This is the Valley Industry & Commerce Association’s (VICA) monthly column for the Business Journal. VICA is a business advocacy group representing the San Fernando Valley and surrounding areas. The Los Angeles City Council’s Jobs and Business Development Committee recently reviewed a motion that called for the city to divest from financial institutions not responding (by certain councilmembers’ standards) quickly enough to the foreclosure crisis. The motion was made by Councilmember Richard Alarcón, and seconded by Council President Eric Garcetti and Councilmembers Janice Hahn, Bernard Parks and Ed Reyes. The motion targets financial institutions the author feels are not participating in activities that would prevent foreclosures, calling for the city to divest all of its deposits. It also calls for the city to encourage divestment of all its partner retirement programs. While the motion’s subjective nature of calling for divestment in “financial institutions that fail to cooperate with foreclosure prevention efforts” is concerning, it is still not what should be setting off panic alarms for the business community. Even more dangerous than divestment based on foreclosure negotiation decisions, is the overreaching social responsibility standards Alarcón proposed in a September Los Angeles Times op-ed. While discussing his foreclosure motion, Alarcón went even farther to say, “in the long run, we must not only divest from those institutions that don’t serve our interests, we must affirmatively invest in financial institutions that have a demonstrated track record of community responsibility.” He suggested that the city establish socially-based criteria (with no consideration for philanthropic activities) to use in selecting the financial institutions with which to do business. Using an example from the City of Philadelphia where banks holding city deposits are required to submit goal statements each year, he proposed a similar program for L.A. “The statements include such things as where the banks are making loans throughout the city and what kind of loans they are making,” Alarcón said. These calls for community and social responsibility are problematic and focus on business decisions where financial executives have an ultimate responsibility to their shareholders. Forcing banks to make important operating decisions while holding the threat of divestment over their heads is at best unfair and more accurately, coercion. Alarcón cites examples of, “opening a branch in a previously underserved neighborhood” as an action that would result in “a higher social responsibility rating.” It seems that the amount of money a bank reinvests in the community by donating to local nonprofits or encouraging employees to volunteer should be a significant factor in determining social responsibility. However, there is no mention of philanthropic activities in the discussion of these so-called social responsibility ratings. Banking is not the City of L.A.’s area of expertise and it is outside of its role to threaten financial institutions into making (what could potentially be) bad business decisions. The banking industry is already facing new restrictions and regulations due to the current financial crisis. Incentives for community reinvestment and encouraging volunteerism are one thing, but holding the threat of divestment over financial institutions is going too far — even for business-unfriendly Los Angeles. Do you think that cities should make banking and investment decisions based on social responsibility standards? Will this practice open the door for government to control other aspects of private sector operations? E-mail your responses to [email protected].
