Finance for the Greater Good

As I have traveled across the country writing and speaking for the past decade, my recurring theme has been the idea of Responsible Finance.

Or call it Enlightened Finance. Finance based on the core principle of Stewardship. Finance as a contributor to positive social outcomes. Finance as a means to greater ends, rather than an end unto itself.  The language may vary, but the point is that Finance should serve a higher purpose.

Financial capitalism is the dominant socio-economic system in the world today. Underpinning it is a metaphorical contract between society and financial institutions. A social compact. It isn’t explicit. It isn’t static. It evolves over time to represent society’s evolving expectations of the role the financial services industry, and indeed the entire financial system, should play.

At the simplest level, Finance matches people who have money (investors) with people who need capital (corporations, governments, not-for-profit organizations) while managing the many risks involved and,  hopefully, enhancing our collective standard of living.

But Yale Economist and Nobel Laureate Robert Shiller articulates a more expansive vision of finance’s role in society when he writes:

“Finance, suitably configured for the future, can be the strongest force for promoting the well-being and fulfillment of an expanding global population – for achieving the greater goals of the good of society.”

“The goals served by finance originate with us. They reflect our interests in careers, hopes for our families, ambitions for our businesses, aspirations for our culture, and ideals for our society.”

“Finance is not about ‘making money’ per se. It is a functional science in that it exists to support other goals – those of society. The better aligned a society’s financial institutions are with its goals and ideals, the stronger and more successful the society will be.”

Better alignment between Finance and the goals of society is the foundation upon which the future of the financial industry must be built. Particularly in a world where, as Shiller puts it, “financial institutions and financial variables are as much a source of direction and an ordering principle in our lives as the rising and setting sun, the seasons, and the tides.”

The threat of a systemic meltdown in our global financial system has receded since the financial crisis of 2008.

But society faces other potential train-wrecks-in-slow-motion which could seriously and negatively affect the quality of our lives and those of our children and grandchildren. Like climate change. Or dangerously high levels of government debt. Or income inequality. Or population growth coupled with resource scarcity.

The financial services sector – including asset management firms, retail, private, commercial and investment banks, wealth management firms, mutual funds, insurance companies, hedge funds and private equity investors – all can and must play a critical role in preventing these problems from becoming full scale crises.

The purpose of this blog is to talk about how we as an industry and a part of society can help ensure that Finance truly does serve the greater good.


What Doing the Laundry Can Teach Us About Investing

One of the most enduring tenets of finance may have passed its prime.

Throughout my career in the financial services industry, the concept of the efficient frontier, first developed in 1952 by Nobel Laureate Henry Markowitz, has underpinned and informed portfolio management and asset allocation – as much, if not more than any other intellectual breakthrough of the last half century.

Conceived as part of Modern Portfolio Theory, Markowitz’s efficient frontier represents the combination of assets that, at any given point of time, will produce the highest investment returns per unit of risk.

“Because Markowitz’s effort was so simple and powerful, it attracted a great number of followers and is still widely used today,” wrote two admirers in a recent academic paper. It became the central tenets of what might be called the golden age of asset allocation, a decades-long period when advisors of all stripes and colors could get paid, and paid well, for the alchemy of constructing portfolios that, at least on paper, promised to outperform less scientific approaches to investing.

But today, new entrants such as “robo-advisors” are disrupting asset management and using low cost efficient frontier algorithms to turn asset allocation into a commodity. Investment professionals are responding by looking for things they can do for their clients that no one else can do (including computers). Helping clients identify life goals and achieve desired outcomes is replacing the construction of investment portfolios as a driver of value. “Goals-based wealth management” and “solutions” are superceding asset allocation and portfolio construction as the future building blocks of wealth and asset management.

In the process, Markowitz’s 1950s version of the efficient frontier is being eclipsed by another kind of efficient frontier – call it the next generation efficient frontier -- the objective of which is to optimize portfolios not in terms of returns per unit of risk, but in terms of the certainty of achieving desired outcomes.

Here’s one way to think of it.

When a consumer walks into an appliance store and buys a washing machine, they expect that washing machine will turn dirty clothes into clean clothes 100% of the time. In fact, they can buy a warranty that more or less guarantees that.

When a consumer walks into a money manager, however, they are asked to accept the investment equivalent of a washing machine that may or may not work as expected. Our industry tells them: “Combine the optimal mix of detergent, water temperature and clothing type and you will have a 50% chance your clothes will come out clean, a 25% chance they will come out dirty, 20 % chance they will be turned a different color, and a 5% chance they will come out shredded.”

Who would buy a washing machine like that? No one.

Yet, in many ways, that’s what advisors and manufacturers of investment solutions have been asking their clients to do for years.

No doubt some readers of this article will question the validity of the washing machine analogy. Investing, they will argue, is a lot more like sailing a ship across open water than doing the laundry. Knowing where you want to go is the first step. Buying the right kind of boat is the next (preferably one with a heavy keel) Equipping it to withstand all kinds of weather and hiring an experienced captain are also important.

Taglines like “Guides for the Journey” - starring the advisor as captain of a seaworthy ship, who can’t control the wind or the waves, but knows how to batten down the hatches in a storm – captures this kind of positioning, which wealth management firms have been offering up for decades.

But today’s consumers of investment advice want more certainty and dependability than that.

They have financial goals, which they often need help articulating, such as generating steady, reliable monthly income to support their chosen lifestyles. Or growing the value of their savings so they have enough money to retire and/or to pay for their children’s education. Or preserving the value of their savings when interest rates rise and stock markets correct.

They want their advisors and investment managers to provide investment and wealth management strategies that offer them a high likelihood of achieving those goals. The Next Generation Efficient Frontier represents in theory the combination of assets, risk management overlays and dynamic tweaking that best accomplishes that.

It’s not nearly as simple or as straightforward or as easy to execute as the risk/return efficient frontier of the 1950s. But then, neither is the world we are living in today.


Quitting Retirement… Because I Missed Clients, Culture and Being on a Team

I am going back to full-time work.

A year and a half after retiring as CEO of RBC Wealth Management, I have been offered one of the most exciting opportunities of my 35-year career in financial services – to join the executive team at Baird as Vice Chairman.

I can’t think of a better fit. Baird, an international wealth management, capital markets, asset management, and private equity firm, embodies everything I have cared about throughout my career: Strong values. Ethical business practices. A client-focused, employee-centered culture. A long history of quality and excellence.

I am joining Baird because I believe they are ideally positioned to succeed. There is really no other firm quite like it in America today. Employee owned and, therefore, in control of their own destiny. Well capitalized. Diversified across several businesses. Small enough to be intimate, but with scale enough to invest for the future.

The US wealth management and investment advisory business continues to split into two competitive camps. In one camp are scale players and aggregators. They tend to be publicly owned. They also tend to be highly regulated. They have a particular view of the world. They believe in a centralized advice model. They believe client relationships belong to and should be managed by the institution. Clients should be segmented into “homes of best fit”. Investment strategies should be developed in the home office, packaged and delivered out through relationship managers whose compensation is tied to corporate priorities.

In the other camp are independents. They tend to be employee owned. They, too, are regulated but (unless they own a bank) aren’t subject to the kind of onerous oversight imposed by the Federal Reserve or the Comptroller of the Currency. They also aren’t beholden to the short term financial pressures imposed by public shareholders.

These types of firms practice a decentralized advice model. They believe client relationships belong to advisors. They believe decisions about what kinds of clients to work with, what advice to provide, and what investment products and services to offer should be left up to advisors.

The result is two entirely different types of client experiences. And two entirely different types of employee cultures.

I’ve worked in both.

I’ve been a client of both.

And in my experience, there is absolutely no question that the independent, employee-owned, decentralized advice model offers the opportunity for better client outcomes and the opportunity for a better employee culture.

Which isn’t at all surprising. Because in wealth and asset management, client experience and employee culture are interrelated. Wealth and asset management are people businesses. In people businesses, employee engagement translates directly and immediately into client satisfaction. Get culture right, and anything is possible. If not, then nothing else matters.

As an example, a couple of years ago, I posted an article on LinkedIn titled “The Long Haul” about a successful advisor-client relationship that had lasted more than 40 years. That kind of continuity is critical to effective wealth management. But it just doesn’t exist at big, complex, highly regulated financial service firms any more.

Instead, at big firms, a soul-crushing combination of top-down risk management and profit-maximizing imperatives leads to the kinds of initiatives you’ve read about recently, such as “cross-selling,” or transferring smaller clients to “robo advisor” services centers or threatening to sue employees if they move to other firms.  

All this is driving out the best financial advisors and investment advisors who don’t want to be told what to do, who don’t want to be manipulated, and who don’t want anything to stand between them and doing what they believe is the best possible job for their clients.

When I retired from RBC in May of 2016, my plan was to build a portfolio of activities that would sustain me through the next chapter of my professional life. I joined the Board of the Columbia Threadneedle Funds as an independent Director. I became a Senior Advisor to Deloitte and Touche, LLP. I was slated to join a second corporate board in January.

In short, I achieved what I set out to do. But I wasn’t fulfilled.

To use a sports analogy, it turns out I missed being on the playing field. Serving on boards and in advisory roles is like sitting in a booth atop a football stadium with offensive and defensive coordinators, watching the game through a plate glass window and communicating with coaches and players through headsets.  

I missed being close to the game. I missed wearing a jersey. I missed being part of a team.

That’s what I have again at Baird. I can’t wait to get down to the field again to help my new team win. 


Our Modern Day March of Folly

When I published Stewardship: Lessons Learned from the Lost Culture of Wall Street (John Wiley & Sons) in 2012, I intended it to be a case study in what can happen when we lose touch with the core principle of stewardship. Stewardship is defined as “responsibly managing what others have entrusted to our care.”

Stewardship failure contributed to the near collapse of our financial system, the enormous loss of asset value and the ensuing Great Recession.

But the very same dynamic underlies and is contributing to other challenges facing society, such as: 

·     Climate-driven environmental changes (such as global warming);

·     Growing levels of public sector indebtedness; and

·     Income inequality.

These are all train wrecks in slow motion that have the potential to make the financial crisis of 2008-2009 look like child’s play. If the financial crisis was the Ghost of Christmas Past, these are the Ghosts of Christmases Present and Future.

The good news is that all these crises-in-the-making could be mitigated and possibly averted if we were collectively to act like responsible stewards and demonstrate more consistently the behaviors I describe in my book: purposefulness, humility, accountability, foresight, integrity.

The bad news is that we haven’t come anywhere close to behaving more responsibly in the years since Stewardship was published. In fact, we’re performing worse by almost all measures of Stewardship than we were in the years leading up to or during the financial crisis. 

Hurricanes are flooding major cities and destroying entire islands, fires are burning down millions of acres in the state of California, yet the United States has withdrawn from the Paris accord and top elected officials are calling climate change a “hoax.”

Congress just passed a tax cut bill that will increase by $1.5 trillion dollars the public indebtedness of the United States, taking us far beyond the debt/GDP ratio where nations have historically spun into irreversible debt spirals – in which the cost of servicing the national debt leads ultimately to a decline in standards of living and social chaos (think Greece or Venezuela).

In the United States, income inequality has increased since drum-beating Occupy Wall Street rallies denounced “The 1%.” Our economic system – the most dynamic, efficient version of market capitalism in the world – is devolving beyond crony capitalism towards something that resembles outright oligarchy, where elected office is viewed as an opportunity for self-enrichment rather than public service.

Everywhere we look, near-term greed is trumping long-term stewardship. We are playing out the title of Barbara Tuchman’s classic, The March of Folly, in real time. And the ominous predictions of The Fourth Turning, (Steve Bannon’s favorite book, reportedly) today look prescient:

“A spark will ignite a new mood … it will catalyze a crisis [tearing] at the civic fabric at points of extreme vulnerability – problem areas where … America will have neglected, denied or delayed action. Anger at ‘mistakes we made’ will translate into calls for action, regardless of the heightened public risk.”

Stewardship failure is leadership failure. Somewhere over the course of the last half-century, we lost touch with and stopped valuing the notion that those who occupy a leadership position in society have an obligation to help improve society in ways that benefit everyone.

Stewardship begins with a shift from self to others. It begins with the realization that we have all been put on this earth for a reason – to leave the world a better place than we found it.

Stewardship is a choice for service as a moral activity.

And stewardship is the flip side of community. When we see ourselves not just as individual actors but as members of communities, we define our purpose not in terms of self-interest alone, but in terms of improving the well being of others.

Unfortunately, every day we seem to be moving further and further away from the Stewardship ideals on which our nation was founded and on which our collective future depends.


How Young Philanthropists Are Embracing and Changing Warren Buffett’s Model of Giving

Warren Buffett is admired for many reasons, but his commitment to giving most of his fortune away when he dies is high on that list.

Buffett’s approach to philanthropy is as old school as his investment style: make your money, then give it away.

He shared that philosophy earlier this month at the Forbes 400 Summit on Philanthropy in New York. The event, in its fourth year, brings together very wealthy people (many of them billionaires who have signed up through Buffett’s “Giving Pledge”) to hear how their peers around the world are approaching the challenge of effectively giving money away, so that they have a meaningful impact on the problems and issues they care about. This year the Summit’s focus was global healthcare. Last year it was education.

I’ve had the privilege of attending the Summit for the last couple of years. Not because I am a billionaire, (I need to borrow a few zeroes), but because the company I work for, Royal Bank of Canada, has sponsored this exchange of philanthropic ideas and strategies as one way to play out its own commitment to making a positive difference in the world.

I’ve been impressed by the energy, drive, ambition, knowledge, expertise and innovation these capitalists are directing at their charitable pursuits. It’s inspiring to see private resources being directed at some of the most intractable problems in the world – such as eradicating polio and malaria, as the Bill and Melinda Gates Foundation is seeking to do – at a time when governmental resources, once the currency place for solving social problems, are shrinking.

Buffett’s approach, which he outlined at the Forbes event, is carefully thought through and elegant in its simplicity. He’s giving his money to five charities. He’s delegating to those five charities all decisions about to whom and how to give the money away. But he’s also directed that the money be spent over the 10 years after his death, so that it maximizes its impact over the relatively short term. And he’s directed that it be invested in Berkshire Hathaway stock until it is spent. (No investment consultants or investment committees necessary.)

Asked at the Forbes Summit how he feels about “new school” social impact investing – that is, about investing in enterprises whose mission is to generate both a financial return and a social return – his response was: “I don’t believe you can solve for two variables at the same time.”

But from what I heard at the Forbes Summit (and according to findings in the recently released 2015 World Wealth Report sponsored by RBC Wealth Management and Capgemini), younger philanthropists appear to be interested in doing precisely that: solving, through their investment activities, for two variables at the same time. 

Who is right?

I asked my daughter, a Yale- and Cambridge-educated math whiz turned sculpture major turned Chartered Financial Analyst turned convertible bond trader. Her answer: the question itself needs to be reformulated. Once you do that, “it is in fact possible to solve for two variables, not with a single answer, but with a set of x, y pairs.”

Translation: “In the context of social impact investing, it is possible to find a set of investments that both earn a financial return (x) and align with one’s values (y).”

My takeaway from this year’s Forbes Summit on Philanthropy is that philanthropy is in the process of being reformulated by a new generation of capitalists, many of whom earned their fortunes disrupting traditional business models.

They’re now doing the same thing to the business of giving money away.


Leaders: Don’t Let This Character Trait Go Unchecked

A months-long internal investigation of Brian Williams by NBC News has turned up 11 instances in which the anchorman publicly embellished details of his reporting exploits…. (Washington Post, April 2015)

The “fog of memory.”

That’s the phrase suspended NBC Nightly News Anchor Brian Williams used to explain his inaccurate account of riding in a helicopter that was hit by artillery fire in Iraq in 2003. Turns out that’s not what it was at all. It wasn’t a memory lapse, but a character trait that led him to embellish his journalistic accounts not once, but apparently multiple times.

I don’t know Brian Williams. From all accounts he is a good and generous man. And I have no reason to wish him anything but the best in his career, but I am using his story to illustrate the extent to which honesty and truth can be frequent casualties of grandiosity, which is often a side effect of power, prominence or fame.

What happened to Brian Williams could happen, and has happened, to a number of prominent people in our world today. Grandiosity is a behavior pattern associated with the kind of functional narcissism that characterizes many successful people in modern society – from presidents and musicians to well-known newsman and, yes, even CEOs.

It’s a behavior that, if left unchecked, can cause indelible damage to relationships, companies and reputations.

I can testify from personal experience that grandiosity is one of the trolls under the bridges many of us cross during life’s journey. The good news is that while one’s comeuppance can be painful, expensive, embarrassing, even humiliating, the ultimate outcome can be like crashing through the sound barrier – a lot of turbulence and noise, but eventually smooth sailing on the other side.

I’d like to see more people in positions of power break through that barrier.

In today’s society, successful people are frequently narcissists, to one degree or another. It’s narcissism that often enables them to feel special and to elevate themselves, temporarily, above whatever pain, damage or insecurity drives them to do what it takes to be successful in the first place.

As Psychology Today pointed out a decade ago, grandiose narcissists are “more likely to attain leadership positions.” Not surprisingly, U.S. presidents rank higher on a grandiosity scale than the overall population. It was those presidents who rated highest in grandiose narcissism – including former President Bill Clinton – who also scored higher on ratings of “presidential greatness” and were more likely to win the popular vote and initiate important legislation.” On the flip side, they were also “more likely to engage in unethical behaviors and more likely to be impeached.”

At about the same time, Harvard Business Review (HBR) published a major article on “superstar CEOs” – the actively self-promoting leaders who dominated the covers of business magazines at that time.

In the piece, HBR wrote: “Skilled orators and creative strategists, narcissists have vision and a great ability to attract and inspire followers.” Much like Psychology Today did in its piece, the HBR article conceded that “narcissism can be a useful leadership trait.” But the publication also pointed to the dark side of narcissism… including grandiosity.

While I don’t propose that we change the formula to what makes great leaders great, I do like to imagine what the world might be like if grandiosity were better held in check.

After watching the Brian Williams story unfold and thinking back to my own journey, I know that many of us would do well to put “taming the beast of grandiosity” on our personal bucket list.


The Path to Enlightened Finance

In the seven years since the world was plunged into chaos by the financial crisis of 2008–09, I have travelled extensively across the country, trying to convince anyone who will listen that there is no more important undertaking than to help build the foundation for what I call “Enlightened Finance.” Finance in the service of society. Finance based on the core premise of stewardship. Finance as a means to greater ends, namely, making the world a better place

Along the way, I’ve run into many people – both within the financial services industry and outside of it – who believe as I do that finance can serve a higher purpose in society. Some, like me, are or have been executives operating financial services firms. Others served as regulators. Still others come from academia and politics

Because I believe so fiercely that finance has been, and can be again, a “force for good” in society, I asked several of these like-minded individuals to join me in writing a book that I hope will serve as a catalyst for change in our industry.

The central idea of this book – A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism – is that the financial services system has an opportunity to move past the damage of the past several years and become, in fact, an agent of positive social change. To stand for “goodness” rather than “badness” (as Judge Smails, of the cult movie classic Caddyshack, would say). To forge what The Economist’s Matthew Bishop terms “the road from ruin” and to walk the path back to respectability. To crawl out from underneath an increasingly suffocating pile of recent regulation and rule making and to contribute to constructive change.

So what needs to happen in order for finance to become a force for good in the world? The answer is threefold: First, the financial industry must stop contributing to the extreme volatility in markets that periodically destabilizes the world economy. Next, financial market participants must foster and engage in a conversation about what outcomes society wants and needs from its economic system. Finally, we must work to align the financial system with its proper role and function in society. A good way to approach that task, I think, is by answering the questions asked by Mark Carney, Governor of the Bank of England: “Who does finance serve? Itself? The real economy? And to whom is the financier responsible? Herself? His business? Their system?”

In financial capitalism, which is the dominant socioeconomic construct in the world today, there exists a metaphorical contract between society and business. Call it the corporate social compact. This compact isn’t written down. It isn’t explicit or static. Instead, it evolves and morphs over time. The corporate social compact represents the public’s expectations of the role an individual business, industry or entire economic sector will play in society. In return for living up to those expectations, businesses are granted a “license to operate” – metaphorically and literally – to pay their employees and profit their owners.

What we witnessed in the financial sector over the past decade was, in essence, a wholesale breach of contract. We saw the financial services industry failing to live up to its end of the bargain. (“One more scandal and we’re going to end up like the tobacco industry,” a colleague accurately lamented to me.) Predictably, society’s reaction has been punitive. This punishment consists not only of investigations, fines and settlements equaling tens of billions of dollars, but the most extensive new set of regulations ever promulgated for a single industry.

In the absence of what Warren Buffett calls an “inner scorecard,” society has imposed an “outer scorecard” on the financial system. No one yet knows what the cumulative effect of this punitive activity will be on financial firms, markets or the economy as a whole. But one thing is clear: unless and until we can quantify that effect, the chances of achieving an optimal balance between economic growth and stability are remote.

What is also clear is that if the financial services industry wants to “stand for goodness” – if it wants to do a better job of delivering what society expects and needs – then companies in this sector are going to have to do a much better job listening to, interpreting and understanding the needs of society – and then responsibly living up to the terms of the compact.

This is not a trivial undertaking, especially since not everything society wants is healthy – in the short or the long term. Consider, too, that what society wants is constantly changing and will continue to change over time.

Since the financial crisis, there has been a lot written and said about finance, but too much of it is looking backwards, assigning blame, looking for villains and meting out punishments. My goal with A Force for Good is to shift the focus of the dialogue toward something more productive. To do so, we need to ask different questions than we’ve been asking over the last five years,  such as what we want from the capitalist system that dominates the world today and what the proper role of finance is in supporting it.

By asking questions like these, we can unearth some truths about our industry as it stands today and where it will, or should be, headed tomorrow. Indeed, by asking such questions, contributors to A Force for Good identified a number of important truths, or themes, that I believe are important to understand in order to chart a new course for our industry.

Those themes include:

Over the coming days and weeks, I hope to dive deeper into these themes and share some of the ideas that contributors to A Force for Good offer in their respective chapters and collectively as a group. I welcome your thoughts and invite you to join the conversation.

From A Force for Good by John G. Taft. Copyright © 2015 by the author and reprinted by permission of Palgrave Macmillan, a division of St. Martin’s Press, LLC.


A Makeover for Capitalism

Capitalism’s great triumph over socialism has been followed by a series of humbling setbacks since.

–New York Times columnist David Brooks

Capitalism is unquestionably the dominant socio-economic model in the world today. But since the financial crisis of 2008-2009 it has become clear that for decades we may have enjoyed a false sense of growth and prosperity founded on what bond guru Bill Gross calls “the sandy loam” of financial leverage.

Perhaps that’s why we’re hearing and reading today about concepts like Social Capitalism. Inclusive Capitalism. Fiduciary Capitalism. Sustainable Capitalism. Regenerative Capitalism.

These are attempts by the likes of New York Times columnist David Brooks, or Governor of the Bank of England Mark Carney, or former CFA Institute CEO John Rogers, or socially responsible investing pioneer David Blood, or Capital Institute founder John Fullerton to articulate new models of capitalism. Their ideas include capitalism in the service of social goals, capitalism that balances growth with stability and capitalism that improves our collective well-being as measured by metrics other than GDP.

Thought leaders around the world are trying to go beyond describing what we don’t want from capitalism – namely, a repeat of the financial crisis – to start a conversation about what we do want from capitalism in the decades ahead.

I was struck by a speech given last year on Inclusive Capitalism by Mark Carney, Governor of the Bank of England (and former Governor of the Bank of Canada).

Carney defined “Inclusive Capitalism” as “delivering a basic social contract comprised of relative equality of outcomes; equality of opportunity; and fairness across generations.”

Arguing that “unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself.” Carney called for individuals and firms to “have a sense of their responsibilities for [the] broader system.”

“…[M]arket participants need to become true stakeholders. That is, they must recognize that their actions do not merely affect their personal rewards, but also the legitimacy of the system in which they operate.”

In other words: If you’re part of the system of financial capitalism, you have a responsibility to that system.

Carney is not alone in calling for a redefinition of capitalism. A new age of Fiduciary Capitalism is envisioned by John Rogers in which “universal owners” – super-large asset owners, like sovereign wealth funds in Norway, Singapore China or Abu Dhabi – exert influence on leaders of corporations and governments. Once awakened, these giants can produce positive, long-term outcomes for society, creating a better system of finance “measured and managed to the needs of people today and for as long as we survive as a species.”

David Blood’s model of Sustainable Capitalism recognizes that in the Anthropocene (The Economist’s term for the current era in which human activity is altering the earth’s ecosystem), many kinds of economic activity are “driving our planet into liquidation” and “do not incorporate sufficient regard for [their] impact on people or the planet.”

The model of Regenerative Capitalism developed by John Fullerton goes so far as to question whether capitalism’s axiomatic assumption of continued compound economic growth is even possible, given planetary limits of various kinds.

As we debate, and before we select, the best model for capitalism in the 21st century, we have to ask: What are the social goals, the positive outcomes, that capitalism should support?

While certainly not the definitive answer, the United Nations’ proposed Sustainable Development Goals -- to be presented for adoption by the General Assembly this coming September 2015 -- represent at least one starting point for discussion.

Steve Young, Executive Director of the Caux Roundtable, a global think tank, believes it is critical, for the moral legitimacy of any new model of capitalism, that business leaders in finance and other industries focus on, have input into, and ultimately align their enterprises with societal goals like these.

“The adoption of Sustainable Development Goals will be a milestone in the evolution of moral capitalism,” writes Young, “as it faces the challenges of inequalities in income and wealth distribution, growing populations and changes in our planet’s environment.”

Capitalism is at an inflection point. While its next iteration is a work in progress, what is clear is that capitalism will need to evolve and change to retain its status as the world’s dominant socio-economic model. And it will need to do a better job of delivering what society really wants.

The ideas of John Rogers, David Blood, John Fullerton and Steve Young are outlined in essays they contributed to my forthcoming book, A Force for Good: How Enlightened Finance Can Restore Faith in Capitalism (Palgrave Macmillan), to be released on March 17.


The Arc of Hope

“The moral arc of the universe is long, but it bends towards justice.”

This month’s release of the movie Selma, and the Oscar buzz accompanying it, reminds us of the spellbinding oratorical capabilities of Dr. Martin Luther King, Jr., who is widely credited (by President Obama, no less) with the quote at the top of this blog.

What I didn't realize is this particular turn of phrase actually came from 19th-century Unitarian minister Theodore Parker. In an 1853 sermon on "Justice and the Conscience," Parker declared:

"I do not pretend to understand the moral universe; the arc is a long one, my eye reaches but little ways; I cannot calculate the curve and complete the figure by the experience of sight; I can divine it by conscience. And from what I see I am sure it bends towards justice."

Three things make this passage so memorable, so powerful and so relevant for me in my role as a corporate leader trying to navigate through increasing complexity and accelerating pace of change.

The first is Parker’s humility – admitting that his “eye reaches but little ways.” That he “cannot calculate the curve or complete the figure by the experience of sight.” If only more corporate executives, or investment managers, or economists, or central bankers or regulators or politicians would admit to similar limitations when it comes to being able to predict how long-term patterns, trends and super cycles will play out over years, or decades or even generations.

Unfortunately, grandiosity, not humility, seems to be the currency of greatest value in the world today. And admitting to uncertainty or confusion of any kind or to any degree risks being interpreted as weakness.

The second striking aspect of Parker’s statement is his willingness to take it on faith, so to speak, to “divine by conscience” in the absence of ascertainable facts. Even if we liberate people in leadership roles to admit to and embrace uncertainty or confusion, not having all the data and not having all the answers doesn’t make them any less accountable or relieve them of the responsibility to act – even if the action they choose is to wait or do nothing. This is when values and core principles – “conscience,” in Parker’s words – become important as the foundation for action.

Finally, and most importantly, I am struck by Parker’s conviction that the world is on its way to becoming a better place, by his declaration that eventually, though only over long time periods and not in a straight line, our collective moral compass will lead us to improved social outcomes.

On vacation recently, I joined my wife in watching a segment of Oprah’s “Super Soul Sunday.” The episode we watched featured an interview with author and former mega-church minister Rob Bell, who defined hope as the belief that “things are headed somewhere… and that somewhere is good.”

The absence of hope is despair. And it is far too easy, I fear, to fall into despair when confronted by the steady drumbeat of “breaking news” (which usually means bad news) coming at us from all directions, 24 hours a day.

This month, as we celebrate the birth of Dr. Martin Luther King Jr., let us remember that optimism – hope built on values and leavened by humility, hope based on conviction even when we cannot be sure of the outcome – is an essential ingredient in the kind of leadership we admire in him and in the kind of leadership we should all aspire to in our professional and personal lives.


America’s Foreign Language: Finance

A recent article in The New Yorker magazine drew an analogy between the religious elite in ancient Egypt – who maintained a secret system for recording and projecting flood levels in the Nile River (called “Nileometers”) – and today’s financial elite.

Both of these groups found a way to take advantage of an asymmetric flow of information in order to establish and maintain power over the most critical drivers of economic fortunes – the Nile in ancient Egypt and financial markets in developed nations today. In both cases, the elite held an advantage over the masses because they developed “elaborate ritual and language, designed to bamboozle and mystify and manipulate.”

The comparison drawn by The New Yorker is an important reminder of the harmful impact widening knowledge gaps can have on society. While several factors contributed to the financial crisis of 2008, a lack of financial literacy among the general public exacerbated some of those issues.

Many investors today are financially illiterate. That’s right, illiterate. Defined as “having or showing a lack of knowledge about a particular subject.”

One would think, given the record ownership of stocks, bonds and other financial instruments today, that the advantage once held by the so-called financial elite was on the decline. But broader participation in financial markets has not been accompanied by a corresponding increase in knowledge about how financial markets work.

I firmly believe that the financial services community bears some responsibility to close this knowledge gap.

And we are. Many financial companies and organizations are taking dead aim at the societal problem of financial illiteracy by stepping up their efforts to educate the public. One particularly impactful financial literacy program in the marketplace today is run by the SIFMA Foundation, an organization I would say is a hidden gem in the financial world.

For 37 years, the SIFMA Foundation has sponsored one of the most popular and effective tools for educating future investors about the market: The Stock Market Game™. The program is an online simulation in which student teams in grades 4-12 manage a hypothetical portfolio of $100,000. Each school year, more than 600,000 students across the country participate. The Stock Market Game has reached 15 million students since its inception in 1977.

It’s people like Michael Jacobs, a financial advisor at my firm, who has volunteered with the Stock Market Game for 30 years, who help make these programs successful.

An inner city kid himself, Michael, now in his 60s, knows what it’s like to grow up not understanding simple concepts such as the ebb and flow of money, jobs and prices. Michael remembers his mother telling him at a very young age that if he wanted to be successful, he would have to do it on his own because his parents weren’t in a position to help.

Today, he spends countless hours sharing what he’s learned with others. “I try to give kids a much broader sense of where their place is in capitalism and what their responsibilities are,” he says.

The lessons that Michael and other volunteers are teaching kids through these programs are obviously resonating. An independent study by Learning Point Associates found students who participated in the Stock Market Game program scored significantly higher on mathematics and financial literacy tests than their peers who did not.

The SIFMA Foundation also sponsors a national InvestWrite essay competition. Students address real world financial issues and situations by answering a new question every year about long-term saving and investing. Since the program began in 2004 almost 162,000 essays have been written in classrooms across the country and more than 20,000 volunteers have served as judges in the writing competition.

Most recently, the organization doubled down on its financial literacy commitment with the launch of the “Invest It Forward” initiative which directly connects volunteer financial professionals with teachers and classrooms.

The work that groups such as the SIFMA Foundation are doing to close the financial knowledge gap is critical. Because, as SIFMA Foundation Chairman Rich Brueckner notes, “The investment world isn’t getting simpler, it’s getting more complicated.”

As John Lanchester writes in his recent article, Money Talks: Learning the Language of Finance, “Many people… feel put off or defeated by anything having to do with money and economics…It’s almost as if they didn’t have permission to understand it.”

Lanchester goes on to say that “The language of money is a powerful tool, and it is also a tool of power.”

By increasing the number of people who are fluent in the language of money, we tip the balance of power simply by empowering more people to compete on a more level playing field.