Please send me SCA's fortnightly briefing:

April 27, 2010

Can we make our economy more civil?

Despite all the fighting talk from our politicians about wanting to curb the future behavior of banks, there has been depressingly little action to show for it.  No lack of ideas to choose from though.  One of the headline themes in Carnegie UK’s civil society report Making Good Society – Growing a More Civil Economy – would be a good starting point

Extract from the summary of MAKING GOOD SOCIETY – the Report of the Commisssion of Inquiry into the future of civil society in the UK and Republic of Ireland  of final report of t

Now is the time to reshape the financial system to align it better with values that emphasise responsibility, good governance, human well-being, and environmental sustainability. The full meaning of the recent financial and economic crisis will not be clear for many years, but what is clear is that it has prompted a widespread desire for change. Governments have been primarily concerned with restoring the system, through bailouts and new regulation. But the Commission believes this is an opportunity to reshape the financial system, not just to avoid future crises, but also to align it with values that emphasise responsibility, good governance, human well-being and environmental sustainability. We advocate growing a more civil economy, which requires a bigger direct economic role for civil society, as well as more open and responsible practices in the rest of the economy. Civil society has long been directly involved in economic activity. In the 19th century, strong friendly societies, consumer cooperatives and building societies developed new financial services to meet the needs of a rapidly urbanising population. Today, civil society remains involved in many areas of the economy, including retail supply chains, such as fair trade and the trade justice movement, energy production, and health and social care. Social enterprise has increased significantly, and in the UK is estimated to have a combined turnover of £24 billion a year. The co-operative movement has a turnover of £28 billion.

What is a civil economy?
A thriving civil economy mirrors a thriving democracy. Constitutional and accountable political institutions supported by political parties, an independent judiciary, a free press, impartial law, civic bodies, and an involved citizenry sustain democracy in a civil society. The parallel institutions of a civil economy can be understood to be constitutional and accountable corporations supported by engaged shareowners and their accountable representatives, independent monitors, credible standards, and vigilant and active civil society associations participating in the marketplace. There are a number of characteristics of a more civil economy:✦
• It is open and pluralist, welcoming entrepreneurship and innovation, whether financial or social, through traditional company or other structures, including mutuals and social enterprise.
• Economic actors are clear about their responsibilities and accountable to their owners, but have due regard for other stakeholders, including communities and workers, and for theenvironment.
• Institutional owners, such as pension funds, are accountable to their savers and push corporations towards sustainable prosperity through responsible management.
• Information standards and flows allow for independent scrutiny on the part of individuals, civil society and the media.
• The success of the economy is not measured in terms of short-term economic growth or financial gains, but in terms of the sustainable well-being of current and future generations.

The legacy of civil society activity in the economy
• Campaigning, economic boycotts and court action in relation to the slave trade contributed to the development of human rights legislation and economic sanctions.
• The labour movement led to the development of employment law and health and safety regulation.
• The environmental movement helped to develop carbon trading, green businesses and the organic movement.
• The trade justice and antiglobalisation movements that emerged to address poverty in the global south led to Fairtrade and have created shifts in public values.
• Concerns over technological monopolies led to civil society developing the open source movement and the creative commons license.

But civil society’s economic roles are more marginal than they once were. The creation of the welfare state undermined much of the rationale of civil society savings and insurance initiatives, and business expanded its role in the provision of bank accounts and mortgages for poor communities. Meanwhile, the moral voice that allowed civil society to influence the rest of the economy in the 19th century – for example, championing reforms to end slavery and child labour – became muted. The Commission believes that a strong and healthy economy depends on a plurality of organisational forms, business models and values. We therefore advocate:
 first, building up a greater diversity of economic organisations rooted in civil society, including co-operatives, social enterprises, charities and trusts,
 and, second, increasing the influence of civil society on decision-makers throughout the economy, including regulators. Specifically, the Commission advocates
increasing the transparency and accountability of financial institutions through mandatory reporting for major institutional investors, requiring them to set out the social and environmental impact of their investments and how they exercise their voting powers, and mandatory lending disclosure for major financial institutions to ensure they are serving the needs of all communities, without discrimination (drawing on international models such as the US Community Reinvestment Act).
The Commission also argues for action to enhance pluralism in the financial sector and sees virtue in more clearly tiered financial system, with different rules, capital requirements and regulations for local finance, national finance and global activities. The large public holdings in banks have brought an unparalleled opportunity to restructure financial services so that they better serve society. This would include remutualisation of failed financial institutions at a local or regional scale, alongside mutual insurance and mutual scrutiny of these institutions to contain risk.

Civil society should champion the development of low-cost financial products that reflect people’s changing needs. These could include mortgages that allow for flexible repayment options and new investment vehicles for people who want to hold their savings in forms that benefit the local community and economy.

Despite the scale and resilience of the social economy, mainstream financial institutions and fund managers have not significantly invested in it. We favour institutional investors setting a minimum benchmark of 2.5% investment in social enterprises that not only generate profit, but also produce social and environmental returns. Regulators should see this as an essential part of prudent fund  management. The Commission also advocates increasing the power and voice of civil society by strengthening its capacity to influence financial institutions and regulators through building its own specialist institutions that have the knowledge and authority to challenge conventional financial thinking. Civil society also has an important role to play in developing and promoting independent, credible standards, so that people can make informed choices about which financial products they
purchase. Specifically, we recommend a ‘comprehensibility threshold’: no product should remain on the market if more than half of its consumers misunderstand fundamental features of how it works.

The time is also ripe for mobilising citizen investors, the millions of ordinary people with pension plans and savings, so that their future incomes are derived from companies that operate responsibly and sustainably.
 And organisations such as charitable foundations and faith-based organizations that have between them tens of billions of pounds in investment assets should pool their collective financial and moral clout to grow responsible and social investment.
Stable, responsible and transparent financial activity must be at the centre of any vision for the future of the financial sector and therefore a key component of the civil economy. The financial sector can only develop these with increased civil society activity.