Transforming Finance to Serve Society

To restore public trust, the financial sector must evolve beyond its current self-serving tendencies and embrace a more ethical, purpose-driven approach.

Understanding Public Perception

Despite its critical importance, the finance industry is often viewed with suspicion. A Bank of England survey revealed that many British citizens perceive the sector as "corrupt." As someone who has spent decades working in corporate governance, this judgment feels harsh. The individuals I collaborate with are not corrupt; they are dedicated professionals committed to best practices. Significant improvements in UK company board structures over the past three decades have been driven by principled advocates like Adrian Cadbury. Their efforts have enhanced accountability and transparency, ensuring the financial system functions effectively. Alfred Marshall, a 19th-century economist, emphasized the importance of integrity in maintaining a robust economic framework. Without honesty and uprightness, our financial system would falter.

One exemplary figure in this domain is Muhammad Yunus, the 2006 Nobel Peace Prize winner. Yunus revolutionized banking by lending to impoverished communities, particularly women, enabling them to invest productively and lift themselves out of poverty. His innovative approach was rooted in human connections rather than complex mathematical models. Such initiatives underscore the potential for finance to be a force for good, fostering social and economic progress.

Evaluating Industry Efficiency

Public skepticism about the finance industry's efficacy is not unfounded. High-frequency trading, for instance, raises concerns about fairness and legality. This costly activity can resemble front-running when executed in real-time, potentially violating regulations. Moreover, academic research highlights inefficiencies within the sector. French economist Thomas Philippon's study spanning 120 years shows that despite technological advancements, the cost of channeling savings back into the economy remains high. This stagnation suggests that the industry's productivity gains have not been fully realized or passed on to consumers.

The core curriculum in business schools focuses heavily on mathematical theories such as present values, capital structure, portfolios, options, and efficient markets. While these concepts are valuable, they have not sufficiently improved the industry's efficiency or alignment with societal needs. Finance is fundamentally a human endeavor, not a mechanical process governed by inanimate objects. The reliance on quantitative models may stem from a desire for scientific rigor, but it overlooks the dynamic nature of human behavior and the importance of ethics, professionalism, and fiduciary duty.

Redefining Academic Curricula

There is an urgent need to rethink how finance is taught. The current emphasis on mathematical theories and models may inadvertently promote self-interested behavior among students. Research indicates that exposure to homo economicus-based models can lead individuals to adopt more selfish attitudes. This shift away from ethical practice could undermine the very foundations of a purposeful financial system. Instead, curricula should incorporate elements like institutional design, incentives for responsible behavior, and the limits of fiduciary duty. These aspects are crucial for creating a financial sector that serves society's broader interests.

Philippon's findings should spark meaningful discussions in every finance degree program. Understanding the nature and boundaries of fiduciary duty is essential for cultivating a culture of responsibility. Institutions must be designed with clear purposes and incentives that encourage ethical conduct. By integrating these principles into education, we can foster a new generation of finance professionals who prioritize societal well-being over personal gain.

Building a Purposeful Financial System

Beyond academia, the financial sector must actively demonstrate its commitment to serving the public. Ignoring the function of financial institutions risks undermining their core purpose. For example, while high-frequency trading may boost stock exchange revenues, it does little to support companies seeking capital. A decline in the number of firms raising funds signals a failure to fulfill the stock market's primary role. To address this, we need a system that rewards purposeful behavior and recognizes the intrinsic value of ethical practices.

A transformed financial sector should inspire pride and confidence. It must play a vital role in tackling global challenges such as economic growth, climate change, poverty, and aging populations. By prioritizing ethics, professionalism, and societal impact, the finance industry can regain public trust and contribute meaningfully to a better world. Let us strive for a future where finance is not just a tool for wealth accumulation but a powerful instrument for positive change.