Milton Friedman, the University of Chicago Nobel Prize winning economist, was an ardent champion of free enterprise. In an interview in 1974 he was asked the question, “Do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? Friedman’s response, “No, they do not.”
The ethos that increasing shareholder value is the dominant driver of corporate purpose is accepted, almost without question or qualification today. If there are corporate excesses, sooner or later the market will take care of those via the magic of competition and the “invisible hand.” Or maybe the regulators will step in if things get too bad.
Ironically, as the triumph of market driven performance is documented quarter by quarter in the U.S. economy, the citadels of American business teaching appear to be going in a different direction. Kellogg, the business school of Northwestern University, and by some rankings the leader in executive education in the world, has introduced two curriculum innovations. One is the study of social enterprises, that is, the role and effectiveness of not-for-profit organizations. The second area is values-based leadership.
As part of this academic reorientation, Kellogg in October hosted the 14th meeting of the Net Impact Conference. This organization, founded in 1993, claims a membership of 10,000 “new generation leaders committed to using the power of business to improve the world,” including eradicating poverty and resolving environmental crises.
A leading example at the conference was John Wood, class of ’89 and founder of Room to Read. In 1999 he set up a library in rural Nepal with 500 books. Today his organization has helped staff and stock over 3,300 bilingual libraries throughout six poor Asian Countries. He describes this transition from the private to the social sector in a book, Leaving Microsoft to Change the World: An Entrepreneur’s Odyssey to Educate the World’s Children. Is growing shareholder value, of which Mircosoft is an iconic example, sufficient to lift up societies?
Still a Need for Credit Unions?
Because many of the functions and services of credit unions are routinely available from tax-paying for-profit institutions, many observers outside the movement (and definitely most competitors) as well as some inside credit unions are asking if there is still a need for cooperative financial services.
Unlike the Depression, when the Federal Credit Union Act was passed, America today is the world’s richest economy, a land of opportunity that is a beacon of hope for many other countries of the world. So what purpose do credit unions serve today?
Financial Services Today
Financial services is one of the most consistently profitable segments of the American economy. The banking industry has reported record profits for so long that the last downturn in the early 90’s is a distant memory for today’s CEO’s. Wall Street is paying record bonuses, with one investment banking firm reportedly rewarding its 50 most senior executives an average of $25 million each. Financial services is a poster child for Milton Friedman’s focus on shareholder value.
But while these institutional successes are being recorded, what is the outcome for some of the customers of these organizations? On November 26, the New York Times announced that the American Banker’s 2006 banker of the year award would be given to Richard D. Fairbank, the founder, chairman and chief Executive of Capital One Financial. He is being recognized for “making credit more accessible, transforming lending practices and diversifying his bank’s balance sheet.” For that, he was paid $249 million last year, making him the second highest paid executive in America, according to the Corporate Library.
Just three weeks earlier his firm was the subject of the lead story in the November 6 edition of Business Week. The story, titled Cap One’s Credit Trap, documented how the lender, by offering multiple cards, landed some subprime borrowers in a deep hole, but boosted Cap One’s earnings with fees.
In September, the GAO released a study that documented routine practices among the top bank card issuing companies, and warned that the “increased complexity in rates and fees heightens need for more effective disclosures.” USA Today, in an October 31 editorial, was more blunt: Banks Use Gobbledygook to Mask Sleazy Practices was the title.
Another example: in an October 28 article in the NewYorkTimes, a personal business section writer chronicled her difficulty in understanding and correcting what she believed were abuses of her account relationship by the card issuer.
Experience suggests that sooner or later for-profit motivation drives corporate behavior not just to higher shareholder return, but into actions that exploit, not merely serve, their customer base. The actions, most of which are not illegal, seem inevitable outcomes from the imbalances that occur in relationships between companies and their customers.
Financial Services and Trust
But the examples are much broader than the mass abuses occurring in the credit card business or the much reported payday lending loan sharking.
Fannie Mae quotes an analysis that suggests that over 70% of borrowers being charged subprime mortgage rates could qualify for conventional products at reduced rates of interest. Eliot Spitzer, the New York Attorney General, announced this week a settlement with Countrywide Financial, one of the largest mortgage lenders in the country, in which the company agreed to adopt measures to prevent improper steering of minority borrowers to higher-cost loans.
On December 5, the Office of the Comptroller of the Currency issued a consumer alert concerning the fee structure of gift cards. It stated that while some cards have no fees, “others have various fees,” and then listed nine examples of how issuers could charge a card independently of consumer purchases. The final sentence in the warning said that consumers should “have a high level of trust in the company standing behind the card before purchasing it.”
Prosperous Yet Nervous
But concerns are more than the abuse of consumer trust. Robert Samuelson, the Newsweek correspondent, described the dilemma of our successful economy as follows:
“An intensely competitive economy enhances overall stability by holding down inflation and spreading economic disruptions throughout the business cycle. But the solution to one problem creates other, though smaller problems. . .even good times are punctuated with insecurities, disappointments, job losses, broken promises and shattered expectations. What may be good for us as a society may hurt many of us as individuals. The unending challenge is to find some system of social protections that help the most vulnerable without frustrating desirable, if sometimes painful, change.”
— Newsweek, Feb 20, 2006
One example of this uncertainty is the pervasiveness of debt as the means to “getting ahead.” Increasingly, the next generation of workers are emerging from their student years with loans that will burden them for the next 25 years. USA Today is publishing a series that talks about the “Generation of Debt,” providing examples such as a chiropractor who enters the workforce with the “kiss of debt” or $160,000 in student loans.
The tax code favors consumers keeping high levels of mortgage indebtedness, rather than paying off the balance. Today many individuals are using their home as a “financial asset” to be used as collateral for more debt whenever a new need arises.
Even more fundamental, in our market-based society the benefits of wealth creation are not distributed in proportion to need. Over the past ten years, persons in the bottom 40 percentile have seen median savings drop while in the upper quintile, the average savings balance has doubled.
And world wide wealth distribution is even more extreme. The Helsinki-based World Institute for Development Economics Research of the United Nations University reports that the richest 1% of adults owns 40% of the world’s wealth and the bottom 50% owns about 1%. Market based economies are not focused on economic fairness.
Wellsprings of Hope
At a recent meeting of credit union CEO’s, one woman made the following statement. “ I have worked in the credit union for over 30 years, I am 54 and have been thinking about retirement. But after joining this CUSO, (CU*Answers) I still think I have something more to give.” Her credit union is $17 million in assets. Note that she said something to give, not something to get.
Her spirit is what drives the cooperative model today. The credit union system empowers members; it does not exploit their needs. The 44 million loans credit unions have outstanding today were done with a member-centered purpose, not a shareholder return goal.
Moreover, survey data suggest that new generations are beginning to ask whether the institutions a person is loyal to are acting in the best interest of society. Faith Popcorn, the futurist author, calls this “buying with ethics.” “What’s the brand made of? How is it responsible to society? The environment? How does the firm treat its employees? What does it stand for beyond getting me from point a to point b?”
Leading edge credit unions and CUSO’s are creating a cooperative system that is based on “doing the right thing” for the member. Many social and charitable organizations have similar objectives, even if in different areas. But credit unions, unlike most non profits, are uniquely positioned to realize the empowerment of individuals because their primary activity is distributing money. The late Henry Emerson Fosdick, the much quoted minister at Riverside Church in New York, talked about that power and responsibility this way:
“A dollar is a miraculous thing. It is a man’s personal energy reduced to portable form and endowed with powers that the man himself does not possess. It can go where he cannot go; speak languages he cannot speak; lift burdens he cannot touch with his fingers; save lives with which he cannot directly deal-so that a man, busy all day downtown, can at the same time be working in a boy’s club, hospital, settlement and children’s centers all over the world.”
Credit unions are proving every day, that “they still have something more to give.” The cooperative model creates wellsprings of hope for every member. That hope is fundamental to America’s promise.