From Paula Jarzabkowski
You are invited to: Reinsurance markets and the future of trading large-scale risk
Tuesday 9th June 2015, 6-7.30 pm
Cass Business School, 106 Bunhill Row
The global market for large-scale risks has never been more important, as climate change exacerbates natural disasters and concerns arise over new threats such as cyber-risk.
Join us for a drinks and canapé reception as we launch our Oxford University Press book: Making a Market for Acts of God: The practice of risk-trading in the global reinsurance industry (authored by Paula Jarzabkowski, Rebecca Bednarek and Paul Spee)
The event will present the findings about the practice of trading risk in the global reinsurance industry and will also feature an expert panel debating the implications for the future of trading in large-scale risk and reflect on the lessons we can learn from other markets.
To register and learn more about this event click: http://www.city.ac.uk/events/2015/june/reinsurance-markets-and-the-future-of-trading-large-scale-risk
- Speaker: Paula Jarzabkowski, Professor of Strategic Management at Cass Business School, City University London
Expert industry and academic panel:
- Tom Bolt, Executive Team member and Director of Performance Management at Lloyd’s of London
- Clem Booth, (re)insurance industry veteran, formerly executive board member of Allianz SE and CEO of Aon Benfield Global Inc and many other executive positions in the industry.
- Michael Power, Professor of Accounting, and former Director of the Centre for the Analysis of Risk and Regulation at LSE
Date: 9th June, 2015 6pm-7.30pm
Location: Room LG001, Cass Business School, 106 Bunhill Row, London, EC1Y 8TZ
About Making a Market for Acts of God:
We thought that the risk society would cause humanity to ponder the sustainability of the conditions of its existence. The book shows, however, that the risk society is also, above all, a formidable opportunity for financial markets. By analysing how reinsurers turn natural disasters unpredictable and theoretically incalculable Acts of God into tradable objects, the authors provide a major contribution to understanding the marketization of our societies and its implications. Michel Callon, Professeur à l’Ecole des mines de Paris, CSI. Ecole des mines de Paris.
This astonishingly thorough global ethnography, involving fieldwork in seventeen countries and over four hundred interviews, paints a fascinating picture of the practices of a unique, and hugely important industry. Donald MacKenzie Professor of Sociology, University of Edinburgh.
From London to Honk Kong and Monaco to Australia, the authors cast an ethnographers eye on the practice of reinsurance, extending the strategy as practice paradigm into the terrain of insurance and finance. In doing so, Making a Market for Acts of God provides a unique material portrait of how markets and organizations deal with risk at a global scale, offering a new and important contribution to the social studies of finance. Daniel Beunza, Assistant Professor of Management, London School of Economics.
For further endorsements, see: http://ukcatalogue.oup.com/product/9780199664764.do
April 22, 2015
It’s spring in London, and the beautiful weather this week reminds me that the LSE is now taking applications for my favorite Summer School, “Firms, Markets and Crises: Foundations of the Social Studies of Finance.” The course is due to start on July 6th, and runs till July 24th. See the official site here.
The backbone of the course is a distinct approach to financial markets that is neither orthodox finance (with its emphasis on impersonal markets) nor behavioral finance (and its focus on individual mistakes and psychological biases). Instead, the course is premised on the idea that social relations matter to the functioning of banks and financial markets. Their influence includes the effect of social networks among bankers, the tools used by traders (technology, after all, is socially constructed), and the culture of financial institutions such as the values, beliefs and attitudes in them. The course can be taken by undergraduates in finance who want to differentiate themselves from their peers with broader exposure to sociology and anthropology. Alternatively, it serves as a great introduction to the City and Wall Street for undergraduate students in business, economics or social sciences like sociology and anthropology. Master’s students are also welcome and typically make up one third of the class.
Here’s how the typical day works. Class starts at 10.00 am in our very Victorian 32L building, with one hour and a half of lectures where I teach the content of a given topic in an interactive manner (PowerPoints are for losers!). We then have a half-hour break, and then I facilitate a session with speaker form the industry for another hour. We’ve had people from Barclays, the FCA regulatory authority, the PRI, a fintech incubator, a hedge fund, investment firm Pimco, the Bank of England… everyday, a different speaker. There’s an hour for lunch, and in the afternoon there are cases for one hour and a half with our TA, Megan Peppel, who is flying from New York to teach in the course. The rest of the afternoon is dedicated to reading ahead of next day’s lecture (the park at Lincoln’s Inn Fields serves as a great library) though students have sometimes been spotted at The George, our local pub at the LSE.
The course is demanding. There is a quiz, a midterm and a final exam. The readings are long, and challenging. But I can promise the effort is worth it. Those who come will find an exciting environment of incredibly international and smart students. Long-lasting friendships are formed. Last year the percentage of satisfied/ very satisfied students was a whopping 100 percent. And I’m hoping it will be at least as good this year.
Tone from the top, skin in the game, the partnership model: my take on the LSE bank culture panel event
April 21, 2015
How to reform bank culture? A panel event on bank culture that I organized this past May 19th at the LSE took up this question by examining the practical solutions that banks are introducing (see photos here). The panel underscored the need for both cultural reform and structural measures. To some extent, the more measures the better. However, it is crucial to ensure that structural changes complement, and do not trivialize or contradict, cultural reform. Changing values and beliefs is a delicate matter, and brute force does as much harm as good, even when voters feel morally justified to use a bazooka.
The event, held at LSE’s Systemic Risk Center, chaired by Joel Shapiro (Oxford University) and supported by the Department of Management and the Principles for Responsible Investment initiative, built on a previous session that called into question the narrow emphasis on structure of the official reports on financial reform. But critique, that longtime favorite of academics, can only go so far, and for that reason in the latest panel I assembled bankers, academics and journalists with the explicit purpose of discussing solutions: what new practices are banks attempting to reform their culture? Which ones are working? Which are not? What do we learn from it all?
Tone from the top and other cultural changes
Appropriately, the panelists started by tracing banking scandals directly to culture, that is, to the values, norms and beliefs that define these banks. One panelist, Patricia Jackson (EY), reminded us about the infamous cabbages that managers of HBOS (a UK retail bank) placed on the desks of underperforming salespeople. The over-effectiveness of this technique, which encouraged the hard selling that ultimately derailed the bank, underscores an established sociological tenet: that internal standing, status, esteem and avoidance of social opprobrium mater as much –if not more- than incentives. Another example of symbols that matter is the bottles of champagne that Libor-rigging bankers received from colleagues for “taking one for the team.”
But if culture is the problem, it can also be the solution. Another panelist, Andre Spicer (Cass), mentioned the importance of the tone from the top, that is, a careful attention to the symbolic actions and messages sent from the top management and especially from bank CEOs. This approach is now very much in use by large banks such as Barclays to “turn around the supertanker.” (Another approach entails mimicking non-banks such as gyms and airlines, but this is only possible for more agile start-up banks).
But exclusive reliance on soft aspects such as norms and values can make financial reform fragile and transitory. Another panelist, Sarah Butcher (eFinancialCareers) reminded us that soul-searching and reform discussions were widespread as far back as 2002, following the dot-com bubble and the widespread perception that equity analysts were responsible for inflating it. Yet despite the banker contrition at the time, the dot-com bubble was followed by the subprime trouble. Memories are short, it seems. Repentance is quick to fade.
Skin in the game and other structural changes
Partly for this reason, panelists to agreed that cultural change needs to be accompanied by structural reforms, that is, by changes in incentives, limits to the banks, etc. Most such reforms are variations on “greater skin in the game:” make bankers subject to the consequences of their actions. In this regard, one policy that according to panelist Yann Gindre (PRI), appears to be working, is deferred bonuses and compensation. This has reduced the turnover of bankers within the City: by getting employees to stay in the same organization they can be expected to take greater responsibility for their actions. Gindre also recommended making fines come out of the bonus pool rather than from the bank’s profits, as otherwise it is the shareholder that foots the bill.
An intriguing variation of “skin in the game” idea is to combine accountability with financial models, and specifically risk management tools. According to Patricia Jackson, regulators have traditionally faced a problem in managing the risk of the banks, which its opacity. But by pushing accountability for risk management down the line, Jackson hopes the heads of the various businesses will be more accountable.
Structural measures such as the above can help with the changes in values and attitudes pursued by cultural change programs. For instance, Butcher gave testimony to a change in attitudes in City institutions following the reduction in bonus sizes: there is now less interest in bonuses among job searchers in finance; banker arrogance –the attitude that financiers are the only hard working and competent people in the country– is partly gone. Butcher’s point illustrates the remarkable and often upside-down and counterintuitive manner in which cultural change operates: employees first change behavior, and then adjust their beliefs to stay consistent. Another panelist, Jo Gerathty (Culture Consultancy), emphasized the importance of integrating the espoused changes in culture within the structure of the organization.
Paying bankers for being good?
One key challenge in adopting structural measures is to avoid crowding out –if not simply destroying– positive cultural dynamics. Treating employees as dishonest immediately reduces their ethical commitment. For instance, banks are currently introducing cultural fit into reward and promotion measures, and developing metrics that measure culture. By explicitly paying more to the bankers that appear to behave in accordance to the espoused culture, the hope is that cultural change will be advanced.
Will this work? My concern (and one echoed by my informants in New York) is that explicitly accounting for values with pounds and dollars may create a confusion that can only be detrimental. First, it attempts a reduction of the domain of the moral into the economic, but by quantifying the monetary value of “good behavior” (e.g., ten percent of the bonus) it suggests that sufficiently high profits might compensate for obnoxious behavior such as hazing new recruits. Second, this approach may also come across as too controlling and manipulative: values and norms are and need to be broad because they call for judgment in specific circumstances, and by boiling them down to hard rules the judgment is eliminated. And third, it invites gaming and cynicism, potentially reinforcing the materialist message that the only point of work is the compensation.
Bring back the partnership model?
By contrast, culture and structure come together remarkably well in Sandy Pepper’s proposal to revisit the traditional institutions of the City of London, prior to the Big Bang of 1986. Before the arrival of the large Wall Street banks, the City was dominated by traditional merchant banks. While these were far from perfect –specifically, the diversity of their workforce was close to inexistent– careers in them were structured as tournaments, partners were collectively liable for losses, turnover was much lower, and employees arguably took greater responsibility for their actions. As Pepper says, these institutions contained pay and limited the traders’ tendency (given the visibility of their contribution to the bottom line) to become irresponsible hired guns.
While it’s tempting to dismiss such interest in the 1980s as romanticizing an inexistent golden age, I have been hearing similar interest in partnerships in my recent fieldwork in New York. And indeed, the organizations that come closest to it – hedge funds and private equity firms – have been the ones that performed best despite fears, well before the financial crisis, that their small size would make them vulnerable. Partnerships relied on status differences, so to the extent that these structures come back, we can expect the return of other retro aspects that come with them: formal dress codes at work, grander facilities, perks that reinforce hierarchical differences and signal esteem. In fact, it is interesting that retro fashion and formal wear appear to be back.
The partnership model will obviously not be viable for the large banks. The key will instead be to understand how to adopt elements of it, both symbolically and structurally, and combining it with technology. One possibility would be to argue for a complete reform of investment banks that shifts risk-taking into smaller hedge funds and private equity firms. The question then is whether capital markets need large global banks willing to risk capital in moments of crisis. This is in fact also Jamie Dimon (JP Morgan’s CEO) criticism of Dodd Frank, and indeed Dodd Frank has been cited as one of the reasons for the recent Treasury bill Flash Crash of 2014. Size, in other words, continues to be a point of contention in discussions of financial reform.
April 13, 2015
From Bill Maurer
I’m happy to announce that the book Data, Now Bigger and Better!, the outcome of a number of interrelated ISTC activities and coedited by Tom Boellstorff and myself, is now out! (http://press.uchicago.edu/ucp/books/book/distributed/D/bo20285526.html).
With chapters by Genevieve Bell (Intel), Melissa Gregg (Intel), Tom Boellstorff (Irvine), Nick Seaver (soon to be at Tufts) and myself, the book is “an exploration of the kinds of theoretical provocations and conceptual enframings that are so needed when, it is often claimed, the very nature of big data means that knowledge is ‘at scale’ and concepts aren’t needed any more.” Prickly Paradigm Press (which publishes through University of Chicago Press) seeks to “bring the old-time pamphlet back… writing unconstrained and creative texts about meaningful matters.” In that spirit we had a lot of fun putting the book together and I hope you enjoy it!
Call for papers: “From Awareness to Impact: Mechanisms of Change in Responsible Investment” PRI Academic Network Conference, London Sept 2015
March 30, 2015
I am hoping to persuade the readers of Socializing Finance to submit a paper to a conference that I am co-organizing: “From Awareness to Impact: Mechanisms of Change in Responsible Investment.”
Here’s why I think the event should be of interest. For the past four years I’ve been collaborating with the Principles of Responsible Investment initiative. The PRI is a United Nations-supported coalition of the largest investors in the world, working to promote responsible investment (e.g., incorporating the social, environmental and governance factors in their investment decisions). The organization is relatively young — founded in 2005. And it’s rapidly grown large, with more than 1,300 financial organizations as signatories at present, representing $45 trillion in assets under management. As a smart promoter of field change, the PRI has traditionally drawn on the work of academics, leading to a gradual emergence of an Academic Network that organizes conferences on responsible investment every year. This Network has traditionally been governed by a Steering Committee, and in 2014 I was invited to serve as its Chair. And I’ve been hard at work for the past months.
The 2015 Conference of the PRI Academic Network will be held in London, as part of the PRI In Person Conference for investors, asset managers and pension fund executives. The academics and their sessions will be fully integrated with the executives who attend the Conference at the ICC ExCel Center — a good mix of suits and jeans, I expect. Academics will have an additional Workshop at the Systemic Risk Centre at the London School of Economics. The Conference starts on September 8th, and the Workshop will take place on the 11th.
The event will showcase research from various literatures, including finance, management, accounting, economic sociology, political economy, law, etc. As such, it is fertile terrain for researchers in the social studies of finance. We invite submissions of full papers, but extended abstracts are accepted, focusing on the following areas:
- ESG (Environmental, Social and Governance) integration
- Long term investment
- ESG engagement
- Financial performance
- ESG impact
The conference benefits from the support of the Academic Network Steering Committee, as well as a dedicated organizing committee that includes Anna Bordon (PRI), Michael Barnett (Rutgers U.), Fabrizio Ferraro (IESE), Jean-Pascal Gond (Cass), Katherine Ng (PRI), Michael Viehs (Oxford U.), as well as myself. So… send us your paper! The deadline for submissions is 1st May 2015. Please see the call for papers here.
March 18, 2015
Provocations are great ways of studying society. Garfinkel’s breaching experiments are classical examples, as are the more recent contributions of people like Andrew Perrin who, through unexpected questions in surveys, explore in interesting ways the social organization of political cognition.
Yesterday, I had the opportunity of seeing the results of one of these provocations. Part of the coursework for my Economic Sociology workshop at LSE consists of 15-minute documentaries produced by small groups of students that, based on one of 6 possible questions, examine the nature of work in twentieth-century Britain. At least one of these questions is designed to be overtly provocative: Who deserves unemployment? Read the rest of this entry »
March 11, 2015
I am pleased to announce an upcoming panel event at the LSE. Next March 19th, the Systemic Risk Centre (LSE) will be holding a “Bank Culture and Financial Reform: What Works?” The event, which I am organizing, is supported by the LSE’s Department of Management and the Principles for Responsible Investment initiative.
Bank culture is a novel and intriguing explanation to the problems faced by the financial industry. Five years ago, no bank expert or regulator would have accepted a diagnosis that wasn’t grounded in incentives, adverse selection or moral hazard. But starting with last year’s governmental reviews in the UK by Salz, Kay and other studies, the cultural explanation to the problems of the financial industry has become a suggestive and compelling alternative. Culture is about on norms rather than rules, beliefs rather than facts, and ethics rather than material incentives. For more, see a recent speech by William Dudley, the President of the NY Fed. Dudley said:
The problems originate from the culture of the firms, and this culture is largely shaped by the firms’ leadership. This means that the solution needs to originate from within the firms, from their leaders. What do I mean by the culture within a firm? Culture relates to the implicit norms that guide behavior in the absence of regulations or compliance rules—and sometimes despite those explicit restraints. Culture exists within every firm whether it is recognized or ignored, whether it is nurtured or neglected, and whether it is embraced or disavowed. Culture reflects the prevailing attitudes and behaviors within a firm. It is how people react not only to black and white, but to all of the shades of grey. Like a gentle breeze, culture may be hard to see, but you can feel it. Culture relates to what “should” I do, and not to what “can” I do.
New as it is to the regulatory discussion, the dangers of a toxic bank culture have long been known to finance insiders and social scientists. See, for example, Greg Smith’s notorious resignation memo from Goldman Sachs. For a more theoretical explanation, the academic studies by Karen Ho and Steve Mandis have explored of how culture can precipitate problems in investment banking (or lead them to drift into problems).
Aware of the cultural turn in the finance reform debate, one year ago I organized a panel event on the topic at the LSE, “Challenges and Opportunities in Reforming Bank Culture“ (with Nina Andreeva). It became one of the best-attended events. The core message that emerged was that for reform to be effective, there would have to be cultural change accompanying structural reforms in The City and Wall Street. Without a change of mindset, beliefs and values among the bankers, structural solutions such as bonus caps or the separation of commercial from investment banking might not accomplish their goal. (For a concrete example of how cultural solution differs radically from an incentive-based one, see this incisive post by Mandis.) For banks, the culture debate also has strategic implications. First-movers in cultural change might derive an enduring competitive advantage over the rest; by contrast, those that stall could be pushed out of investment banking altogether. Recent news appears to confirm this reasoning: Goldman, a pioneer in cultural reform such as tackling work-life imbalance, seems to be doing well in a difficult environment while RBS and Credit Suisse, which did not do much on the reform front, seem to be exiting the investment banking industry.
The upcoming panel event complements last year’s. While the first one established the existence of problem, the current one emphasizes solutions. Hence the title, “What works?” The premise is a pragmatist belief in experimentation and learning. As I see it, the solution to the cultural challenges of the banking industry is complex enough to be beyond the ability of a single academic from his or her office. The solution lies instead in the many distributed experiments in cultural reform being undertaken by various banks. What are they doing? What is working? What is failing? The solution, in other words, lies in bringing together different attempts and learning from them (see here for an example).
To this end, I have invited a solution-oriented panel. It’s made up of two consultants specialized in finance and culture, one former bank CEO, three London-based academic specialized in finance and management, and my favorite finance trade journalist. It will be chaired by a finance professor from Oxford. We’ll be discussing practical policies undertaken by concrete banks, and considering what is working and what is not. Here’s the line-up:
Academic panelists: Sandy Pepper (LSE Department of Management), Andrew Spicer (Cass Business School), Daniel Beunza (LSE Department of Management / Systemic Risk Centre)
Media panelist: Sarah Butcher (eFinancialCareers.com)
Banking panelists: Yann Gindre (former CEO, Natixis US)
Consultant panelists: Patricia Jackson (EY), Jo Geraghty (Culture Consultancy)
Chair: Joel Shapiro (Finance, Oxford Said Business School)
So… come and join. Free of charge, but registration needed. From 4:00 to 6.30 pm, followed by drinks.