Extra episode: Katrin Kaufer about her book “Just Money: mission driven bank and the future of finance” (transcription)

Transcriptie: Katrin Kaufer

This is Leaders in Finance, welcome to an extra episode of our podcast about the financial world. This time, we’re talking about banking with good intentions and the big money that is needed to make this world a better place. But first, a warm thank you to our sponsors for their ongoing support. They are: Kayak, Odgers Berndtson executive search and Roland Berger.

Our guest wrote a book on how the banking business commits to green and social values. She says “Money as a social construct allows us to completely disconnect from our reality and therefore, it takes a little more of an effort in the financial world to stay connected to reality.” So, in order to stay grounded, let’s listen to our guest in this episode, Katrin Kaufer, your host is Jeroen Broekema.

Katrin Kaufer directly after the interview with Jeroen Broekema of the Leaders in Finance podcast

Jeroen: Welcome to a new episode of Leaders in Finance. This is an extra episode in which we explore a particular topic or we discuss a book. This time, we do the latter; we talk to the author of a book. We have Katrin Kaufer this week, she’s the author of the book titled Just Money, with the subtitle Mission-Driven Banks and the Future of Finance. welcome, Katrin, to the show!

Katrin: Thanks so much, wonderful to be here.

Jeroen: It’s great that we’re here in person on a two-meter distance in Driebergen in the Netherlands. Before we dive into the book, first I would love to introduce you. Doctor Katrin Kaufer is director of the Just Money Program at the community innovator’s lab within the Massachusetts Institute of Technology, MIT. Co-founder and executive director of the Presencing Institute. Katrin teaches on leadership and transformational change. Her research focuses on leadership, organizational change, mission-based banking as well as on participatory action research. Her 2013 book co-authored with Otto Scharmer is titled Leading from the Emerging Future: From Ego-System to Eco-System Economies. As mentioned, her most recent book explores the role of mission-driven banking for addressing societal challenges and is titled Just Money: Mission-Driven Banks and the Future of Finance. I love the book, let’s start with that.

Katrin: I’m so glad to hear that! That’s wonderful.

Jeroen: It was very interesting. I wanted to start with that subtitle: Mission-driven banks and the future of finance. What actually would you say is a mission-driven bank?

Katrin: Mission-driven banks are banks that use finance as a tool to address societal challenges, ecological challenges, societal challenges in general. It’s combining banking and finance with an intention. This type of banking has existed as long as there is finance. There were early forms of mission-driven banks but this movement or this perception to look at value and impact in finance has really grown in the last ten years. The terminology changed, depending on where you are. If you’re in Europe or the US, it’s very different. It also depends on the culture, but it basically points at ending this idea that finance is neutral and arguing “What is the impact of my actions?” You open up this box and you look into what happens. At the end of the day, I believe finance is the central sector if we want to address the issues we face as a society. Every investment decision describes the story of our future. So it’s very essential, that’s why I’ve written the book.

Jeroen: That’s great. When we talk about the other part of the title, the future of finance, is this going to be crucial?

Katrin: Absolutely. I believe finance has changed; I think we all saw the first shift happen in 2007-2008. The public opinion about finance completely shifted. Now we see that the financial sector is also recognizing the opportunity they have to contribute towards possible– There’s a lot of discussion about green washing and whether it is real values-focused finance. But I think what we are observing here is a paradigm shift that’s happening. Not just in finance, but in business in general.

Jeroen: That makes sense. To you personally, why is this an important topic for you and how did you get to do so much research on this topic?

Katrin: It came as a surprise to me as well. After I graduated from school, I worked in finance for a few years and then studied economics and did my PhD actually on values-based banking about 25 years ago and nobody was interested in that. So I decided to shift my focus on how to lead change and I got a post-doc at MIT and continued there. With the financial crisis, I was able to merge these two topics. The core of my focus or the driving force behind my work is the acknowledgment that we will not be able to address for example climate change or other pressing social issues without the financial sector. Instead of just criticizing everything and saying “It’s wrong what’s happening”, I decided to focus on the innovators, on the examples that use finance in new ways.

Jeroen: So 25 years ago, you already wrote a PhD on value-based banking.

Katrin: That’s true.

Jeroen: How did you get to that topic? Was there a professor or was it purely your own idea?

Katrin: I think it was a combination. In Germany, there is this apprenticeship process, I worked for three years in a bank and then there was my deep interest in societal change. I felt there were pressing issues and that’s how this merged. Actually, I really had to push my professor hard to let me move into this topic.

Jeroen: You were way ahead of your time!

Katrin: Yeah. A little lonely.

Jeroen: Did you go back to your PhD once in a while to see if it’s still correct?

Katrin: It’s still correct, I think the whole sector has shifted so much, nobody could have anticipated that. I called my PhD rentability of the context, which is a complex setup to look at these things. But I still believe a core challenge in finance is that money is too efficient for us humans. We are constantly struggling to reconnect money to the context and our environment. I think the core focus of my PhD is still relevant.

Jeroen: That’s great that you were well ahead of your time. In the book, you describe examples from all kinds of different countries in the world. But let’s take the US and Europe, because these are the two areas you know very well. Is there a big difference in how we look at things from this perspective?

Katrin: In terms of values-based banking, definitely. The European perspective is definitely more focused on environmental issues, whereas the US perspective is much more on social exclusion, marginalization, community development. But both sides are recognized today as you can’t do one without the other. To separate environmental and social topics really doesn’t work well. In that regard, I think they are moving closer to each other.

Jeroen: What I find one of the most interesting things in your book is this idea that you could be a mission-driven bank, big versus small. Is it much harder for a larger bank to do this or can they actually adopt certain smaller things from this whole thinking around value-based banking? Can we explore into a little more detail whether large banks can also do this or not?

Katrin: Large banks definitely can do this. In the book, I talk about three anchors of values on mission. One is ownership structure and what we see here is that by changing a public opinion about the role of bank and finance, this is reflected also in the ownership structure. And then it’s about leadership and culture in the organization. There is an inherent dynamic in finance to disconnect from the context banks operate in, which has to do with the character of what money is. I talked about the efficiency of money. So to connect finance to impact takes much more intentionality than doing this in any other sector of society. At the same time, the leverage point is so much bigger. I think these two sides describe it a little bit.

Jeroen: You mentioned a couple of things that I want to get back to. But first about this big versus small, there are examples in your book that are clearly mission-driven banks or mission-driven financial institutions. Are there also banks that you would say are partly doing this, for example, or have bits and pieces that connect with that mission? Are there also a lot of bits and pieces that are not?

Katrin: In the US, there’s a nice saying: The perfect kills the good. The question is, how much is possible in what organization? I believe any step in this direction is a good step and it’s not about judging, but it’s about transforming our economy and how we run businesses. What we see is really this paradigm shift in our economic system, the awareness about impact in society is now everywhere. Now we need to learn what that means in day-to-day action. That was really the purpose of writing the book. Let’s look at lead innovators that actually operate at the margin of the system and let’s take a closer look at how they operate, what works for them, what doesn’t work. Then each organization can pick it up and translate that into the specific markets they are in.

Jeroen: So is it fair to say that the examples in your book are really also illustrations for bigger players to change things?

Katrin: I hope so. I hope they recognize that these innovators develop new ideas and they are really hard to develop when you are in the centre of a system. We know from innovation processes that it’s really difficult to innovate in the centre of something, so the more you move to the margin of a system, the easier it is to challenge the overall system and to come up with new ideas. That’s why I felt looking into this area is really exciting. And it’s amazing what these banks are doing.

Jeroen: Give me a couple of examples, that would be great.

Katrin: To innovate a financial product from the perspective of society, for example GLS Bank in Germany is currently moving away from an impact measurement that just looks at the CO2-reduction, for example, but asked “What kind of vision do we have for Germany? What are contributions within the next 15 years to come to this point?” So they measured themselves against a vision of the renewable energy sector in Germany. So instead of saying “We reduced our carbon emission by x% this year”, they measure themselves against the vision of a future, which I find really interesting. Then you see a lot of small examples, an alternative to pay their lending, creating communities, creating banking products that are specifically designed for communities. Also Triodos Bank is doing really interesting work now in the UK where they develop financial products that allow different stakeholders to collectively create a solution. Let’s say flooding, which is a huge issue, but if you only have one player, you can never finance preventive measures for flooding. But if you put municipalities, insurance companies and maybe house owners together at the table, you can co-create a solution and a financial solution. I feel there are very interesting new ways of looking at the role of banks and society as well.

Jeroen: In the book, you give a lot of examples, which I love to read. But I don’t see examples from the large players, is there a reason you haven’t done that?

Katrin: I really focused on organizations that have values-based business at the core of their business proposition. So they basically make money by being a values-based bank and that’s really difficult for a larger bank but I thought this perspective is much more focused and interesting than looking at a bigger organization that has 10 or 20% values impact. I intentionally focused organizations where the value focus is part of the business proposition.

Jeroen: Maybe in part two we’ll get some examples of large banks that are values-based.

Katrin: I would love to see that. And I think the world is moving into this direction.

Jeroen: One of the things I love, a loan officer in one bank we work with asked the following question about the bank’s position as a niche player in the Just Banking industry: “If Bank of America decides to switch to 100% recycled paper, would they save more CO2 than our entire renewable energy program?” That’s exactly my point, it’s a great illustration what small banks do but obviously big banks move into this direction where there’s really a large impact.

Katrin: And we see this happening everywhere. I think that’s amazing. The purpose of the book is to inspire and to look at what innovators are doing and then translate this into your own way of operating.

Jeroen: An important part of your book is where you lay out the principles of Just Banking. Maybe without going into every one of them, because people should read the book, could you elaborate a little bit what these principles and assets are?

Katrin: With the principles of Just Banking, I try to offer a language that allows to be more clear about how Just Banking distinguishes itself in this sector. One huge distinction that I like to focus on is the difference between being reactive or proactive. Are you excluding certain investments or are you proactively looking into opportunities where you see this needs finance? I’ve seen in many organizations that just this small distinction can create a really interesting conversation in organizations that like to move into this direction.

Jeroen: One of the things you mention is the anchoring of the mission. You talk about governance, organizational structure and leadership, I think you mentioned something like that before in this conversation. But if we unwrap that a little bit, like governance, what do you think of that?

Katrin: I described these three anchors because there is an inherent pull away from banks to stay connected to the context. So if a bank wants to move into this field of mission-driven banking or values-based banking, they need to consciously make sure that these ideas are anchored in the organization. I describe this also as a minimum condition. We see banks that have an ownership structure like credit unions, cooperative banks that I might not describe as values-based because they moved away from that. I believe ownership is one of the most important drivers for the strategy and intention of an organization, of a business. And to move towards values-driven banking, mission-driven banking without including the ownership structure of an organization I don’t think is a long-term strategy. How this works obviously depends on what kind of ownership exists in a business. But I haven’t seen a values-based bank where the ownership is actually opposing the strategy.

Jeroen: Does that mean that a publicly listed company could never be anchoring the mission as strongly as the examples in the book?

Katrin: They haven’t had a time, except for example last year the business round table in the US, which is an association of the largest hundred businesses in the US, commented that shareholder value is not the only focus and responsibility of a business, but stakeholder value as well. So five years ago, I would have said yes, you are completely right. Today, I say the public opinion is shifting and with that, the intention of the ownership structure is also shifting. So I would say yes, it is possible.

Jeroen: The other point on the anchoring of the mission was the organizational structure. What do you mean with that?

Katrin: What I’ve seen in values- or mission-driven banks is that they adjust their structure so that it reflects an anchoring of the mission in the organization. For example credit decisions, who’s taking that and how are the values of the mission represented structurally in this decision? Do you have a loan committee that takes a decision from both perspectives or do you have a loan committee that reflects the mission and reflects the response to the financial assessment of a loan? I’ve seen how these banks – and I describe that in the book – innovate new structures that allow this mission to be anchored throughout the organizational structure and not just in a mission statement.

Jeroen: The third one on the anchoring of the mission is my favourite one: leadership. You quite elaborate on that; you have very clear ideas, especially about the hiring of leadership. I’d love to delve into this, because I think we can have a good discussion on that. First of all, it is crucial who you hire. Everywhere, always. But to anchor the mission, how do you anchor the mission if you hire someone?

Katrin: Every hiring process is complex, but what I’ve seen in a mission-driven bank is that sometimes there is a polarity between the mission and the operation. Sometimes, banks for a while focus very much on hiring for professional skills and then they realize they are missing out on some connection to the mission. Then they start hiring more folks that are more mission-aligned. Often, it’s a little bit of a struggle; an organization has to learn to balance these two. But, at the end of the day, how do you conduct an interview where you actually want to understand the values of an individual that applies? In one of my conversations with the head of HR from Triodos Bank, she made a really good point. She said “In my interviews, I ask my candidates when they’ve taken an important decision in their life, what values have driven these decisions?” And I thought that’s an interesting method, to look at these turning points in someone’s biography and use it as a starting point for a conversation about “How do you balance your values in who you are and want to be with your professional career?”

Jeroen: I think it makes total sense. In whatever organization you hire the kind of cultural fit, if I may call it that, or mission-oriented. At least there is a clear match with the mission. But the thing I always find difficult is that you also want to hire people that on mainstream subscribed to the mission but are also thinking differently. Missions also change over time; they develop. How do you make sure that you don’t get exactly the same people, to exaggerate a bit?

Katrin: I think this really has changed since 2008. There are a lot of professionals in the financial sector out there that ask themselves “What’s my purpose? What am I doing? Is what I’m doing aligned with who I am and who I am outside of my work?” I feel this challenge really has changed over the last ten years and it’s much easier. Honestly, at MIT I’m also running a lot of leadership programs and my experience is: if you create an environment where there is an opportunity to explore, what do I want to leave behind in this world and who am I? There is always something positive and inspiring in everyone. I don’t see such a hard line between the conventional mainstream banking and this new form of banking; I think it’s fluid and I don’t actually think it’s so difficult to bridge this.

Jeroen: You’ve said you worked a lot with leadership programs and the title of this podcast is Leaders in Finance, so I’m especially interested. What I find very interesting is, you mention a couple of times after 2007-2008, the financial crisis, there is a lot more attention on this topic, the whole society is changing. People that start working now or start working in leadership positions, is this becoming way more important? Or are people ultimately still going to Wallstreet because they can earn more?

Katrin: I think it depends on the individual situation. One data set I have is on my students at MIT and I’ve really seen a shift in the last ten years. When they graduate, they really ask themselves “What do I want? What is my work? What do I want to bring into this world?” But financial restrictions are a challenge and if you leave school or university with a loan of $100,000, you have some restrictions. But as I said, I think these two worlds move towards each other more and more. If I take a hard look back, 15 or 20 years ago, I would say these two worlds were completely separated. Right now, I’m very optimistic.

Jeroen: I’d love to talk about the word intention, because you have mentioned it a couple of times. You mentioned it a lot in the book, it must be a good intention. But I wonder, is it always that important? Because in a perfect world, yes. But ultimately, someone that does something purely because he or she can earn a lot but still is having great outcomes, is that problematic or is that okay?

Katrin: I don’t see an issue in earning a lot at all.

Jeroen: For example, the intention is not to do value-based banking; the intention is just to make a lot of money. Does that matter or is it okay? If that still has a great outcome for example for the environment or for biodiversity or for other ESGs?

Katrin: Then it’s fine, but my experience is that there is a conflict at one point.

Jeroen: How does that work?

Katrin: That’s where the intention comes in. There is at one point a conflict between profitability and impact. Sometimes, there is not. There are new markets, we saw that in renewable energy where you can have high profitability and at the same time create amazing positive impact in the world. But at one point, there is a trade-off and you have to decide what to do at this point. I focus a lot on this topic of intention because it has a huge leverage point. We focus a lot on what the outcome is of what leaders do or how leaders do something. But this moment, I sometimes describe it as a moment in front of the empty canvas, where the painting isn’t done or you’re not in this process of painting. This moment where you take the first step, that’s the moment of your intention. When you decide you want to move towards mission-driven banking or values-based banking, you will quickly realize whatever you do, it’s never perfect. So you will always have these decision-making points or you have to come to a decision or a judgement about a situation. And in this process of taking a decision, being clear about my own intention makes a huge difference.

Jeroen: Somewhere in the book you talk about a term I find very interesting, which is ‘delayed feedback loop’. Can you explain what it is? Can you also give an example of that?

Katrin: This is a terminology from system thinking. I moved to MIT because of this dynamics group there that started looking at society, at our ecosystem, from the perspective of the whole. I think climate change is our easiest and biggest example. Our action doesn’t have immediate consequences that we personally feel. This is a moment where we as humans need to step back and we have this enormous capacity to think in systems. I’ve really seen how in the last ten years we as a society also started learning and thinking in systems. Thinking about the larger impact, always being aware that we never have the perfect answer. But just moving into this helicopter perspective on our action and I think this is in the core what mission-driven banking or values-based banking is about. It’s not about finding the perfect solution but constantly looking at yourself from a larger perspective.

Jeroen: And long term, I think.

Katrin: And long term. I describe this also at one point in the book as a shift from ego- to ecosystem thinking. So our basic paradigm in economics is that we are ego-driven, self-interested and inspired individuals. I think this is true and I think it’s a good thing. Because in this ego sits our creativity, it’s the power what we can bring into the world. But what I see happening is that this ego shifts. So it’s not just about me; it’s about me and my family. Maybe it’s about me and the ecological system we are embedded in. So we start enlarging our ego perspective. So this shift from ego to eco doesn’t push the ego out of the way, but transforms it into “I want a healthy world” into this larger perspective.

Jeroen: Is it possible to teach that as well?

Katrin: I think it is. That has to do with the NGO that I’m also running, it’s called the Presencing Institute. We work on social technologies, as we call it, that allow individuals, groups and organizations to make exactly this shift. All the methods we develop are creative common, to democratize access to these tools. And in the centre of this is to develop tools that allow us in freedom – so not being pushed or manipulated – to create these environments that allow us to connect to these deeper questions.

Jeroen: And you’ve seen a lot of organizations over time, both in the financial service industry and outside the financial industry. Do you see a big difference in culture and how people think in the financial services and outside?

Katrin: There is a difference and again, coming back to the nature of money, it has to do with money. Money is such an abstraction. So money in a way is a social construct that doesn’t have a value in itself. It depends on all of us believing in it and it’s enormously efficient. It allows us to completely disconnected from our reality. So I think in the financial sector it takes a little bit more of an extra effort to stay connected to reality and to the impact of the work than if you build computers or tables.

Jeroen: That’s super interesting. So it’s basically the product. The product is too abstract and too efficient, as you mention, it’s very interesting because it’s very philosophical but that attracts a certain type of person as well, you think?

Katrin: I don’t have data on that, but I think if you’re more mathematically aligned, you’re probably drawn to the sector. But I think it also does something to us. And there’s also a beauty in it. There is this perfection, we can create this product that works so well and it sometimes takes real effort to let go of this and open up the black box and say “What’s the reality underlying this?” I think we are all aware of the dysfunctionalities; we all have seen these numbers, the eight richest have as much money as 50% of the rest of the world. All these numbers that we all know well. I think we are aware that the system that we have created has a dysfunctionality. We have a system challenge here. We can say “Values-based banks”, but there is a systematic issue here and it will hit us at one point.

Jeroen: I’m just very curious about the question, as long people make a lot of money, if they are really willing to give something up. You have to give something up for this, to go into mission- or values-based banking. Will people really do that? Maybe in small numbers, but will they really do that in big numbers? You’re very optimistic, I’ve been trying to challenge that a little bit, but are you also optimistic when there is this big salary in front of you or this big sale you can do, that people will still go back to that mission and give something up for it? Are people willing to do that as well in large numbers?

Katrin: I don’t know, I can’t predict these things. What’s very clear is that we live in times of disruption and we live in times of huge disruption. The covid situation is from my perspective just the starting point. We will see enormous climate disruption. I think a lot of these decisions will be taken away from us by the collapse of the system we live in right now. At that point, we need to collectively come to answers.

Jeroen: Working towards the end of the interview, one thing I was so interested in is regulation and regulators. Somewhere in the book, you write “The concept of Just Banking often is unfamiliar to regulators.” What does that mean and what are the consequences of that?

Katrin: Maybe at this point I come a little bit to the defence of the small- and medium-sized banks. What I’ve noticed after the financial crisis, regulation realized also mistakes they made and became much more strict. For small- and medium-sized banks, it’s so much harder to respond to that. If you are a large bank and you have a whole department able to respond to regulatory changes, this really differs from the situation of small- and medium-sized banks. Although they weren’t involved in many of the challenges that created the financial crisis, these types of banks had to respond to this. I think that was what I wanted to point at. But I think this concept of using finance as a tool to address challenges is actually not very well known in these fields.

Jeroen: So it’s two things. On the one end, it’s the actual burden of regulation.

Katrin: Changed regulations after the financial crisis, exactly.

Jeroen: Are there particular countries that do really well, from a Just Banking perspective, in the world?

Katrin: In general, countries that have a decentralized financial system, for example if we look at Germany with the Sparkasse and Raiffeisen, those are owned by municipalities. You have already a financial structure that aligns a lot with small- and medium-sized businesses and are more anchored in communities. Structurally, these countries have an easier time. Other than that, I would say this is a factor that makes a difference. You also saw that during the financial crisis, Germany’s ability to respond to the crisis.

Jeroen: Because it was more decentralized than many others?

Katrin: And they were able to work with small- and medium-sized organizations and businesses.

Jeroen: If you are a leader or CEO of a large bank here in the Netherlands or in Germany or anywhere else and you want to become more value-based, you want to move your organization more into a general purpose mode, what would you do first?

Katrin: I think the interesting question is not to consider this type of activities as somewhere to the side of your business, but asking yourself “In the core of my business, what opportunities do I see when I look through this lens?” I think that would be the first question I would ask. For the second step, I would suggest to go to the margins of the edge of the system, either your own organization or the financial system, and look at the overall system from that perspective. That’s where the new ideas emerge.

Jeroen: Great! The last question is the following: Is there something you really would like to share about the book? Obviously, I’ve covered only a couple of things, hopefully some important things. But are there particular things where you say “You should have asked that” or “I would love to mention that”?

Katrin: I think I would like to come back to the start of our conversation. I think if we become aware as individuals who work in the financial sector how important our work is for society overall, that’s a really important step. Every investment decision is relevant and matters. Just taking this perspective and acknowledging the importance of this work for society overall. The role of finance is to facilitate transaction in our economy. In a way, it’s a serving role and our financial system has become so dominant that this aspect is lost, I think.

Jeroen: That’s a great end, I would love to thank you a lot for the time you took to talk to Leaders in Finance and to talk about your book. I will put the link about the book in the show notes. For now, in your book you write about B-corp certified organizations, I have a small present here, which is from Bocca Coffee, a B-corp certified organization. Again, thank you so much, Katrin, for your time!

Katrin: Thank you for having me, it was a joy!

You have been listening to an extra episode of Leaders in Finance. If you are hearing this via an app on your phone, please consider hitting the subscribe button for free so you will never miss a new episode. We would like to thank our sponsors for their support, they are: Kayak, Odgers Berndtson executive search and Roland Berger.

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