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The Purpose of Banks

May 8, 2012

I wrote this article with Antony Elliot, chief executive of the Fairbanking Foundation. It was published in the May edition of Financial World under the title ‘Business Angels’.

In February, Stephen Hester received positive comment in the Financial Times for his memo to RBS staff setting out his expectations of the organisation: “To be purposeful, calm, and do our jobs to the best of our ability.” This idea of ‘purpose’ has arisen more than once in recent commentary on the financial services sector. Pursuit of a valuable purpose could be viewed as a way of addressing prominent criticisms of the sector, such as that of undertaking ‘socially useless’ activity.

However, without more careful consideration of what this entails, talk of ‘purpose’ risks being just so many words. The idea that business activity can be judged by how well it fulfils its proper purpose goes back at least as far as Aristotle, who viewed it as one amongst many arts, all of which were properly focused on the ultimate aim of promoting human flourishing.

This tradition of thought also reveals complexities: ‘purpose’ can be used to mean several different things. Insofar as it is intended to address criticism of an activity, we are interested in the sense of purpose as identifying a worthwhile or justified aim. However, two other uses of the term can be noted. A ‘defining purpose’ is simply the feature of an activity that allows us to categorise it properly. Twenty two men running around a field is not a game of football unless they are organised into two teams, each trying to kick a ball into opposing goals.

On the other hand, a ‘motivating purpose’ identifies what it is that persuades people to engage in that activity. An individual’s motivating purpose for engaging in business activity might be to make money. Others could have different motivations. But the sense in which the identification of purpose indicates social usefulness is different. A ‘justifying purpose’ is one that legitimises the activity in question from the perspective of society, and to have such a purpose is to be socially useful.

That society has a role to play in legitimising the activities that take place within it takes us back to the idea that all legitimate activities have an ultimate goal in promoting what is good for people. This idea finds more recent expression in the idea that businesses must earn a societal ‘license to operate’, and is reflected in another tradition of philosophical thought: that of the social contract.

Thinkers of the pedigree of Hobbes, Locke, Rousseau, and Rawls have made compelling arguments (albeit in slightly different contexts) for why the obligating power of contracts, so familiar in the business world, can be invoked to govern social relations. Such relations include those between businesses and society, which, by their establishment, may be thought to generate implicit contractual obligations. On such a contractual analysis, society would permit the activity of business on the basis that business produces results of value to society.

Christian church leaders have been speaking out on the subject of purpose in this context. Underlying the debate is the sense that each life is seeking fulfilment and that the concept of vocation can be translated into the role of financial services. Pope Benedict recently said that “Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments, which can serve to betray the interests of savers”. The emphasis has moved from condemnation to a need for the financial services industry to redeem itself.

These points highlight that business organisations, just as much as the individuals within them, are in need of a justifying purpose; they must understand the terms of their contract with society. At stake is not just the legitimacy of the business’ operations, and the social acceptance that goes with it, but also, as Hester goes on to say, the confidence and pride that an organisation can take in its work.

This raises the questions of how to identify the justifying purpose of financial services organisations, and how business leaders can gear their organisations towards such purpose. Calls to promote human flourishing, in this context, might not be helpful in guiding such leaders in what to do.

Here some common mistakes can be avoided. The pursuit of profit may define a commercial organisation, and many people employed by such organisations may be motivated, at least in part, by profit. However, to conclude from this that pursuit of profit is socially useful and legitimises the existence of commercial financial services organisations would be to confuse defining and motivating purposes with a legitimising purpose.

This is not to say that a commercial focus cannot be socially useful. It is worth remembering that the wealth of society is built upon the economic success of its businesses. But a focus on profit in itself is not enough. The invisible hand has always been an imperfect arranger of economic activity and, as recent events have clearly demonstrated, the pursuit of private profit cannot guarantee socially beneficial results. And besides, society values things beyond pure economic wealth.

Here we start to run into ideological divides that might threaten attempts to make practical progress. A solution to the challenge of engaging commercially oriented financial services organisations with their social purpose will be realistic about the obstacles it must overcome, and recognise that sustainable change takes time to implement. A useful idea to introduce here is that of ‘shared value’, as conceived by Michael Porter and Mark Kramer in their articles in the Harvard Business Review.

The idea is that the interests of businesses and of society are mutually dependent. In addition, the question of how to identify and promote social value need not be a mysterious one. Within their areas of expertise, financial services organisations are second to none at identifying and creating value. While it may take imagination for such organisations to work out how they are best placed to create value beyond the confines of the business, and what value means in the social context, this is not a sector short of imagination and innovation. Just ask HM Revenue and Customs.

This necessity to think differently emphasises the need for leadership. Where innovation is required a solution is rarely to be found in surveying consensus opinions either within the sector or of the public more broadly. The Fairbanking Foundation is an independent charity, trying to provide such leadership in the area of retail financial products. Its ‘fairbanking marks’ are designed to assist and encourage providers to develop products that improve the financial well-being of their customers.

Another source of leadership is the professional bodies. The idea of serving the public interest is strong in the professions, and financial professional bodies are working to develop a contemporary understanding of this notion, and communicate it to their members. For example, the Inter-Disciplinary Ethics Applied Centre at theUniversityofLeedshas recently worked with the Chartered Insurance Institute and the Actuarial Profession to develop training programmes focused on codes of ethics that put service to the public at their heart.

The ideas of acting with purpose, and promoting shared value, change the tone of a business’ relationship with society. Rather than a negative requirement to comply with minimum standards in a zero sum game, we can now ask a positive question: how much value can we create together? Not only will organisations find their social purpose when they apply their expertise to the particular interests of society that they are best placed to address, they will also accrue benefits in the process.

Fulfilling a social purpose establishes legitimacy, but it also generates social capital that is a vital input to the creation of business value. Whether it is the financial literacy of customers, or a genuinely service-orientated employee pool, the benefits that a financial services business is best placed to deliver to society are likely to be ones from which it will also profit.

Hester was right. In order to promote the interests of those they serve – customers, shareholders, and society more generally – financial services organisations must be purposeful. In order to do this, however, some effort is required to determine clearly what that legitimate purpose is.

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