIII, in an era of profound change driven by ideological, technical, political, social and economic factors. In politics, the result of these changes “was a new conception of society and of the state, and consequently of authority itself.” There was a new society, “one which brought the hope of new freedoms but also the threat of new forms of injustice and servitude.” John Paul’s call, even more than Leo’s, was to harness these changes for the service of the human person and the common good, especially in service to the poor. John Paul noted that Leo saw a new society emerging in the 1890’s – “one which brought the hope of new freedoms but also the threat of new forms of injustice and servitude.” Leo saw a society emerging that was “divided

“In the developed world we see the political will to intervene on behalf of greater social justice disappearing and that same political will failing to develop at all in regions where it is most needed in other parts of the world.”

into two classes, separated by a deep chasm.” At the same time in the political order the prevailing theme of the time sought to promote economic freedom by passage of appropriate laws or, conversely, by a deliberate lack of any government intervention in the marketplace. John Paul was calling us to understand that this scenario was beginning to repeat itself. The technological and other changes of this era are bringing immense benefits. But are the poor adequately sharing in these benefits? Why is the chasm between rich and poor growing? In the developed world we see the political will to intervene on behalf of greater social justice disappearing and that same political will failing to develop at all in regions where it is most needed in other parts of the world. Why should this be so. Why are societies around the world failing to achieve greater justice?

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Centesimus Annus Retrospect and Prospect Dr. Thomas A. Bausch Dean Emeritus College of Business Administration Marquette University In his analyses of “Rerum Novarum” John Paul implied that Leo (and the Roman Catholic Church) had the necessary credibility to analyze social realities, to make judgments about them and to indicate directions to be taken for the just resolution of the problems involved and thus to make a solid contribution to moving justice forward in the world. It can be argued that when John Paul wrote in 1991 he was able to make the same case for the Catholic Church of his day. But in the years since 1991 it can also be argued that the Church has lost this sort of credibility, even as all of our major institutions have similarly declined in the eyes of the public. Governments no longer count on the trust of citizens and seem to be unable to tackle the most important problems facing our societies not only on a national level, but also internationally. In the United States, as labor watches a rapid retreat from the gains of the first 60 years of the past century, unions have become almost irrelevant. Our educational system is failing our youth, especially in America’s inner cities. And, arguably, the social institution deteriorating most rapidly is the family even while study after study emphasizes the importance of the family in the preparation and life success of our youth. John Paul affirmed the importance of all of these institutions, as did several of the pontiffs before him. Possibly he recognized how fast those institutions would deteriorate as well as why this would be so. Small wonder then that John Paul in “Centisimus Annus” and many other documents called for the strengthening of social institutions, though he always did so in a balanced way, acknowledging the need for reform and effective oversight.


Pathways A Publication Advancing Global Capitalism

He also declared that the principal of private property and “the things necessary for one’s personal development” are to be affirmed and upheld. On the other hand, he affirmed the complementary principle of the universal destination of the earth’s good. This is a principle of significant importance in today’s “knowledge-based economies” and world of “intellectual property,” but one not being implemented as the chasms between rich and poor grow. Two major questions face those in business advocating corporate social responsibility and corporate citizenship. If a necessary condition for a stable society is private property, especially home ownership, how do we prevent the mortgage debacle of recent years? How do we change the compensation/reward structures in our society in a manner that will both reward initiative and creativity while enabling a system of private property that is just? In conclusion, “Centisimus Annus” is rooted in 100 years of the first principles of Catholic Social Thought, but is also focused on the issues of the day. It challenges us in an era of a growing chasm between rich and poor, the decline of the labor movement, and other changes to focus on the resolution of these justice issues. Thomas A. Bausch is currently the Dean Emeritus of the College of Business Administration at Marquette University in Milwaukee, Wisconsin, USA. His experience ranges from the Co-Director of Programs in Management and Leadership (2010) and Director of Pastoral Leadership and Management (2004) of Hekima College in Nairobi, Kenya to the President of the Middle East Business School (1995) in Amman, Jordan. He has been a Fellow of the Caux Round Table since 2006.

Good Luck or Good Measure How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table The global financial crisis (GFC) resulted in the most fundamental dislocation in global financial markets seen in our lifetimes. There is no avoiding the fact that the GFC can be traced to severe weaknesses in governance and regulation in the key US, European and UK banking and financial markets. In particular, it exposed: lax and insufficient capital requirements; too little attention to leverage and to liquidity; inappropriate risk taking; adverse incentive structures for banking executives; unmanaged conflicts of interest; and serious weaknesses in disclosure and accounting standards. Light-handed and inadequate regulation of the financial system in key markets simply opened the gates for the so-called ‘masters of the universe’ to command enormous rewards for exposing others to ever greater and poorly understood risks. Without adequate controls, there were no counterbalance to the mispricing and misjudging of risk by the culprit banks. In fact, much of their risk assessment was outsourced to conflicted and seemingly incompetent credit rating agencies, with the banks gambling on a government bailout should the music stop. Meanwhile, the regulators involved simply stood back and just let the party happen.

• The global financial crisis has had little effect on the Austrailian financial system • This is due in large part to their proactive regulation and relative economic strength in 2008 • Financial crises can be handled by correct behavioural, prudential, and governance fundamentals.

or behavioral factors that explain the resilience of the Australian financial system? In fact, Australia’s relatively benign experience of the GFC can be traced to a number of factors. While various aspects of the Australian economy and Australia’s financial circumstances going into the crisis insulated the country from the worst aspects of experience elsewhere, other key factors such as the financial regulatory architecture, a strong banking sector, and a positive corporate governance culture help explain why Australia largely avoided the GFC. The Quality of the Australian Financial Regulatory System Australia experienced rapid credit growth in the late 1980s following deregulation of Australia’s financial system and the floating the currency in 1983. This gave way to assetprice deflation and corporate distress during the recession of the early 1990s, triggering a series of mini-financial and economic crises.

“Timely and appropriate policy intervention was also a big factor in ensuring the continued strength of the Australian banks.” In contrast, the Australian financial system demonstrated extraordinary resilience leading up to and over the course of the crisis. Critically, the major banks remained highly rated and well capitalized throughout. But how did the Australian banks manage to not succumb to the seduction of increased leverage and to the sub-prime mortgage / collaterized debt obligations (CDO) fever that took the global financial system to the brink? Was it simply good luck or was it more fundamental regulatory, structural, economic

In response the government commissioned a Financial System Inquiry in 1996 to take stock of the deregulation of the Australian financial system since the early 1980s and to make recommendations on “the nature of the regulatory arrangements that will best ensure an efficient, responsive, competitive and flexible financial system to underpin stronger economic performance, consistent with financial

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Good Luck or Good Measure

How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table

stability, prudence, integrity and fairness.” The Inquiry recommended that the best financial regulatory structure for Australia would involve two regulators: one responsible for prudential regulation; and one responsible for market and disclosure regulation. In response, the Government adopted a ‘twin peaks’ model creating: • the Australian Prudential Regulation Authority (APRA) as a single national prudential regulator to supervise all deposit-taking institutions, life and general insurance companies and superannuation funds; and • the Australian Securities and Investments Commission (ASIC), to cover market integrity, disclosure and other consumer protection issues. This reform removed prudential regulation responsibilities from the Reserve Bank of Australia (RBA) and refocused the central bank solely on the objectives of monetary policy, overall financial system stability and regulation of the payments system. Importantly, these changes recognized that central bankers tend to take a whole-of-economy perspective, given their economy-wide focus and responsibility. However, successful prudential supervisors need to constantly monitor and intervene, if needed, at a micro level with individual institutions.

“…[T]he dangerous practice, so prevalent in the US for example, of ‘poacher turned gatekeeper’, has not been a feature of the Australian way of doing things.” 12

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A further important factor in the efficiency and effectiveness of the financial regulatory structure has been the role played by the Council of Financial Regulators, comprising of the RBA, APRA, ASIC, and the Australian Treasury, in providing a workable forum for co-operation and collaboration across regulatory bodies. For example, the Council of Financial Regulators conducted a coordinated review of failure and crisis management arrangements across the Australian financial system in 2005 and spent many years collectively preparing for an eventual crisis such as the GFC. Also relevant to maintaining healthy and stable conditions has been the fact that APRA has taken a more proactive approach to regulation than some of its counterparts overseas. Its prudential rules are often tighter than the minimum international standards, such as higher lossgiven-default assumptions, and it takes a more rigorous approach to supervision. In fact, many of the recent recommendations for strengthening global financial regulations in response to the GFC fallout already apply in Australia, or were in the process of being applied. All of this reflects the view of APRA that there is no good prudential regulation without good supervision and that means effective intervention. As APRA’s Executive General Manager recently stated “There is no good supervision without a culture of effective intervention. Effective intervention over the necessary years and decades is impossible without broad public sector support, most of all from politicians across the political spectrum. If you show me a country where the politicians listen to bankers more than they listen to regulators, I will show you a country which is guaranteed to have a banking crisis.” Importantly, APRA does not allow itself to be discouraged or distracted in its endeavors by Australian politicians, vested interests, or the general public. For example, APRA took on vested interests when it pushed, prior to the GFC, for domestic insurers, and at the time highly-rated foreign re-insurers operating in Australia, to increase their capital reserves against some classes of exposures in 2007. An important factor in this regard is that the dangerous practice, so prevalent in the US for example, of ‘poacher turned gatekeeper’, has not been a feature of the Australian way of doing things. Key executives of banks and insurers do not move on to become the heads of regulatory bodies.


Good Luck or Good Measure How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table As a result, in the years preceding the crisis, APRA and the industry built up stronger capital buffers and maintained good credit underwriting standards. APRA’s role in ensuring the Australian financial system was well prepared for the GFC has been noted by the International Monetary Fund (IMF) - “APRA’s proactive approach and conservative capital adequacy rules helped avoid risky lending behavior.” The IMF went on to also commend APRA for regularly stress testing the banking sector and concluded that Australian banks should be able to withstand potential losses from a further sizable downside shock as a result. Australia’s economic and financial settings Australia and its banks were also assisted in weathering the GFC storm better than other advanced economies by the Australian economy being in good shape going into the GFC. Strong demand for raw materials had produced a sustained upswing in global commodity prices and the once-in-a-generation upswing in Australia’s terms of trade had resulted in unemployment falling to a low of 3.9% by early 2008.

while not unsustainably increasing debt levels. Australia’s net debt is now only approaching 10% of GDP, unlike the US, UK and Europe where net debt levels are heading to 80% of GDP. Australia and its banks were also spared the compounding impact of collapsing house prices. While house prices had risen appreciably, Australian prices did not collapse during the GFC due to the strong economic settings, relatively low unemployment levels, and the fact that the supply of new dwellings has not kept pace with underlying populationinduced demand for housing. In fact, total housing credit continued to grow through the GFC. By contrast, large falls in house prices were seen in US and parts of Europe due to overbuilding, the sub-prime crisis and subsequent collapse of the mortgage securities market. In addition, the Government’s decision to invest in the Australian residential mortgage-backed securities to head off weakness from the flow-on fallout of the GFC global financial crisis was an important factor in promoting the market’s recovery and investor confidence.

To battle the resulting inflationary pressures from the strong growth, the RBA maintained tight monetary policy, which saw the official cash rate reach 7.25% in March 2008, the highest level since December 1994. This left plenty of scope for the RBA to then cut interest rates to stimulate the economy as the GFC took hold – which it did with the cash rate falling to 3% by April 2009 before rising again as economic conditions strengthened. This substantive reduction in the cash rate greatly supported domestic demand as the global economy deteriorated. This was in stark contrast to the situation in most OECD countries where the central banks had begun to cut interest rates before mid-2008. This resulted in their rates soon approaching zero, thereby leaving virtually no room for stimulatory monetary policy as the financial crisis intensified. Also in contrast to most OECD countries, the Australian Government’s fiscal position was strong. Net public debt had fallen to zero in 2006 following an extended period of domestic economic growth and gains from the commodities boom. In the fallout from the GFC, the government was able to support growth through large fiscal stimulus Pathways A Publication Advancing Global Capitalism



Good Luck or Good Measure

How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table

Strong financial institutions The strength of our financial institutions, particularly the banking sector, going into the GFC was a further important factor in Australia weathering the crisis. In contrast to many of their overseas counterparts, profitability was high, capital buffers were well above minimum international regulatory standards, and exposure to high risk assets was relatively low. Importantly, the Australian banks had no significant exposure to the more exotic securitization products such as collateralized debt obligations (CDOs) and synthetic CDOs. Consequently, on the back of APRA’s pro-active approach to supervision and their less aggressive lending and securitization practices, the Australian banks continued to function well throughout the GFC. Indeed, the four major Australian banks were able to maintain their AA rating and profitability throughout, with their net impaired loans staying well below 1% of total assets and their capital adequacy ratio improving to an average of around 11.5% after capital raisings. This allowed the banks to continue lending - albeit intermediated bank credit became more expensive and subject to tighter lending conditions. Timely and appropriate policy intervention was also a big factor in ensuring the continued strength of the Australian banks. Key amongst these were: • the RBA’s measures to ensure the financial system had sufficient liquidity; • the government’s introduction of guarantees on all deposits under a million dollars; and • the government’s risk-priced wholesale funding guarantees which assisted banks in accessing international capital markets. These timely and appropriate policy interventions underpinned confidence in the financial system. Importantly, exit strategies from these policy measures were also considered at the time albeit the risk-pricing element of the wholesale funding guarantee provided a natural exit strategy when global credit markets normalized.


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Improved governance, more effective boards, and more considered incentive plans also played their part in assisting Australia to weather the GFC. The Australian Securities Exchange Corporate Governance Council first released its ‘Good Corporate Governance Principles and Best Practice Recommendations’ in 2003. Under the Principles and Recommendations, all listed entities must disclose in their annual report the extent to which they comply or otherwise with the principles, including whether: • a majority of their board consists of independent directors, with an independent chair; • the board has implemented risk-management policies and systems, via a board audit committee, board risk management committee or another relevant board committee; and whether • there is a board remuneration committee with appropriate policies. In addition, APRA has implemented specific Prudential Standards covering the governance of authorized deposittaking institutions, general insurers and life insurers. Under the Standards, boards and management of such institutions must be fit and proper people in the sense of ethics and competence. The requirement to have a majority of independent directors, board audit and risk management committees, and effective internal audit process are also important elements, as are the external auditors. Specifically, under the Standards boards of the regulated institutions must ensure that the directors and senior management, collectively, have the full range of skills needed for the effective and prudent operation of the institution, and that each director has skills that allow them to make an effective contribution to board deliberations and processes.


Good Luck or Good Measure How the Australian Financial System Avoided the Global Financial Crisis Noel Purcell Chair, Global Governing Board Caux Round Table Executive remuneration

Lessons from Down Under

APRA has also incorporated detailed requirements on remuneration into its good governance prudential standards for authorized deposit-taking institutions and general and life insurance companies. As their starting point, APRA took the requirements set out under the Financial Stability Board’s Principles for Sound Compensation Practices of April 2009 which have also been endorsed by the G20 leaders.

While some elements of luck may have assisted, such as Australia’s proximity and trading relationships with the high growth Asian markets, the extraordinary resilience of the Australia’s financial system throughout the GFC, compared to others, can be clearly linked to key structural and behavioral factors that were too often absent in those jurisdictions most impacted by the GFC.

APRA’s focus is on ensuring that remuneration practices are appropriately aligned with sound risk management. APRA’s prudential standards on remuneration, therefore, are not concerned with the level of remuneration in and of itself. Rather, they are concerned with ensuring that the remuneration practices adopted by regulated financial institutions are sound and do not imbed ‘risk time bombs’ in the balance sheet which could undermine the future viability of the regulated financial entities. APRA had reviewed the remuneration policy and practices of regulated entities and has concluded that “Australian financial institutions measure up well – especially when compared with most their overseas counterparts. Of course, this is mainly because our institutions did not engage in many of the excesses that prevailed in offshore markets during the height of the boom. But that is not to say that there aren’t areas where our financial institutions can do better.”

The Australian experience clearly demonstrates the critical importance of the following: a coordinated and highly effective financial regulatory architecture; sound prudential supervision; a strong and well capitalized banking system; robust economic and monetary policy fundamentals, and a positive corporate governance culture. While future financial crises may be inevitable, they are at least in part predictable and therefore partially avoidable. Certainly financial crises can be managed and they have proved to be much more manageable when the right behavioral, prudential and good governance fundamental are in place.

Noel Purcell was elected to the Chair of the Global Governing Board of the Caux Round Table in January 2010. Following a distinguished executive career spanning both the private and public sectors, Noel now devotes his time to nonexecutive director and advisory roles and to consulting in the areas of corporate governance, responsibility and sustainability. He is a trustee/board member of several charitable organizations and advisory councils. Noel was recognized as one of Ethical Corporation’s 2007 Best of the Best top 15 ethical leaders globally.

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Why Can’t We Talk About It?

Ethical Discourse as A Leadership Imperative John C. Knapp Ph.D. Mann Family Professor of Ethics and Leadership, Stamford University Author of The Ethics of Leadership in the 21st Century and several other books. Fellow of the Caux Round Table When are businesspeople most likely to talk seriously about ethics? In many organizations, the subject only seems to be a priority in the aftermath of a perceived ethical failure. An officer of a Fortune 500 company recently told me of an experience that illustrates how the topic is often seen. Meeting with a committee to plan the firm’s international sales conference, she proposed including a session on ethics. “As soon as I suggested this, the room grew silent,” she recalled. “There was an awkward moment as my colleagues shifted uncomfortably in their seats, then the conversation resumed as if I hadn’t said anything.” She made one more attempt to raise the idea, but it was obvious there was little enthusiasm for an ethics session. Crossing the elevator lobby after the meeting, she encountered the company’s well-known CEO and took the opportunity to seek his support for her idea. “He smiled, thanked me for my work with the planning group, and made it clear he had no interest in the suggestion.” The CEO explained, “Ethics is such a negative subject. After all, this is a meeting where we roll out our new products and incentives to motivate the sales force. There’s a time and a place for everything.” She began to walk away, but he called her back to ask, “Is there an ethics problem in the sales organization?” “I told him I wasn’t aware of a problem, but thought we might prevent one by getting the salespeople to focus a bit on our ethical standards and values,” she said. “But it was clear the sales conference wouldn’t be the time or place for this.” Why relate this story? Because it illustrates an all-toocommon phenomenon in businesses and other organizations. Almost everyone agrees that ethical behavior is essential to personal and business relationships. They wish to be known as ethical individuals and hope others in their organizations are upholding high standards. Yet they may be uncomfortable with the idea of taking time for a serious discussion of ethics.


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Ethics After the Fact This is an irony of ethics in organizations. To be sure, many firms require some form of ethics and compliance training. But this is no substitute for addressing ethical aspirations and challenges where they live and breathe in everyday work life. At the heart of the problem may be our human capacity for self-deception – a tendency that is only magnified in groups. Like the CEO who asked if there was a problem in the sales organization, we often find it difficult to imagine that ethics needs attention when business is going well. We resist suggestions that we are failing to live up to our espoused ethical commitments. Thus, we may rationalize or turn a blind eye when small compromises are made for expediency’s sake – a little deception here, a broken promise there. It is only after the fact, when the consequences of wrongdoing are evident, that our attention turns to ethics in a serious way.

“At the heart of the problem may be our human capacity for self-deception – a tendency that is only magnified in groups.”


Why Can’t We Talk About It?

Ethical Discourse as At Leadership Imperative John C. Knapp Ph.D. Mann Family Professor of Ethics and Leadership, Stamford University Author of The Ethics of Leadership in the 21st Century and several other books. Fellow of the Caux Round Table This is true in the larger business and political community as well. Think of the recent sub-prime lending scandal in the United States, or the accounting debacle of a decade ago. The conversations after the fact were typical of what happens in any organization: Some tried to assign blame as others ducked to avoid it. Legal and regulatory types rushed to write new rules (e.g., Sarbanes-Oxley, Dodd Frank) to prevent the bad behavior from happening again. Others lamented the erosion of ethics in business and called for a return to traditional values. Given such experiences, is it a surprise when a CEO deems ethics “a negative subject?” It isn’t any wonder some businesspeople steer clear of serious discussions of ethics in the workplace. Similar attitudes extend to ethics training as well. Even people who value ethical conduct most highly are unconvinced they personally need to be trained. They figure they learned right from wrong at an early age and can’t imagine their employer has much to teach them. It doesn’t help, of course, that much ethics training continues to be poorly designed and delivered. Learning to Lead Ethical Discourse Part of the problem is that few leaders know how to talk productively, positively and honestly about ethics in their organizations. We are not born with skills of diplomacy to raise prickly questions in the workplace, nor are most of us experienced in leading conversations about behaviors that may place reputations or relationships at risk. In most cases, the leadership competencies for initiating and sustaining ethical discourse must be learned. It is possible for any of us to improve our recognition of moral questions and the adequacy of our problem analysis. We can become more adept at visualizing alternatives, at engaging others in the process, and at forging connections between practical considerations and ethical values. Good leadership and good citizenship require capacities to adjudicate between the competing interests that confront us in every area of life – conflicts between justice and mercy, short-term and long-term benefits, self and community, truth and loyalty. These are adult capacities that we do not acquire in childhood or at our mother’s knee.

How many business or professional people have honed these skills enough to lead ethical discourse with confidence? Where are their opportunities to do so? Certainly, very few corporate compliance programs are designed with this in mind. It may be that higher education is better positioned to build these competencies than is any other sector. The ethicist Will May is among a growing chorus of thinkers calling for higher education to reclaim its role in the moral development of leaders in fields from law to medicine to management. He notes that many of the professions came to universities during the 20th century, “just when universities denied moral formation as part of their responsibility. . . . Thus the university shaped the professions at approximately the same time many faculty began to exclude value questions from the university’s domain.” Consequently, students did not learn to grapple with ethical questions in a community of peers. William Sullivan at the Carnegie Foundation has made a similar argument in his recent call for a “new ideal” of professionalism, one that insists that all professionals must perform as moral agents. And, like May, he looks to universities to lead the way. Sullivan writes, “Since professional schools are the portals of professional life, they bear much responsibility for the reliable formation in their students of integrity of professional purpose and identity.” Harvard Business School’s Rakesh Khurana, writing in From Higher Aims to Hired Hands, decries the failure of business schools to offer little more than the skills of a trade, marketing themselves with a promise of return on tuition investment, but doing very little to provide ethical competencies for business leaders in a society that is becoming less trusting and more hostile to the assumptions of shareholder primacy that underlie much of the business curriculum. These issues were taken up at a 2009 retreat of the Caux Round Table Fellows, a gathering of scholars that produced

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Why Can’t We Talk About It?

Ethical Discourse as At Leadership Imperative John C. Knapp Ph.D. Mann Family Professor of Ethics and Leadership, Stamford University Author of The Ethics of Leadership in the 21st Century and several other books. Fellow of the Caux Round Table a statement arguing that higher education must teach students to be both responsible and responsive in all relationships. The declaration read in part: Through their education, professionals should learn to discern whom their decisions will affect and what those effects will be; to reflect upon the moral quality of those effects; and to act wisely upon such reflection. Thus, professional responsibility may be understood as the capacity to respond fully to the needs and interests of those who depend upon the professionals’ skills, and the ability to exercise these skills in an ethical manner. The exercise of such professional responsibility is necessary now to restore trust in vital social, political, and economic institutions. Why all of this concern now? Have our universities really lost their way – or is something else happening in the world around us? It may be some of both, but it is certain that the ethical challenges facing 21st century society are placing a substantially greater burden on the shoulders of university graduates who must inevitably provide the leadership to recognize and resolve vexing problems in every sector. Our colleges and universities strive to be communities of moral purpose. Their graduates must be prepared to live and lead in a digitized and globalized society where the pace of change is quickening – and all of our institutions are feeling its effects. Our common good today depends in large measure on our collective ability to reflect, to ask deeper questions, to discuss and weigh the larger effects and consequences of our actions. A CEO of a large corporation asked me recently, “How can we realistically expect our managers to think through the ethical implications of decisions they’re usually making under time pressure, and often in response to an endless stream of e-mails that demand instantaneous answers?” In every organization, it is leaders who must carve out the time and space for careful reflection and meaningful ethical discourse – perhaps even at sales conferences. A hallmark of an educational community of moral purpose is a commitment to fostering discourse on the difficult issues facing our lives, our institutions and our world. The British ethicist Ian Markham says a central purpose of higher education is the formation “morally serious people.”


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This idea is the cornerstone of the center I direct. Samford University’s Frances Marlin Mann Center for Ethics and Leadership is a university-wide program that develops ethical competencies across our eight academic schools. Helping students learn to initiate and lead discussions about ethics is one of our highest priorities. For example, our Courageous Conversations series features student-led forums where all participants may take an active part in discussions of difficult ethical issues. They practice the art of civil discourse, including listening to opposing views with the same intensity that they voice their own. Crucial to theses forums is the selection of topics that students might otherwise prefer to avoid – human sexuality, academic cheating, risks in social networking, justice for immigrants, religious diversity, the pursuit of power, the lure of greed. It is our belief that future leaders must be are willing and able to initiate and sustain such conversations in their institutions and in their public lives. The Mann Center also works with faculty to develop opportunities for ethical discourse across the curriculum. And other universities are undertaking similar initiatives. The truth is, ethics should not be seen as an off-putting subject, but as something to embrace and even celebrate. As Aristotle might have said, it is about living well together. But to change prevailing attitudes in business, we must learn to talk about it.

John C. Knapp, Ph.D., is University Professor and Mann Family Professor of Ethics and Leadership at Samford University, where he serves as founding director of the Frances Marlin Mann Center for Ethics and Leadership. He is a Fellow of the Caux Round Table and an internationally known speaker. His books include For The Common Good: The Ethics of Leadership in The 21st Century (Praeger 2007); Leaders on Ethics: Real-World Perspectives on Today’s Business Challenges (Praeger 2007); The Business of Higher Education (ABC-CLIO, 2009); How The Church Fails Businesspeople (and what can be done about it) (Eerdmans, 2011); and the forthcoming Ghostwriting and The Ethics of Authenticity (Palgrave McMillan, 2013).

Pathways Issue 1  

A publication produced by the Caux Round Table, a non-profit organization furthering ethical capitalism in our world, informing people of th...