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Gaping Gaps in CSR at Banks:

An inquiry into the CSR practice, what it can and cannot achieve.

Essay for the Research Master in Philosophy at

The University of Amsterdam

First Reader: Ewald Engelen

Second Reader: Huub Dijstelbloem

Etienne Coerwinkel

Stnr: 0488623

April 17, 2009

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Contents

Synopsis………………………………………………………………………………………………………………………………... p. 4

Acknowledgments…………………………………………………………………………………………………………………. p. 5

Introduction………………………………………………………………………………………………………………………….. p. 6

Part I: Banks and Corporate Responsibility: the double gap…………………………………………………… p. 14

1. The double Gap…………………………………………………………………………………………………………. p. 14

a. Banks are depositories of our trust…………………………………………………………………….. p. 15

The indirect responsibility of banks………………………………………………………………. p. 18

Yet banks are not meeting NGOs expectations…………………………………………….. p. 19

b. What banks cannot deliver…………………………………………………………………………………. p. 20

Matters of facts and matters of concern………………………………………………………. p. 21

Matters of facts……………………………………………………………………………………………. p. 22

Matters of concern………………………………………………………………………………………. p. 23

c. What banks are not requested to deliver……………………………………………………………. p. 24

The US Subprime crisis: a responsibility of banks?............................................ p. 25

d. How we will address the questions raised by the double gap……………………………… p. 27

2. Definitions and theoretical questions……………………………………………………………………….. p. 28

a. The notion of responsibility………………………………………………………………………………… p. 29

What is ethically correct?.................................................................................. p. 30

The issue of many hands………………………………………………………………………………. p. 30

b. Corporate responsibility……………………………………………………………………………………… p. 31

What is socially responsible?………………………………………………………………………… p. 32

c. The globalization of the banking sector………………………………………………………………. p. 34

The liberal view…………………………………………………………………………………… p. 34

Ownership of the firm: shareholder theory versus communitarian

stakeholder view…………………………………………………………………………………………..

p.35

Global business…………………………………………………………………………………………….. p. 36

d. Corporate Social responsibility: a First reformulation………………………………………… p. 37

Part II: The current practice of Corporate Responsibility: a critical review…………………………….. p. 38

1. Corporate Responsibility: a historical perspective…………………………………………………….. p. 38

1960-1976: the world order contended............................................................ p. 38

1998 and after: Global business becomes Global business............................... p. 40

NGOs are now institutionalized parties………………………………………………………… p. 41

2. Reviewing the current Corporate Responsibility practice………………………………………….. p. 42

a. The GRI Guidelines……………………………………………………………………………………………… p. 43

b. The empirical review…………………………………………………………………………………………… p. 45

How do Corporate |Responsibility reports address the externalities

identified by NGOs………………………………………………………………………………………..

p. 45

Governance…………………………………………………………………………………………………... p. 48

Do the Corporate Responsibility reports address the externalities linked to

the core activities of the bank and particularly the notion of financial

stability………………………………………………………………………………………………………….

p. 49

Corporate responsibility and the notion of financial stability………………………… p. 49

3. External critique of the practice of Corporate Responsibility……………………………………… p. 50

a. The critique formulated by Banktrack…………………………………………………………………. p. 51

Human Rights……………………………………………………………………………………………….. p. 52

Climate change……………………………………………………………………………………………… p. 53

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Matters of fact and matters of concern (2)……………………………………………………. p. 55

Matters of concern are in need of political articulation…………………………………. p. 56

b. Critique of Corporate Responsibility practice in literature…………………………………… p. 58

Corporate Responsibility and the level playing field………………………………………. p. 58

Will Corporate Responsibility create a new economy……………………………………. p. 59

Veto or engagement……………………………………………………………………………………… p. 60

4. CSR practice within the bank……………………………………………………………………………………… p. 61

The defensive nature of the Corporate Responsibility practice of banks……….. p. 62

How do banks position themselves in the shareholder-stakeholder debate….. p. 62

Corporate responsibility and corporate governance……………………………………… p. 63

Deal by deal: the working floor perspective………………………………………………… p. 65

5. The need for a reflexive redefinition of the bank’s social responsibility……………………. p. 67

Part III: searching for a new definition of Corporate Responsibility for banks………………………… p. 69

1. Corporate Responsibility redefined…………………………………………………………………………… p. 69

a. From moral choice to political issue……………………………………………………………………. p. 69

The notion of the public………………………………………………………………………………… p. 69

Building a democratic consensus…………………………………………………………………… p. 70

The notion of politics…………………………………………………………………………………….. p. 71

b. What is the corporate responsibility of banks?....................................................... p. 72

2. Banks and the Basel 2 agreements: global regulation of banking activities……………….. p. 73

a. Basel 2………………………………………………………………………………………………………………… p. 73

Basel 2: a mixed form of regulation and self-regulation………………………………… p. 74

The weakest link……………………………………………………………………………………………. p. 75

b. The political character of the Basel 2 regulation………………………………………………….. p. 76

Where is the Public in the Basel 2 discussion? ……............................................ p. 77

c. Financial stability is a corporate responsibility of the banks………………………………… p. 78

Mark to Market…………………………………………………………………………………………….. p. 79

Interdependency of the Financial actors……………………………………………………….. p. 80

Interdependency of financial flows and the power of exporting countries……. p. 81

Bonus schemes affect the risk taking appetite………………………………………………. p. 82

3. The issue of governance in a deliberative Corporate Responsibility model………………… p. 83

a. The issue of individual responsibility…………………………………………………………………… p. 83

b. The democratic deliberative process…………………………………………………………………… p. 84

A need for a democratic process…………………………………………………………………… p. 84

Fight for one’s interest………………………………………………………………………………….. p. 85

Conclusion……………………………………………………………………………………………………………………………… p. 87

Bibliography…………………………………………………………………………………………………………………………… p. 89

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Synopsis:

De verantwoordelijkheid van bedrijven, en die van banken in het bijzonder, is een complex begrip.

Deze complexiteit komt slecht naar voren in de recente ontwikkelingen rondom Corporate Social

Responsibility (“CSR”) omdat deze ontwikkelingen plaats hebben gevonden in een gegeven historisch

context, waarin antwoord moest worden geboden aan de druk die NGOs (Non Governmental

Organizations) op bedrijven uitoefenden. Echter, als we de praktijk van CSR onderzoeken, zien we

dat banken op minstens twee fronten falen: banken kunnen enerzijds niet voldoen aan de

hooggespannen verwachtingen van NGOs, omdat deze verwachtingen iets aan de banken vragen die

ze niet kunnen leveren namelijk, een democratisch besluit over hardnekkige sociale problemen.

Anderzijds hebben banken tot dusver niet het concept van verantwoordelijkheid reflexief op zichzelf

toegepast waardoor ze cruciale verantwoordelijkheden weigeren te zien. Stabiliteit van het

financiële stelsel zou daar een voorbeeld van kunnen zijn, een voorbeeld dat ons nu in een diepe

crisis heeft getrokken waar banken deels verantwoordelijkheid voor dragen.

Banken hebben in een dialoog met NGOs hun sociale verantwoordelijkheid ontwikkelen ontwikkeld.

Dit heeft de hele discussie een wending gegeven die mede bepaald wordt door de agenda’s van deze

NGOs: milieu problematiek, werknemers bescherming en de bescherming van minderheden. In deze

ontwikkeling vragen NGOs echter van bedrijven dat ze het ontbrekende politiek debat rondom deze

complexe problemen vervangen door een unilaterale actie vanuit hun bedrijfsvoering. Dit is niet

mogelijk en ook niet wenselijk. Zo zet Latour uiteen dat politieke discussies die nog geen consensus

hebben weten te bereiken, zogenaamde matters of concern, aan een democratisch proces moeten

worden onderworpen om tot een sociaal acceptabele propositie te komen.

Wat banken niet hebben ondernomen is een reflexief denkproces over hun daadwerkelijke

verantwoordelijkheid naar de maatschappij. Hadden ze dat wel gedaan, dan waren ze tot de

conclusie gekomen dat ze mede verantwoordelijk zijn voor de financiële stabiliteit van het stelsel van

banken en financiële instellingen en dat deze verantwoordelijkheid opgenomen zou moeten worden

in de CSR rapporten die ze publiceren. Een empirisch onderzoek toont dat dat niet het geval is. De

praktijk van de afgelopen jaren toont het wellicht nog beter en het huidige debat rondom de rol die

de banken hebben gespeeld in de huidige economische ontwikkelingen maakt deze discussie zeer

acuut. Hoe zouden banken deze probleem kunnen –moeten- aanpakken. Bijvoorbeeld door te

herkennen dat de Basel discussie de notie van sociale verantwoordelijkheid met zich mee brengt,

evenals discussies rondom de “mark to market” boekhouding en variabele salariëring (lees

bonussen).

Banken staan nog aan het begin van een vanuit zichzelf gerichte analyse van hun maatschappelijke

verantwoordelijkheid. Zonder een dergelijke analyse zullen CSR rapporten een defensieve reactie

blijven aan druk afkomstig van buiten de bank. Daarbij kan het ontwikkelen van CSR een politieke

platform worden voor maatschappelijke politieke besluitvorming.

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Acknowledgements

I have written most of this essay during a sabbatical period. It is only just that I should thank those

who have made this sabbatical possible, my employer and particularly Leo van Stijn. I must thank the

UvA and the students of the Philosophy research Master (Eeva, Jan Willem, Johan, Robert and Thijs)

to have tolerated an old student like me in their philosophy classes, and my mentor Ewald Engelen

for his trust, patience and valuable comments and advice. Huub Dijstelbloem was at the beginning

and the end of this project and opened a field of reflection foreign to me before following his

lessons. I wouldn’t have undertaken this journey without the inspiring support of my intellectual

mentor Marc Raidelet. Sophie Denave, Hotze Lont: thanks for the stimulating discussions. Wim

Vandekerckhove and the other members of EBEN (European Business Ethics Network) have been

helpful in filling my literature gaps and testing ideas developed here. And of course, Maurice, thanks

for being yourself.

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INTRODUCTION

I feel uneasy when reading the Corporate Responsibility statements elaborated by the most

prominent banks. These statements are dissonant when I try to accord them with my perception of

the environmental and social reality. It is as if, "acting" in some reality-show, banks were playing

their own role and yet making us believe they are not playing. Slazov Zizek1 reminds us of this joke

running in the communist DDR: a German worker finds a job in Siberia: knowing that his letters will

be read and censured, he agrees with his friends that he will write in blue to tell the truth and in red

if he lies. The first letter arrives and it is written in blue: “Everything is perfect here, shops are well in

stock, plenty of food, housing is spacious and well heated, the movie theatres are playing western

movies, there are many girls and they are very accommodating: the only thing missing here is red

ink". Is it as if the only thing missing in the bank's Corporate Responsibility statements was

something to tell us that they have been written under pressure from outside the bank, under some

threat or censure. Where is the dissonance? First of all, while banks are so insistent in demonstrating

how they are preserving our environment, we know that we are only starting to realize how much

must be done to produce sustainably. Second, banks are demonstrating for almost two years now

how fragile the whole financial system is and how weak their regulatory regime is. Yet, nothing in

their Corporate Responsibility statements hints at their responsibility towards society regarding the

stability of the financial system. How are we to believe banks when they say that they do recognize

the interests of their many stakeholders when the analysis of the very source of the current financial

crisis reflects a short term view and defence of their shareholders' interests? These Corporate

Responsibility statements are the product of a number of historical developments where the activism

of NGOs has forced banks to come with this defensive response. Banks have not, or only partially,

endorsed the view that they should answer for anything else than shareholder value. Now, the

particular views of the banks' management on issues such as the ownership of the firm or

stakeholder considerations and what they are, as banks, actually responsible for are never written in

blue ink. Instead, an interpretative analysis of their practices can help us understand what are the

forces at play that lead to Corporate Responsibility statements. This is what this essay will try to do.

This essay will develop a fairly radical critique of the social responsibility practice of banks. Not

because I have a particular liking for radical critique but because a critique of social responsibility

that takes its objective seriously has to set the current practice against the very notions of what is

socially responsible and inevitably comes to the understanding that the current practice can at best

be taken for a hasty filling of some sort of vacuum, under pressure from forces that have emerged in

1 Zizek, S, 2002 : Welcome to the Desert of the Real, Verso.

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the landscape of Corporate activity. This practice, and this will be our first thesis, cannot meet the

demands that have been laid upon it. What are these demands? That banks, because they are in

charge of financing investments in the economy, steer these investments towards sustainable

production. Yet, what it exactly means to produce sustainably, how this sustainable economy will

come about and how we are to migrate to it is something we just don’t know. And it is likely that

difficult choices will need to be made on our way to it. Banks are not in a situation to steer alone the

economic activity towards a sustainable mode of production. As much as Non Governmental

Organizations (“NGOs”) and some other stakeholders would like us to believe otherwise, the very

notion of sustainability is not something that can be defined single handedly and simply

implemented, and certainly not by banks alone: “replace the fossil burning sources of energy by

renewable energy, apply fair trade practices, respect workers, minorities and threatened species and

you will have a sustainable economy”. Each of these issues and the many other that form part of a

path towards what these actors have gathered under the name of sustainability are actually as many

situations where compromises will be required, where arbitrages need to be rendered, where

priorities will force us to suspend other developments. This first gap, as we will develop hereafter,

could be seen as an attempt to measure the distance between the status of certain facts relating to

sustainability to the more problematic status of concerns, or as Bruno Latour would put it, the

distance between positive matters of facts and socially structured matters of concern. Banks cannot

decide alone to make compromises, arbitrage between different options and decide what the

priorities are. We will try to show how these issues call for a political debate that should be held in

front of the public and ultimately sanctioned by the public, not by the banks alone -nor by the NGOs

alone, for that matter-.

And then, when we have identified this first gap and created this first movement from positive

sustainable propositions to complex political issues, we will not be finished with the Corporate Social

Responsibility of banks. For I believe CSR could not be reduced for its greatest part to sustainability. If

Corporate Social Responsibility is to mean anything, then it should certainly assess how banks affect

our economic and social conditions in many other ways. Short of being at leisure to develop each and

every of these social dimensions of banking activities I will focus on one that is at the very core of

their activity: the stability of the financial system. While my first proposition consists in

problematizing a responsibility that a number of stakeholders would like to see us as taken for

granted, here I am actually bringing to the notion of Corporate Social Responsibility something that

has simply not been there at all. In all the Corporate Responsibility Reports from banks I have been

able to lay my hands on, the very notion of financial stability as a social responsibility is simply not

endorsed, not developed, not acknowledged. Yet, the financial crisis that is unfolding as I write these

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words, is puttting hundreds of thousands of people homeless and deeply indebted, to cost millions of

jobs and affect the savings of people and economic development all over the planet. How not to see

that this is a social responsibility indeed, and one that must at least be in part put on the shoulders of

the banks themselves. So why do they not identify this in their social reports? Why do the same

NGOs that are so eager to convert banks to responsible behavior not chase them for more prudent

financial conduct? Now this proposition is certainly not simple and it has complex implications: how

can banks that are essentially competing with each other and managing primarily their own financial

condition be held responsible for the sector as a whole? But then, how could they not be held

responsible when they have pushed for several decades towards a self-regulated regime where the

interference of regulators was considered less desirable and a constraint to market driven

adjustments? Banks are not just another sector of our liberal economies. They are the depositors of

people’s trust in their money and this very function of “trustees” comes with particular obligations

that should be understood and endorsed collectively by the banking sector.

Now, if financial stability is a social responsibility of banks, then, just as for the notion of

sustainability, it becomes a responsibility towards the public and also requires to be debated publicly

and decided democratically. Sustainability and financial stability are indeed matters of concern,

matters in need of a political debate where the public participates in deciding what is best for all.

The dichotomy between facts and values is sterile, says Latour. Facts are not just “out there” for us

to act upon them, and the choice is not simply to be moral or not. Now we will largely refer to Bruno

Latour to make this backward conversion from facts to matters of concern. We will follow his actor-

network theory to show how different stakeholders (different actors) are to be called into a process

where matters of concern are identified, hierarchized and then institutionalized. Yet, we will also

deliver a critique of this process, reflecting on what this political debate is really about. It is about

“who gets what, when and where”. It is about creating a consensus in the Polis to achieve a “greater

good”, It does not dissolve itself in a singular process but keeps figuring opposing interests,

conflicting situations and power relations. Using the Basel 2 discussions as an illustration of how a

political debate is robbed from the public, we will question its democratic legitimacy. Grabbed by

technicians, monopolized by the financial community, the realization of financial stability has never

reached the public as an issue where it would have a say. The very fact that this issue is not

presented as a social debate and a social responsibility is a testimony to the fact that historically

dominant actors are generally not willing to share their current prerogatives into a public forum.

Institutionalization is required, for sure, but it will not happen without a fight. Enlarging the social

responsibility of banks to financial stability is therefore a strong political proposition. To counter

Latour in this sense: actors will not simply be “invited” to participate in this process; they will have to

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force many doors to the negotiation table and count only on themselves to be represented

adequately.

This is our fourth and final proposition: corporate responsibility could well constitute a completely

new political arena. Literature abounds in references to the globalization of economic actors and the

progressive weakening of national state control. The transnational regulation that is progressively

substituting itself to the nation-state is not coping with the swift development of the global

economy. In an effort to meet the concerns of the public, often intermediated by the NGOs,

corporates have developed this form of self-regulation that we use to call their social responsibility.

Yet, they have so far kept this development to themselves and not bothered much with democratic

legitimacy. This is why I believe corporate responsibility needs to be made a political activity: one

that involves the public in choices that affect us all. But this means that we have to re-visit our

representation of what a company is: is it the property of its shareholders? What sort of claims can

the other stakeholders put on the company and its activity? How to build a democratic process

around something that is seen by some to be first supposed to respond to the interests of its owners

and how can one define the notion of ownership? Again, surprising as it may seem, corporate

responsibility statements have so far not responded to these questions. While the notion of

stakeholders is largely used in social reports, it is not clearly articulated with the more traditional

notion of ownership and the latter’s control over the management of the firm remains largely

unabated.

Why is this critique so important? Because, against cynical comments about the insincerity of CSR as

much as against the optimism of some pointing to what CSR has achieved, we want to take the very

phenomenon of corporate responsibility seriously. Not in a naïve way, not simply by hoping that all

these publicized good intentions will somehow produce the results one may expect from them, but

rather because there is such thing as a responsibility of corporates towards the social and economic

world and that it is better to start defining this than speculating about the good will of the men who

are in a position to steer these processes. This essay explains why the current CSR role assigned to

banks cannot keep its promises. And it attempts to sketch a reformulation of CSR that would include

the core of the activities of banks, which is to take savings and lend to the economy and at the same

time safeguard the trust people have in the money and the banks themselves, both at the heart of

this intermediation.

Such a journey into CSR is one that does not make much progress if one does not allow different

theories to speak their voice and shed a different light upon the issue. I have chosen to submit them

as we move along different subjects without letting myself support any of them beyond their

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respective contribution to the debate. The issue, at the level we have decided to raise it, is too

complex and multifaceted to fit into any attempt to support one holistic theory against another and

simply chose sides. I believe this undertaking requires a multi-theoretical analysis, one that breeds on

the contributions of many authors, while believing none has provided an all encompassing solution.

But as much as outlaying theoretical background, our essay is looking into the current practice of CSR

at banks. Being a practitioner myself, it would be unthinkable to me not to write out of the

perspective of my actual working experience. The practical anchoring of this critique has been

substantiated by the review of three CSR reports from banks. Three only because it is difficult to

draw meaningful conclusions from reports that are largely qualitative and free format in spite of all

the work that has been done to get them into a normalized format. Statistical studies will make more

sense once more quantitative information will be provided, which is hardly the case today. Which

banks to select, though? I have decided they should be representative of the three areas where CSR

is most advanced: the U.S., U.K. and Continental Europe. Then it had to concern banks that are

scoring well on their CSR responsibility so that I couldn’t be accused of choosing easy victims. My

selection therefore ended with Citibank, the leading US Bank, Royal Bank of Scotland, a prominent

U.K. bank and Deutsche Bank, an institution within the German banking sector. The CSR reports

available at the time of my survey were those of 2006. This review of practical work actually did

reinforce my earlier intuition that the CSR banks have been practicing so far has been very much

geared towards a very specific sort of external constraint: the voice of NGOs. Now, pressure in itself

is not necessarily bad: most changes have taken place under some pressure or other. My thesis will

show that the very pressure exercised by NGOs was actually much needed when it emerged and is

still very much needed today. NGOs have been able to fill a gap when transnational companies were

not confronted with their social responsibility because they were not tied to national authorities

anymore. NGOs have picked-up issues such as sustainability long before our traditional politicians

had taken this turn. Yet NGOs are not as present on all fronts where the responsibility of banks is at

stake and they are not necessarily representative of all the interests of all the public. Hence the

pressure of NGOs alone cannot dictate what CSR should develop.

Finally, a word on the literature used. As mentioned earlier, the multi-perspective approach has led

me to cite theoretical works from very different backgrounds. Considering the scope of this essay, I

will mostly develop these aspects of the respective theories that I believe are useful to my research.

This theoretical anchoring is much needed as we would otherwise drift away in a sort of

compounded journalism that would only stand for the time that events are unfolding. Key theoretical

references will cover concepts such as what constitutes the public (Dewey 1927), matters of concern

(Latour 2004), and the notion of responsibility (Boven 1998). A second tier of literature covers

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specific aspects we need to address, such as the ownership of the firm and stakeholders theories

(Capaldi, Engelen 2002, Fontroda and Sison 2006, Hemmati 2001, Stiglitz 2003, Freeman 1984).

Finally, the very notion of CSR is a source of prolific literature that needed to be covered. We refer to

our bibliography for these articles. But this essay has to deal also with a history in the making,

particularly so when there is a financial crisis raging out there that has everything to do with the

notion of financial stability I develop here. The practice orientation of this paper has thus allowed me

to include a number of recent press articles and opinion columns that are a good indication of how

the community reacts to this crisis and how the different propositions I develop are actually in touch

with a very pressing reality. All this makes for a paper that will be difficult to classify in the usual

academic exercises, mixing up literature review, with the analysis of bank documents and press

coverage, including an empirical approach and theoretical considerations and finally asserting a

number of new propositions for which there is little reference material to be provided. The very large

scope and ambitious program of this thesis means also that a large number of propositions are not

fully developed and remain disputable. It is in this respect a work in progress that will hopefully call

for many comments and questions on its whole as much as on its parts. Having set the stage in this

essay, we will need to substantiate each of these propositions in more detailed research. Yet, in a

first instance, they need to be exposed in conjunction.

The practice orientation of this essay has made it vulnerable to the developments observed in this

very practice. Now, the developments on most of the issues I will be exposing here are currently

taken into a completely new perspective than when we started writing this essay. I first started

thinking about Corporate Responsibility in 2006 and most of the intuitions developed here were

emerging then. The essay produced today was developed between September 2007 and October

2008. Now the crisis that was rampant in the beginning burst out with the fall of Bear Stearns March

16, 2008 and got into an accelerated mode with the fall of Lehman Brothers on September 15, 2008.

The reader of this essay will need to remember now and in the future that it was written in this

context. I often refer to this crisis without detailing its course of events nor specifying its many

developments. It is somehow present, though, in every line I have been writing, simply because the

issues that we are discussing here are all so much at the forefront of this very crisis: systemic risk, the

failing regulation, the greedy bank management and top employees, the limitations of markets. The

crisis is at its peak now and the most radical views are becoming mainstream: the wildest scenarios

are being advanced, including some where the whole banking sector may become a nationalized

utility. While I felt pretty much alone and radical myself at the beginning of this essay in saying for

example that banks are responsible for financial stability, I know feel the urge to moderate the

“bankers bashing” and reaffirm the need to keep the overall prudent banking activity insulated from

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government driven interference at its core: the collecting of deposits and granting of loans. Let me

simply stress here that my writing could not possibly be sheltered from these events and that the

reader must put these events back in his mind when reading these pages.

Here is the sequence I have adopted to submit my propositions: the first part of my essay is detailing

what I have called the double gap: the CSR of banks is not delivering a sustainable economy (first

gap) while it does also not address what could be its main responsibility which is to protect people’s

trust in their financial system (second gap). While the first part of this chapter is essentially a

deconstruction of the current CSR practice, we review in the second part of it a number of concepts

that are required to establish new exigencies for the sort of CSR that will meet a more robust notion

of responsibility. This chapters ends on a review of the banking sector in the recent period and

engages into the discussion of who owns the firm. In the second chapter I undertake a critique of the

current practice of CSR at three different levels: historical, empirical and in specialized literature. The

historical development of CSR leads me to conclude that it has essentially originated in a vacuum

created by the internationalization of the companies and their escaping national regulators: CSR as

business pursued by other means. This section explains the role taken by NGOs in forcing corporates

to formulate CSR policies. The empirical review of the CSR reports of Citibank, Royal Bank of Scotland

and Deutsche Bank confirms the focus on sustainability and the absence of financial stability, the two

gaps I have identified in the first part of the essay. Looking into the critique formulated by BankTrack,

an NGO specialized in banks, we see develop the confusion between facts and matters of concern. A

review of the literature on the subject of CSR allows me to confirm that the very practice of CSR is

still very much pray to theoretical debates, in the absence of a consensus on issues such as

ownership of the firm, how to manage collective responsibility, what to expect of CSR and who

should be leading this process. Finally, we sketch some of the considerations that are actually

considered within the bank itself, when it comes to Corporate Responsibility: how does an account

manager take CSR into account in a lending decision? The third chapter is trying to think forward into

a new form of CSR, one that would make the formulation of responsibility the outcome of a political

decision process. Going through the mechanisms of the Basel 2 discussion that is geared towards a

new form of regulation for banks, this chapter reviews a number of recent discussions that have

emerged in the financial crisis. The difficulty that is being exposed is that banks are on one side

competing with one another while at the same time taking ownership of the regulation that is

supposed to protect the sector as a whole. Are banks able to follow the logic of competitive

performance while at the same time taking all the measures to protect themselves and their peers

from systemic risk? Have these discussions been addressed in the Basel 2 effort? Have the right

people been involved in its elaboration? How does the notion of CSR tie into the different models for

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corporate governance? This discussion builds on the critical review of the notion of CSR as developed

in this essay to come to a new formulation of what the social responsibility of corporates could really

mean.

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PART I: BANKS AND CORPORATE RESPONSIBILITY: THE DOUBLE GAP

I will hereunder give the claims I have made in the introduction more ground. First I will establish

why banks are not just companies like any other but the depositaries of our trust and thus subjected

to our scrutiny. Then, developing the concepts of matters of fact and matters of concern, I will

establish more firmly how NGOs have asked banks to deliver environmental related change they

simply cannot decide upon alone. Finally, I will show how banks do have a social role to play in

keeping the financial system whole and how they fail to acknowledge this task. These two

propositions, these two gaps will be our guiding observation throughout this essay and will constitute

the backbone of our critique of CSR as it is practiced today. At the end of the chapter, we will review

a number of concepts that need to be evoked if one wants to make any progress on the notion of

CSR: responsibility, collective responsibility and social responsibility in the frame of a global liberal

economy.

1. The double gap

If we had forgotten how much our economies are based on trust, the US Subprime crisis and

subsequent credit crunch -itself leading to a deep and threatening financial crisis- have provided us

with an expensive reminder of it. This trust is symbolically crystallized in the very currency we

exchange as a token of underlying physical goods. What I want to highlight in this first section is that

our banks and financial institutions, together with the central banks and regulators are the holders

and guardians of this trust society has put in its money as much as they are the intermediaries of the

transactions whereby we decide to spend, invest or save our money, projecting ourselves into an

always uncertain future. Strikingly as it may seem, we will establish hereafter that this social

responsibility of the financial sector which could be called the safeguarding of trust is hardly at all

exposed in the corporate responsibility statements that have flourished in the recent decades among

major financial institutions. Instead, these codes of conduct and social responsibility statements are

addressing a number of issues that are generally covered by the notion of sustainability, with a

particular focus on environmental issues, issues relating to human rights and working conditions.

Banks are targeted specifically by NGOs as they are considered to be driving the economic

development by allocating resources to the economy, thereby somewhat neglecting the fact that this

activity of distribution of credit is primarily based on investment programs that are submitted to

them by the corporate world. It seems thus that banks are in a difficult position and cannot but fail

15

on both accounts: while they are being held to account for the sustainable orientation of our

economies which they do not directly control, they seem not to put such a high degree of social

responsibility on this other task of theirs which is to maintain the stability of the financial system as a

whole. This is what we refer to as the double gap: gap between expectations of the sponsors of a

sustainable economy and how much banks can achieve in this domain and gap between what banks

have acknowledged to be their social responsibility and this other one they don’t acknowledge:

financial stability.

a. Banks are depositaries of our trust

Why focus on banks? In its special edition of finance, the economic review Alternatives Economiques2

is hammering out this trust issue when, looking back at the origins of the banking activity, it

underlines how, starting with the different techniques of discount of trade bills, banks have been

able to basically create a new form of currency that would allow for a development of our

economies: credit. Banks create money when they extend credits to their customers. Central banks

became the regulators of the system as much as they guaranteed the good end of operations. From

this moment on, money had definitely cut its link to any “natural” basis: it became a matter of

finance. And indeed, banks have always assumed this role and accepted that they do have a very

specific status in the financial system. As a counterparty of this very specific task, they are submitted

to particular scrutiny. A popular translation of this situation is that banks are “lending other people’s

money” which is only half of the story: they are not only intermediating between people desiring to

save money for later needs and people who have investment needs, they do actually hold the reins

of the very availability of money to finance the economy, irrespective of there being any deposit to

lend this money from. Banks are not lending other people’s money: they are actually lending other

people’s trust. Credit, the decision of lending money to an investor in need of funds, is the very act

by which (scriptural) money is being created. Ultimately, the central banks are the counterparty of

last resort and in control of the interest tool to influence the price of credit, not directly its quantity3.

So, banks are indeed very specific actors in our economies and examining how banks address the

issue of Corporate (social) Responsibility should be extremely useful to both the functioning of banks

and the very notion of Corporate Responsibility.

2Aglietta M. (et al). 2008: « La Finance », in Alternatives Economiques, Hors Série number 75, 1st Quarter 2008.

3 Ibid above, p 15: “Le tournant se situe en 1694 avec la création de la Banque d’’ Angleterre. Depuis cette date,

elles incarnent l’intersection entre l’économique et le politique. Banques, elles émettent des billets ; centrales

elles assurent la bonne fin des opérations. En contrepartie de quoi elles organisent et contrôlent les systèmes

bancaires (ensemble des banques) ». (translation : The turning point can be situated in 1694 with the creation

of the Bank of England. From this moment, [Central Banks] represent the intersection between the economic

and the political. Banks, they issue bank notes; Central [Banks] they guarantee the good end of operations. In

exchange for this, they organize and control the banking systems (including all banks)).

16

This essay cannot pretend to lay out all the theoretical background of this notion of banks as actual

source of money supply and how money supply can be associated with financial (in)stability. Instead I

will refer to one study that is particularly relevant in the context of financial stability I will develop

further here. Barry Eichengreen and Kris Mitchener4 wrote this paper back in 2003, at a moment

where the first signs of the current financial crisis were showing yet had not turned into a systemic

crisis. The paper was presented in the context of the Bank for International Settlement (“BIS”) to

which I will refer largely in the third chapter of this essay. Now, the thesis developed by the authors

is that the current crisis, which they had already largely identified then, is very much resembling the

big crisis of 1929, in the fact that the financial sector has played in both an equally determining role.

The current financial crisis which has now spilled over into an economic recession is the direct

consequence of the credit crunch which started in 2007. But this credit crunch itself is the

consequence of a credit boom, much as the 1929 crisis was. It is this credit boom that the authors

analyze in the period from the early twenties to 1929 and they draw a number of similarities

between the condition of the financial sector then and now. Going back as far as the 1990ties, the

authors identify a period of booming credit where the regulatory authorities had little reason to

tighten the credit supply as inflation threats were low. In this period, banks and non bank financial

institutions have been competing fiercely to provide credit to different sectors of the economy. The

“benign” financial environment5 were making the cost of credit very low and financial institutions

were looking for higher risk activities that were susceptible to pay higher returns.

This period actually lasted undisturbed until the dotcom bubble of 2001. Symptomatic of this period

was the legend that dot.com entrepreneurs, most of them in their early twenties, could receive

4 B. Eichengreen and K. Mitchener, 2003: “The Great Depression as a credit boom gone wrong”, BIS Working

paper, Monetary and Economic Department, www.bis.org 5 Tustain, P, 2008: “Subprime Mortgage Collapse: Why Bear Stearns is just the Start”, published on the web on

September 5, 2008, www.moneyweek.com

17

abundant financing on a project plan no longer than a one A4 treasury forecast. Banks and financial

institutions were stumbling over one another to lend their money and the startup funds and

incubator funds were plethora. Until this abundance of money created an unjustified valuation of all

these companies which led to the dotcom bubble and its subsequent burst. Instead of bringing back

some sanity in the system, this first bubble quickly got transferred into the real estate bubble we are

now seeing bursting with the dramatic consequences it has over the financial system as a whole.

What characterizes the financial sector now, as much as the financial sector in the 1929 crisis,

according to the authors, is the non-intervention of central banks combined with lower credit

standards at the financial institutions themselves. While the central banks have limited themselves to

an anti-inflationary policy, without any regard to the effect of the extension of credit on the (over)

valuation of assets, the latter have let their risk culture drift away in a frenzy of piling up high risk

assets. We all have in memory the crazy years just before 1929 where private persons were granted

loans from financial institutions to buy stock and how this flow of money had pushed prices on the

stock exchange to dazzling heights, before crashing on this famous Friday of October 1929. “In

search of yield, investors dabble increasingly in risky investments. Their appetite for risk is stronger [..]

Eventually, [..] the financial bubble is pricked and, as asset prices decline, the economy is left with an

overhang of ill-designed, non-viable investment projects, distressed banks, and heavily indebted

households and firms, aggravating the subsequent downturn”.6 Much like now, the crisis of 1929

cumulated several bubbles: real estate (1925), Wall Street (1929) and consumer durable goods

during the whole second half of the 1920ies. Which reminds us that one bubble is still to come in the

current crisis, which is the consumer credit bubble that has pulled the industrial production growth

over the last decade. The presentation of this paper in 2003 at the highest international regulatory

instance indicates that the current crisis was already largely anticipated. But somehow, both

regulators and financial actors have been deaf to the warnings extended to them. We will come back

to this aspect of how financial institutions lower their lending criteria in search for higher returns in

the section relating to responsibility in this chapter. There we try to understand how the practice of

banking can lead a whole sector to slowly put aside the rules of caution usually key in lending

decisions. Let us simply draw this preliminary conclusion that there is a direct relation between the

activity of extending credit and the potential overvaluation of assets that lead to the formation of

bubbles and cycles. And hence there is a direct responsibility for banks and their regulators in

managing these bubbles and cycles.

6 Ibi above, p 2.

18

The indirect responsibility of banks

Now, NGOs have focused on banks for a more “pragmatic” reason: in their reasoning, banks have

both a direct and indirect social responsibility: directly, banks are responsible for the management of

their own company, their own performance on matters such as their CO2 “imprint”, diversity, and

management of their relations with different stakeholders. On top of that, banks are indirectly

responsible for the activities of the companies to which they are lending their money. BankTrack, an

NGO specialized in following the banking sector and which we will be quoting regularly through these

pages for that reason, has for example calculated the CO2 imprint of the Royal Bank of Scotland

(“RBS”) on both direct and indirect ways, concluding that its CO2 imprint was very substantial

because of all its lending into the oil sector7: “The Royal Bank of Scotland is covering up involvement

in carbon emissions greater than those of the whole country of Scotland, according to new research

published today, Monday 12 March 2007”.

This approach by the NGOs does of course have an element of truth when we observe the banking

practices: indeed, banks are often compared to the heart of the body economy, pumping money in

its financial arteries to the place where it is best used, according to their financial standards. That is,

investments are financed if they are able to create enough revenues to repay the money invested

plus interest. To illustrate this very simply, a company would probably not be able to get financing for

a bombastic head-office if the latter does not contribute to its revenues in a way that is

commensurate with the investment. The same company would successfully attract financing,

however, if it concerns a productive investment that will enhance its revenues and create the

capacity to repay the loan. More pragmatically, banks base their lending decisions on the probability

of getting the investment paid back and this risk analysis is certainly taking into account the chances

that these investment projects do respond to a demand of our economies, that it represents “money

well spent”, today and in the future (at least up to repayment of their loan). Where risks of any

nature, including long term risks of an environmental nature, are overwhelmingly outweighing the

potential profit of the investment in question, there are little chances banks would support such a

project. Coulson and Monks8 underline that environmental considerations could for example affect a

bank in case it needs to repossess a piece of land (Brownfield) that would be contaminated. The bank

could be asked (and has been asked so in a few occasions) to pay for the clean-up of these sites

7See: “The Oil and Gas Bank. RBS and the financing of Climate Change” . Researched & written by Mika Minio-

Paluello of PLATFORM www.carbonweb.org. Published by BankTrack, Friends of the Earth - Scotland, nef (new

economics foundation), People & Planet and PLATFORM in March 2007. 8Coulson A. and Monks V., 1999: “Corporate Environmental Performance Considerations within Bank Lending

Decisions”, in Eco-Management and Auditing, Nr 6 p 1 to 10

19

under his lender’s liability. Using the example of Lloyds TSB Group, Coulson and Monks then detail

how the analysis of environmental risk has been made an integral part of the risk assessment of the

bank. So indeed, through their risk analysis, banks provide a confirmation of the soundness of the

investment decision of the company they finance. It is this confirmation that NGOs tend to identify

under the notion of indirect responsibility. The content of the analysis applied by banks to a given

investment, is then also what NGOs will challenge through their naming and shaming campaigns.

While an investment in a palm-oil exploitation in Indonesia could be financially sound, its damage to

the environment could be considered unacceptable. Do banks include such considerations in their

evaluation process? Well they certainly have done so increasingly and reputation risk, the risk of

being targeted by a NGO naming and shaming campaign, is now an integral part of the bank’s

financial analysis process. Cowton and Thompson9 argue that both reputational and prudential

motivations are combining in the bank’s credit risk assessment of environment related matters. Out

of 57 banks they have questioned in a survey, only 9 did not include environment related criteria in

credit risk assessment; of the same sample, 48 banks considered the avoidance or mitigation of

liabilities the most important reason to do so, including in pricing the transaction, while reputational

and image issues ranked only second most important. The authors underline that, while codes of

conducts’ influence on the process was hard to measure, the best illustration of the banks’ increasing

concern for environment related issues was expressed in their signing of collective agreements:

Carbon disclosure project, UNEP, Equator Principles, Collevecchio Declaration, etc..

Yet banks are not meeting NGOs expectations

If we are to believe BankTrack’s recent report on banks’ compliance with their social responsibility,

they are not scoring very high in the eyes of who makes environmental considerations prevail. The

title of the report is not lying about it: Mind the Gap10

! Nor are its conclusions: “This leads to the

conclusion that the large majority of the [..] banks need to devote significantly more attention to

developing clear sector and issue policies. There remains a clear gap between the intentions on

sustainability as expressed by many banks and the content of their credit policies”. BankTrack

essentially reviewed Banks sector policies in a number of sensitive sectors (Agriculture, Dams,

Fisheries, Forestry, Military Industries and Arms Trade, Mining and Oil and Gas) and on a number of

sensitive issues (Biodiversity, Toxics, Climate change, Human Rights, Indigenous People, Labor,

Taxation). Banks’ policies on these issues were inventoried and evaluated on a “best practice” basis,

9Cowton C, Thompson P, 2000: “Do Codes Make a Difference? The Case of Bank Lending and the Environment”,

in Journal of Business Ethics, N 24, pp 165-178 10

See BankTrack’s report: “mind the gap” published in the internet December 21, 2007

http://www.banktrack.org

20

producing scoring matrixes that allowed a comparison between them and best in class standards.

The overall conclusion was that banks, while taking significant steps and signing different agreements

on these topics, were still reluctant to let themselves be constrained to the details of their evaluation

process. So banks seem to be responding to the pressure for more engagement in social

responsibility, but at the same time they appear to be sticking to general statements and

declarations of intention which do not respond to the pressing expectations of BankTrack. It is as if,

paying lip service to the NGO community, banks are protecting their decision making process

jealously and not letting stakeholders getting too much into the details of their evaluation process.

The gap identified by NGOs could therefore be rephrased this way: banks are doing the talking but

they fail to do the walking. Banks are producing all the right declarations in their social responsibility

reports, adhering to many international treaties and conventions, as long as the latter do not impose

any hard constraints on their lending criteria. When it comes to translating these things in concrete

action such as lending policies and lending restrictions, effective exclusion of some investments, then

banks are felt by NGOs to be much more reluctant to abide to these intentions.

b. What banks cannot deliver

Several reasons can be invoked to explain the gap between banks’ willingness to address social

responsibility and the NGOs expectations. First, banks are indeed guarding their independence and

commercial strategy jealously and therefore not releasing into the public all the criteria they use to

define their lending strategy, if only for competitive reasons. Underwriting criteria belong to the core

of the bank’s commercial strategy and it does not seem a reasonable expectation that these

strategies would be made completely public and transparent. They are also protecting the

confidentiality of the operations of their clients, conforming in this to generally accepted compliance

rules embedded into banking practices. There is a reality to this point beyond the cynical view that

this secrecy would protect some less than orthodox practices of their clients: to perform their risk

analysis of the activity their clients engage into, banks often need to know details of these activities

that are really sensitive, details that would prejudice their competitive position if they were to be

disclosed to their competitors. Companies rightfully want this information to be held out of the

public domain. Next to this, however, banks want to stay in control of their own processes and not

expose themselves to discussions that would go too deep into the details of how they intend to

achieve compliance with the general standards they have endorsed. This doesn’t mean banks do not

comply, but simply that they intend to control the level of disclosure.

Yet there is another cause for this gap between the banks’ performance on social responsibility and

the NGOs demands. It has to do with the vision NGOs have of the world and how they uphold this

21

vision, sometimes against any existing consensus. To illustrate this, we would like to stay within the

context of the CO2 issue. Now it is generally accepted, with some differences here and there, that we

are in a period of climate change. It is also increasingly accepted that this climate change could be

linked to the burning of fossil fuels, releasing CO2 (or so called greenhouse gases) in the atmosphere.

Consequently, most countries have accepted to implement CO2 emission reducing programs -as

expressed in the Kyoto agreements- and most companies have committed to reduce CO2 emissions

from their activities where they can –as for example in the carbon disclosure project11

-. Yet, it is still

not clear to everybody and there is certainly no consensus on how we will migrate from a fossil

burning economy to an economy that will essentially drive on renewable energy, if this ever

happens. The recent developments around nuclear power is a good demonstration of this: while it

has been commonly accepted for a long period in many countries that nuclear was an undesirable

source of energy because of the issue of nuclear waste, it appears increasingly necessary to include

some form of nuclear power in the transition to new forms of energy. The recent 180 degrees

turnaround in UK policies on this matter is a good illustration of this recent change of paradigm.

Meanwhile, NGOs are asking banks to reduce their financing of the oil and gas sector, irrespective of

what scenario has been endorsed as a general consensus on this migration issue. Quoting BankTrack

again: “It is important for every bank to establish a comprehensive climate or energy policy and

strategy that addresses issues such as climate risk, assessing and reporting on climate emissions [..],

phasing out of financing of the Oil and Gas industry and most greenhouse gas intensive energy

infrastructure and investing in renewable energy and energy efficiency programmes and projects.”12

In our view, such a recommendation is typical of the sort of deliverables banks cannot produce and

typical of the way NGOs go about a number of issues that are in need of a discussion rather than of

disengagement by banks. How to phase out of the fossil fuels is not something that our societies

have built a consensus on. How then could banks alone have a plan for this? Phasing out of the oil

and gas sector could have consequences that BankTrack apparently does not see or does not want to

take into consideration here. It is not difficult to imagine that a sudden cut in the production of fossil

fuels due to the lack of investments could lead to electricity black-outs, heating problems, security

hazard, up to the fallout of entire parts of our economies. Let alone the fact that our sourcing of

energy is indeed an equation that involves several geo-political dimensions: security of supply,

reliability and power relations with our main oil suppliers, security of the different oil transport

channels and up to acute defence issues. Besides, the reduction of energy supply will probably affect

11

“The Carbon Disclosure Project (CDP) is an independent not-for-profit organization aiming to create a lasting

relationship between shareholders and corporations regarding the implications for shareholder value and

commercial operations presented by climate change. Its goal is to facilitate a dialogue, supported by quality

information, from which a rational response to climate change will emerge. “ http://www.cdproject.net/ 12

BankTrack Internet site, October 21, 2007: Banks, Climate and Energy. http://www.banktrack.org/

22

countries in different ways, impacting less adaptive poor countries more than rich countries thereby

increasing the wealth gap between developed and emerging countries. Likewise, within a given

country, the economic consequences of a contraction of the economy caused by shrinking natural

resources availability will most probably impact on people differently: the higher the cost of energy

in one’s spending, the higher the impact. Again, poor households will probably suffer most. All these

aspects need consideration. And quite obviously, the solutions devised to solve the issue will have

political consequences that need to be anchored in a political legitimate decision process. We will

have the opportunity to develop into more details what we mean when we talk about legitimate

political decisions below. Let us draw the simple conclusion here that banks are not the sort of social

actor that are in a position to decide what the energy policy of a community, a country or even, in

the context of globalization, of the whole planet should be. The issue is simply too big for them.

Matters of fact and matters of concern

On this issue as on many others, NGOs may have given us the impression that there is a consensus,

that they were talking for the public at large, where there is not even a fully articulated democratic

discussion taking place. To use the vocabulary developed by Bruno Latour in its Actor-Network

theory13

, while global warming could to some extent be called a matter of fact, the migration to a

new form of economy that would consume less energy is definitely a matter of concern. Matters of

concern are issues that are in need of a political articulation where all the stakeholders to a given

problem are invited to participate in a discussion and where the right institutional platform is created

to support these discussions, establish a consensus and monitor its implementation. Banks are not -

nor are NGOs- the right sort of entities to go (alone) about matters of concern.

Matters of facts

Yet, it is clear also that banks have been listening to NGOs and that they have taken steps wherever

the requests from NGOs seemed to meet a consensus or were simply affirming the law. We will not

go much deeper in this essay about situations that are in fact matters of compliance with the law.

Workers rights, protection of minorities, respect of environmental regulations, in countries where

the existing legal system is sufficiently developed on these matters, these issues are sometimes

presented as social responsibility issues, but are simply matters of following the law: they are not

subject to discretionary powers of the parties involved. Matters that have reached a strong

consensus but are not legally formalized are most of the times, the sort of issues banks cover in their

13

Latour B, 2004: Politics of Nature: How to bring the Sciences into Democracy. Translated by Catherine Porter,

London, Harvard University Press

23

social responsibility reports: environmental issues, issues relating to human rights in countries where

these rights are insufficiently protected in the law, positive discrimination, representation of

minorities within the firm, etc.. Those we would call: matters of fact. Latour uses the term matter of

fact rather than simply facts to underline that these matters have in their time potentially

constituted issues and that they do require an “ordering” of data to constitute facts. While the idea

that the world is round can now be considered a fact, it has required a considerable theoretical

development to be admitted as a fact. Latour therefore calls it a matter of fact. Yet at the same time,

this matter of fact has now been accepted and it would be vain to discuss it all over again. It has

become uncontroversial and an integral part of the order of things, an element of the realm of

reality.

Matters of concern

Matters of concern are propositions that are in need of a more elaborate investigation. While the

classical opposition between facts and values tends to call in echo this other opposition between

objectivity and subjectivity, between positive science and ethical consideration, this opposition tends

to give to facts a sort of superior ranking. In this movement, we may well overlook how treacherous

some so-called facts really are. Positive science will have a tendency to draw into the area of facts a

number of things that are actually in need of a social discussion. Take the example of children labour

to stay close to the sort of issues debated in CSR discussions. The proposition: child labour is not

desirable, sounds very much as a matter of fact. Yet, does the refusal to be involved in children work

lead to a better situation for children in emerging countries? Not necessarily. David Vogel in The

Market for Virtue14

cites a number of examples where children are actually worse off when

international exporting companies decide to exclude them from their staff: these children are then

generally left to work with domestic companies where working conditions are much worse, wages

are lower and security less of a priority. Or they are left with no other choice than stepping into

prostitution. Finally, the reduction in income is often putting their families in worse situations than

before, with no hope for education and social promotion. Behind the fact: “children should not be

put to work” hide a number of matters of concern that are too complex to be solved through binary

decisions “to do” or “not to do” something. Already there, the excessive simplification of what is to

be achieved has negative effects on what is originally a good intention. We will hereafter investigate

how banks are to deal with matters of concern and how these issues cannot simply be put at rest in

Corporate Responsibility engagements. Let us produce here the “golden rules” of Latour’s theory.

Creating a suspicion around the notion of fact (“Thou shall not simplify the number of propositions to

14

Vogel, P, 2005: The Market for Virtue, The Potential and Limits of Corporate Social Responsibility, Washington,

Brookings Institution Press, p 98.

24

be taken into account in the discussion”)15

Bruno Latour nevertheless accepts that some propositions

are instituted as matters of fact (“Once propositions have been instituted, thou shalt no longer debate

their legitimate presence within collective life”)16

. Regarding matters of concern, a debate needs to

be installed (“Thou shall ensure that the number of voices that participate in the articulation of

propositions has not been arbitrarily short-circuited”)17

which takes into account existing

propositions: (“Thou shalt discuss the compatibility of the new propositions with those which are

already instituted, in such a way as to maintain them all in the same common world that will give

them their legitimate rank”)18

.

While banks can be asked to act in accordance with what we have accepted to be matters of fact,

they are not in a position to act alone on matters of concern, unless they are able to show they have

indeed done so after having engaged all the necessary actors to reflect on the issue and come to a

consensus. We hope this development has sufficiently created the sort of anxiety, of concern Latour

wants us to feel about things people would like us to take as positive facts. We will have a chance to

come back to it in the second chapter when we will look in detail into the critique provided by

BankTrack on the CSR reports of the various banks we have made part of our empirical research.

c. What banks are not requested to deliver

The first gap we identified is one between what NGOs expect from banks and what we believe they

can and cannot produce. Accused of “talking the talk but not walking the walk” banks could well have

been charged with the impossible task to move alone matters of concern into the realm of matters of

fact. Now, let’s move on to the second gap we have identified: banks do not seem to see financial

stability as one of their social responsibilities, nor do NGOs and other parties pressing for social

responsibility. That is not to say that banks are not concerned about this issue: they are. Banks spend

a lot of time and attention to the risks associated with the regulatory framework, systemic risks,

speculative bubble bursts, countries being in default, etc. If only because all these risks have an effect

on the assets held by the bank itself, on counterparty risk (risk taken by the bank on other financial

institutions), on the safety of payments and the settlement of transactions, country risk, etc. Yet they

have not recognized this risk as one where stakeholders may have a say on how they should go about

these risks. Banks discuss internally, with the regulators and with their peers about these issues, but

not with the public at large. While being one of the core activities of the bank, managing systemic

15

Latour B, 2004: Politics of Nature: How to bring the Sciences into Democracy. Translated by Catherine Porter,

London, Harvard University Press 16

Ibid above 17

Ibid above 18

Ibid above

25

risk in the broadest possible sense (including increased chances of bubble formation and subsequent

bursting, recession, of a financial meltdown, of countries going into default, of assets being impaired

abruptly), is not something that appears in the Corporate Responsibility reports. Yet, time after time,

the analysis of financial crisis show that banks have a direct role in how these crises came about. This

is not a simple matter: banks are first and foremost competing with one another. From that

perspective, they are not inclined to think about the robustness of their peers as being their own

problem and would not mind to see them get weaker and eventually stumble. Yet at the same time

they do realize how much their balance sheets are intertwined with other financial institutions and

how much they are at risk if any of their peers were to default. In this respect, the role of Central

Banks as neutral sector supervisors comes naturally to mind, were it not that their role is increasingly

difficult to fulfil in the context of globalization and the push to self-regulation.

The US Subprime crisis: a responsibility of banks?

The recent US Subprime crisis is certainly in part attributable to the sloppy underwriting of mortgage

loans from US and other banks. These financings, offered to people who had a high probability of

defaulting on their loans, were apparently distributed with the conviction that the associated

collateral (the financed house) would keep their value and offer sufficient coverage in case of

payment defaults. After a long period of “incubation”, under the double conjunction of increasing

defaults (due to interest rate rises and the specific nature of these loans that postponed some of the

initial payments) and house prices falling in the market, the bubble exploded and a stiff correction on

market prices had to take place. While initially the problem could have been limited to that market,

the sheer size of the correction and the fact that risks have spread among all banks worldwide (due

to the financial packaging of the original deals into securitized assets) then caused a general credit

crunch among banks that distrusted one another on how much they were exposed to the crisis. Now

the situation of overheating in the sector was a known problem for a number of months amongst

most banks. The banking sector as a whole and the central regulators had to a certain extent seen

the credit boom unfolding and were aware of the risks involved. Referring back to the survey of B.

Eichengreen and K. Mitchener19

we have evoked above, this paper showing the dangers of a credit

boom in analogy with the financial crisis of 1929 was discussed among the Monetary and Economic

Department of the Bank of International Settlement, the organ coordinating the regulatory oversight

across countries back in 2003, long before the extent of the current financial crisis were visible and in

part before the excesses of lending in the US real estate sector knew the heights they have

developed since. Yet, no collective action was taken that could have diffused the bomb as banks

19

B. Eichengreen and K. Mitchener, 2003: “The Great Depression as a credit boom gone wrong”, BIS Working

paper, Monetary and Economic Department, www.bis.org

26

were content with a “my own backyard” strategy. Somehow banks did not feel that they carry a

collective responsibility in the creation and subsequent burst of the speculative bubble. The results

are therefore much worse and in the end the whole sector –the whole economy- got hit and is

suffering, as we have entered into a period of global recession as a consequence of it. Not to talk

about the fact that a substantial part of the financial sector is now virtually nationalized. Millions of

people lost their house while they are still in debt with the banks for the negative equity. The

recession will for sure affect more people in their income, their social security coverage and in their

pension plans as the stock exchanges worldwide were also hit by the gloom perspective ahead of us

and lending activities have come to a complete halt. Whether or not the mortgage business was a

matter of social responsibility before the crisis, it certainly is now as nobody will stay unaffected by

the crisis we are facing. Primarily competitors of one another, taking inconsiderate risks in their

struggle for market share, banks lost sight of the collective effect of their lending activity. Without

the limiting effect of regulatory control, things simply grew to dangerous proportions.

Now if one still had any doubt about the social –and political- character of financial stability, the

recent series of government driven mergers and nationalizations of financial institutions

spectacularly removed the last possible doubts. First Northern Rock and Bear Stearns were rescued

by their respective governments, the first through a straight nationalization, the second through a

merger piloted by the federal instances. After which Fannie Mae and Freddie Mack, the two

powerhouses of mortgage lending in the US, needed to seek shelter in State ownership. Afterwards,

while Lehman Brothers, essentially an investment bank was not rescued, the insurer AIG was bailed

out, Washington Mutual entered into a merger with J.P. Morgan orchestrated by the US Federal

Deposit Insurance Corporation (“FDIC”), Merrill Lynch was forced to accept a merger with Bank of

America, Goldman Sachs was saved in extremis by the billionaire Warren Buffet while the latter and

Morgan Stanley had to seek refuge in accepting to change into a bank under FED regulatory

oversight. Morgan Stanley also got a capital injection from Japanese Mitsubishi. Strikingly, the US

investment banks, benefitting from more regulatory leeway as they did not fall under the same

supervision as the classic banks, will all have to accept the latter going forward. Finally, in Europe,

Bradford and Bingley were nationalized by the UK Government, the Irish government formally

guaranteed all the deposits of their banks, Glitnir, Landsbanki and Kaupthing banks of Iceland also

needed rescuing by the government and the Belgian and Dutch states had to nationalize Fortis Bank,

ABN-AMRO and provide support to ING Bank. This list is not complete and more developments are

still to come. What to make of this wave of government driven intervention? Simply that banks are,

as we have indicated earlier, not companies as any others. Their role in the stability of the financial

system and the trust we have in our monetary and economic system simply forbids them to get into

27

default, if such a default would pose a threat to the economy as a whole. Last but not least, the USD

700 bio bailout plan voted by the US Government, which was immediately put in equivalence with

the costs incurred in the whole Iraq war, as much as the commitment from European governments

to support their ailing financial institutions offer the last proof of what we call the political dimension

of financial institutions and the sector as a whole. We will need to keep this in mind when examining

the social role of financial institutions as much as when we will reflect on the notions of ownership

and governance of financial institutions. Let us here take an advance on this issue: if (big) banks are

not allowed to fail and can say with a reasonable certainty that they will be bailed out, what then is

the actual role of the shareholders and senior debt holders? If the latter are to be bailed out anyway,

do they not get a free ride on the back of the taxpayer’s money? If banks cannot be allowed to fail,

should they not endorse this need of government backing at all times and act in accordance? These

questions have certainly never been as pressing as they now emerge in the context of the current

crisis. The very notion of competition among banks, of level playing field will never be discussed after

these series of government intervention the same way as they have been before.

d. How we will address the questions raised by the double gap

Why is this? Why is it the case that banks are willing to respond to NGOs on a number of social

responsibility matters that are of concern to them yet at the same time not giving them full

satisfaction, and why do they not undertake a reflexive self-examination by way of which their true

and extensive social responsibility would be better understood? I want to show in this essay that it

has to do with the historical development of Corporate Responsibility and the role NGOs played in

this process. This will be the thrust of the second chapter where I will undertake a critical review of

the current practice of social responsibility based on the reading of a number of CSR reports of banks

representative of the community globally and the critique formulated by BankTrack (external) to

which I will add a critique that will speak with the banks’ own logic. I will then, in a third chapter

undertake this reflexive journey into what sort of social responsibility banks also have towards the

public –financial stability- and what consequences can be attached to this care for financial stability.

But before I go into these matters, I want to highlight the limitations and ambiguities attached to a

number of concepts and theories used in setting the global picture of social responsibility, which will

need to be dealt with eventually. These discussions concern the very notion of responsibility in the

context of a firm, the notion of prescriptive philosophy in the search for ethics and how this

prescriptive philosophy should deal with some outcomes from the descriptive philosophy and

sociology and finally the notions of ownership of the firm and the shareholder-stakeholder debate.

28

When undertaking their reflexive journey, banks will have to keep an eye on these different issues

and sometimes clarify their own position on these matters.

2. Definitions and theoretical questions

What is social responsibility or Corporate Responsibility or Corporate Social Responsibility? The terms

are used alternatively without there being a clear change of content or focus. Corporate

responsibility is necessarily social as it has always to be given to “a forum” in the words of Mark

Bovens20

, which in the present case can be considered to be society at large or “The Public” whether

or not structured into a number of stakeholder groups. We will submit two issues in relation with this

definition: (i) the issue of responsibility, (ii) the notion of what is ethically correct and its prescriptive

aspect. We will then, zooming in into the Banks’ world, comment on the notions of shareholders and

stakeholders to see how the ownership of the firm debate is generally perceived in the context of

financial institutions.

a. The notion of responsibility

How to go about the notion of responsibility in the situation of a complex organization such as a

major firm. This is a much debated issue in academic literature and one with considerable

consequences in terms of governance. We are not interested here in reproducing all the arguments

that are being displayed but we must at least say enough to be able to make some progress on the

notion of Corporate Responsibility and our issue of the double gap. To be responsible, says Mark

Bovens, is indeed to answer to a forum regarding the violation of a norm as an established consensus

about human conduct. We will look into these notions of norm and consensus later when we

examine the prescriptive aspects of corporate ethics. To be responsible is also an indication of a

causal link between one’s action and a given result. But in a large company, the notion of

responsibility has to deal with the issue of “many hands”. How can external judges (the forum, the

Public) really appreciate who, of the many people involved in a process, is really cause of the result?

Responsibility carries the notion of being accountable for something (passive responsibility) as well

as the idea that one has been mandated with a number of tasks (active responsibility). On top of

these dimensions, Mark Bovens raises the notion of responsibility as virtue: an individual will to do

the right thing. His pluralistic response to the problem of many hands is that responsibility can only

be considered in the context of what has taken place and often requires that both hierarchical and

20

Bovens, M: The Quest for Responsibility, Accountability and Citizenship in Complex Organizations, Cambridge

University Press, 1998

29

collective dimensions of the firm and individual agency be considered. To arrive at the notion of

responsibility, Bovens actually follows the chain of causality that leads from the action to its effects.

Accountability, an ex post consideration, is the passive form of responsibility. It displays (i) a norm

transgression, (ii) a causal connection that must be established in this transgression, (iii)

blameworthiness of the person that made this transgression and (iv) a given relationship between

the one who did something and the one who mandated him to do it. Virtue, the active or ex ante

form of responsibility, is about having consideration for the consequences of one’s doing. Yet this

implies that the agent has a certain autonomy: the ability to decide on one’s own account. Besides,

the agent must be acting on the basis of a moral code and he should be taking his role seriously. It is

clear that one cannot be held responsible when one did not have any realistic alternatives to the act

in question: under too much pressure, there is little an employee can do to disobey an order he feels

is blameworthy. At the other end, the CEO of a company cannot reasonably be held responsible for

the acts of any employee of the firm, regardless: he, most of the time, will simply be unaware of the

situation at hand. While this does not take away all the blame –after all, being responsible means

that one has to be made aware of what happens within one’s field- it clearly puts some boundaries

to the simple hierarchical responsibility. Between these two extremes, it appears as if something is

lost of the collective action, as if the company itself was carrying a responsibility. Yet, the company, if

it can be judged and found guilty in court, is at the same time not an organism with a conscience and

a rationality, and punishing the firm by fines or other measures may have repercussions on

employees that have nothing to do with the act considered blameworthy. Blaming the company as

collective entity may not do justice to those, within the company, who have not participated in the

blameworthy action. Therefore, whether through hierarchical responsibility, collective responsibility

or individual responsibility, it is ultimately individuals that have to take the blame. Therefore,

companies must ensure that, while all employees have a good understanding of their duties and

responsibilities and of the company’s code of conduct, they must also have the means to disobey and

voice their concerns –to exercise their agency- when asked to do things they feel are not ethically

correct. Ultimately, if responsibility is to be considered as an individual responsibility, then the very

code the agent will adhere to must be one that he has consciously accepted. It may be impossible to

obtain a full endorsement of the collective code of conduct of a company. The least one could obtain,

though, is an explicit acceptance of this code as the result of a democratic consensus, one

comparable to accepting the law as an expression of the collective will. Now, this wouldn’t close the

philosophical debate as the law is not necessarily just and there must be a way to fight against

injustice including when the latter is legal. The same is true for the codes of conduct and other

responsibilities within a company. In last resort, the individual should be entitled to disagree with

30

even democratically elaborated codes of conduct. Let us however insist foremost on the need for

these codes to be collectively endorsed.

What is ethically correct?

The judgment exercised by individuals must be based on a notion of what is ethically correct. So far,

we have been able to define it only in the largest possible sense, i.e. in conformance with a strong

public consensus. This idea of social consensus, or as I mentioned above democratic endorsement is

important here because responsibility cannot be about every individual’s own opinions and

preferences, in which case the company would be under the threat of chaos, but about things that

would meet the public’s interest, that do not cause damage to society “as a whole” or “on balance”.

This notion remains fairly obscure in the context of a firm as the individual must balance his own

notion of what is ethical and the very situation where orders may have been given to act otherwise.

The tension between one’s individual notion of what is ethical and the collective project expressed

by the firm can only be solved if there is some sort of rationalization possible of this notion of ethics

through the strong collective consensus notion. Codes of conduct, within the firm, generally support

this rationalization by making explicit how the individual employee should use his judgment to

evaluate the ethical content of what he does in a number of collective situations. To support this

idea, companies often ask their employees to be able to respond for their individual acts within the

company. The “classic” test for this would be: “do only those things that you would be able to explain

to your spouse and children”. We will come back on this issue when we discuss social responsibility.

The issue of many hands

Strikingly, one has to realize that, because the firm is a hierarchically structured group, individuals

are generally more disposed to do things they would not do in situations where their moral judgment

alone is at stake. This phenomenon is best explained through the “case of the harmless torturers”21

:

1000 persons are requested to inflict an imperceptible incremental pain to someone, the result of

these many small tortures ending up in an unbearable pain for the victim. Yet, because each of their

individual acts is in itself not reprehensible, the torturers are generally willing to do their share of the

wrongdoing and do not feel they are responsible for the torture. Now the dilution of responsibility in

the firm is what provides the employee with an endless list of excuses: “another would have done it”,

“I only did what others did”, etc. This issue calls for an even stronger notion of Corporate

Responsibility to balance a tendency of carelessness in the firm. The stakeholder needs to feel what

21

Ibid above, p 48: Bovems himself quotes here an example provided by D. Parfit: Parfit, D. 1984: Reasons and

Persons, Oxford, University Press

31

his responsibility in the collective undertaking is and he needs to feel that he is empowered to take

this responsibility including against direct hierarchical orders.

b. Corporate Responsibility

How does all this relate to the notion of Corporate Responsibility? Certainly it shows that

responsibility cannot simply be defined by the management of a firm without taking into account

that this responsibility must be distributed to and endorsed by the employees. In this sense,

Corporate Responsibility must be established on the basis of something all can live by, something

that reflects a strong social consensus. In other words, Corporate Responsibility is not a discretionary

domain of management: it must be incorporating the values that are shared by all and ultimately be

in conformance with the interest of the public at large. Now, to fall back on the example that will

serve as a thread all through this exposé, it has been demonstrated that financial stability is indeed

something that is a (shared) responsibility of banks. Then we actually have no other option than

including this into the bank’s code of conduct. Virtuous employees would otherwise find themselves

in a dilemma: while their individual responsibility, their virtue, may tell them that the activities of the

bank is threatening the financial stability, nothing in the Bank’s code of conduct would explicitly

allows them to take this into account. It may sound a little abstract still, but let us consider the

following: Bank A has set ambitious objectives for the distribution of mortgage loans in the US Real

Estate sector. Employees are being set very high individual targets and are also interested in the

profit generated by this activity. The underwriting standards of the bank are overly aggressive and

employees are basically distributing loans to customers with the knowledge that there is a

considerable chance they will not be in a situation to honor these loans in a foreseeable future. Who

is to blame for the piling-up of bad loans at Bank A? Employees will have many excuses: (i) “if I didn’t

do it, my colleagues would have”, (ii) “I could be fired if I didn’t reach my objectives”, (iii) “everybody

did it”, (iv) “I tried to voice my concerns, but nobody would listen”, etc.. Now it so happens that the

practice of Bank A is actually standard for the industry and that this distribution of easy credit is

provoking a credit boom, cause of a serious overheating of the home sector. Who is to blame for

that? Could the US Sub-prime crisis be avoided and by whom? Should employees have disobeyed,

following their individual conscience at the risk of losing their jobs? Should management have

considered the risks these activities were putting on society and at which moment? These are the

sort of issues that we will need to address in the third part of this exposé. Corporate Responsibility

well understood and taken seriously, is not something optional that enhances the social profile of a

given firm. It is also not something that is there to keep NGOs happy. It is something that is at the

heart of the problem of individual and collective accountability. While it could at first sight be

32

considered radical to suggest that financial stability be incorporated in the code of conduct of a bank,

we can only conclude from the above that if we are to hold employees of the bank accountable for

this financial stability, then it must be incorporated as an objective in the code of conduct of the bank

and stakeholders should be encouraged to consider it as a higher command than direct hierarchical

orders.

What is socially responsible?

We have been talking so far of a “strong consensus”, of the “public interest” to come to grip with the

notion of what is socially responsible. This notion is far from being straight forward, though, when it

comes to collective bodies such as corporations and ultimately, society at large. While an individual

will in a broad sense, “follow his conscience” and learn from his mistakes in a fairly consistent way, a

company does not necessarily obey to such a rationality. As mentioned by Mark Bovens22

, the

division of the company into different departments, the recourse in decision processes to

committees whose decisions can vary, the existence within the company of opposing interests, all

contribute to the constitution of a sort of internal logic that is not necessarily in line with the

rationality that underpins Kantian ethics. Looking for a moment at descriptive philosophy and

sociology, authors like Bourdieu23

refer to the doxa of different fields and how these doxa are

primarily the product of the dominant culture in these fields. In this sense, the working environment,

especially in large corporations, does have a strong autonomous internal logic that is the result of a

historically developed culture. The combination of this doxa and the upbringing of employees, their

habitus, generate practices that are not necessarily geared towards any sort of universal rationality.

The sort of norms generally accepted within a company cannot therefore be translated into social or

ethical norms: they are the product of a company culture, underlines Mark Bovens24

. All this to

explain why, while individual moral choice is something that has been rationalized by Kant under the

categorical imperative, this agency does simply not translate well into collective situations. This is

another way to explain why individuals who would not do certain things in other situations, suddenly

find so many excuses to legitimate their going along with “the others”: it is in the end the culture of

the company as a whole that dictates a number of the dos and don’ts without them being explicitly

laid out anywhere. And when we refer to this culture, we do not mean the brochures produced by

the communications department which are trying to convey changeable “feel good” messages across

the organization. The sort of practice Bourdieu refers to is much more a product of power relations

22

Ibid above, p 59 : “Complex organizations sometimes appear not to behave at all as if they were almost

perfectly rational, natural persons” 23

Bourdieu P. 1994 Raisons Pratiques, Paris: Seuil 24

Bovens, M: The Quest for Responsibility, Accountability and Citizenship in Complex Organizations, Cambridge

University Press, 1998, p 62-63

33

and the pursuit of particular interests combined into a corporate practice. Agency, in this context, is

largely subordinated to the shared internal scale of values, the doxa of the firm.

Besides this issue of the rationality at play within a company, there is this other issue that seems

insufficiently covered in literature about Corporate Responsibility: the existence of different norms

and values according to different ontological or metaphysical worldviews, relayed by institutional

and corporate practices. Literature on the subject of Corporate Responsibility, most of the time,

simply states that companies are moral or not, according to their using a number of internal codes to

come to decisions. To take an advance on something we will develop below, it does make a

difference whether one adheres to the view that ownership of a company is to be seen as strictly

held by the shareholders (the liberal view) or whether one recognizes that employees, customers

and the public, to some extent, are also owners of the firm (a view defended a.o. by communitarian

authors). This difference is primarily one that is situated in the area of principles and ideas. Yet it

does have consequences all the way down to the governance practices that will prevail in the

company. While discussions on these subjects can clarify the different viewpoints, they will not

necessarily bring them to a conclusive end and differences of opinion, differences in worldviews, are

there to stay. How will we decide what sort of worldview a corporation should choose to adhere to?

Is it possible to somehow negotiate a middle way between diverging opinions within the company?

Ewald Engelen25

shows how it is possible to adopt a pluralistic approach to these sort of issues by

recognizing the different layers that exist between (i) rules, principles, ideals, values and rights –the

level that is closest to theoretical standpoints- (ii) the institutional and legal level, (iii) the level of

culture, practices, ethics and virtue and (iv) the level of actions and behaviors. Now all these levels

interact with one another: a change in values can induce changes in institutions and in practices as

much as changes in practices can lead someone to review his principles. It is clear that the discourse

around Corporate Responsibility is essentially a prescriptive one, one that tries to define the

conditions for a better alignment of the activities of the firm with social objectives. It is therefore

tempting to assume that there is a large consensus about these social objectives and focus on how to

align corporate conducts to these objectives. It is however a dangerous simplification of social reality.

In other words, any definition of social responsibility endorsed by a company is a reflection on a

number of standpoints taken in the sphere of ideals, values and rights. Today, these aspects are

simply not explained. They have also not been the object of a debate within the firm. They are simply

implicit in the sort of governance that is embedded in the firm and is the source of the sort of social

responsibility the corporate has developed. Making these underlying principles visible and submitting

25

Engelen, E, 2000: Economische Burgerschap in de Onderneming, Een oefening in concreet utopisme,

Amsterdam, Thela Thesis

34

them to a democratic debate within the firm would better translate this interdependence of the area

of values and ideas with the field of institutions and the actual practice. A. Scherer and G. Palazzo26

offer a Habermasian view on this subject: corporates are increasingly becoming political actors

involved in deliberative democracy: their participation into institutionalized discussions are actually a

means to create new consensus on a number of topics, involving all the meaningful stakeholders in a

political debate: “There are no final theoretical proofs, no ultimate reference point, and thus no

hypernorms on which our institutions of liberal democracy could be grounded. Rather than searching

for the Archimedes’ starting point, pragmatist philosophy suggests to start within the practices and

institutions of our social life [..] to consider the achievements of our institutions of capitalism and

democracy, and from there to work for their continuous reform. [..] a “priority of democracy to

philosophy (original emphasis)”” I will endeavor in this essay to expose the underlying assumptions

that are underpinning observed practices as much as I will try to project our views on a number of

principles to their institutional and practical implications. Above all, I will try to differentiate the sort

of worldviews underlying the different practices and articulate them into (opposing) political projects

that can stem from differences of opinions and conflicting interests.

c. The globalization of the banking sector

The liberal view

Companies do not generally advertize the sort of political orientations or values they are adhering to.

Yet, it is clear that the recent period has been marked globally by a long push for liberal policies,

translating essentially in globalization, deregulation and privatization of most economies worldwide.

Financial Institutions, maybe more than any other sector have been endorsing the liberal view.

Financial markets have all been freed to international financial flows –foreign exchange rates were

liberated in the early seventies- and there are hardly any frontiers anymore for money movements,

with maybe the notable exception of China and a few smaller countries. The current financial

paradigm is largely based on the notion of efficient markets: markets price the information correctly,

adjusting the risk-reward of any kind of asset category being a function of information that becomes

available. Nobel prices in economy have been attributed 3 times in recent years to economists that

have contributed to the theory of efficient markets. (Tobin in 1981, Markowitz, Miller & Sharpe in

1990, Merton & Scholes in 1997). If markets are efficient, then they should be given free play and not

be constrained by regulations that could distort their self-regulating mechanisms. This dominating

26

Scherer A.G., Palazzo G, 2007: “Towards a Political Conception of Corporate Responsibility: Business and

Society Seen from a Habermasian Perspective”, Academy of Management Review, Volume 32, N4 pp 1096-

1120

35

paradigm is the main reason why financial institutions, as much as most economical sectors, have

been very reluctant to accept hard regulation and have been promoting instead different forms of

self-regulation, including the recent development of Basel 2 which places the responsibility for

producing models and calculating capital reserves within the banks themselves; more on this topic in

the third part of our exposé. This dominant paradigm is not undisputed, though. Stieglitz (Nobel prize

in 2001) has underlined the many troubles financial markets undergo with the bursting of speculative

bubbles and subsequent credit crunches. Ironically, the most spectacular blow to the efficient

markets theory was inflicted by the very same people that developed the theory: Long Term Capital

Management (“LTCM”), a fund advised by Nobel prize winners Merton and Scholes built-up massive

positions in the Russian bond market in conformance with the efficient market theory. The idea was

simply that a calculation of the effective risk of certain assets could allow investors to anticipate a

correction the market would necessarily make under the hypothesis that it had to be efficient in the

long run. The practice did apparently not confirm the hypothesis and the collapse of the fund almost

triggered a worldwide financial meltdown, had it not been bailed out by the US Central Bank. Yet the

theory the authors developed was left unabated by these events.

Ownership of the firm: shareholder theory versus communitarian stakeholder view

In line with the same liberal theories, banks have been adopting all through the eighties and nineties

a strong shareholder view: the shareholder is the legitimate owner of the company and therefore he

is the principal to which management and employees have to respond as agents27

. According to this

theory, shareholder profit maximization is therefore the only legitimate purpose management should

pursue and any distraction from this objective is a threat to the efficiency of the firm itself and of the

markets. Banks have by and large embraced this view until a new series of corporate scandals

showed the limits of pressure for high profit returns as illustrated most famously by the Enron

bankruptcy. Meanwhile, and under pressure from different sides, stakeholders have increasingly

been taken into account and the notion of ownership of the firm has been central in number of

academic debates. Ewald Engelen28

contests that while shareholders have a rather volatile

relationship with the firm in publicly listed companies, employees and customers are morally much

more entitled to claim part of the effective ownership of the company. This is less true for

entrepreneurs that invest in a company for the longer run and for shareholders that take large long

term participations in companies. Yet, the most frequent form of shareholdership in banks

27

Capaldi N, 2007: “Corporate social responsibility and the bottom line, in the International Journal of Social

Economics, Volume 32, Number 5, 2005, pages 408 to 423. 28

Engelen, E, 2002: “Corporate Governance, property and democracy: a concenptual critique of shareholder

ideology”, in Economy and Society, Volume 31, N3: p-p: 391-413.

36

corresponds to a diffuse and rather volatile type of investment. Joan Fontrodona & Alejo José G.

Sison29

insist on the notion that a firm, being a set of relationships cannot be owned in the Lockean

sense. The purpose of the firm cannot be to simply maximize profits as this could be achieved

through unethical means which cannot be socially acceptable. To this view, they oppose the notion

of the firm as a community of persons that must have enough incentive to stay within the company.

Employees do not always have the means to divest themselves from a company nor can they

diversify their (work as) investment across different companies. In this sense, there is something that

should be called the “social capital” in a firm and this capital must also be protected. In order to

achieve this, companies need to adopt a stakeholder approach where the interests of the

shareholder is balanced against employees, customers, and other parties related to the firm. This

stakeholder approach very much in vogue after Freeman30

is clearly what has motivated Corporate

Responsibility movements and the triple bottom line reporting: there is more to a company than the

pure financial performance and profit returns. Yet, even within Corporate Responsibility supporters,

the degree of acceptance of interests other than shareholders’ interests are taking all shades of grey

one can think of. Closest to shareholder value, one finds the notion that in the long run, the triple

bottom line protects the business case for the corporate activity: Corporate Responsibility is then

nothing else than the preservation of profits in the long term through the internalization of

externalities (see also below: the current practice). At the other end of the spectrum, the

stakeholders approach is genuinely stemming from the recognition that markets alone do not realize

the social optimum liberals have claimed they would. Corporate Responsibility then translates the

recognition that firms are there also to serve non financial interests of the community and that these

interests should weigh somehow in the overall performance of the firm. Banks, in their Corporate

Responsibility statements generally insist on their engagement with stakeholders and how the latter

drive a number of activities the bank has chosen to support. Yet, whether this push is based on a long

term profit view or on a communitarian view of the activity of the firm, this is generally not made

explicit.

Global business

What is important in the line of the quest into the effective social responsibility of banks is to

observe that, from being corporates with a very specific status embedded in national financial

regulated economies, banks have evolved into global operators that manage financial flows across

the world in search for acceptable risk-reward. The traditional image of the bank, collecting savings

29

Fontroda J and Sison A, 2006: “The Nature of the Firm, Agency Theory and Shareholder Theory: A Critique

from Philosophical Anthropology”, Journal of Business Ethics 66: pages 33 to 42. 30

R. E. Freeman, 1984: Strategic Management: A Stakeholder Approach, Boston Pitman

37

in its domestic market and intermediating these savings into financing of the economy has changed

very dramatically into global financial agents managing assets and liabilities on a worldwide scale. In

this process, it seems banks have lost somewhat the almost physical feeling of being part of a fragile

system of trust. Now, regulators are still there of course and they are in close contact with the banks

falling under their jurisdiction. Yet these regulators are principally national entities and the

complexity of the financial products as well as their spreading over the globe makes the life of the

regulator very difficult. Basel 2, the new set of regulatory discussions started by the Bank of

International Settlement across the whole sector has started the movement towards a mix of

external regulation and bank self regulation and it remains to be seen if it can meet the expectations

and needs from the regulators to effectively control banks in their activities. Risk management is

increasingly a matter of complex quantitative models developed internally by the banks. Hopefully

regulators will manage to keep transparency of the risks taken by the banks at acceptable levels.

d. Corporate Social Responsibility: a first reformulation

We have hopefully introduced more complexity into the notion of Corporate Responsibility,

especially where it concerns financial institutions. While responsibility itself is a difficult concept in

the context of the firm, we must keep seeing it as an individual duty. Yet our agency is threatened

from many parts in the context of a company and it takes a careful balancing of rights and duties, of

the collective project and the individual will to allow a company to be responsible as a whole. Now

the status of depositary of our trust makes financial institutions bear a very high social responsibility

indeed and this exacerbates the importance of the critique undertaken here. Banks have however

failed on at least two accounts: they have given ear to the injunctions of NGOs on issues that are not

in their control but in need of political articulation and they have neglected to assume their

responsibility for financial stability. This chapter has hopefully given sufficient ground to these two

propositions for us to push our investigations further. What we want to do now is to put these

propositions into perspective: first historically, then by performing an empirical survey of a number

of Social Responsibility reports and finally through a review of critiques formulated in literature. After

that, we will look at social responsibility from within the bank and see how the practice there

confirms the extent of the gaps we have observed.

38

PART II: THE CURRENT PRACTICE OF CORPORATE RESPONSIBILITY: CRITICAL REVIEW

To comment on the current practice of Corporate Responsibility, I propose to first look into a brief

historical perspective that teaches how the whole notion of Corporate Responsibility came about and

understand the role NGOs played in this genesis. I will then analyze the statements produced by

Citibank, Royal Bank of Scotland and Deutsche Bank, all major banks in their respective geographical

areas, before extending this critical review to literature and the practitioner’s view.

1. Corporate Responsibility, a historical perspective:

The trigger of Corporate “activism” is stemming from what in literature is generally referred to as

“(negative) externalities”, that is, the harm the activities of companies can do to the environment

and society at large: inadequate wages, poor working conditions, deforestation, exhaustion of

natural resources, and general environmental degradation. The response has largely been in self-

regulating undertakings from Corporates, says James K. Roye31

, to avoid State imposed legislation

and government intervention. Roye’s thesis is that Codes of Conduct and other Corporate

Responsibility statements have been produced under pressure from the “public opinion” through the

voice of NGOs and are a way of “pursuing business by other means”. NGOs have encouraged this

effort simply because they believed to have a better grip on Corporations that have committed to

some sort of conduct than on Corporations that haven’t. To support his argument (that these codes

have been elaborated under external pressure) the author offers a historical perspective which

distinguishes two periods:

− 1960-1976: the New International Economical Order

− 1998 and after: when anti-globalization protest increased the pressure on Corporations (again).

1960-1976: World Order Contended

While SRI can be traced back over a century ago, essentially as an extension of religious convictions

into investment choices (refusal to be involved in gambling, pornography, alcohol and tobacco

industries) it really developed after World War Two in the then dominant economy of the US.

Transnational Corporates (“TNC”s) deploying their activities abroad uncovered a field of opportunity

31

Roye J, 2005: “Corporate Social Responsibility as Business Strategy”, in Globalization, Governmentality and

Global Politics: Regulation for the Rest of Us?, Routledge

39

that was at the same time a relative regulatory Greenfield. Cheap labour, abundant natural

resources, new markets and the slow dismantling of colonial structures created as much incentives

for expansion abroad. Yet this promising picture knew soon enough its dark moments: the war in

Vietnam, the first signs of delocalization and its effects on domestic labour markets, and of course

political influence of TNCs in the government of third world countries. Against these practices,

political opposition had to develop new instruments: the debate was no more centred into the

structures of democratic policy making, but had to find a way to address corporate behaviour more

directly. This is how activism developed and as leaders of this activism, developed the NGOs. The war

in Vietnam (and the napalm producers), cases of bribery, double accounting, illegal financial

transfers, all these activities were subjected to the naming and shaming of NGOs and the reputation

of the corporate world suffered major blows in this period. These attacks culminated when the role

of TNCs in the unsettling of the democratically elected government of S. Allende in Chile was made

public. Third world countries did react to these practices in their way: through nationalization and

regulation of financial flows in their countries. They also stood up in international instances to obtain

a hard regulation of the activities of TNCs. At that stage, corporates organized a collective answer

and, to avoid this regulation, consented to take self-regulating measures. This response is known as

the first set of OECD guidelines on Multinational Corporations drafted with the support of the

western governments that were also not in favour of additional legislation that would curtail the

earnings of their national “champions” and corporate representatives such as the International

Chamber of Commerce (“ICC”). The more stringent –and enforceable- regulatory framework, in

preparation under the impulse of emerging countries within the UN, was consequently abandoned

under the Reagan administration.

In this period, a sort of crystallization took place on both sides of the “fence”. On one side the public,

including within developed countries, was made aware of the developments of Corporations

internationally and of the consequences this could have for emerging markets and for their own

countries: delocalization, exploitation of cheap labour conditions and cheap commodities in

emerging countries. This increased awareness of the fact that TNCs were operating in a sort of

vacuum called for a reaction which found its expression through the creation of different NGOs that

were able to call public opinion’s attention to new issues emerging alongside these new

developments. On the other side, Corporations, in the wake of the scandals that were uncovered in

this period, realized they were exposed and vulnerable to Reputation Risk in their home markets for

their activities abroad. Corporations, learning from the public and the creation of NGOs, equally

organized themselves (such as through the ICC), to actively lobby with their respective governments

and with international organizations such as the UN to avoid constraining legislations being

40

implemented. This defensive move was completed with a push for corporate codes of conduct that

would hopefully secure business from its own excesses and keep reputation risk at bay. Both

developments created the permanent structure of this dialogue of a new kind outside of the

traditional political structures: a direct dialogue between Corporates and NGOs.

1998 and after: Global business becomes Global business:

As a natural transition between the two periods, James Roye mentions the –partial- transformation

of productive capital to money capital, using the terms of M. Polanyi in The Great Transformation32

.

While productive capital is still attached to some territoriality and hence at times favourable to tariffs

and labour legislation, money capital is much more insistent on a totally free circulation of capital

and other production factors. As the influence of the latter form of economy became more

dominant, unsurprisingly, so became the pressure for advances in deregulation and against the

welfare State that had developed under influence of the public and was in part supported by the

productive capital. The period from 1975 to 1998 was thus one of a dual fight between social and

national protection on one side and a countermovement towards liberalization and deregulation on

the other. Ultimately, though, with the help of the IMF, the World Bank and the WTO, deregulation

made significant progress globally and very advanced deregulation was indeed well on its way until

new corporate scandals and a now well organized and attentive public movement represented by

the NGOs managed to slow it down again. The scandals were relating to all kinds of matters, from

Human Rights violations to environmental issues to financial scandals such as Enron. Most of the

times, they produced Corporate codes of conduct to counter them or at least control the damage

done: “All of the decade’s major corporate codes were drafted by public-relations firms in the wake of

threatening media investigations: Wal-Mart’s code arrived after reports surfaced that its supplier

factories in Bangladesh were using child labour; Disney’s code was born of the Haitian revelation [of

sweatshop conditions imposed by Walt Disney]; Levi’s wrote its policy as an answer to prison labour

scandals. Their original purpose was not reform but to ‘muzzle the offshore watchdog’ groups, as

Alan Rolnick, lawyer for the American Apparel Manufacturers Association, advised his clients”33

. The

one significant event that did almost stop the deregulation movement entirely was the upheaval

around the Multilateral Agreements on Investments (“MAI”) rounds of negotiations. “The Financial

Times reported that “fear and bewilderment have seized governments of industrialised

countries…their efforts to impose the MAI in secret have been ambushed by a horde of vigilantes

32

Polanyi K, 1944 : The Great Transformation, Beacon Press Books 33

Roye J, 2005: “Corporate Social Responsibility as Business Strategy”, in Globalization, Governmentality and

Global Politics: Regulation for the Rest of Us?, Routledge

41

whose motives and methods are only dimly understood in most national capitals”34

. This is when the

corporate world decided to change its strategy and to associate NGOs with the negotiations in a

redrafted form of MAI that would include a number of self-defined undertakings from Corporates,

regarding human right and sustainability issues: the revised “OECD Guidelines”35

. Again, a defensive

move to avoid a harsher set-back against deregulation and a hard coded regulation on investments

abroad. Why did NGOs accept to be compromised in this negotiation process? Because they believed

it would be easier to expose a Corporate that had officially endorsed an ethical code of conduct: a

hypocrite Corporate is more vulnerable than a simple faulty Corporate, was their reasoning. Yet, this

arrangement allowed Corporates to avoid hard regulations and circumvented the further

involvement of national States in the discussion, albeit at the price of installing NGOs as

institutionalized discussion parties.

NGOs are now institutionalized parties

This short historical outline has helped us understand how the NGOs, at first spontaneous activist

groups of politically engaged citizens confronting the corporate world, slowly became

institutionalized participants in the drafting of international conventions and declarations adhered to

by the corporate world. Although traditional instances are at times associated with this process, it

remains largely a voluntary self-regulation of the corporate that cannot be mistaken for the

traditional political form of regulation. Now as this institutionalization of NGOs occurred, two

negative effects started to rise: (i) NGOs slowly lost touch with their “activist” basis, and (ii) their

tendency to claim to represent “the Public” increased. NGOs have grown from activist leftist groups

gathered at the occasion of protest actions into professional organizations with a number of full time

employees and considerable financial means, including State subsidies (BankTrack, the NGO we have

mentioned several times in relation with bank activities are directly sponsored by the Dutch

government). This institutionalization has somewhat reduced the democratic legitimacy of these

NGOs as they are less in contact with the public as they were initially. In the same move, NGOs have

had the tendency to somehow claim a democratic legitimacy in the voicing of their standpoint,

irrespective of the number of adherents or other forms of public support. Their engagement with

corporates have taken different forms, some NGOs pushing into collaborative practices with the

34

Ibid above 35

The Guidelines (www.oecd.org/daf/investment/guidelines) are recommendations addressed by governments

to multinational enterprises operating in or from adhering countries. They provide voluntary principles and

standards for responsible business conduct in a variety of areas including employment and industrial relations,

human rights, environment, information disclosure, combating bribery, consumer interests, science and

technology, competition, and taxation.

42

corporate world, others preferring to keep a safe distance from companies’ board rooms36

. We will

revert to this institutional push of the NGOs and the legitimacy of their claims below.

2. Reviewing the current Corporate Responsibility practice

The empirical part of our essay is not extensive nor does it follow a well defined methodology. We

have simply read the Corporate Responsibility report of three major banks in the US, UK and

continental Europe, respectively Citibank37

, Royal Bank of Scotland38

and Deutsche Bank39

. These

banks are major financial groups, ranking respectively first, thirteenth and twenty-seventh on the

Forbes Worldwide Groups ratings in 2007. Our choice for these three banks reflect our will to cover

the different types of CSR being essentially the original US model, the now dominant U.K. model and

the continental Europe model. To show the differences and possibly the convergence in CSR, we will

refer to a study that was made on a related subject: Social Responsible Investment (“SRI”). Now,

while SRI is speaking mainly from the perspective of the investor, essentially the shareholder, it is

nevertheless connected to CSR as the screening of SRI investors will be largely based on the CSR

commitments from the firms in which they wish or not to invest. Now our proposition is that SRI

shows the same convergence and divergence across countries as CSR does. C. Louche analyzed the

similarities and differences in SRI across several countries, including the ones we are considering

here40

. While convergence is on its way through increased institutionalization, local divergences

remain. I will talk below of some forms of institutionalization and how it indeed creates convergence

(on the format of CSR reports, for example). Clearly, standardization and convergence of CSR as

much as of SRI is a question of credibility of the whole activity. If countries fail to agree on how to

formulate SRI and CSR, there is little chance the very phenomenon will survive much longer, says C.

Louche. Yet at the same time, much needs to be done to give SRI a globally accepted definition and a

universally accepted benchmark. SRI investors, SRI screening bureaus and SRI labels are still very

much working with half formulated policies and principles. SRI and CSR practices do show local

divergence, partly, according to the author, because the activity needs to adjust to what she calls the

“national business systems”. The latter are roughly liberal market economies for the US and the UK

and coordinated market economies for continental Europe. Besides these different business models,

36

On this subject, please see: Ahlstrom J. and Sjostrom E, 2005: “CSOs and Business Partnerships: Strategies for

Interaction”, in Business Strategy and the Environment, Number 14, pp 230-240 37

The Citibank Corporate Responsibility report can be found on the internet:

http://www.citigroup.com/citigroup/citizen/community/annualreport.htm 38

Royal Bank of Scotland’s report is available on the Internet under:

http://www.rbs.com/media03.asp?id=MEDIA_CENTRE/PRESS_RELEASES/2007/JULY/11_CR_REPORT 39

The Deutsche Bank report can be found under: http://www.db.com/csr/en/index.html -*/ 40

C. Louche, 2008: “Socially Responsible Investment: Global Convergence or Local Divergence”, forthcoming in

Finance for a better world: The Shift Towards Sustainability, Bordeaux BS (edition).

43

a different history of development of CSR and SRI also created differences in perception. Older in the

US, the CSR model is generally driven by the corporates and geared towards the notion of justice,

fairness and personal values while the European models (including UK and Continental Europe) are

more geared towards environmental issues and sustainability. Selecting banks in these three regions

will allow us to have a good coverage of these particularities and hence cover all the main

development areas of CSR. We used the 2006 Corporate Responsibility reports for all of them, the

latest available reports at the time of doing this research. All these banks publish one or several

separate reports on Corporate Responsibility, referring also to the financial reports for detailed

information. All these banks follow the Global Reporting Standards (referred to as the “GRI initiative”

or “G3” for the latest standards)41

. These standards were formulated by a group of stakeholders

under supervision of the United Nations (“UN”) and Coalition for Environmentally Responsible

Economies (“CERES”), a US based network of stakeholders, of which a dominant number of

environmental NGOs, involved in developing the notion of sustainability42

. “Sustainability reporting is

the practice of measuring, disclosing, and being accountable to internal and external stakeholders for

organizational performance towards the goal of sustainable development.” The concept of

sustainability is used in GRI’s literature according to the definition provided by the World

Commission on Environment and Development, a UN commission that established the need to

protect poorer countries and future generations from the possible negative effects of economic

development43

: “meet the needs of the present without compromising the ability of future

generations to meet their own needs.”

a. The GRI guidelines

Now, we may want to make a small digression here, about the development of the GRI reporting

standards, which we believe are symptomatic for what is happening with Corporate Responsibility.

First of all, the genesis of this norm created to become a worldwide standard is in direct line with

how we have described the development of Corporate Responsibility practices in our historical

section: the development of the GRI reporting is the translation of this institutionalization of a

dialogue between the corporate world and the NGOs, intermediated here by the UN. The result is a

document, that is very broad in its definition, yet one that follows the logic of the triple bottom line

with its economic, social and environmental dimensions, where the accent is put on the notion of

(negative) externalities. Economic activities are somehow producing effects that are not or

41

See the website of the GRI Initiative: http://www.globalreporting.org/Home 42

Ibid above, the GRI Guidelines: http://www.globalreporting.org/ReportingFramework/G3Guidelines/ 43

The minutes of the World Commission on Environment and Development meeting can be accessed through

the United Nation’s website at: http://www.un.org/documents/ga/res/42/ares42-187.htm

44

incompletely computed in the exchange of goods underlying them. Fishing is, potentially, not

accounting for the depletion of fish in the ocean, polluting industries are not (correctly) charged for

the health hazard they put on people, natural resources industries do not sufficiently take into

account the limited availability of the resources they exploit. With the notion of externality comes

the idea that a third person is potentially affected and should be protected against transactions he is

not necessarily a part of. This is why GRI is constantly referring to Stakeholders: “Stakeholders are

those who have an interest in a particular decision, either as individuals or representatives of a

group.”44

This includes people who influence a decision, or can influence it, as well as those affected

by it45

. In the historical part of our exposé, we saw human rights violations, environmental hazard

and availability of work in the developed markets, as as many social and environmental externalities

of the globalization of the industrial sector. Now the sort of externalities NGOs have been putting on

their agendas are the ones that one finds again in the GRI reporting: mainly environmental

externalities and social externalities in third world countries concerning human rights and working

conditions. The purpose of Social Responsibility reports according to the GRI philosophy is basically

to make apparent and transparent all these (negative) externalities that the company’s activity is

inducing and address them in a way that warrants sustainable operations: operations where the cost

of externalities have been “internalized” i.e. have been neutralized, included as a cost item or

compensated for in one way or another. Now we need to be careful here when we say that the GRI

reflects the concerns of NGOs: In principle, any externality, any consequence of the company’s

activity on the economy, society and the environment could find a place in a GRI reporting without

changing anything to the framework as it exists today. Indeed, financial stability, which would for

banks constitute an economic and a social externality, could very well fit within the GRI reporting,

under the reporting of economic impact, codified as the EC2 (direct impact) and EC9 (indirect impact)

reporting items46

as well as under the social reporting under the S01 (Community) item47

. Yet the

accent and the focus in this document is created by the depth at which it goes when environmental

and human rights and workers protection are concerned, as opposed to the rather broad and

tentative definition of the economic impact. It is in this respect that the GRI guidelines are very much

in phase with the agendas of NGOs, which should not come as a surprise considering they have been

substantially involved in the drafting of these guidelines. To make the critique more explicit: NGOs

have agendas which are not necessarily reflecting the entire span of what constitutes social

44

Hemmati, M. 2001: Multi-Stakeholder Processes for Governance and Sustainability - Beyond Deadlock and

Conflict, London, Earthscan 45

In its guidelines, GRI names the following stakeholders: “Communities, Civil Society, Shareholders and

Providers of Capital, Suppliers and Employees”, the GRI Guidelines:

http://www.globalreporting.org/ReportingFramework/G3Guidelines/, p 24. 46

Ibid above, p. 26 47

Ibid above, p 34

45

responsibility. Instead, they are often pushing particular single issue agendas, especially those

related to environmental issues. And their participation in setting the norms and the accents of CSR

reporting have skewed the latter to satisfy their particular concerns. This particular orientation of

CSR will be made visible in our empirical review of the social reports of the three banks under

consideration.

b. The empirical review

Reviewing the Corporate Responsibility reports of the three selected banks, one must come very

quickly to a first observation: in spite of the GRI guidelines, the reports are currently very much “free

format” which makes any precise comparison very difficult. Long narrative sections alternate with

some quantitative data yet the latter is generally not in any form or shape that allows for a direct

comparison between them. How then can we make an interpretative reading of these reports that

addresses our questioning in the perspective of the double gap? Here are the two fundamental

questions we will address in this review: (i) how, and to what extent, do the Corporate Responsibility

reports address the concerns of NGOs about externalities, and (ii) do they address the externalities

linked to their core financial activities and particularly the notion of financial stability?

How do Corporate Responsibility reports address the externalities identified by NGOs?

All three Corporate Responsibility reports have endorsed the language of sustainability, responsibility

towards the community and engagement with stakeholders. Environmental issues are strongly

marked in all reports and notions such as carbon footprint and the responsible management of

limited resources are indeed developed substantially. See the word count table in figure 1 below. Of

course this very rough measure should be treated with a lot of caution. We have used very basic

words and did not measure related words (such as sustainable, sustained, etc.. for sustainability).

Besides, a count of the word risk is of limited use, considering it is quite context dependent

(environmental risk, financial risk, risk management, etc..). Yet, this count does give an immediate

indication of the relative weight of some themes: the environment still holds by far the absolute

record while stability is surprisingly low. Some contrasts are also remarkable (such as the use of the

word customer at the Royal Bank of Scotland or the word sustainability at Deutsche Bank) and are

commented on below. Finally, the count must take into account the total length of the respective

documents, with the notable fact that the Royal Bank of Scotland report is much shorter than reports

from its peers.

46

Word count Citibank Royal Bank of

Scotland

Deutsche Bank Total

Total number of pages 89 48 111 248

Environment 136 40 63 239

Customer 11 159 44 214

Sustainability 23 1 126 150

Community 59 39 45 144

Risk 59 18 42 119

Stakeholders 25 21 12 58

Human rights 25 11 11 47

trust 7 16 17 40

Regulator 7 8 12 27

Poor 17 0 3 20

Financial System 4 0 0 4

Basel 1 0 1 2

Stability 1 0 0 1

Bubble 0 0 0 0

Figure 1

International agreements but no meaningful quantitative data

All three banks are signatories of some major international agreements such as the Carbone

Disclosure Project48

, the Equator Principles49

, the UNEP Finance Initiative50

and the UN Global

48

“The Carbon Disclosure Project (CDP) is an independent not-for-profit organisation aiming to create a lasting

relationship between shareholders and corporations regarding the implications for shareholder value and

commercial operations presented by climate change. Its goal is to facilitate a dialogue, supported by quality

information, from which a rational response to climate change will emerge.” http://www.cdproject.net 49

The Equator Principles were issued by the IFC and a small number of “Founding Banks” soon to be followed

by a larger number (around 50 international today) of Banks in a response to pressure from NGOs. See:

http://www.equator-principles.com/ . Equator Principles are especially geared towards Project Finance

activities. Equator Principles compliant projects should be: “socially responsible and reflect sound

environmental management practices. By doing so, negative impacts on project-affected ecosystems and

communities should be avoided where possible, and if these impacts are unavoidable, they should be reduced,

mitigated and/or compensated for appropriately”. 50

UNEP FI is a global partnership between UNEP and the financial sector. Over 160 institutions, including banks,

insurers and fund managers, work with UNEP to understand the impacts of environmental and social

considerations on financial performance. http://www.unepfi.org/

47

Compact51

. In spite of the jungle created by the profusion and the amount of overlap between these

different agreements (see the footnotes below), it appears that all these different commitments

from banks create a sort of “the minima” standard nowadays for major (financial) institutions. They

generally reproduce across one another the spearhead concerns we have identified already:

environment, labour conditions and human rights. While many details are provided on different sorts

of engagements that fall into the respective categories, quantitative information is lacking when it

comes to measure the impact of these orientations on the actual banking activities as much as

measuring the gap with the bank’s development would all these engagements not be pursued. In

other words, while we have here an exercise in mapping the banks activities to the commitments

they have issued, there is no way one can measure the effective impact the “socially responsible”

conduct has had nor the costs they have generated, other than in some specific cases such as

voluntary work and other philanthropic projects. Also, all three reports have little to say about the

actual impact of their lending activities in all the sectors where this impact could be negative, the so-

called indirect responsibility: financing of oil & gas and other extracting businesses, financing of

delocalized production such as in the apparel industry, a common target for sweatshop practices,

etc. Instead, a few examples are produced of “virtuous” lending: specific alternative energy projects,

ethical funds and microfinance envelopes are pushed forward a bit as “feel good” activities. In total,

51

The Global Compact's ten principles in the areas of human rights, labour, the environment and anti-

corruption enjoy universal consensus and are derived from:

• The Universal Declaration of Human Rights

• The International Labour Organization's Declaration on Fundamental Principles and Rights at Work

• The Rio Declaration on Environment and Development

• The United Nations Convention Against Corruption

The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a

set of core values in the areas of human rights, labour standards, the environment, and anti-corruption:

Human Rights

• Principle 1: Businesses should support and respect the protection of internationally proclaimed human

rights; and

• Principle 2: make sure that they are not complicit in human rights abuses.

Labour Standards

• Principle 3: Businesses should uphold the freedom of association and the effective recognition of the

right to collective bargaining;

• Principle 4: the elimination of all forms of forced and compulsory labour;

• Principle 5: the effective abolition of child labour; and

• Principle 6: the elimination of discrimination in respect of employment and occupation.

Environment

• Principle 7: Businesses should support a precautionary approach to environmental challenges;

• Principle 8: undertake initiatives to promote greater environmental responsibility; and

• Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

• Principle 10: Businesses should work against corruption in all its forms, including extortion and

bribery.

http://www.unglobalcompact.org

48

the Corporate Responsibility reports appear a bit as a balancing act between very general

information that could be seen as a “declaration of intention” which cannot be quantified and very

specific information, examples, figures, tables, none of which however is comparable to the total of

the banking activities of any of them. When such information is available, it appears the considered

numbers remain quite marginal, which casts some doubts about the actual impact of it all. To take

only a few examples; Citibank, the biggest bank, has only 86 project finance transactions in 2006 for

which the Equator Principles apply, representing less than 2% of total assets, yet in this small number

of transactions, two exceptions have been granted to these principles. Deutsche Bank’s philanthropy

program absorbs 1.4% of its net profit. Royal Bank of Scotland lent GBP 600 mio to Small and

Medium sized Enterprises (“SMEs”) in the UK’s most deprived areas, which is less than 1% of its

lending portfolio. These figures do not mean a lot and one wouldn’t dare to comment on them, but it

is symptomatic of what Corporate Responsibility reports do not provide: a convincing image of how

the banking industry is becoming aware of and making a difference in relation to the notion of

sustainability. So, are banks “talking the talk” without “walking the walk” after all?

Governance

All three banks try to create some differentiation in the respective introductions of their Corporate

Responsibility statements, indicating what sort of place sustainability has conquered in their

respective organizations. For Deutsche Bank, sustainability is really business pursued by other means.

The message appears to be: we believe so strongly in the case that we do not see it as an add-on but

as something that will help us to stay at the edge of innovation and efficiency. Citibank is focusing on

the notion of community (as confirmed in figure 1) and how the bank is serving the growth of the

community, recognizing that the community is confronted with issues such as poverty and climate

change and that the bank has to take its share of these burdens. Unsurprisingly, being a US bank and

hence focusing on justice and fairness, philanthropic activities receive more attention at Citibank

than its peers. Royal Bank of Scotland is, in this respect, probably the bank that stays closest to its

core activities (the word customer is surprisingly high in Figure 1). Much time is spent on customer

satisfaction, on the geographic spread of outlets over the country, training of customers into

financial matters only to finish on issues that are the bread and butter of traditional reports:

environment and social issues. These differences are interesting in themselves and one wish one

could pursue this dialogue about what are the beliefs that underpin the Corporate Responsibility

commitments of these institutions. Yet there is still too little there to create a reliable picture.

49

Do the Corporate Responsibility reports address the externalities linked to the core activities of the

bank and particularly the notion of financial stability?

It would be wrong to say that the selected banks say nothing about their banking activities that is not

related to the traditional externalities as presented above. Especially Royal Bank of Scotland actually

spends a reasonable amount of attention in detailing the core activities of the bank: saving, lending

and payments, and how they want to see these activities meet the expectations of their customers.

Deutsche Bank and Citibank spend time telling how their lending criteria have been adjusted to more

social objectives instead of only responding to a financial criteria of profit maximization. Citibank has

created an Environmental and Social Risk Management Desk (ESRM) which reviews projects and

credits above a certain threshold where the object of the investment is known. This extension of

Equator Principles to financings that are not at first sight eligible for these principles also allows the

Bank to issue a number of specific sector policies such as Nuclear, and Forestry policies. Customers

are identified as stakeholders and the customer satisfaction index is considered a relevant Corporate

Responsibility criterion in all three reports. Citibank also developed a policy regarding foreclosure on

mortgages that are more protective for homeowners mainly through educating customers about

loan delinquency, valuation of their houses, etc. Now this could be seen as a relevant piece of Social

Responsibility in the way we intend it to be, which is to indentify, measure and control the impact of

the financial system on the real economy, such as speculative bubbles and the damage incurred

when they burst. With hindsight, however, one could say that this program, although it is extensively

discussed in the Corporate Responsibility report (3 pages out of a total of 89 pages) was probably

too little too late: Citibank has to date had to write down bad mortgage loans in excess of any of his

competitors. Yet, in terms of engaging with the customers on the intricacies of the finance world, this

is about as good as we have been able to track in the Corporate Responsibility reports we have

reviewed.

Corporate Responsibility and the notion of financial stability

The great absent of all three reports, though, is the financing community itself. We have

demonstrated in our introductory section that banks and financial institutions, together with the

central bank and other regulators, form the financial system that has charge of the trust society puts

in its money and financial assets. Yet, peer banks are almost absent of the stakeholder picture and

the notion of regulators (the word regulator appears 27 times across all reports: see figure 1) is

generally linked to specific issues such as money laundering rather than to the prudential

management of the system as a whole. Royal Bank of Scotland does mention Investors as

50

stakeholders but the perspective they develop is geared towards inclusion and know your customer

practices, and does not allude to the financial system and its stability. Citibank evokes the “Global

Financial System” and its transparency, but develops this theme only in the direction of money

laundering practices. Deutsche Bank mention the need to engage into a political dialogue that

addresses the effect of regulation on the banking activity, but again the objectives pursued are

different: “Our main aims are to strengthen Germany as a financial center, to foster the integration

of the European financial markets and to strengthen transatlantic economic ties.”52

The whole Basel 2

project we mentioned earlier, which has been a very expensive and labor intensive project for all

banks over the last ten years, is hardly mentioned (the word appears 2 times in total across all

reports, see Figure 1), nor are its consequences in terms of additional capital requirements or capital

release. Whether this new regulation will strengthen the financial sector or not is not seen as a Social

Responsibility issue. Financial innovation and its consequences is also hardly discussed, except where

it concerns specific areas such as microfinance and new scoring methodologies. While “Know Your

Customer” and scoring are discussed in the Royal Bank of Scotland and Citibank reports, the quality

of these tools to increase the robustness of the banking activity itself is hardly mentioned. On these

issues, it appears that all three banks are shy of speaking of their activity from their own “hard core

financial risk management” perspective. We will not comment further here on something that is

simply not there. Let us refer to the third part of this essay where we will develop what we believe

should be said in Corporate Responsibility reports about the financial community and its stability.

3. External critique of the practice of Corporate Responsibility

An external critique of the practice of Corporate Responsibility can be considered from many angles.

Each stakeholder, so to speak, could issue concerns that his interests are being harmed or

insufficiently protected by the engagements the banks have underwritten in these statements.

Positive and negative externalities (public goods and public bads) , in this respect, are as varied and

diverse as the interests that are at stake in and around the bank: shareholders, employees,

customers, suppliers, regulators, peer banks and the public at large. Now, the interests of suppliers,

customers and employees are not central to this paper other than that they are also part of the

public. We will therefore not take-on their critique here. Regulators have so far taken a modest

interest in the development of Corporate Responsibility of banks and we will touch upon these issues

in the third part of the essay. We will therefore limit this section to the standpoint of the public at

large intermediated by NGOs, and specifically BankTrack who has done quite some work in reviewing

the Corporate Responsibility Statements of banks. After the critique of BankTrack, we will review a

52

Deutsche Bank, Corporate Social Responsibility Report, 2006, http://www.db.com/csr/en/index.html -p 59.

51

number of academic research papers that address the same issue before turning to the internal

critique.

a. The critique formulated by BankTrack

I will refer below essentially to the report issued by BankTrack and called “Mind the Gap”53

. This

report reviews the Corporate Responsibility report of 45 different banks, including Citibank, Deutsche

Bank and Royal Bank of Scotland. Central to BankTrack’s critique is the very simple idea that banks

are shaping our society through their lending activities and that they must therefore establish:

“minimum standards to be met by each prospective client before the bank is prepared to provide any

form of financial service. [..; even more important is the integration of these policies into the day to

day operations of the bank. All investment and lending decisions eventually need to be based upon

these policies, and lead to the rejection of – prospective- clients which do not meet criteria defined in

the policies. Implementation needs to be further supported by commitments to transparency and

accountability”54

. In other words, much more than the banks’ efforts to reduce their own CO2

imprint, using recycled paper, limiting business flights, improving the insulation of their buildings and

buying green electricity, they should really see that all their clients apply the same sort of measures

in all their activities. It is the indirect responsibility of banks, their responsibility through their lending

activities, that is at stake in this review. Now, the idea that banks have a formidable impact on the

economy is not something new, we have evoked this aspect of banks in our first chapter. And banks

themselves agree to some extent to this statement or at least they let us believe so when they

mention examples of “virtuous” lending as for example to the renewable energy sector. The Citibank

report gives way to this line of thinking when expanding on their Environmental, Social and Risk

Management (“ESRM”) activities. Here is an ambiguity, though: while the role of the banks’

underwriting criteria on the economy cannot be denied, while we could endorse this role in theory,

our empirical survey does not show any of this in a quantitative way. As we mentioned above,

examples of “virtuous lending” are at best marginal and used to create a “feel good” sense without

any intention to show how it does or does not impact the economy profoundly. Besides, it is our

proposition that banks are actually not in a situation to develop these underwriting criteria to

conform with social objectives, because the latter should be elaborated in a democratic debate. As

53

Please refer to BankTrack’s Internet website: http://www.banktrack.org/ . December 21, 2007: The

acknowledgement section provides the following precisions about the authors:” the report was written by: Jan

Willem van Gelder and Sarah Denie of Profundo, a consultancy for economic research and a partner of

BankTrack [..]The benchmark project was coordinated by Ulrike Lohr, research coordinator of BankTrack, who

also acted as liaison with the 45 banks covered in this report. David Barnden of BankTrack assisted in the

preparation of the Dodgy Deal and the bank profiles. Bart Bruil (Easymind) developed the bank and Deal

profiles on the BankTrack website. Final editing of this report was done by Johan Frijns “ 54

Ibid above, p ix

52

we mentioned in the first chapter, matters of concern are too big for banks to address them alone.

Yet, let us see how BankTrack develops its critique.

With the notable exception of the ESRM policy of Citibank, all banks score quite low on the sectors

and issues BankTrack has defined for this survey (see above). The absence of policy or the absence of

disclosure of these policies, basically add no points to the scores of the respective banks, which are in

line with BankTrack’s general comment: “Exceptions aside, the overall quality of the credit policies

developed by the 45 banks is fairly poor. The content of many policies hardly exceeds a vague and

aspirational level and usually lacks clear criteria and objectives. Oftentimes, the content of policies,

which may or may not be of good quality, are not disclosed at all”55

. The central question here is:

how did BankTrack benchmark the policies or treaties signed by banks with what they call “best

practice”. And the document gives actually a very extensive and thorough explanation for each of the

sectors and issues, on how this best practice was established. The idea is to look at all the standards,

certifications, conventions and other criteria that have been gathered in each sector and establish

the best practice from there. Yet, the devil is in the detail and we need to access this level to

understand what really happens there. For the sake of readability of this essay, we will limit

ourselves to two issues, and try to understand what are the sources of this gap we have been

referring to all along.

Human rights

Let us first look at Human Rights, an issue that is generally the object of a broad consensus. All banks

but one scored a 156

only on this issue. The benchmark chosen, while being currently discussed at

the UN, has not yet been adopted as a consensus, and therefore many banks have not referenced it

as their objective. Yet all claim to have Human Rights policies in place (the word appears fairly

frequently in our word count above, see Figure 1). BankTrack, however, disqualified any policy and

declaration of intention if there were any exceptions in the portfolio that contradicted these

55

“Mind the Gap”, : http://www.banktrack.org/, p xi 56

Ibid above. Scoring is established following these definitions:

0. The bank has no policy on this issue or has a policy that deals only with operational emissions;

1. The bank’s policy acknowledges the bank has a responsibility for its financed emissions, but does not

commit to clear steps;

2. The bank’s policy aims to measure and reduce the bank’s financed emissions OR takes concrete steps

to shift its financing to renewable energy and a carbon extensive economy (excluding unacceptable

alternatives);

3. The bank’s policy aims to measure and reduce the bank’s financed emissions AND takes concrete steps

to shift its financing to renewable energy and a carbon extensive economy (excluding unacceptable

alternatives);

4. The bank’s policy sets ambitious (about 90%) portfolio-level reduction targets and is actively shifting

its portfolio towards renewable energy and a carbon-extensive economy (excluding unacceptable

alternatives).

53

intentions, leading to this bad score for virtually all banks. Is this a sign that banks are basically paying

lip service to the NGOs in their commitment to Human Rights practices? It is indeed easy to “walk the

walk” of Human Rights: nobody can seriously say that children labor or sweatshop conditions are

desirable nor can we pretend it is good for society to support tyrants and corrupt governments. Yet,

how much are we really accepting to pay to “walk the walk”? What if major countries such as China

or Russia are at stake? And notably, the bravest and most righteous banks will probably be easily

replaced by less stringent banks and will lose substantial competitive strength on the way. The notion

of level playing field plays a role of major importance in these issues and each deal turned down for

Corporate Responsibility reasons is one that competition will take thankfully. Banks would then

probably turn to their governments and to international regulatory institutions and ask them to re-

establish the level playing field by making the ban compulsory for all. Corporate Responsibility often

meets the hard limit of the level playing field and there is only so much one can ask a bank to do

when its peers are not following similar guidelines.

Climate change

Consistent with the illustrations we have been using so far let us look now at the issue of climate

change exposed in BankTrack’s report page 73 to page 79. All the banks under survey score a 1 on

this topic in spite of their strong claims about their control over their own CO2 emissions, their

buying green energy, their compensating for business travel and their awareness of consequences of

CO2 emissions in the industry. We need to make a second detour here to consider the situation from

the perspective Latour reaches us in Politics of Nature57

. The question Latour asks in the third

Chapter of this book is: “how can we obtain the reality, the externality, and the unity of nature

according to due process”(his emphasis). Latour rejects the idea that there could be an externality

that would simply be there, beyond and out of reach of discussion, a reality that would simply

impose itself and its laws upon us. Science –because it is science that Latour is concerned about here,

but I believe this equally applies to any “activity” that uses the same processes- tries to base itself on

a legitimacy of the “fact of nature” that would escape to the deliberation of society. The notion of

fact actually hides the very coming about of these facts through a deliberative process. Facts are

more often than not unstable matters of concern and they should not be “frozen” to the state of fact

and they should not hide the process of their fabrication. This is really what we are trying to show

here: NGOs are hiding that what they present as facts are actually not stable propositions, yet asking

57

Latour B, 2004: Politics of Nature: How to bring the Sciences into Democracy. Translated by Catherine Porter,

London, Harvard University Press

54

the banks to treat them as undisputable facts that create an injunction to do certain things. In other

words, NGOs are imposing a sort of philosophy of nature where it is nature itself that imposes on us

a certain code of conduct. Against this view, I am convinced that many of the propositions they

advance are actually in need of a social deliberation. BankTrack is not ignoring the deliberative

process systematically though, as the report starts with a number of “facts” presented as strong

consensus that emerged in the Intergovernmental Panel on Climate Change (“IPCC”) report . This is a

matter of fact as Latour believes it should be presented: not as a law of nature, but the result of a

consensus established in an institution, IPCC, through dialogue of the many parties that have an

interest in the matter. It would be important, according to Latour’s actor network policy to ascertain

that all parties have been invited, that the agenda was democratically established and that the

discussion has not been closed before all aspects of the issue at stake have been examined: the

complexity of the issues at stake combined with the interests that are involved between all parties

create this necessity. To use the vocabulary of Latour which we introduced earlier, these facts are

actually themselves hardly “matters of facts” and already in part “matters of concern”, issues that

need to be publicly debated. But we will accept that, when they do reflect a strong consensus, these

“states of affairs” be considered as close to matters of fact as we can hope to achieve. From these

observations, BankTrack basically concludes that climate change is a fact and that CO2 reduction is a

necessity, which we can acquiesce to. Now, the next step is already more controversial: what exactly

is the expected impact of the different scenarios one can draw for the future. The estimates are quite

widespread (for example: temperatures could rise from 1.1 to 6.4 degrees; sea levels could rise from

18 to 59 centimeters, etc..). BankTrack does not take a specific stance here and is still following IPCC

in its approximate evaluation. Then comes the part where action is discussed: what are banks to do

about climate change? BankTrack first distinguishes between operational emission and financed

emission, what we have so far called respectively the direct and indirect responsibility of banks.

Then: “banks should engage with civil society groups to agree upon a methodology to assign the

greenhouse gas emissions of their corporate clients in a fair and reliable way to all financial

stakeholders of these clients”58

. So, the financial actors are actually requested to take over the CO2

burden of their customers, under the assumption that financiers are responsible for the carbon

emissions of their customers. Now I suppose that this would not, of course, give the latter a “free

ticket” and that this is meant to form a sort of “shadow accounting” for the financial sector of CO2

emissions in the “real economy”. Finally, banks should “set ambitious targets” that should

outperform the Kyoto agreements and should lead “to a CO2 reduction of 90% by 2050 in

industrialized countries” (my emphasis), and “Banks need to develop targets and timelines to achieve

58

Mind the Gap”, : http://www.banktrack.org/, p 76

55

a reduced exposure to the fossil fuel sector. New investments in fossil fuel should be avoided (my

emphasis). Energy technologies which emit relatively large amounts of CO2 per energy unit produced,

such as powder coal plants, should be excluded completely from financing.”59

. Now of course, when

entering into the “prescriptive” part of the exercise, one cannot just rely on facts. Yet the

methodological part of BankTrack’s benchmarking was referring to “best practice”. How do the

numbers and actions above reflect best practice? Suddenly, any reference to strong consensus and

international agreements have disappeared and it is BankTrack’s word that these measures are to be

considered best practices. It suddenly appears that it is BankTrack’s view against the view of banks

and that the whole benchmarking exercise has been abandoned.

Matters of Fact and Matters of concern (2)

So we have now slipped from matters of facts into matters of concern in a big way. The need to

reduce CO2 could be a matter of fact. How to do this, is still very much a matter of concern. Let us go

just a little bit deeper into what we mean (what Latour means) exactly by a matter of concern. A

detour is needed again to grasp the heart of the matter here. When opposing facts and values, as

traditional philosophy would tend to do, injustice is done to this notion of value: In opposition to the

notion of fact, the notion of value comes as something subjective and less “legitimate” than facts.

Facts are certain; facts are there, while values are discussable and subjective. As Latour puts it: “the

notion of value [..] has the pronounced weakness of depending entirely on the prior definition of

“facts” to mark its territory. Values always come too late”. The notion of matter of fact shows that

the matter has been constructed and is not by itself superior, A matter of concern is a matter that is

socially constituted (as opposed to “existing in nature”) and articulates actors and their respective

interests. Matters of concern cannot be treated simply as facts, they need to be discovered in their

complexity (Latour would call this the moment of perplexity), exposed in the presence of all the

parties that are concerned by this issue (making things public), then articulated and hierarchized and

finally institutionalized60

. Now to come back to the issue we are discussing here: what BankTrack

presents as facts are actually very much matters of concern. By hiding the complexity of its

propositions, BankTrack puts the banks in a situation where they are forced to acknowledge the facts

and act on them in the way BankTrack wants them to. This way, the whole process of identifying

environmental issues and gathering the actors that should be involved in discussing them is ignored:

“matters of fact are surreptitiously used to impose preferences that the user does not dare admit or

59

Ibid above p 76-77 60

B. Latour, 2005: Reassembling the Social, an Introduction to Actor-Network-Theory Oxford University Press,

2005

56

discuss frankly”61

. It would be interesting indeed to try to understand how NGOs have come to this

position where they abuse the leverage they have over companies to push their own agendas

beyond any legitimate mandate. Is it their own history of activism that induces them to go beyond

what can be reasonably requested from banks? In the literature review below, we will examine a

number of alternative practices of NGOs and how the latter decide to engage or not in cooperative

processes with banks. It is our contention and this is the gap we want to raise, that banks cannot

address alone matters of concern, and -as an example-, banks cannot alone solve the issue of

reducing CO2 in the economy. It is a process that involves many different stakeholders representing

many interests and requiring many arbitrages. We may, ultimately, come out at the same target of a

50% reduction by 2050, but we will do so knowing where we need to reduce first and why. The best

practice adopted by BankTrack is apparently not an agreed best practice but simply the projection of

what they believe to be the right level. How to get there? Banks apparently have to figure it out by

themselves. While one can understand the frustration that people have with the limited impact of

Corporate Responsibility, it is simply not realistic and quite dangerous to assign responsibilities

where they simply cannot be assumed. It is not the task of banks to arbitrage the reduction of CO2

across our economies and therefore one cannot follow BankTrack in its measure of the so-called gap

in Banks Corporate Responsibility. As a matter of anecdote, ten banks out of the 45 banks sample

BankTrack has been using actually scored higher, i.e. 2 on the scale of BankTrack: “Ten banks

specifically mention that they recognize their role in financing climate change by financing very

carbon intensive industries, but none has translated this recognition into a credit policy with strict

criteria or targets with respect to carbon emissions or financing of green energy.”62

Matters of concern are in need of political articulation

Now, without going much deeper into the several ways matters of concern can be discussed publicly,

it is clear that these are political matters, matters where choices will be needed that take into

account the interests of as many parties involved as possible. Indeed, the State or Body Politic does

not necessarily have the last answer on these issues and the actual actors are as much industrial

groups and financial institutions as employees, countries, and would say Latour: objects: planes, air

conditioners, trains and kitchen equipment, to name just a few63

. How the public can best learn to

61

B. Latour, 2004: Politics of Nature: How to bring the Sciences into Democracy. Translated by Catherine Porter,

London, Harvard University Press, p. 100 62

Mind the Gap”, : http://www.banktrack.org/, p 79 63

What does Latour mean by that? Let’s take the example of planes. Planes are an integral part of our reality.

But planes are also “actors” in the debate we need to pursue here. While we would not have had to address

their impact on the environment just a hundred years ago, they are an integral part of the issue now. When

discussing the reduction of CO2, we will need to address the issue of air travelling and whether it can be

sustainable to travel as much as we do today. And immediately, one sees different groups being formed around

57

deal with these issues, experiment alternative solutions, learn from its mistakes and maintain a

creative process going is not just a matter of decisions in the highest democratic representation of

the country. So, we are not suggesting here that banks are not very important actors in this

discussion: they are. Simply, banks cannot be made responsible beyond what they can achieve. Any

financing must, beyond the marginal philanthropic efforts, have a valid business case. When

alternative sources of energy have not met the criteria of a viable financing, banks simply cannot

step-in and finance these solutions. If it is a collective political will to develop these sources of

energy, they will need to be made financially viable. Creative solutions exist, and they could well be

aligned with the notion of externality that we have used here. The CO2 tax (the carbon tax)

introduced in the UK, for example, could very well reduce the gap that exists today between fossil

fuel efficiency and alternative energy sources. All these ideas deserve to be pursued, but banks

cannot do the job alone. It is not their social responsibility, it is not their political mandate and it is

not their decision alone. In this respect, we find an interesting convergence between our reading of

matters of concern and what Scherer and Palazzo express in their Habermasian perspective on

Corporate Responsibility64

. In their paper, the authors advocate a political role for Corporates, along

with other stakeholders, in addressing the political issues of our times in a democratic deliberative

process. Corporate Responsibility could be seen as a platform where the interests of the different

stakeholders are translated into a political debate with the aim to come to a balanced outcome: “for

a corporation to deal with changing societal demands in a reasonable way, it must replace implicit

compliance with consensual societal norms and expectations with explicit participation in public

processes of deliberation and justification”. 65

Or, to use another concept that has been much in

vogue in political philosophy recently: banks could be actors in a form of horizontal democracy66

that

does not leave the issues in the hands of the vertical political institutions (parliament, government

and the voting citizens that have given them a mandate) but chooses to advance complex agendas at

the level they are best discussed. In this horizontal democracy, Corporate Social Responsibility could

be an instrument to advance on a number of issues by creating a discussion at the level of the firm,

engaging new powers into the resolution of issues that national states are less and less able to solve.

More on this topic in our third chapter.

the plane: the lobby of the air industry, the transportation companies, the travelling business world, oil

companies, tourism, etc… See: B. Latour: “From Realpolitik to Dingpolitic, or How to Make Things Public”,

Atmospheres of Democracy, MIT Press 2005 (edited by Bruno Latour & Peter Weibel] 64

Scherer A.G., Palazzo G, 2007: “Towards a Political Conception of Corporate Responsibility: Business and

Society Seen from a Habermasian Perspective”, Academy of Management Review, Volume 32, N4 pp 1096-

1120 65

Ibid above, p 16. 66

Cohen J. and C.F. Sabel, 1997: “Directly-deliberative polyarchie”, in: European Law Journal, 3, pp 313-342

58

I hope the critique formulated by BankTrack and our analysis of this critique has shown how banks

have been requested to achieve Corporate Responsibility objectives that are simply out of reach for

them. Going back to our notion of responsibility, it appears to me that either BankTrack does not

represent the right sort of forum to “respond to” in the words of Mark Bovens or to say the same

thing differently banks are simply not and cannot be responsible of, in the sense of “mandated for”,

the sort of tasks BankTrack has assigned to them.

b. Critique of Corporate Responsibility practices in literature

Corporate Responsibility and the level playing field

Critiques of the Corporate Responsibility generally agree on two things: it is very difficult to measure

the impact of Corporate Responsibility commitments from the corporate world and it is equally

difficult to make a business case in favor or against Corporate Responsibility. David Vogel has

reviewed a large number of both academic and practical inquiries into the Corporate Responsibility

issue without being able to decide whether there is a Market for Virtue67

. The origins of Corporate

Responsibility have been privatization, deregulation and globalization: all leading to a decline in the

power of nation-states to regulate efficiently the business world and an increase in power for

Corporates to shape the world. In this respect, the corporate world had to become the political front

line it seems to become through the Corporate Responsibility forum. Vogel can only observe that a

number of companies have made substantial progress on Corporate Responsibility, though most of

them have done so under pressure from NGOs and the public. While other stakeholders do have at

least a theoretical choice to consume a certain product or to work for a certain employer, they

remain far less involved and potentially harmful than the naming and shaming pressure from NGOs.

The voluntary character of Corporate Responsibility is also its weakness in a competitive market

where free riders are taking advantage of the good work done by others and disturbing the level

playing field. Much along the lines we have outlined above, he also supports the view that what

could benefit some stakeholders may in turn be detrimental to others. Finally, the main threat of this

indecisive case is that Corporate Responsibility itself could be falling into disgrace if it fails to show its

added value: it has been up to now the main vector of progress and convergence of self-imposed

regulation on a global scale. If it fails, it will leave the scene to hard regulation at local and global

levels. Overly simplified, it appears as if a new political order is being established: NGOs pursue

companies because they are sensitive to reputation risk. Subsequently the latter may at some point

decide to ask the state for hard regulation to re-establish the level playing field through the

67

Vogel, D, 2005: a Market for Virtue, The Potential and Limits of Corporate Social Responsibility, Washington

D.C., Brookings Institution Press

59

imposition of legislative measures. In the end, the wish of NGOs to see harder regulation being

implemented is realized with a small detour.

Will Corporate Responsibility create a new economy?

Simon Zadek has a more constructive approach to Corporate Responsibility in The Civil Corporation68

though he does admit that the critics of Corporate Responsibility have not disarmed and for good

reasons. Zadek views the activity around Corporate Responsibility as a much needed but incremental

business. While first generation practices were defensive and geared towards the management of

reputation risk, a second generation has emerged, which puts the issue more into the innovation

strategy of the firm (Body Shop, Ben & Jerry, etc..). The third generation will re-shape market

practices and install responsible business as the mainstream paradigm. Yet, Corporate Responsibility

is not the only place to look for improving business morale. Where required, hard regulation should

be preferred or used as a second phase when the level playing field needs to be reestablished among

Corporates that have adopted constraining regulations and those who have not. Corporate

Responsibility is not the answer to everything all the time but it is a good place to start discussions,

to raise perplexity in the words of Latour. But much as Latour, Zadek also recognizes that if it is to be

successful, Corporate Responsibility must find the right institutional support to expand and

generalize good practices. The trend is from conflictual and non-statutory to consensual and

institutionalized and Corporate Responsibility is really only one step on the path to institutionalized

good practice. In another paper, “The Logic of Collaborative Governance”69

, Zadek further elaborates

on what sort of processes may create the conditions for a real progress in Corporate Responsibility.

These processes differentiate between emerging, mature and institutionalized issues and the

corporate response: from defensive to compliant to managerial, strategic and civil. Leaders are the

corporates that are able to deal with issues as soon as they emerge in a civil way. Laggards are

defensive even when issues have reached a mature stage. Banks would in this perspective probably

fit the laggard qualification, with a few exceptions such as the Triodos Bank. Defensive, mostly

worried about reputational issues and not having integrated ESG as a strategic vector of

development, most banks are indeed not putting Corporate Responsibility at the heart of their

organizations. In the mature to institutionalized stage, Zadek recognizes that legislative steps are

most of the times required to re-establish a level playing field and limit the free-riders advantage.

68

Zadek, S, 2007 (First edition 2001): The Civil Corporation, London, Earthscan 69

Zadek, S 2006: “The Logic of Collaborative Governance. Corporate Responsibility, Accountability, and the

Social Contract”, in Corporate Social Responsibility Initiative Working Paper Number 17, Cambridge, M.A: John

F. Kennedy School of Government, Harvard University.

60

Veto or engagement?

Zooming into banking practices, Andrea B. Coulson asks the question: How Should Banks Govern the

Environment70

. His questioning addresses the issue of veto versus engagement action at two levels:

between NGOs and banks and between banks and their customers. The question is whether

engaging with a company that does not meet the requirements of the bank’s Corporate

Responsibility is better than excluding this company from the bank’s portfolio. The reasoning is that a

veto could be less efficient as it does not allow the bank to enter into a dialogue with the company

on its activities and thus does not allow for any improvement of its practice. After all, the company

has more ways to get financing than through bank lending and a veto could therefore be of limited

influence. The issue is whether the bank should sustain a “do no harm” position in which case a veto

is required or whether it should pursue a “mitigate harm” policy in which case engagement is a

better option. Let us remind the treatment BankTrack gave banks on the Human Rights situation: any

bank engaged in activities in dodgy countries was immediately scored lower on this issue. In other

words, BankTrack did not believe banks could engage with companies and countries on these issues

and was clearly advocating a veto position. But is it efficient? It is generally agreed, as an example,

that the involvement of banks signatories of the Equator Principles is generally able to push project

finance into best practice: the very controversial Sakhalin project, in spite of a less than adequate

start, has slowly improved its environmental standards under the push of several Equator Banks.

Whether the final project will meet acceptable standards is difficult to tell at this stage. Would the

companies participating in the Sakhalin consortium have financed the project anyway? Most

probably, yes. In spite of the very high investments needed, the sunk costs are such that companies

would finance the transaction “on balance sheet” i.e. through other means if project banks refuse to

step in. Banks need to balance between “red lining” certain sectors, excluding them from financing,

in which case they cannot engage with them to mitigate the risks, or instead accept to lend to these

sectors but with the clear intention to mitigate the externalities identified. Again, one of the main

limits to red-lining is the level playing field issue: if all banks agree to red-line a sector, it could be

efficient to a certain extent, if they do not, then the free rider gets away with the deal and no

mitigation has taken place. Coulson argues that the same question is true for NGOs. Following in this

the argument developed by Ahlstrom and Sjostrom71

, Coulson identifies four ways for NGOs to

70

Coulson, A., 2007: “How Should Banks Govern the Environment? Challenging the Construction of Action

Versus Veto”, in Business Strategy and the Environment, published online in Wiley InterScience:

www.interscience.wiley.com 71

Ahlstrom J. and Sjostrom E, 2005: “CSOs and Business Partnerships: Strategies for Interaction”, in Business

Strategy and the Environment, Number 14, pp 230-240

61

engage with banks (and companies generally): “protesters”, “modifiers”, “scrutinizers” and

“preservers”. Protesters are, as one could imagine, essentially using the naming and shaming

strategy to confront banks with their practices. BankTrack, in its report on banking practices would

typically fit under the “scrutinizers” category, while “modifiers” are using all sorts of institutionalized

platforms to obtain that constraints be put on the company’s practices. Modifiers can be found

behind all the agreements and conventions issued by UN, IMF, etc. Finally the “preservers” are the

NGOs that engage with their counterparts and try to better the company “from the inside”.

Obviously, NGOs are following different approaches at different times, and it does not appear that

any of these strategies necessarily yields better results at all times. Actually, these different

approaches replicate the strengths and weaknesses of self regulation in a competitive environment

which we highlighted earlier. Coulson advocates that a precautionary approach should be preferred

where banks approach each financing in the appropriate way, choosing a mitigation strategy where a

satisfactory outcome is possible and a veto strategy where it is not. Equally, NGOs and banks should

engage one another where this could raise understanding of their mutual concerns and lead to a

satisfactory outcome but they should also resolve not to control one another’s agendas. The

precautionary approach, concludes Coulson, is the only means for banks to adapt their position to

the prevailing consensus and learn about the consequences of different business practices under the

double constraint of the level playing field and the fact they are not the sole source of borrowing for

companies.

Other authors have taken other views in the spectrum from cynicism to skepticism to sheer belief or

hope that Corporate Responsibility will bring the necessary prescriptive content to a business

practice that seems unable to limit negative externalities. Most of them agree though, that

Corporate Responsibility needs to take another turn, from defensive and geared towards reputation

risk to strategic and geared towards a proper analysis of what is the social impact of a company’s

activities and how externalities can be managed towards the betterment of society. This is what we

will try to bring to the fore in our analysis of the banks’ Corporate Responsibility practice.

4. CSR practice within the bank

Could we formulate a critique that is geared towards a new perception of what Corporate

Responsibility could achieve? How could we formulate such a practice? These are the questions we

will address in this section. In order to get there, we will use a number of simplified views of how the

Corporate Responsibility practice has been developing until now and how this practice has led to

sub-optimal solutions.

62

The defensive nature of the Corporate Responsibility practice of banks

It has been sufficiently demonstrated how banks have engaged into Corporate Responsibility

practices historically under the pressure of especially NGOs as a means to manage reputation risk.

While it is false to say that banks were not responsible prior to these attacks, the external pressure

has forced them to formulate explicitly and make transparent to the outside world how they were

weighing negative externalities in their decision process. We have also seen how this Corporate

Responsibility activity of banks has been primarily addressing the agendas of NGOs and how this

results in an overweight of environmental issues, of human rights situations and working conditions

conflicts. It is quite symptomatic to see that, even today, Corporate Responsibility issues are

generally dealt with in the public relations department of banks (in our sample, the Citibank

Corporate Responsibility department reports into the Public Affairs department). Does this mean

that banks are indeed “talking the talk” more than they are “walking the walk”? Have banks tried to

adopt a “please the NGOs” strategy? In order to assess this, we may need to consider a number of

fundamental normative issues: (i) the shareholder versus stakeholder debate, (ii) the impact of

Corporate Responsibility on the issue of governance at banks and (iii) the “deal by deal” practice of

Corporate Responsibility

How do banks position themselves in the shareholder-stakeholder debate?

CSR reports are endorsing a language that tends to show attention to stakeholders. Does that mean

that banks are actually reneging the shareholder’s view? There is no public answer to this question.

Banks do not disclose their intimate view on who owns the firm or how much say stakeholders can

be granted. Besides, answers may well vary substantially from one bank to another. Finally, the

question is not answered with a yes or no type of answer but rather allows a whole range of answers

addressing the tension that exists between the interest of the shareholder, entitled to the profits of

the bank, and stakeholders (customers, employees, the community) who want to see their interests

managed with more consideration. But let us simply turn back time for about 10 to 15 years. The

“roaring nineties”72

were the years of shareholder value, of stock options and of deregulation. Banks

went along with this movement and the sector knew a long period of globalization and deregulation.

The dominant paradigm was that of efficient markets that should be left alone to optimize the

economy. Stakeholders had no place in this picture: as long as the management of the firm was

consistent with the shareholders interest, which was ensured through substantial share-option

72

This expression is used as a reference to the book by J. Stiglitz: Stiglitz, J, 2003: The Roaring Nineties, a New

History of the World’s Most Prosperous Decade, New York, W.W. Norton & Company Inc.

63

schemes, the market would adjust the variables to this optimum. Now the question is not whether

this theory was wrong, as Stiglitz affirms it was, but how one goes from this paradigm to one where

stakeholders are indeed taken into account and where externalities come to play an important role,

beyond –apparently- what the market would do. But banks did, and we now see them all embrace

the notions of stakeholders and negative externalities in their Corporate Responsibility statements.

The question remains open: is this change of strategy a form of “lip service” to the pressure from

NGOs? Is it the recognition that long term profit for shareholders requires that externalities be

properly identified and mitigated (internalized)? Or is it the recognition that a firm, if it is legally

owned by the shareholder, is nevertheless also responding to the needs of its customers, employees

and the public73

and that this duty exceeds the simple preservation of long term profits. Corporate

Responsibility statements certainly reflect a mix of the second and third answer. Sustainability is

good business, says Deutsche Bank, endorsing a long term profit view. “We clearly recognize what

our role is and what our responsibilities are to the betterment of society. Indeed, the many benefits

accrued from our franchise come with these responsibilities” says Citibank, which one could easily

interpret as the view that there is more to a company’s object than profit maximization, although we

do not get a clear answer to the “what” question. We will have to see in the third part of this essay,

how this issue of shareholder versus stakeholder is increasingly important when a corporate

conducts a “true” process of identifying its social responsibility. We will not reach a conclusion on the

theoretical aspect of this debate. It is, ultimately, maybe not that important to see the companies

explicitly adhere to one or the other view on the ownership of the firm. Rather, let us acknowledge

that the different stakeholders –including the shareholders- are defending their respective interests

and that the Corporate Responsibility statement of a company reflects this conflict of interests and

how they are brought to a given equilibrium. In other words, while the management of the firm

could have a conservative shareholder view, it is nevertheless subject to these external pressures

from the different stakeholders and the latter are generally forcing the company to take the

stakeholders actively into account.

Corporate Responsibility and Corporate Governance

The question of governance actually flows from the shareholder-stakeholder question: how does the

bank organize itself to hear the voice of its stakeholders? What sort of changes to the bank’s

governance are required to create the right balance between the vested interests of the different

parties? In the words of Latour, it is when the right people are gathered around the governance issue

and when their respective agenda’s are fully weighed in the discussion, that a balanced outcome can

73

R. Freeman, J. Harrison and A. Wicks, 2007: Managing for Stakeholders, Survival, Reputation, and Success,

Yale University Press

64

be produced. Now: how have banks generally tackled this issue? Niklas Egels-Zanden has looked into

“Post-Partnership Strategies for Defining Corporate Responsibility”74

developing this very idea in the

jargon of Latour’s actor-network theory: translation. Translation “can be defined as comprising the

acts of negotiation and persuasion by which an actor is able to set the agenda for and [..] gain the

authority to speak and act on behalf of other actors (original emphasis)”75

. Now how does the bank,

gain the authority to speak for all the stakeholders? How does the bank ensure it has the legitimacy

to speak for all stakeholders? Of course, the dialogue with employees is one that has been

institutionalized in developed markets well before Corporate Responsibility came into publicity. Yet

NGOs have been the ones that have pushed the practice of engaging with corporates on new

domains such as the environmental and social matters in third world countries. Likewise,

shareholders do have institutionalized forms of voicing their opinions: shareholder meetings, their

role in appointing the supervisory board and voting for strategic decisions. Customers, one could

argue, vote with their buying decisions. Then again, it is today impossible not to have a bank account,

which means that this freedom of the consumer will find some hard limits. While Corporate

Responsibility reports give us the outcome of this dialogue, through customer satisfaction indexes,

employee feed-back and financial return for the shareholders, it does not (necessary) tell us how the

bank has arranged to include them in his decision process. The answer could be in Egels-Zanden’s

survey applied to a different branch of industry, the Swedish garment retail industry and a specific

initiative: the Business Social Compliance Initiative (“BSCI”). The stages of this process mirror quite

well what the banking sector went through. While in a first instance, the retailers tried to answer

alone to the pressure from NGOs, they quickly discovered that they needed to enter into

collaborative processes with the latter to better understand their grieves and share some of their

knowledge in the field. Banks have the same sort of ambiguous relation with NGOs: on one side they

know the power of NGOs to hurt their reputation in naming and shaming campaigns. They also know

that NGOs have collected over the years a certain knowledge on a number of issues. Yet at the same

time, NGOs are not direct stakeholders, they are only insofar they do represent the public opinion.

What sort of role should one give to NGOs in a stakeholder approach? How legitimate are their

claims? How do NGOs feel about engaging with banks and will they not be hurt themselves if banks

appear to have behaved badly while NGOs were implied in their decision process? It is clear, though,

from BankTrack’s report that if collaborative strategies have been pursued, they have at least

partially failed. Time, maybe, for the banks, to enter more intensively into post-partnership strategies

together with their peers in banking. This conclusion would fit nicely in what we will be suggesting in

74

Egels-Zanden, N, 2007: “Post Partnership Strategies for Defining Corporate Responsibility: The Business Social

Compliance Initiative”, in Journal of Business Ethics, N 70 (2), published on the Internet: www.springerlink.com 75

Ibid above, p 4

65

the third part of our exposé, as we will advocate that banks need to re-possess and interiorize their

core social function of ensuring the financial stability.

Deal by deal: the working floor perspective

While Corporate Responsibility statements and codes of conduct are drafted somewhere in a staff

department of the bank, the Front Office is dealing with corporate responsibility choices relating to

transactions on a continuous basis. How do they deal with these issues? First of all, the Front Office

reasoning will be one of gauging risks and rewards and see whether a transaction is paying enough

for the risks it entails. In this respect, the world of banking is fairly one-dimensional and straight

forward: a transaction is financeable if it repays itself, or to put it the other way around: a

transaction is not financeable if it doesn’t produce the cash flows to reimburse the debt. The first and

foremost concern of a banker, before we look at any additional consideration, is to see if the

“economics” of the transaction make sense, which means that the investment considered will be

fully repaid within the life of the financed asset and within the tenor of the loan. Renewable energy

may provide a good example, in this respect: most of the time, renewable energy is simply more

expensive to produce than fossil fuel burning energy. Which means that renewable energy will not

be able to compete in the market with cheaper sources of power. In banking terms this means that

renewable energy, on its own economics, is not bankable today76

. This is why we see governments (i)

provide subsidies for the production of renewable energy and (ii) create a carbon tax for the

production of fossil fuel power. The combination of these elements may make the business case of

renewable energy a bankable one. It must be realized though, that with all the best ethical intentions

of the world, a transaction needs to make economic sense before it can even be considered. Which is

not to say that other criteria cannot be used in the evaluation process: they will only be considered

after the financial business case has been made. Now, reputation risk will enter into this equation as

one among many factors. Individual employees will most certainly agree that they would not like to

finance something that they themselves would judge unethical. Yet the notion of reputation risk is a

way to make this judgment an objective one, one that is endorsed by the community. In other words,

while the internal code of conduct gives employees the tools to check whether they should or not

have moral objections to a transaction, it remains a judgment one prefers to represent in public

terms. This is not as odd as it might seem at first sight: evaluation of transactions seldom is a matter

of black or white. The very fact that a transaction exists in the market means that more people have

been staring at the same issues and have decided to move it along. Yet, all the issues we have

76

Now to be completely accurate on this question, it could be the case that renewable energy is competitive

against a barrel of oil above, for example, USD 100. Bankers will generally consider that oil prices are essentially

volatile and test the competitive position of renewable energy against a 10 year average oil price.

66

discussed above when we evoked the problem of many hands and responsibility resurfaces here and

peer pressure as much as the will to please and the bonus incentive can push the buck beyond

acceptable levels. Here is where the external risk of reputation plays a salutary role, one that is less

subject to being influenced one way or another. If a transaction is susceptible to get the (negative)

attention of newspapers and if the bank is at risk of being exposed because of this transaction, then

reputation risk is considered too high and the transaction is not pursued.

Furthermore, the Front Office is more than any other place within the bank, the point where the

level playing field materializes. Account Managers can feel the pressure of competition when, to

comply with their Corporate Responsibility statements, they engage with a company to improve the

environmental and Social Responsibility (“ESR”) issues attached to a transaction. Even when several

banks participating in a transaction have signed the same agreements such as the Equator Principles,

differences in interpretation of these agreements can make a difference between the winning and

losing banks in a bid process. This is another dent in the argumentation that banks can change the

world if they redirect their lending business: it would require concerted action with their peers or

hard regulation to get there.

Finally, Account Managers experience every day that companies have more ways to finance their

activities. While banks can engage companies when the object of their financing is known such as in

project finance, very often companies finance their more controversial activities on their own

balance sheet and finance themselves in the bond market or through general purpose loans or out of

their retained earnings: money is essentially fungible, and no difficult questions are asked for general

lending transactions, no transparency is required other than the reporting obligations of the

company itself. To support this view, let us mention here a paper written by Bert Scholtens77

and

which mentions that only 10% to 20% (only Japan realizes a higher score of 30%) of a company’s

financing is provided from external sources (debt and equity), the larger part coming from retained

earnings. Of this financed share, the largest fraction is provided by loans, except in the US where

bond financing is equally important.

Now of course, the bank knows how difficult it can be strike the right balance in these circumstances.

This is why any decent bank has instituted a dual process in its approval street at all levels of the

organization. Front Office managers always have in front of them a risk management peer that is

required to balance the risk and the reward of the transaction at hand. For larger transactions, this

double pair of eyes is replicated all through to the highest approval authority. Risk management is

77

Scholtens B., 2006: “Finance as a Driver of Corporate Social Responsibility”, in Journal of Business Ethics n 68,

pp 19-33.

67

therefore most of the time also in charge of the control of the application of the Corporate

Responsibility engagements of the bank.

To conclude one could say that, while account managers and their risk peers do appreciate

reputation risk and ethical considerations in their transactional approval process, the financial

orthodoxy, the competitive pressure and financing alternatives in the market limit substantially the

efficiency of corporate responsibility commitments from the bank.

5. The need for a reflexive redefinition of the Bank’s social responsibility

The defensive nature of the Corporate Responsibility action of banks until now has postponed the

moment of self-reflection and internalization of what this responsibility really is. At a certain point,

the discussion is more important than its outcome, and this is the point we seem to have reached

today. Should banks not take the initiative to ask themselves what it is they really mean to society

and define for themselves who are the relevant stakeholders, the sort of dialogue they want to

entertain with their stakeholders, and the governance that would best fit this dialogue? Is it not time

that banks define for themselves what definition of sustainability has gained enough consensus to be

enforced and which requires to be shared in a public debate? It is our conviction that this self-

reflection would necessarily lead banks to the conclusion that, along with the traditional ESR issues,

their primary role is to ensure that the financial system they are forming together with their peers

remains a sound and solid one, a system that is able to contain cyclical moves and limit speculative

bubbles, a system that ensures the stability of financing on the longer term and does not expose

people, companies and countries to excessive volatility of their sources of financing, and one that is

firmly in charge of keeping systemic risk at bay. If we want to distinguish these risks from the ones

we have been treating so far but still call them externalities we could differentiate them as financial

externalities: the induced costs of failing financial systems.

Sure enough, we have demonstrated that the Corporate Responsibility practice banks have

maintained so far could not respond to the demands of the NGOs that have triggered it in the first

place. Banks cannot substitute themselves to the process that is required to handle what we have

called after Latour: matters of concern. After having harvested in their Corporate Responsibility

statements all the low hanging fruit of most of the issues that represent a strong enough consensus

to be approximated as matters of facts, banks must oppose to their stakeholders that they are not in

a position to control the economy and gear it towards objectives which are themselves not clearly

defined. The pressure from NGOs has so far controlled the agendas of Corporate Responsibility for

banks and created an overweight for environmental, human rights and working conditions issues, but

68

banks have another responsibility that needs urgent consideration: the stability of our financial

system. While the deregulation of the “roaring nineties” has created the global financial situation

where markets are all interdependent, it is now time to create the conditions for these markets to

function without the ups and downs that are each time taking their toll on the economy.

69

PART III: SEARCHING FOR A NEW DEFINITION OF CORPORATE RESPONSIBILITY FOR BANKS

We have investigated in the second part of this essay the first leg of the double gap we have

identified in our introduction: why banks could not meet the expectations of NGOs in their Corporate

Responsibility exercise. Before moving on to the second leg of our double gap, we need to

understand what we believe is Corporate Responsibility from the bank’s perspective, what it should

achieve and what is out of boundaries.

1. Corporate Responsibility redefined.

What we have observed in the current practice of Corporate Responsibility is that expectations from

the NGOs could not be met because the externalities the latter have identified are simply out of the

control of the banks. One has to ask the question why banks have nevertheless engaged themselves

on this path and responded to demands they could only partially meet.

a. From moral choice to political issues

NGOs, and with them a considerable part of the literature relating to Corporate Responsibility have

presented the issue as a question of moral choice. Banks, as much as any other corporate, would

simply have the choice of being moral in their activities or not. As Latour told us earlier, when

matters of concern are presented as facts, the decision becomes a moral one and values “always

come too late”. If banks accept to make value decisions, is their motto, on the facts we submit to

them, then they are moral. If not, then they should undergo our naming and shaming campaigns. Yet

we have seen how NGOs have drifted from facts to matters of concern and how it is not about a

value choice but an acceptance that matters of concern are in need of a political debate. We have

created a separation between what could be considered matters of facts, matters sufficiently

debated to have created a strong consensus and hence can be acted upon and what should be called

matters of concern. This separation is the one between moral choice and political deliberation. Yet a

number of concepts need to be further clarified to get this issue fully explained: the concepts of the

Public, the need for consensus and the very notion of what is political.

The notion of the Public

“The public” may be a fairly vague notion. Dewey proposes a pragmatic approach to this notion that

circumvents many theories that have been elaborated in the past and which are exposing a number

of oppositions that cannot be reconciled. The search for a sort of ontological status of the Public, as

70

political animal, as a social animal, or as in constant search of power is not fruitful as it necessarily

combines nature and nurture in a sort of mythological foundation. Instead, Dewey proposes to “take

our point of departure from the objective fact that human acts have consequences upon others78

”.

Taking this pragmatic approach, then: “those indirectly and seriously affected for good or evil form a

group distinctive enough to require recognition and a name. The name selected is the Public”. The

Public embodies the fact that our action affects not only those involved in the action but also those

that are indirectly affected by them. Corporate Social Responsibility then represents indeed a matter

for the Public to consider. The notion of stakeholder is thus a legitimate one, as stakeholders are

indeed affected by the action of the corporate. Beyond the notion of ownership of the firm, where

the legitimacy to manage the firm is connected to the concept of legal ownership, the notion of the

Public links to the firm all those affected by its operations. The firm is an actor in this sense, one that

produces acts and affects the public. Its operations are therefore by essence something that falls into

the public domain and must be open to calls made by the Public. Where these actions are of the sort

that fall under a broad consensus, a matter of fact, then the firm can decide what is best for the

Public in following this consensus. Where it concerns matters of concern, the firm becomes one of

the participants in the debate that needs to take place.

Building a democratic consensus

Here is a problem: NGOs have made us believe on many of these instances that they were the Public

and that they had the consensus all figured out. But in some instances, they simply don’t. While

pressing for solutions is a good thing, it may be much more problematic to take a shortcut and take

beliefs of a small group for the political right answer. Now, with the help of Latour79

we can refine

this notion of Public and actually get to what is really needed: a political debate. Things that have not

reached a strong consensus (“perplexity”), matters of concern, need to be properly articulated

(“consultation”), gathering all the stakeholders (the Public) and their particular interests and

hierarchizing the issues as a function of these interests (“hierarchy”). These issues must then carry

the institutionalized state of political issues (“institution”). Banks, for that matter, are very useful

actors in this scenario as their experience with managing uncertainty and running scenarios are skills

that are of great use in these type of discussions. But this is something different altogether from

asking banks to decide alone on what should be done.

78

Dewey, J, 1927: The Public and its problems, Chicago: The Swallow Press, p 12 79

B. Latour, 2004: Politics of Nature: How to bring the Sciences into Democracy. Translated by Catherine Porter,

London, Harvard University Press, p 111.

71

At times, the good is the enemy of the better. Let us remind here the example we mentioned from

David Vogel’s The Market for Virtue80

regarding children labor. Now, that children should not work is

a strong consensus, at least in developed countries. Yet the position endorsed by NGOs and followed

by most companies to ban children labor may have had consequences in some cases that actually

made the situation only worse for these children and their families. Realizing this, most NGOs and

most companies involved in these issues have learned to deal with the externalities they created by

solving an earlier externality. Banning children from the working floor can only be executed if enough

measures are taken to ensure that they and their environment will not suffer from this measure:

access to schooling, compensation for the loss of revenue, etc.

Let us agree that in the rest of this essay, we will refer to the notion of Corporate Responsibility as

we have defined it just now: where there is a strong consensus about how to deal with specific

issues, Corporate Responsibility commitments should endorse this consensus and align themselves

to these norms. Where a strong consensus does not exist, banks can only raise the issue to the status

of political problems in need of a response and facilitate the institutionalization of the deliberative

process that needs to take place. This is not new: many of the platforms created between

corporates, NGOs, the body politic and the Public, are matters of concern being recognized for what

they are. And often, these platforms actually open the way to adequate solutions for complex issues.

Certainly, the UNEP FI81

is a generally accepted platform for discussing environmental issues among

financial institutions. We are not in a position to judge whether the UNEP FI has gathered all the

actors to represent the Public correctly, in the words of Niklas Egels-Zanden, if it has the authority

and the legitimacy to speak for the Public, but certainly this is the sort of institutionalization many of

the problems we are facing in Corporate Responsibility need. So we have moved from a notion of

Corporate Responsibility where things were a matter of applying or not sustainable solutions, to a

notion where it actually becomes the forum where complex matters are identified and discussed

democratically.

The notion of politics

Yet we must right now define one concept we’ve been using carelessly until now: the notion of

politics. We have said above that banks could not go alone on matters such as CO2 reduction and

other matters of concern, because the latter are in need of a political articulation, referring generally

80

Vogel, P, 2005: The Market for Virtue, The Potential and Limits of Corporate Social Responsibility, Washington,

Brookings Institution Press, p 98. 81

UNEP FI is a global partnership between UNEP and the financial sector. Over 160 institutions, including banks,

insurers and fund managers, work with UNEP to understand the impacts of environmental and social

considerations on financial performance. http://www.unepfi.org/index.html

72

to the notion of democratic legitimate deliberation. Yet, democracy, if it creates legitimacy, does not

necessarily create a right decision. As Gerard de Vries notes in “What is Political in Sub-politics?”82

,

the modern view of democracy has led us to believe we are all “mini-kings” participating into

decision making and that this participation alone is legitimating any decision. Now it must be clear

that politics, if they concern the dealing with public affairs, the affairs of the Polis, the City, must be

geared towards some notion of the common good. A deliberative process that does not weigh fairly

the interests of different participants, that does not take into consideration the notions of fairness

and justice is not properly a political process. Says de Vries: “A tyrant who uses violence to enforce

order is therefore not involved in politics”. Now the notion of politics often refer to the traditional

political institution: the State. Yet, in our modern societies, the area of politics cannot be limited to

the instances of the State: everywhere where issues that concern the common good are discussed, a

form of political activity is taking place, which de Vries refers to as sub-politics: politics, is about a

practice (taking from the Aristotelian concept of praxis) that is itself realizing the common good. In

the case we have advanced, recognizing the political dimension of CO2 reduction means that the

community, the polis, engages into a qualitative reflection geared towards addressing the issue in

the best possible way for the common good. So, the notion of politics as limited to the affairs of the

State is obsolete. We have mentioned earlier this notion of horizontal democracy where problems

are diffused within society to stakeholders gathered around a given issue. If CO2 is such an issue, it is

clear that all the sub-national or transnational instances where sustainability has been discussed are

as many examples of horizontal democracy or sub-politics, provided they have been speaking with

the right attendees (the Public) and that their discussion was effectively geared towards the common

good.

b. What is the Corporate Responsibility of banks?

We are obviously not in a position to answer to this question exhaustively. This is the sort of work

banks should be undertaking both individually and together with their stakeholders and peers. What

we propose to do, however, is to put our notion of financial stability to the test. We have so far

affirmed that financial stability is something that is desirable as it limits the negative financial

externalities of speculative bubbles, credit crunches and volatile availability of finance and systemic

risk. This, we believe, could meet with a strong consensus of the Public. From there, however, and

before financial stability could be inserted into Corporate Responsibility statements where it

ultimately belongs, we will need to see how financial stability can be defined as a discussion item. To

make this analogy once again, while we agree that we should reduce CO2, we are not able today to

82

G. de Vries, 2007: “What is Political in Sub-politics – How Aristotle Might Help STS”, in Social Studies of

Science, Vol 37, N. 5, pp 781-809

73

reach a consensus on how we should do this. Equally, while financial stability is desirable, how to

preserve financial stability is most certainly in need of a discussion. But it is to create this discussion

that we need to earmark it as a social responsibility item, one that should gather not only the

financial actors, the regulators, but also the Public in the sense of Dewey: all people affected by the

negative effects of financial crisis have to have a representation in this discussion. It is not only about

the survival of banks, it is also about articulating the interests of financial institutions with the

interests of the potential victims of these periodic crashes and asset volatilities. Corporate

Responsibility then becomes more than a unilateral commitment from banks to do this or that. It is,

recognizing that different stakeholders are affected differently by the things banks do, creating the

deliberative space where these interests are analyzed and confronted. We will develop below a

number of the issues we believe should be addressed in this perspective and see how these issues

will receive a new dimension if we take financial stability to be a social responsibility of banks.

2. Banks and the Basel 2 agreements: global regulation of banking activities.

I may want to insert a disclaimer here: it is not the objective of this essay to re-visit the Basel 2

agreements and I do not pretend I will fix all the weak spots of financial markets regulations in the

remaining pages of this essay. What I want to achieve is to show how, earmarking financial stability

as a social concern, the whole reading of the Basel process takes another dimension.

a. Basel 2

The philosophy behind the Basel 2 initiative is strikingly simple: banks are exposed to system risk: the

collapse of one of them could create a domino effect whereby banks would collapse one after the

other until the whole financial system melts down. The 1929 crisis started with such crisis, and since,

the bankruptcy of a number of financial institutions threatened to reproduce similar circumstances

(Herstatt Bank, LTCM, etc.). The current crisis has produced all the signs of a similar process: from the

early bankruptcy and subsequent nationalization of Bear Sterns and Northern Rock, to the

developments we see unfolding now. Only a massive intervention of the States across the globe

seem to create a possibility to stop this domino effect to propagate across the whole financial system

and reduce our financial system to a smoking wreck. The Basel 2 agreements follow, as the name

indicates, a prior regulatory framework put in place in 1988 after the bankruptcy of the Herstatt Bank

and the Franklin National Bank which threatened the whole financial system in 1974. They have been

formulated under the auspices of the Bank of International Settlements (“BIS”) which represents the

central banks of major developed countries. Basel 2 is essentially a platform where spokespersons of

the banking sector and of their central bank regulators are meeting to elaborate the regulatory

74

framework of the future. The need for an international framework became increasingly pressing as

the globalization of the financial sector and the exponential rise of financial transactions volumes

worldwide created a situation of interdependency between financial institutions in terms of the risks

they were running on one another for the good end of their financial operations. While each bank is

in charge of the risk evaluations of the counterparties it is dealing with, the sheer effect of this

systemic risk requires that banks meet global prudential standards. The Basel agreements are not

binding for all banks worldwide automatically. They only provide national regulators with a

regulatory framework which these regulator may chose to adopt or not. The first round of the Basel

accords were largely adopted by more than 100 countries, including the main developed countries

and managed to keep systemic risk under control as long as it lasted. Yet the measure of risk was

considered insufficiently differentiated and the Basel 2 agreements should provide more

sophisticated measures, adjusting the regulatory capital to the risk nature of the assets transacted by

the banks.

Basel 2: a mixed form of regulation and self-regulation

While the framework of Basel 2 will be progressively adopted by the central banks of the major OECD

countries and will thus form the backbone of national regulation, the actual models used to calculate

the regulatory capital for each type of assets are being developed by the banks themselves and

validated by their respective central banks. The exercise of developing these models is a difficult

balancing act between ensuring that enough capital is put aside to cover the risks incurred by banks

while at the same time not immobilizing more capital than is necessary in order to optimize the

shareholder return of these banks. This framework is therefore shaping the risk profile of the whole

banking sector: overly prudent models would increase the capital required and thus reduce the

profitability of the transactions while overly aggressive ratios would create a risk for banks to be

undercapitalized and thus vulnerable to financial shocks. This simple equation goes all the way down

to the competitive position of banks in daily transactions: if the models used are conservative, the

bank will need higher returns and thus price its transactions too high and loose market shares. If they

are too aggressive, then the bank will be likely to price transactions very competitively but be

exposed to downturns in the market. Banks have managed this equation as they do with all their

current business: by seeking a balance between risk and reward through a dual internal process

where risk management and commercial management need to come to an agreement on the right

measure. Besides, the validation of these models by the central bank provides an additional

prudential step in the process.

75

The weakest link

Yet, and here is the element that may have been insufficiently addressed: because they are so much

entangled with one another, banks are as strong as their weakest peer(s). The financial crisis of 2007

and 2008 is a proof of this: (large) banks can simply not be allowed to fail and go bankrupt. The

interdependencies between them, created by the massive exchanges of financial instruments, simply

do not allow for any bank of a reasonable size to be let down. The different national States caught

between their liberal principles and the threat of seeing the financial instability spread to the whole

sector have been obliged to constantly arbitrage between letting down the firms that could be let

down (Lehman, Washington Mutual) and rescuing those that could create a global meltdown. Banks

are simply not companies like any other. While the liberal doctrine would request governments not

to intervene, it has become obvious to the most orthodox market defenders that letting banks go

bankrupt was simply not an option. While aggressive management of the bank’s financial position

may boost profits in good times, it will necessarily cost tax payer’s money in bad times. Now, the

short term view could create incentives for banks to have an aggressive stance towards their

regulatory capital levels. And shareholders could indeed benefit from this aggressive policy and low

levels of capital. Yet, the recent bail-out of the whole financial sector with public money clearly

shows that the short term interest of these shareholders is conflicting with the Public interest, as

much as, in these cases, long term shareholder interest. The mocking slogan of “privatization of

profits and nationalization of losses” has never been as true as in the recent financial crisis. Now

voices are suggesting that banks, if they advocate a mixed regulatory regime of self-regulation and

regulation by their central banks, should also create a collective protective “rescue fund” to cope

with possible default situation in their weakest peers. The very existence of this discussion proves

that this new regulatory regime, a mix of self-regulation and national regulatory guidance, has

apparently failed to protect the system as a whole. In any event, this discussion cannot but be a

public one as the consequences of defaults from banks are currently being addressed with public

money. Depositaries of the public trust, guardians of the money that the public has entrusted to

them, banks are no ordinary competitors: they ultimately depend on public funds to sustain the

financial system globally. This very observation has started to raise question marks as to the status of

shareholders of financial institutions: are they not free riders that can claim the profit of the firm

while not running the risk normally associated with their position because of the likelihood of a

government driven bailout.

76

b. The political character of the Basel 2 regulation

Two intertwined questions seem particularly relevant in this context: (i) how to define what is an

acceptable risk and (ii) how to ensure that all banks (and central banks) have the same view on this

issue. What is an acceptable risk? How does one look at the downside (financial instability and

systemic risk). Now this question, I believe is the sort of questions that engage the social

responsibility of banks and of the central bank and is therefore, in my view a political problem. There

are no facts or certainties that can determine what is the right level of regulatory capital: it remains a

function of risk appetite or risk aversion and it does in fact articulate the interest of the public against

the interest of the shareholders. How have banks approached this exercise? In a first instance, what

mattered was to replace a very rough measure of risk –the first Basel agreement- by something that

was more in line with the increased sophistication of the financing instruments and that would allow

banks to actually finance riskier transaction at the right price. Yet, with a view on competitive

pressure and shareholder return, banks were quickly focusing on how much regulatory capital they

could return to the shareholders and improve their competitive position. This would all be

acceptable if the models used were sufficiently proven and solid to withstand stormy financial crisis

scenarios. Yet the methodology used by most banks and encouraged by the Basel Committee is not

without critics. Jon Danielsson83

criticized a number of assumptions of the mathematical

fundamentals of the models used, particularly regarding the fact that market participants are not

exogenous but endogenous factors (which react in a homogeneous way, particularly in times of

crisis). The threat, according to this author, is that Basel 2 may increase the sensitivity of the financial

sector to financial crisis instead of smoothening them: “In other words, risk properties of market data

change with observation. If, in addition, identical external regulatory risk constraints are imposed,

regulatory demands may perversely lead to the amplification of the crisis by reducing liquidity”. The

recent crisis may have proven him right in a most spectacular way: the correlation between the

default of financial institutions is beyond any doubt such an endogenous factor. This critique

received recently support from an unexpected expert: Mr. Greenspan himself. In an article published

in the Financial Times84

, Mr. Greenspan, ardent defender of liberal policies and deregulation admits

that models insufficiently account for fear and euphoria tendencies of the financial agents: “The

essential problem is that our models – both risk models and econometric models – as complex as they

have become, are still too simple to capture the full array of governing variables that drive global

83

Danielsson, J, 2002: “The emperor has no clothes: limits to risk modeling”, in The Journal of Banking and

Finance, N 26, p 1273 to 1296 84

Alan Greenspan, 2008: “We will never have a perfect model of risk”, Financial Times, published: March 16

2008 www.ft.com

77

economic reality. A model, of necessity, is an abstraction from the full detail of the real world”.

Greenspan, however, does not abandon his liberal views on the matter as his conclusion is that “it is

important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and

regulation [does] not inhibit our most reliable and effective safeguards against cumulative economic

failure: market flexibility and open competition”. Now, it is a political question to ask oneself who will

be hurt if the new regulation would increase financial instability? The answer is: the Public. The

particularity of the financial system, as we have discovered earlier is that everybody is hurt when a

financial crisis happens: the volatility of assets raise doubt about the creditworthiness of many banks,

which in turn create a credit crunch which potentially transforms financial instability into a global

recession. The US Subprime crisis is a school example of exactly this phenomenon, much like the

internet bubble burst was in 2001.

Where is the Public in the Basel discussions?

Now, if the Public is a stakeholder in this issue, it needs to have a representation in the discussion

process. Central banks may claim that they represent the public. And to a certain extent this is

probably true. Yet, central banks are also competing with one another to retain the head offices of

their “national champions”. A bank can easily change its head office address from one country to

another if it would appear that a national regulator is particularly conservative. This competitive

nature of regulatory regimes is increasingly calling the latter to arbitrage their own prudential

measures against the more aggressive regulatory framework of their neighbors. Is this in the interest

of the Public? In view of the recent developments, this is rather doubtful. A striking example of this,

again taken from within the heat of the current financial crisis, is the behavior of the Dutch regulator,

the Dutch National Bank (“DNB”) towards the internet bank Icesave, a subsidiary of the Icelandic

bank Landesbanki HF. While the Icelandic banking system was a cause of concern -as the DNB

Chairman later admitted in different interviews- at the very moment it was requesting a banking

license to operate in the Netherlands, the regulator did not feel itself strong enough to oppose to it

operating in the Dutch market. Three months later it was forced to be put in insolvency and

depositors were bailed-out by the Dutch Central Bank in conjunction with its Icelandic peer. Did the

DNB really represent the interest of the Public in this? That is doubtful to say the least. So, other

forces have moved the DNB towards this lenient attitude, and time will tell us exactly what these

were. But it certainly invalidates the DNB as the representative of the Public at large. Obviously, the

latter needs also to be countered by other voices more at ease to represent the public without being

limited by the sort of compromises the DNB needs to make. Surely, the Public needs some

78

representation in these sort of occurrences, but obviously some that will show more independence

than DNB showed at this occasion.

The second question was: how to ensure that all banks and central banks have the same view on

what is acceptable risk? Indeed, the market has become global and the risk profile of any bank of a

reasonable size anywhere in the world does have an influence on the solidity of the whole system.

While stability was pretty much a national concern before the vast globalization movement, it is

increasingly evident that the bankruptcy of any bank anywhere can have consequences on the whole

system. The series of financial companies’ failures and their impact on the financial system as a

whole, if it did not provoke the recent credit crunch, certainly did increase its depth and its length

and forced almost all governments worldwide to come to the rescue. Was the Public fairly

represented in the Basel process? Has the Basel platform the authority and the legitimacy to speak

for the Public in this matter? Our conclusion must be clear by now: regulatory capital is a matter of

concern, as much as are climate change and human rights. We must gather the actors, both expert

enough to understand the intricacies of financial matters and representative enough of the interests

of the Public at large, to sit at the discussion table to establish what is prudent conduct. And by all

means, the Basel 2 discussions held until now cannot be credited with a true representation of the

public, nor have they laid out to the Public what the implications were of the decisions they were

taking.

c. Financial stability is a Corporate Responsibility of the banks

I opened this section by saying that I would not be able to define the precise content of what is the

Corporate Responsibility of banks. This exercise will require banks to take the process seriously and

make up their social role in a reflexive process. Yet I believe that the social character of the

regulatory issue has been made sufficiently clear. One cannot but be perplexed by the fact that NGOs

have not picked-up on this issue. Nothing, in the BankTrack report seems to hint at this very

fundamental responsibility of the banks’ activities. Now, the adequate level of regulatory capital is by

far not the only issue that threatens financial stability. The financial markets have become

increasingly complex and regulators are facing challenges to follow the financial innovation and

understand its consequences. The role played by the securitization of financial assets in the US

Subprime crisis is a good example of this: who bears the final risk of the US Real Estate market?

Almost every financial player in the world, apparently. The repackaging of risk assets and their

dissemination all over the world has created a new challenge banks and their regulators need to

address. Financial innovation insufficiently controlled, while it can be an instrument to improve the

79

financing of the economy, is in itself a threat to financial stability, and therefore something that

needs to be addressed also in its social impact.

Mark to Market

Also, the implementation of International Financial Reporting Standards (“IFRS”) arguably

generalized a mark to market methodology which increases the volatility of the financial markets and

“punishes” banks that would otherwise try to be counter-cyclical. Paul de Grauwe writes the

following in the Financial Times85

: “Thus marking to market today accelerates the downward spiral.

[..] Markets are wiser than the judgment of individual bankers or accountants, it was said. [..] not

today, when markets are clearly driving towards a bad equilibrium. Markets are not always right.”

Particularly relevant to our thesis is the concluding remark given by Paul de Grauwe: “A massive

overhaul of supervision and regulation of the financial system will be necessary, especially in the US,

where a religious belief in the infallibility of markets has led regulatory authorities [..] to abdicate

their responsibility of supervising and regulating markets.” This remark may not fully reflect what had

happened, though: It is not that regulators were less aware of their responsibility: they simply

believed that the markets would do the job better than they could. Letting the markets price the

assets was, in their minds, the best possible way to ensure an efficient financial system, as the

markets would establish the best possible equilibrium. Good supervision, in that framework, was

synonymous of less supervision. Today, after the markets have gone down with an amplitude the

most bearish financial actors could not have predicted, the issue becomes more acute than ever.

Already, measures are being prepared to relieve banks and financial institutions of the

unmanageable consequences of marking to market their assets thereby reducing their regulatory

capital beyond regulatory levels at a moment there is little hope for them to raise equity in the

markets. This measure, taken as an emergency step to calm a market that is spiraling down is itself

already not uncontroversial. Transparency is more than ever required to restore confidence and the

mark to market norm had the merit to increase transparency. If regulators change this method, they

will have to ensure that they do not create room to arbitrage between different accounting practices.

Apparently, mark to market has become a matter of concern. At first, It presented itself as a fact,

something that was not subject to deliberation and value judgment but simply a technical feature

that would optimize the transparency of book-keeping. People one would not have expected

suddenly see more complexity to the matter than there was before86

. In the maelstrom of the

85

De Grauwe, P, 2008: “Act now to stop the market vicious circle”, in The Financial Times, published on March

19, 2008. www.ft.com 86

Take for example the Republican head of parliament Newt Gingrich, 2008: “Suspend Mark to Market Now!”,

in Forbes.com, last consulted on the web, October 14, 2008. www.forbes.com . Or Mark Sunchine, 2008: “Mark

80

financial crisis, it deploys as what it really is: a matter of concern with implications for many

stakeholders, something that needs to be (re)assessed from different angles and weighing different

interests to come to a balanced decision.

Interdependency of the financial actors

Equally important is the interdependence of the financial flows around the world. Commenting on

the intervention of the US FED to save Bear Stearns from bankruptcy, Krishna Guha87

notes: “The

action reflects the new Fed doctrine that - at least at a moment of extreme market fragility - some

institutions are too interconnected to fail”. It is simply not possible to let a bank (or in this case an

Investment Bank) go bankrupt while it is engaged with so many peers in so many transactions. The

latter would immediately be in danger and the domino effect would be triggered. This

interdependency actually exceeds the domain of banks and other regulated entities. The case of the

Carlyle subsidiary that was recently drawn into bankruptcy is a good illustration of this: adopting the

profile of a typical hedge fund with a very high leverage, Carlyle Capital was holding long positions in

a number of US quasi government paper (called Fanny Mae and Freddie Mac, these funds are holding

mortgage portfolios and benefit from an implicit support from the US Government). When asset

values started to know volatilities that exceeded the usual risk profile of these assets -most probably

because they were contaminated by the overall sentiment towards mortgage business in this crisis-

Carlyle was requested to put up cash against its Repo positions, and when cash was no more

available, the positions were liquidated by the holders of the paper. In this case, Carlyle creditors

could limit the damage, yet the whole incident showed again how fragile the system is. Regulated

entities, such as banks, are therefore not only subject to systemic risk with their peers, but also with

other less well regulated entities. This, too, is in our view a matter of social responsibility: should non

bank financial operators not be regulated as well when one knows how much the whole system can

suffer from their demise? Meanwhile, the crisis has again created clarity in this respect: all major US

Investment Banks less regulated than their banking peers have been forced into some mergers or

adopted the status of banks to counter a wave of distrust. The issue is now plain in the limelight: why

would some powerful financial entities be let unregulated: the financial market is as strong as its

least regulated entities and the latter are a threat to the whole sector. It is too early to write the

history of the current financial crisis, but the bankruptcy of Lehman Brothers was certainly the event

to Market Accounting: Kill it Before it Eats us Alive”, in www.seekingalpha.com . Mark Sunchine is the CEO of

First Capital, a West Beach financial institution. 87

Guha, K, 2008: “Experts speculate on unorthodox policy measures”, The Financial Times, Published: March 18

2008. www.ft.com

81

that accelerated the whole crisis into a fast downwards spinning mode. Unsurprisingly, this very topic

is currently being debated in the US, and a proposal to extend the powers of the FED over non bank

financial institutions is being contemplated88

. Another matter of concern has emerged: regulation is

not something that should be applied to some and not to others: the financial system is one and it is

as strong as its least regulated entities.

Interdependency of financial flows and the power of exporting countries

The sudden need for fresh equity among US Investment banks triggered a new question: what are

the intentions of the Middle East and Chinese Government funds? Do these white knights of the US

banking sector have good or bad intentions? Do they have political motivations and what are they?

More interesting is the fact that, over the last ten years, global imbalances are becoming a structural

feature of our economies: The US owe an unprecedented public debt estimated at USD 9 trillion and

China is holding a positive balance estimated at USD 1.4 trillion. Instead of converting its reserves

into local currency, which would have as effect to increase its currency value and reduce its

competitive position, China invests these amounts in USD assets. What are their intentions and could

they not use this creditor position to push their political agenda? So far, these funds have been

rather anti-cyclical as their investment objectives are in the long term, says Michel Aglietta89

.

Ironically, the developed countries which were so strongly pushing the deregulation agenda in the

eighties and nineties seem to discover the dangers of huge amounts of foreign capital that can come

and go without much limitations. Again, while financing was considered a matter of market

optimization without political content in the liberal program, the reversal of financial power seems to

put all these issues back on the political map. Many countries have experienced what the withdrawal

of financing could mean to their economies. Argentina and Brazil, in respectively 2001 and 2002,

were probably the last victims in a long row of countries that discovered the hard way how the

financial sector can amplify the negative impact of economic downturns. Exchange rates and their

consequences are equally important socially. Fluctuations of the currencies against one another have

a deep impact on the competitiveness of the national economies. While the liberal theory foresees a

self-regulating virtue in foreign exchange fluctuations, the way these adjustments are operated can

have dramatic social impacts.

88

Joanna Chung, James Politi, 2008: “Paulson says overhaul could take years”, Financial Times, March 31 2008,

www.ft.com 89

Agglietta, M, 2007: « Comment réguler la mondialisation financière », in Alternatives Economiques, Hors Série

number 75, 1st Quarter 2008, page 50-53.

82

Bonus schemes affect the risk taking appetite

Last but not least, the compensation schemes for bank employees could be mentioned in the long list

of causes of the current trouble. The wish to align employees and management interests to the

shareholder’s interests has resulted in substantial bonuses and stock-option packages for the higher

staff, encouraging greed and aggressive conduct in business acquisition and execution. We have seen

how responsibility within a firm is dependent on the right mechanisms for individual responsible

behavior: the possibility to voice one’s concern and potentially disobey orders. Variable

compensation schemes increase the peer pressure and competitive behavior within the firm

potentially beyond reasonable levels and blur the sense for individual responsibility. While it is

difficult to analyze the facts properly in the middle of the storm, some have raised the issue of

asymmetry in bonus packages: they are generously distributed in good times but not taken back in

bad times: they create an incentive to grow and underwrite business carelessly as the sanction never

matches the benefit. Says Raghuram Rajan90

: “Compensation structures that reward managers

annually for profits, but do not claw these rewards back when losses materialize, encourage the

creation of fake alpha [fake added-value]. Significant portions of compensation should be held in

escrow to be paid only long after the activities that generated that compensation occur.” Now, when

public money was increasingly needed to rescue the sinking ship, political leaders had to convince

the tax payers that their money had to be spent on rescuing the financial sector. But this could not

be done without finding scapegoats to put the blame on: the highly paid executives were good

enough targets. Their pays would be controlled as soon as executives of the Government would be

appointed at the board of the rescued firms. While this had the merit to put the subject on the

agenda, it threatens to miss the point, though. The big bonus winners in the current financial system

were following a logic the very management of these firms had led them to believe into: that they

were actually managing as many franchises, their financial activities, and hence were entitled to get a

portion of its revenues. In Working Rich91

, Olivier Godichot describes how highly educated

econometrists are capturing large fractions of the income financial institutions are making in their

trading activities and are running their desks as the actual owners of that part of their bank’s activity.

What they have forgotten, and their managers with them, is that on one side they are only able to

trade because their financial institution has all the trust of the financial community and on the other

side, that against good times there are bad times and that they will not be the ones to come up with

90

Rajan, R, 2008: “Banker’s pay is deeply flawed”, in The Financial Times, published on January 8, 2008.

www.FT.com 91

O. Godichot, 2001: Working Rich, salaries, bonus, et appropriation du profit dans l’industrie financière,

éditions de la découverte

83

the means to compensate losses when they occur. Financial Institutions are able to trade because

they are equipped to weather difficult times, not their high flying traders. Financial Institutions have

a horizon that exceeds the several good years of trading, and arguably so should these traders that

claim part of the income. Voices are rising to say that these incomes should be put on escrow

pending the good ending of the transactions they have put on the balance of their institution. This

feature would align their revenue with the risks taken by the institution in their name and would, in

the current crisis, certainly have allowed for some of these bonuses to flow back to the company and

compensate a small fraction of the losses incurred.

Financial stability has many aspects and many variables contribute to it. We cannot possibly describe

them all and expand too much into their economic intricacies. Yet, because we have defined financial

stability as a Corporate Responsibility of the banks, they will need to address these issues if they are

to take Corporate Responsibility seriously. It has been hopefully clarified how, when looking at these

issues from a social perspective, the role played by banks in controlling these variables changes from

a shareholder value maximization into a protection of the Public against the financial externalities

linked to these activities.

3. The issue of governance in a deliberative Corporate Responsibility model.

The issue of governance in Corporate Responsibility has received increased weight from our

observation that (i) responsibility requires that employees can voice their concerns and potentially

disobey hierarchical orders and (ii) what is at stake is the articulation of a democratic deliberative

process towards the common good.

a. The issue of individual responsibility

We have observed that the responsibility of a company, when it has to deal with the issue of many

hands, must ultimately ensure that individual agents are able to take their share of responsibility. In

terms of governance, this means that stakeholders of the company must individually feel they have

the possibility to follow their conscience while at the same time answering to the demands of the

collective enterprise they form within and around the company. When looking at the situation of the

subprime debt crisis in the US, this would mean that employees would be empowered to react to the

trend that prevailed in the industry to let the lending criteria slip and accumulate bad loans in the

portfolios. In this respect, individual responsibility can only be assumed if the company’s

management accepts to put limits to its hierarchical authority and creates the possibility for people

to voice their concern and disagreements and potentially disobey orders when they are felt to be in

contradiction with the public good. This entails that the company’s code of conduct promotes

84

individual reflection and that there exist enough possibilities within the company to voice one’s

concern and raise questions where required. Next to this code of conduct, the existence of an

ombudsman, his efficiency in handling claims, is one of these requirements. But next to institutional

tools, the culture within the company is equally important. While a competitive stance is generally

required in a company to fight for one’s market share, the company culture must not let this drive

prevail over integrity and the care for the common good, what we have so far called the Public

interest. Where there is no consensus about what is the Public interest, the governance of the

company must allow for a discussion to get started.

b. The democratic deliberative process

Sharing responsibility is sharing somehow the authority. Yet, the very acceptance of such a

standpoint is a departure from the dominant practice of governance within the firm and of corporate

responsibility. We have identified the two opposite poles of the debate about who owns the firm to

be either a shareholder view, where the management of the firm is considered to be the agent of the

shareholder, the principal, or a communitarian view where stakeholders such as the employees and

the customers share this ownership with the shareholders. Again, the practice of corporate

responsibility does not clearly reflect a stance in this debate and companies keep an ambiguous

position. While Citibank does use the stakeholder language and insists on the notion of community, it

does not make convincingly transparent how this view translates into the deliberative process within

the firm. In other words, while Corporate Responsibility statements seem to recognize the existence

of different, potentially conflicting, interests within the firm, they do not clearly adhere to a

democratic representation of these different interests. The management of the firm, agent of the

principal –the shareholder- is still today very much the highest authority in the company, in

accordance with the shareholders' ownership view. While management accepts the notion that there

are conflicting interests that need to be managed, it has not accepted that it should share its

authority with these instances in a democratic process. Again, aligned with the defensive nature of

Corporate Responsibility statements, while consenting to give voice to concerns other than the

maximization of profit under the pressure of the Public, management has in no way given away its

domination over the decision process.

A need for a democratic process

If we believe that Corporate Responsibility, beyond the points of strong consensus, should be able to

articulate the deliberative process required by matters of concern, then the governance surrounding

the establishment of this political dialogue must be unequivocally oriented towards a democratic

85

process, where stakeholders are given the weight they are entitled to. But how will the latter be

defined? How could one design a legitimate process when there is a fundamental disagreement on

this very notion of ownership, agency and legitimate representation? So far, the role granted to

NGOs has not been given freely, but under the pressure of their activist campaigns and the threat

they imposed on the management of the firm. Latour may have an overly positive view on the matter

when he seems to believe that his handling of matters of concern will alleviate the fundamentally

violent character of the political debate. Management has so far rested its authority on a paradigm

where it has received this authority from the shareholders. We have no reason to believe that

management will voluntarily share this authority other than under the pressure of another form of

authority that is able to show its strength up to the point of challenging traditional management’s

power. The defensive nature of Corporate Responsibility statements can be read in the very absence

of a reflection in the governance sphere. Giving way to the claims of NGOs without giving them –or

other stakeholders- any institutional delegation of authority, at least within the company, may well

be the result of a defensive strategy: let us respond to the specific demands of NGOs where we can

at little cost, in order to preserve this more important privilege we have been given historically: the

authority to manage the company and controlling input from the other stakeholders.

Fight for one’s interests

It is at best naïve to believe that the shareholders and managers of the firm will consent to share

their authority with other stakeholders freely. While the latter have different means to claim their

respective rights, it would be in contradiction with the simple observation of practice to believe that

such changes in the governance paradigm will occur without a fight. Let us remind how Corporate

Responsibility initially started: as a reaction to active work of NGOs that seriously damaged the

perception of the firm in the public eye. This only reinforces our view that Corporate Responsibility

could indeed potentially form the new place for political debates: debates where the opposition of

conflicting interests force an adequate solution. The latter does not necessarily exclude collaboration

as we have read in the contribution from Zadek92

: it is only one of the means to solve conflicts. It

does not, however, exclude either that these conflicting interests will have, from time to time, to

show their strength and manifest their democratic legitimacy. In this respect, both NGOs and the

management of the firm have so far undermined the democratic representation in the banking

world: the former by pushing their own agendas and caring only for their environmental and social

92

Zadek, S 2006: “The Logic of Collaborative Governance. Corporate Responsibility, Accountability, and the

Social Contract”, in Corporate Social Responsibility Initiative Working Paper Number 17, Cambridge, M.A: John

F. Kennedy School of Government, Harvard University.

86

issues, the latter by failing to include sufficiently other stakeholders in defining their true corporate

responsibility.

87

CONCLUSION

We have started our exploration of the Corporate Responsibility issue in the banking world with a

sense that it was asked too much and too little. On one side, banks are asked to simply solve on their

own, the problem of sustainability: they cannot deliver on this request and it would be politically

illegitimate for them to try. On the other side, banks seem not to see it as their social responsibility

to maintain the stability of the financial system, but it is. In our investigation of the Corporate

Responsibility statements of banks and of the reactions they have provoked in the academic world

and among their stakeholders, we have discovered that corporates actually have a political role to

play, contributing to the opening of deliberative political processes where matters of concern are

articulated among all the authoritative and legitimate Stakeholders. These processes, while allowing

for an individual sense of responsibility within the company, are then meant to weigh the conflicting

interests of the different parties and provide a democratic outcome. This deliberation, we believe,

should be instrumental to both the issues we have identified: sustainability is not a matter of fact but

a socially constructed concept. Financial stability is also something that will necessarily be

constructed in an opposition of social and economic interests. Where Bruno Latour may have

believed that the process of gathering the stakeholders and engaging into a deliberative discussion

may put the issue at rest, we need to insist that these oppositions and conflictual interests will never

go away. Responsibility and democracy is all we have to manage the necessarily violent process of

arbitraging particular interests. It does not mean that the violence has been pacified. The particular

space of the firm does not neutralize this conflict either. Shareholders will fight for their status of

legal owner of the firm and employees, customers and the Public at large will not be given a voice in

a deliberative process within the company on these new issues if they do not fight for their

legitimate right to do so. Corporate Responsibility is, in this respect, still balancing on a very unstable

compromise: between the view that it actually secures long term profit and the view that it gathers

the legitimate stakeholders of the firm. And so is the notion of the public interest or common good:

do markets create the economic optimum or do we need more (self) regulation? Behind these

different viewpoints lay different interests and there is no reason to believe that the opposing parties

will suddenly defend their interests with less vigor. It is interesting to see, however, how this

relatively new space of democracy within the firm, the space where companies have to answer to

society for what they are accountable for and what they accept to be blamed for, could slowly be

transforming into a new political agora where all the new classes of citizens voice their interests and

views on the common good. We need not go as far as saying that this new form of democracy is

substituting itself to a declining traditional body politic. These dimensions will remain, for a long

88

time, complementary and mutually dependent. It is important that the traditional forms of

democracy and political representation actually see this development and seek to be articulated in

the process. And it is equally important that corporates see that legislation is a necessary means to

re-establish the level playing field and put issues at rest when a strong consensus has been obtained.

I couldn’t have foreseen, when I started this investigation, that the daily unfolding of the financial

crisis worldwide would give me such a strong confirmation that what I have said about financial

stability was so right and so important. We may not have seen the end of this crisis and it will take

time to overcome the current financial debacle. As could be expected at this stage of the financial

crisis, voices are raising everywhere to ask for more regulatory control over the financial system in

our economies. Yet it is clear today that, in the words of Polanyi93

, the transformation of productive

capital in money capital has been completed and will not be reversed, in spite of the current turmoil.

The crisis has brought into broad daylight most of the issues we have been raising here up to the

point that some of it could feel oddly mundane today, while it was almost unspeakable not so long

ago. Conversely, the crisis will bring along counter reactions that will not contribute to develop a

good deliberative process. I have tried to keep the right middle way in this essay, building on new

processes that are going in the direction of better democracy and improved deliberation. While

history is made of pendulum movements that tend to exacerbate trends and polarize the issues, I am

confident that the push for corporate responsibility as a new form of horizontal democracy will

develop slowly but surely into a more reflexive dialogue between all parties affected by the firm: the

Public.

93

Polanyi K, 1944 : The Great Transformation, Beacon Press Books

89

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