Jumping off the financial Ferris wheel

John Kenneth Galbraith, the great economist and thinker who died a few years back, said in one of his many tomes: “The world of finance hails the wheel over and over again, often in a slightly more unstable version.”

Few missives have been so wise, because the evidence is gathering pace to suggest these wheels are yet again spinning rapidly as we enter another up cycle in the world of finance. Is there any alternative to this wheel of finance?

Let’s start with the recovery. For the most part, the big banks are seeing an upward spike in their share prices – for some like Lloyds TSB Bank in the UK and Société Générale in France, their share price revival has been very strong since the beginning of the year. Now it’s more about what products and services they can provide, rather than how they will go to great lengths to ensure customer satisfaction when they were feeling less confident.

Of course, banks have a long way to go before they get to their pre-crisis size. Various estimates suggest that the balance sheets of the big banks shrunk anything between one-third to two-thirds since the financial crisis. 

But this recovery could happen faster than most think judging by the rapid revival in initial public offerings and other fee income investment banks make their money from. Realistically, it probably won’t take long before the likes of Citigroup and HSBC move again into being the biggest companies in the world in terms of market capitalisation. 

These banks will again become too big to fail. Their chief executives and other senior managers will have no skin in the game and will be able to walk away pretty much unscathed when their banks collapse, or are bailed out by the taxpayer as they did back in the storm of the financial crisis. They can do this because governments will allow them to get away with pretty much the same practices that flourished before the financial crisis. 

Yes, some progress has been made in countering their excess.

Regulators have shown more teeth in recent times, like JP Morgan Chase’s near $1 billion fine in September for derivative trading irregularities. Regulators can only do so much and by their very nature tend to be more reactive, rather than regulating by pre-empting difficulties. 

Do we as a society learn nothing by tolerating this form of turbo-charged economics that has all the rewards of capitalism on the upside, and none of its risk on the downside? There are some voices out there that want to see change – and they aren’t just academics and journalists. John Elkann, the chief executive of one of the world’s biggest conglomerates, Exor, says that capitalism organised more on the basis of stakeholder values offers some alternative to the excesses of the financial sector. 

Stakeholder management within business is about considering the consequences of your decisions more from the perspective of all the parties affected by that decision, not just shareholders. Elkann isn’t some naive optimist who believes capitalism can be made all soft and comfortable. He’s a hardnosed businessman who says that returns are ultimately what matters for all businesses. But he thinks these returns can be maximised by businesses adhering more to stakeholder values rather than just shareholder ones.

Elkann also runs one of the biggest family businesses in the world, and he says family businesses are crucial to perpetuating stakeholder values. Many of you will know the importance of stakeholder values for your own business and realise how important it is to get the message across to the wider business community and even society as a whole.

Even parts of the financial sector may see an opportunity in stakeholder values. Edward Freeman, a professor at the University of Virginia, and one of the world’s biggest proponents of stakeholder values, says he’s seen Wall Street types increasingly interested in the concept with, he adds, talk of funds being launched based on stakeholder values.

Let’s hope it’s more than just a financial flash in the pan.