Month: February 2021

A recent Financial Times article regarding regulation of subprime lending to individuals in the US raised interesting thoughts that also apply to Microfinance lending. The core of the article covers the potential for predatory practices that subprime lenders in the US have used ensure that borrowers stay in debt and pay relatively high levels of interest rates for that privilege. This issue is one which occurs frequently in Microfinance lending as well.

The core of the dilemma was outlined in the article as follows: “There is little doubt that instalment loans land some borrowers in trouble. The harder thing to determine is whether there are offsetting benefits.” The article than quotes a lawyer who works for subprime lenders noting that these loans are made to individuals who desperately need money, usually for an emergency that has cropped up in their lives. Unexpected and uninsured medical expenses, car repair issues, and so forth are clearly a threat for the poor in the US given that most poor people also lack savings. As noted in a Federal Reserve study, 30% of the US population did not have resource to make a $400 emergency payment.

However, perhaps the discussion is about the wrong topic. The real issue may be that those using predatory credit are just not earning enough to build up financial security for themselves and their families. Perhaps the real solution is not more regulation of predatory lenders but policies such as an increased minimum wage or support for children as proposed by Mitt Romney so that families are not forced to use the predatory credit that keeps them forever in debt at high interest rates.

No sooner had I posted my comments yesterday than an essay from Tom Peters appeared in the Financial Times. Peters spent part of his career at McKinsey and his remarks were generated in part by the McKinsey settlement regarding their work with pharmaceutical companies (and especially Purdue Pharma) for increasing sales of opioids. But he uses that example to focus on much larger issues plaguing the business world today.

He is especially critical of the current business school model that focuses on marketing, finance and quantitative analysis. But as he notes: “The “people stuff” and “culture stuff” gets short shrift in virtually all cases.”  He further links this problem to the focus of too many corporations on only making profits as preached by Milton Friedman. An issue covered by me in an earlier post.

But perhaps the most important point I took away from Peters’ remarks relate to his early fame when he preached managing by walking around. For Peters this insight made in 1980 focused on the value managers receive from walking around their companies and finding out what is happening with their employees. But perhaps this insight should be extended to managing by walking around in society. Would the McKinsey consultants continued to press for more sales of opioids if they had seen the destruction in communities where overuse of opioids ruined families?

Perhaps a real issue to be addressed is getting our professional cohorts more in touch with the real world and not just the world in which they live. A world filled with other professionals isolated from how most people live. A world with schools that can teach remotely to children with their own laptops and mobile devices? With state of the art internet connections? With the ability to hire tutors as needed? With advantages that will only lead to further inequality?

Two recent articles highlight bad behaviour among professionals – a source of serious concern in our society and especially for banks. On 4 February the Financial Times had a detailed article regarding a settlement between McKinsey and a variety of US jurisdictions regarding McKinsey’s work for pharmaceutical companies relative to opioids. Perhaps the most telling comment was from the Colorado attorney general who noted: “The partners who tried to cover up their actions placed profit over responsible behaviour and acted reprehensibly.” Although his remarks related to the coverup which included potential destruction of evidence, the core of the message relates to professionals who put profit before responsible behaviour.

A similar story of profit before propriety was seen in a Financial Times article covering issues at Credit Suisse in its private bank. In this case the information came to the surface only by accident when a clerical error allowed a confidential report of the Swiss market regulator, Finma. Normally those reports are not publicly available but this one surfaced most likely as part of a lawsuit. As noted in the FT article: “About a dozen senior Credit Suisse executives — including top management — were aware of concerns over Lescaudron and repeated rule-breaking by him, the report said.” Perhaps that is the reason the report like other Finma reports are not made public. One could ask why a governmental body such as Finma is allowed to hide this information from the people who pay for its services.

A series of articles and opinions in the Financial Times at the end of January and beginning of February are indicative of how much has changed vis-a-vis sustainability.  Gillian Tett started this chain off on 28 January with practical insight on the need to think “olive.”  Whilst this focus on achievable change may not meet the demands of serious environmental activists and may not be enough to avoid climate change disaster, it does provide a route for many companies to start to make the needed change. It may well be that after taking initial and inadequate actions to address their carbon footprint, companies may discover they can and must move even faster and more fundamentally.

Ms. Tett followed up a few days later in an overview of how climate change is now seen as a profit opportunity – especially for Wall Street firms. She focuses on how Larry Fink of BlackRock realised in his personal experiences that climate change was real and a real threat to the economy. She goes on to highlight the challenge the environmental movement has had working with Wall Street and major corporations but notes a mindset change beginning around 2018. She now predicts that “2021 is likely to be the year that green meets Wall Street greed and fear. Finance sometimes moves in strange lines.”

But there can be roadblocks to this shift if boards are not adequately prepared to address the issues of climate change. Pilita Clark in the Financial Times at the end of January notes the lack of expertise at the board level. Corporate boards have long had a focus on diversity but it is clear from her discussion with someone knowledgeable about board composition, that this diversity push has not focused on the need for experience on environmental issues. I suspect boards are going to regret this lack of diversity in the very near future as they face increased demands to be environmentally positive.

Finally the Financial Times editorial board took up the critical issue of climate reporting standards at the beginning of February. Whilst covering the myriad efforts to create standards, they go on to note that “accounting standards that accurately reflect what risks companies are taking have a vital role to play in speeding up the transition to cleaner energy.” Clearly this reporting will be sorted out and investors and society will be able to judge on a standardised basis who is helping to address the climate risks we face and who is harming.

So 2021 begins with hope for a future in which money is channeled to address climate change risks. But hope tempered with the fear that it may be too little, too late.