There are still some people that think corporate social responsibility is about giving stuff away. A bit of charity. Nothing to do with how you make your money.
Some of those people will now have their names always attached to the story of the financial crisis of 2008, and there are more to follow.
The financial crisis is going to affect everyone. But it has not been caused by good businesses, creating products or offering services that people need, and doing so with integrity.
It has been created by companies that began to believe in a form of business where trust and integrity were naive, fringe concepts that played no part in the process of wealth creation. And yet, the whole edifice came crashing down when trust disappeared overnight, when the banks didn't believe each other and refused to do business together.
There are two parts to this - the way that companies are owned, and the way that the financial markets created products that had no connection to real value creation.
Five years ago, I wrote the following: "For decades, owning shares in companies has become a game of chance - a way to make money quickly from assets and processes that you briefly own, but take no responsibility for. The fact of ownership without the responsibility of ownership is exactly what has created businesses that have been able to thrive financially without an eye to some of the fundamentals of risk and sustainability."
It isn't just about dealers shorting stocks in an attempt to make money from thin air. It's about oversight and accountability.
The fact is that all these companies, Lehman Brothers, Bear Stearns, AIG and the rest, had massive financial holdings that were worth considerably less than they thought. Nobody was able to penetrate the fog to get to the truth of it. Nobody really knew or understood the terms of their securities and what they were worth. They had become so far removed from the real circumstances of primary debt holders that the warning signs, which should have been plain to see, were obscured from view.
How do we keep doing this? A few years ago, it was the dot com bubble, when a bunch of apparently sane, rational people began to believe that the laws of gravity had been suspended by the advent of the internet. This is the economics of Disney - the character who runs of the edge of the cliff, and can keep running up until the point he looks down and realised there is no ground under his feet.
Does it matter that this was a shared madness, not a sign of unique wickedness on the part of a few? Certainly not as far as the public are concerned, who see billions of dollars of their tax money about to be committed to propping the whole thing up, and are outraged if this goes to the benefit of the overpaid people that they feel caused the problem in the first place.
The US has traditionally been the place where people did not waste time envying the super-rich, but instead saw them as evidence that ordinary people could apply themselves to succeed. And so long as they look at the super-rich and they see risk-takers, people who built a company that makes stuff, companies that then work to keep their trust, they are still pretty much content to see huge wealth. We're talking the Apples, the Googles, the Microsofts.
But they have shown that they draw a line at the fabulous super-rich that they suspect got that way by finding new and underhand ways to cream off money from wealth creators and other ordinary folk, but who actually create nothing of real value. The billionaires they've never heard of are the ones they are most ready to believe the worst of.
And the companies have played into the stereotype with greedy gusto. Last year, Wall Street's five biggest firms paid themselves $39bn in bonuses. The companies were Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley.
That is a lot more than the $29bn loan now being made by tax payers to JP Morgan. During that year of record bonuses, the companies together lost nearly $75bn from their collective share price.
Such practices, that had become wholly institutionalised and accepted, smack of the decadence of the Roman Empire just before its fall. When the mighty forget the practices that made them so, and fall into believing that it is simply owed to them as their birthright, that is the beginning of the end.
But unlike the Roman Empire, which built itself on solid foundations but then lost its way, there were no foundations at all underneath this new empire. Somebody should have noticed that all the vast wealth claimed for the mortgage-backed securities, and collateralised debt and the rest, was not real. Greed, wishful thinking, and the knowledge that if you could play the system for a while and then get out, maybe you could make your huge personal fortune before it all came crashing down.
Oh, by the way. Bear Stearns produced no CSR report of any sort. Lehman Brothers did not produce a CSR report, but they produced a philanthropy report. Even if they had gone further, it seems unlikely that the complex nature of how they created wealth would have been a feature.
Now it needs to change. If anything is to come out of this, it has to be that corporate social responsibility once and for all leaves behind the philanthropy tag, and we see clear focus on two areas:
* How we create a different ownership structure for businesses where responsibility for consequences is a more real feature of share ownership.
* That the oversight and accountability demanded of companies now goes into the detail of how they make their money - and what are the consequences of their actions.
Two months ago, such concepts were unthinkable. Now they are essential.
CSR is about the health of the relationships between the company and other stakeholders, with a view to building trust. The current crisis is about the collapse of trust. The biggest task for the banks for the next few years is to rebuild it. It is definitely time for CSR to take centre stage and focus on some of the hard questions.
Reproduced with kind permission from Mallen's "Business Respect" e-newsletter. For more articles like this and to sign up, visit www.mallenbaker.net
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