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«Global TrusT and EThics in FinancE Innovative Ideas from the Robin Cosgrove Prize Carol Cosgrove-Sacks / Paul H. Dembinski Editors Trust and Ethics in ...»

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Very much like Dr. Frankenstein, we have designed our very own monster and it is now getting out of hand. William H. Gross founder of Pimco, a global investment management firm, employed the term “shadow banking system” to describe the system whereby “derivatives are a means to creating money outside the usual central bank boundaries, simply because they’re bilateral contracts between institutions or companies.”(www.marketwatch.com/story/derivatives-are-the-newticking-time-bomb) And Warren Buffet almost compared the highly technically sophisticated financial engineers who developed derivatives to mad scientists designing a nuclear bomb when he wrote in his 2002 letter to Berkshire shareholders: “We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralised receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying danger that, while now latent, are potentially lethal.” We know the rest of the story…

Modernity gone mad

The derivatives bubble, cultural taboos around money, our own personal tension around ethics and finance… all of these symptoms, in a way, can be traced back to what the philosopher Ken Wilber calls the “disaster of modernity.” But first let’s quickly clarify what we mean by modernity, as it is one of these words to which many meanings can be attached. Historically, modernity loosely starts at the Renaissance and continues in some ways to this day. Philosophically, it refers to our attempt to understand and represent nature as accurately as possible. Scientifically, modernity is about measuring nature and discovering the mechanisms that causes its functioning. Politically, it marked the rise of human rights (equality beTrust and Ethics in Finance fore the law, outlawing of slavery, women’s rights, and so forth). From a techno-economic structure standpoint, it is associated with industrialisation.

Before we investigate the bad news of modernity, first let’s acknowledge its good news. Wilber reminds us that “the governing principles of the hundred or so democratic nations in today’s world are in fact the principles of modernity – that is, the values of the liberal Western Enlightenment.” (Wilber, 1998.) We have to remember that these human rights that are so dear to us (freedom of speech, religion, assembly, etc.) did not exist on a global scale before the Enlightenment – though they still have to be adopted more universally.

Another way of characterising the dignity of modernity is through the separation of church and state. This is a direct manifestation of what Max Weber called “the differentiation of the cultural value spheres – that is the differentiation of art, morals, and science.” What happened typically during the Middle Ages is that someone such as Galileo would clash with the church because the spheres of science and religion were not differentiated and the latter prevailed. It was not a healthy integration of these value spheres but rather an unhealthy fusion. What differentiation permitted is for someone such as Galileo to pursue his endeavours without being persecuted by the Inquisition.

But then, this differentiation went too far into disassociation. Dignity turned into disaster. What happened is that the value-sphere of science took over as the value-spheres of aesthetics and morals were reduced to a monological view. Art, morals and science went their separate ways.

And science unfortunately turned into scientism by dismissing all the interior aspects of consciousness, soul, art, morals, and ethics, arguably because none of these subjective domains can’t be apprehended by the “eye of flesh” of empirical science.

So what was declared real, was anything that could be described in an empirical fashion; as all phenomena investigated by empirical science Reconciling Finance and Ethics 195 all have what Alfred North Whitehead called a simple location: meaning that you can literally put your finger on them. Therefore, the brain is real, galaxies are real. Yet you can’t put your fingers on goodness, nor on consciousness (the disaster of modernity has reduced it to brain waves), nor on ethics. Our sense of discomfort has profound roots indeed.

Unfortunately, our conversations around finance have followed the trend set by the disaster of modernity by almost solely focusing on the quantifiable exterior, which is the domain of indexes, statistics, and measurement systems for accounting. While we have no issues speaking intelligently to the quantifiable, we haven’t reached the same level of complexity in our interior dimension. And our ethical relationship with finance and money has suffered. We are definitely ill-equipped to address hard-to-measure data such as goals and motivation, not to mention meaning-making and culture. To this day, finance professionals lack words for these conversations. They are reduced to using terms such as “life planning” or “soft side.”

The paradox of money

It’s almost funny to think that we apply the principles and methodologies of exact science to finance when we think of the nature of money. Indeed, when we attend a course in finance, read the economics section in the journal, or watch CNBC, it might seem that finance is akin to a hard scientific discipline. And in a way it almost is, when we look at all the charts and numbers. Yet it would be foolish to believe we’re really in the realm of strict calculus and exact science.

Bernard Lietaer reminds us that money is actually not a thing; “it’s a combination of beliefs, promises, and commitments anchored to some principle upon which enough people rely on so that it can be used to support different types of exchange.” (www.lietaer.com/2010/09/whatis-money/) 196 Trust and Ethics in Finance And so there lies the paradox of money: Trapped in the disaster of modernity, some finance professionals and economists continue to treat finance as a big machinery and people as routine operators. Yet we just saw money is not only the result of physical workings. It primarily requires subjective integrity and intersubjective ethical agreement. Certainly by looking at charts, we might observe some trends. But these trends are the results of aggregations of human interactions based on agreements. And we should not forget that humans are even less predictable than natural elements, even though classical economists might argue the contrary.

In the end, we can’t predict what will happen in finance. Its principles are as much of the social as they are of the hard sciences, hence their inexactitude. We shouldn’t be surprised then that money is the second most addressed topic in the Christian Bible (Wagner, 2006). Money is both from interior and exterior, hearts and hands.

Rehabilitating the interior

The task that lies ahead of us is not to merely promote ethics in finance. Doing so may lead us to think of ethics as a band aid to partially cover the deep wounds left behind by the excesses of finance. No. Our task is to rehabilitate the interior dimension of reality thereby putting as much attention on ethics as we do on [the technical side of] finance.

One of the main lesson of post-modernity – we’ll refer very broadly to it as to what emerged in the wake of modernity – is that “reality is not in all ways pre-given, but in some significant ways is a construction, an interpretation (…); the belief that reality is simply given, and not also partly constructed, is referred to as the myth of the given.” (Wilber, 1998).

Immanuel Kant was one of the first philosopher to fight the myth of the given. In Critique of Pure Reason, he demonstrated that science wasn’t able to come to the conclusion that the interior dimensions of Reconciling Finance and Ethics 197 soul, morals, and ethics existed. Furthermore, he demonstrated that science wasn’t able to conclude that these interior dimensions didn’t exist either. Next, in Critique of Practical Reason, he went on to demonstrate that indeed the interior dimension could not be addressed by science, but was rather the domain of dialogical – or moral, ethical, practical reason.

Finally, he brought the subjective aesthetics dimension back into the picture in his Critique of Judgement, thereby completing his attempt at integrating the value-spheres of art, morals, and science.

Again, the paradox of money can then be extended to a paradox of science that can be summed up as follows: science itself relies on instruments and structures found only in the interior dimension. These structures not only include cultural backgrounds, linguistic frameworks, and ethical norms, but also devices such as logic, statistical analysis, algebra, complex numbers and so forth, all of which scientists make extensive use. And then scientism claims this interior dimension does not exist in the first place. In other words, the interior dimension both partly shapes our empirical knowledge and can be inquired in its own right.

Other scholars have insisted upon integrating the three value spheres of art, morals, and science. For instance, Karl Popper points out to that, by suggesting that we divide the view of reality into three sub-realities which he calls Worlds. The first World is the physical world investigated by empirical science. The second World refers to the psychological or mental world of thoughts, feelings, perceptions. And the third World is the domain of products of the human mind: tales, stories, myths, languages, songs, paintings and sculptures. The German sociologist and philosopher Jürgen Habermas also divides reality into three worlds: the subjective world, the social world, and the objective world.

Maybe the easiest way to remember the three value-spheres is to use Plato’s the Good, the True, and the Beautiful. In this case, the True refers to the objective of empirical world; the Good refers to the interTrust and Ethics in Finance subjective space of ethical appropriateness; and the Beautiful refers to the subjective or aesthetic dimension.

So the question remains: how do we explore these interior dimensions? We’ve already seen that empirical science, which explores phenomena that have a simple location, is not suited to explore the intangible interior.

Wilber has identified four epistemological families that explore the interior either in its individual or collective dimension: phenomenology, which investigates direct experience (the insides of individual interiors);

structuralism, which explores patterns of direct experience (the outsides of individual interiors); hermeneutics, which examines inter subjective understanding (the insides of collective interiors); and cultural anthropology, which studies patterns of mutual understanding (the outsides of collective interiors). (Esbjörn-Hargens, 2006). We’ll soon examine how a domain of inquiry derived from structuralism can shed some light on the ethical development of individuals.

Level five leadership

One question that keeps intriguing the public is why do we have, at one end of the spectrum, people such as Joan Bavaria, who pioneered the whole socially responsible investment (SRI) movement and, at the opposite end, people such as Bernie Madoff who used his cognitive capacity to design one of the biggest financial fraud in history.

Joan Bavaria (1943-2008) was the founder of Trillium Asset Management, an independent investment adviser whose mission is to Invest for a Better World (since 1982). On the company’s website, we can read

some words that are employed to describe her character and actions:

“humour, compassion, dedication, vision, humanity, mentor, hero; unending commitment to serving clients; a unique vision for how the capital markets intersect with society and the environment…” Reconciling Finance and Ethics 199 When I read testimonies from people talking about Joan Bavaria’s character, Jim Collins’ work on leadership immediately came to my mind. In his seminal book Good to Great, he shares a framework that explains how elite companies were able to produce sustainable results for at least fifteen years. The first key element he describes in his book is that these exceptional companies were led by what Collins calls Level 5 Leaders. In his Harvard Business Review article “Level 5 Leadership,” he writes that “Of 1,435 companies that appeared on the Fortune 500 since 1965, only 11 made it into our study. In those 11, all of them had Level 5 leaders in key positions, including the CEO role, at the pivotal time of transition.” And, when he sums up what level 5 leaders’ character is about, he uses the following terms: “Personal humility”; “Relies principally on inspired standards, not inspiring charisma, to motivate;” “Channels ambition into the company, not the self; sets up successors for even greater success in the next generation.” What we read about Joan Bavaria is very close to the description Jim Collins makes of level 5 leaders. Yet he admits there is one key element he has not been able to delve into with his research, and that is what he calls the “black box” of inner development of an individual to Level 5.

The black box of inner development

Once again, Jim Collins himself has been a victim of the disaster of modernity – though by his own recognition – by focusing his research on the exterior dimensions of reality: he used empirical studies to investigate leaders and he concentrated exclusively on the financial bottom line of companies. Indeed, to investigate an individual’s inner development requires making use of the appropriate method of inquiry, typically developmental psychology, which is itself influenced by structuralism.

For over half a century, developmental theorists such as Jean Piaget, Jane Loevinger, Jenny Wade, Erik Erikson, Susanne Cook-Greuter, 200 Trust and Ethics in Finance Howard Gardner, Robert Kegan, Lawrence Kohlberg, and Carol Gilligan have investigated the interior unfolding of the human being.

Howard Gardner’s work on “theory of multiple intelligences” is particularly helpful when it comes to understanding why individuals with comparable cognitive capacities may display very different ethical behaviours. He explains, “We observe daily that only one kind of talent – say, technological creativity – is being rewarded, and only one measure – say, profitability in the marketplace – is being recognised. These indices are insufficient; other parts of the human spirit merit recognition, respect, and veneration.” (Gardner, 1999). While acknowledging the importance of intelligence quotient, Gardner invites us to value other important manifestations of human intelligence (interpersonal, intrapersonal, musical, spatial, and bodily-kinaesthetic). He agrees that his way of framing his theory is simply one of several legit approaches to look at the different human capacities. His and others’ work in the area of developmental psychology form the backbone for a broader comprehension of human interior’s unfolding referred to as “developmental streams.” Taking Gardner’s and his peers’ work into consideration, we can point to five human aptitudes most appropriate to understand discrepancies in ethical behaviours: Cognitive aptitude – general intellectual abilities including logic, reason, linguistic, analysing, and decisionmaking; Emotional aptitude – ability to access one’s own emotions and those of others, to derive meaning from them and to manage them; Ethical aptitude – being able to use accessible information, and to take decisions with regard to the needs and wants of others to bring about the highest good for all concerned; Physical aptitude – awareness of one’s body and ability to use it in skilled ways; Spiritual aptitude – ability to gather and use wisdom in the investigation of “what matters most.” And so different people display unequal levels of “expertise” in various domains. We can illustrate these discrepancies using a “psychological equaliser.” Reconciling Finance and Ethics 201 Let’s dive into some very broad orienting generalisations around what low, medium, and high levels of ethical aptitudes might look like.

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