Humanistic and economistic approaches to banking – better banking lessons from the financial crisis?

• Date: 01 October 2016
• Author: Fiona Wilson,Michael Pirson,Anuj Gangahar
• DOI: http://doi.org/10.1111/beer.12131
• Published date: 01 October 2016

Humanistic and economistic

approaches to banking – better

banking lessons from the

financial crisis?

Michael Pirson

1

, Anuj Gangahar

2

and

Fiona Wilson

3

1. Fordham University,Research Fellow, Harvard University,New York

2. Editor, Investing section, The WallStreet Jour nal

3. Department of Management, Whittemore School of Business and Economics, University of New Hampshire, Durham, NH

We sketch out two basic paradigms informing banking practice: the economistic paradigm focusing on profit

maximization and the humanistic one, serving the common good. We then highlight paradigmatic cases to

explore how each of these business models fared during the quasi-natural experiment of the financial crisis.

We find that many humanistic banks outperformed traditional economistic banks. Despite the uneven playing

field humanistic banks fared remarkably well with regard to traditional financial performance judgements,

muting criticisms of competitiveness. We find that overall both paradigms can provide a basis for successful

banking as long as social and financial value generation are blended. We conclude by providing lessons

learned for better banking.

Introduction

In the aftermath of the global financial crisis, many

thought leaders have called for a rethinking of basic

management practices. While Michael Porter and his

colleague Mark Kramer (Porter & Kramer 2011)

have been proposing Shared Value Creation rather

than Shareholder Value Maximization, others call

for Conscious Capitalism (Mackey 2011), Coopera-

tive Capitalism (Hertz 2014), or Natural Capitalism

(Hawken et al. 2000). Long before such catchy terms

were promoted, admonitions to change the underly-

ing thinking of management have come from

business ethics scholars (Hampden-Turner 1999;

Rozuel & Kakabadse 2010), organizational scholars

(Spreitzer & Sonenshein 2004; Spreitzer et al. 2005)

as well as sustainability scholars (Rees 1996; Dyllick

& Hockerts 2002). These perspectives, while differ-

ent, share fundamental properties in that they ques-

tion the reductionist view of human organizing

presented by the finance-dominated management

scholarship (Mintzberg et al. 2002; Mintzberg 2004;

Khurana 2007; Pirson & Turnbull 2011b).

In this article, we follow an increasing number of

scholars suggesting that a new paradigm in the field

of management is emerging (Mele 2009; Pirson &

Dierksmeier 2014; Donaldson & Walsh 2015). By

paradigm shift we understand a fundamental con-

ceptual shift of underlying assumptions about

human nature as well as the purpose of organizing

(Kuhn 1996; Pirson & Dierksmeier 2014). We adopt

the propositions by Mele (2003, 2009) and others

who label the newly emerging paradigm humanistic

and juxtapose it with the traditional economistic

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doi: 10.1111/beer.12131

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Business Ethics: A European Review

Volume 25 Number 4 October 2016

paradigm (Mele 2003; Pirson & Lawrence 2010).

Building on the emerging literature on a humanistic

management paradigm (Mele 2009; Spitzeck et al.

2009; Amann et al. 2011; Dierksmeier et al. 2011), we

focus in this article on the question of economic per-

formance as one of the central points of critique

raised by proponents of the economistic paradigm

(Jensen 2002). To paraphrase this critique in its vari-

ous forms, it holds that any organization that pro-

tects human dignity and promotes the common good

is bound to financially underperform and thus is

uncompetitive. To address the critique squarely, we

will focus on the field of finance and examine the per-

formance of humanistically oriented and economisti-

cally oriented banks. We apply our analysis to the

performance of these banks during the financial cri-

sis from 2007 to 2010. We do so because the global

financial crisis provides a special timeframe in which

overall economic performance was put to the test.

We draw on case studies of banks that fit the human-

istic typology with those of the economistic typology

(Spitzeck et al. 2011). If the criticism leveled against

a humanistic practice of management is correct, the

economistic banks should have outperformed

humanistic banks even during the crisis. We are able

to show that this was not the case; in fact, humanisti-

cally oriented banks often, but not always, outper-

formed economistic banks. Finally, we propose

some lessons learned on how we can move toward

better banking overall.

Economistic paradigm for banking

Banks and financial service organizations tradition-

ally have been seen as support organizations to the

real economy (Johnson & Kwak 2011). Their func-

tion in society was to support businesses that created

products and services and needed credit and other

financial services (e.g. insurance) to be more produc-

tive (e.g. Fligstein 2010). In the recent decades there

has been a remarkable shift toward a form of bank-

ing that produced new financial innovations that did

arguably little to support the real economy but serv-

iced the needs to profit-maximize via trading and

arbitrage (Fligstein 2010; Johnson & Kwak 2011).

Such a shift from ‘real value creation’ to casino style

gambling is frequently cited as the main cause for the

global financial crisis in 2008 (Johnson & Kwak

2011).

To understand how such a drastic shift could have

happened, it helps to understand the underlying,

paradigmatic assumptions that guide the logic of

management, business, and banking. It has long

been acknowledged that business and management

theory has its roots in economic theory (Khurana

2007; Dierksmeier 2011a). The foundation of man-

agement theory has been consequential in that it

shaped our general understanding of human nature

in a business context. Such understanding has largely

influenced how organizations, including banks, are

conceptualized. The arguments presented by various

scholars suggest that the idea of homo oeconomicus,

the self-interested, amoral maximizer of short-term

utility has been a helpful conceptual bridge to estab-

lish rigor in economics and management (Dierksme-

ier 2011b). However, akin to Occams’ razor, many

scholars are criticizing that despite its parsimony the

problems of inaccuracy loom large over current

management theory. Most notably Ghoshal

(Ghoshal & Moran 1996; Ghoshal et al. 1999; Gho-

shal 2005) and Mintzberg (Mintzberg et al. 2002;

Mintzberg 2004) criticized and blamed this overre-

liance on economic theory in management for a very

poor fit with actual reality.

Despite such criticism the influence of the econo-

mistic paradigm over general thinking, practice and

pedagogy is enormous. To highlight such influence,

other scholars have argued that effective forms of

organizing must take into account the amoral char-

acter of human beings (setting up incentives), cater

to their self-interested tendencies (set up stock

options and bonuses), monitor their activities (by

setting up controls) (Jensen 2002). Generally such

insights are supported by principal-agent theory or

other forms of economic theory (Jensen & Meckling

1976). In addition, to best organize homo oeconomi-

cus, it is wise to follow a mechanical structure that

emulates the hierarchical command and control

model of an army.

Justified by economic theory and its utilitarian

roots then, command and control oriented organiza-

tions should contribute to social welfare by profit

maximization. In that logic, banks should equally

pursue profit maximization strategies (Jensen 2002).

Building on that rationale and supported by the

Business Ethics: A European Review

Volume 25 Number 4 October 2016

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