The Case for CSR

In 2012, the city of New York passed legislation known as the Responsible Banking Act. There was plenty of complexity, but at its heart the law set up a local board to review segments of the banking industry every two years, specifically to evaluate how financial services institutions with more than $6 billion in city deposits are doing their part to help less fortunate communities.

That law just got shot down. In August, a federal court found it unconstitutional, ruling that despite valid concerns, “the means by which it sought to harness banks to redress those concerns intrudes on the province of the federal and state governments.”

The legislation has a contentious history. Then-mayor Michael Bloomberg originally vetoed it, had his veto overridden by the City Council, then dragged his feet on appointing nominees to the local board. His successor Bill de Blasio went the other way by making the necessary appointments and pursuing enforcement. Pretty soon board members were seeking detailed information regarding delinquent loans, foreclosures and so on. Several banks resisted the effort—citing concerns over confidentiality and the expenses involved—and at least one apparently changed its status as a community bank. Now, all those worries are moot.

There have been other such dustups recently. Just last year, a federal appeals court decided that the Securities and Exchange Commission can’t force companies to say whether they got conflict minerals from troubled African nations. The court even ruled that such mandates represent a violation of free speech.

There’s a strong case to be made why such regulations, however well-intentioned, represent government intrusiveness. Businesses should get to decide who they give loans to and who they do business with. There are plenty of mandates already in place to govern banking operations, and pushing companies to do good can have the opposite effect. Besides, isn’t the market strong enough to punish corporations that go against the best interests of their communities?

All that is undeniably true, but there’s another way to look at this.

Few would question that the reputation of the banking industry has taken a beating in the past few years. In that context, here’s an alternate look at how things went down with the Responsible Banking Act.

The New York City Council established a law to shine a light on banking practices that potentially discriminate against (or at least don’t do their part to help) middle- and lower-income communities. The billionaire mayor and the New York Bankers Association—which includes conglomerates like JPMorgan Chase, Citibank and Bank of America—strongly resisted the law. The court took their side.

There’s a lesson here, and it has to do with Corporate Social Responsibility (CSR), the discipline that blends ethics and compliance with the business model. At its heart is the belief that doing good for the community can be good for the bottom line.  However, CSR is built on the concept of self-initiatives, not government mandates.

The New York City law and others like it arguably overreach, but the perception problem isn’t going away. Fresh from its victory in the courts, the New York banking industry should be equally aggressive in sending out the message that these laws are not needed because the industry is already doing the right thing. That’s the best way to keep unwelcome mandates at bay.

Written by Jack Dougal