Leadership and business dilemmas teaching finance under the new light of sustainability

According to the best-selling book Reimagining Capitalism: How Business Can Save the World, “traditional finance may be the single biggest stumbling block to reimagining capitalism.” This can generate an ethical dilemma for somebody like Prof. Carlos Casanueva, who teaches finance in a business school: Is he one of the blocks? In this article, he therefore aims to reflect upon the compatibility of finance and business schools’ strategic goal of promoting better business and creating sustainable value.

I have endeavoured to learn more about sustainable finance, a term I heard a lot but honestly was not sure I fully comprehended. What I find surprising and intriguing is that I had not faced the need to learn about sustainable finance in order to explain it to my students. To make sure I was not wrong, I looked into the index of the three main prestigious textbooks I use in my classes (Berk/DeMarzo, 2020; Mishkin, 2018; Pilbeam, 2018) but I couldn’t find this term or anything similar. With humility, I decided to search for the term “sustainable finance” in Google. One of the first results from this search belongs to the European Commission and is titled Overview of sustainable finance. It is perfectly structured and very well written, although somewhat bureaucratic, and it explains everything about sustainable finance. I discovered it was connected with important European projects such as the European Green Deal Investment Plan, which will mobilize at least €1 trillion of sustainable investments over the next decade. I felt overwhelmed by all this information. My first conclusion was that sustainable finance is very important because of the amounts of subsidies that will be distributed. 

Let’s take a look at some ideas on this topic coming from the United States, and thus more focused on self-regulation. In Reimagining Capitalism: How Business Can Save the World, Harvard Professor Rebecca Henderson reasons that capitalism has been great, but that at the same time it has brought huge challenges that need to be resolved, and that businesses have to get involved and lead this transformation. I basically see these ideas as good grounding to start building a better business. The challenge for me, as a teacher of finance, lies in the ‘third piece’ of her method to achieve this transformation, which she calls “rewiring finance.” She describes traditional finance as possibly “the single biggest stumbling block to reimagining capitalism. As long as investors care only about maximizing their own returns…” How can I reconcile this with my teaching? 

It seems possible to shed some light by looking at different financial gurus’ opinion about maximizing shareholder value. Berk and DeMarzo explain it very clearly in their section titled The Goal of the Firm: “Many corporations have thousands of owners. [...] All the shareholders will agree that they are better off if management makes decisions that increase the value of their shares.” I think their ideas are interesting for two reasons. First, because they show that current capitalism allows the creation of different types of firms (sole proprietorships, partnerships, Limited Liability Companies, etc.) in which the goal does not have to be about maximizing shareholder value at all. Second, because they show that for public corporations with thousands (or millions) of owners, it seems that the best way to align their interests is to encourage management to make decisions that maximize shareholder value. Berk and DeMarzo’s solution for this is expressed in the section The Firm and Society: “Are decisions that increase the value of the firm’s equity beneficial for society as a whole? Most often they are. [...] When the actions of the corporation impose harm on others (like pollution, editor's note), appropriate public policy and regulation is required…” This highlights the role corporations and government regulation have to play, which is very much in line with the European Commission’s sustainable finance subsidies strategy.

It is also interesting to look at Yale Professor and Nobel Prize winner Robert J. Shiller’s book, Finance and the Good Society. The chapter The Great Illusion, Then and Now, is especially pertinent: “The illusion was (then, editor’s note) that military conquest brings economic advantage. This misconception persisted,” he claims, ultimately leading to World War I. “There is similar danger (now, editor’s note) in the idea that people will relentlessly pursue wealth in business, for it too sows mistrust…” Shiller’s words are crystal clear and especially interesting to put Rebecca Henderson’s book in context. When she talks about rewiring finance and the problems of traditional finance, many readers can be moved into what Shiller calls “an atmosphere of excessive suspicion” against capitalism and the financial system resulting in “social costs.” 

Henderson also talks in her book about “three pieces that are, fortunately, underway [...] to reimagine capitalism.” However, I have the feeling that these pieces are not exactly linked with reimagining capitalism, but are perhaps more linked to traditional capitalism, making it more in line with Shiller’s point of view. The first of Rebecca Henderson’s ‘pieces’ is the so-called ESG metrics. In relation to this, Professors Philip Kotler and Gary Armstrong were already talking about “the societal marketing concept” and “the sustainable marketing concept” as a normal evolution of marketing and not as a revolution of capitalism back in 2008, in the fifth European edition of their traditional and famous book, Principles of Marketing. The second ‘piece’ she mentions is about looking for alternative sources of capital: so-called impact investors. She illustrates her point through several interesting cases that, in my opinion, could have a strong political weight and be misused. For example, Mondragón, a firm based in Spain’s beautiful Basque region. The latter’s political situation is very complex, with a history of terrorism that has had extremely unfair social and business implications that should not be linked with reimagining capitalism. The book Patria, which has been recreated in an HBO series, explains this quite well. 

These topics inevitably come with a heavy political and struggle-for-power load that stems from different private democratic attitudes. This leads me to the topic of leadership theories, as a way of finding a convergence point to facilitate the collaboration among highly diverse groups of citizens. It is interesting to see how both Shiller and Henderson finish their books talking about leadership and human values as the way to make a change. Honestly, this is music to my ears. At ESCP I teach Total Leadership, a methodology developed by Professor Stewart D. Friedman from Wharton, my alma mater. I deeply believe in the potential of this management methodology for the 21st century to make an impact and help make the world a better and more sustainable place starting from the individual human being.