Financial stability: does social activism matter?
Pages | 183-214 |
DOI | https://doi.org/10.1108/JFRC-08-2018-0118 |
Date | 20 June 2019 |
Published date | 20 June 2019 |
Author | Peterson K. Ozili |
Subject Matter | Financial risk/company failure,Financial compliance/regulation |
Financial stability: does social
activism matter?
Peterson K. Ozili
Monarch Business School, Monarch University, Switzerland and Banking Supervision,
Central Bank of Nigeria Economic Policy Directorate, Abuja, Nigeria
Abstract
Purpose –This study investigatethe impact of social activism on financial system stability.
Design/methodology/approach –Financial stability was analysed from two complementary
perspectives: bank-led financialstability and financial system stability driven by sector-wide credit supply.
Social activism was analysed from three perspectives: gender equality advocacy, environmental
sustainabilityadvocacy and social protection advocacy.
Findings –The findings reveal that gender equality and environmental sustainability advocacy have
significant positive effects for financial stability, whereas social protection advocacy has a significant
negative effect for financialstability. In addition, social activism has negativeeffects for financial stability in
the post-2008 financial crisisera. Finally, there are differential effects for country-groups, for instance,social
activism strongly improves bank-led financial stability in African countries and for BLEND countries
(countries that are eligible for International Development Association(IDA) borrowing based on per capita
income levels and are also creditworthyfor some borrowing from the International Bank of Restructuring and
Development). The findings are relevant for the on-going debate about whether social inclusivity and
activism has any economic value for the stabilityof businesses and the financial system. The findings have
implications.
Research limitations/implications –The implication for policy-making is that the pressure on, or
commitment of, financial institutions to be socially inclusive in all social matters such as gender equality,
environmental sustainability and social protection does not guarantee stability in the financial system –
whether bank-ledfinancial stability or sector-wide financial stability.Therefore, regulators should ensure that
financial institutions exercisecareful discretion when adjusting their risk models to include all “social risk”
factors amidstthe recent pressure on corporations to be sociallyinclusive.
Practical implications –Another implication for businesspractice is that business leaders in financial
institutions should identify the optimal level of social inclusivity that improves the stability of their
corporations,because it would seem counterproductive if business leadersadopt full-scale social inclusion (or
considerations) that subsequently make their corporations financially unstable which could lead to loss of
shareholderswealth.
Originality/value –This study is the first attempt to investigate the impact of social activism on
financial stability to determine whether greater social activism promotes stability or instability in the
financial system.
Keywords Gender equality, Financial stability, Social activism, Financial crisis,
Environmental sustainability, Financial institutions
Paper type Research paper
1. Introduction
This study investigates the impact of social activism on financial stability. Social activism
in finance is an issue that financial stability policymakers are concerned about, to a lesser
degree –although it should be taken more seriously. One serious implication of social
activism for financial stability is that social activism, when disruptive, can worsen or
prolong an existingfinancial crisis in unpredictable ways.
Social activism
183
Received28 August 2018
Revised29 October 2018
Accepted6 December 2018
Journalof Financial Regulation
andCompliance
Vol.28 No. 2, 2020
pp. 183-214
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2018-0118
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
Although a pro-active financial regulator or policymaker can carry out some early
assessment to determine the optimallevel of social activism which promotes stability in the
financial system, the pro-active policymaker may face some difficulty in identifying the
specific social activismindicators to focus on, the type of social activism,and the intensity of
activism that pose the greatest risk to financial system stabilityand whether to analyse the
activism indicatorsas a group or in isolation[1].
Moreover, the general lack of attentiongiven to social activism as a potential significant
risk in the global financial stability policy setting shows that policymakers underestimate
the potential for human behaviour to disrupt financial systems. Furthermore, in the
literature, there is a lack of understanding of how social movements can affect financial
stability in good and bad times. Althoughpast research shows, for example, that organised
social activism may shape firms’decisions to adopt “genuine”strategies to improve social
factors such as environmental sustainability and gender equality practices (Lenox and
Eesley, 2009) or adopt “ceremonial façades”pretending to achieve these objectives (Forbes
and Jermier, 2002), yet we know little about the effect of social activism for the stability of
the financial system. Motivated by these concerns, our study is the first attempt to
investigate the impact of social activism on financialstability, to determine whether greater
social activism promotesstability or instability in the financial system.
From a policy standpoint, the events following the 2007-2008 global financial crisis
which led to violent protests in several countries, including the abduction of staff of some
finance corporations in Asia and the destruction of corporate assets of some financial
institutions in some European countries, have led policymakers around the world to
consider investing some resourcesinto social mechanisms that promote short-term stability
both in their policy narratives and intheir supervision and regulatory interventions during
bad times to calm tensions among individuals and other groups affected by existing
financial imbalances in the financial system. To achieve these goals, policymakers need a
clear understandingof the most critical social activism indicators to focus on.
The analyses in this paper sheds some light on this issue by analysing social activism
from three indicators or perspectives: gender equality advocacy, environmental
sustainability advocacy and social protection advocacy, to identify the indicators which
pose the greatest contribution to financial stability or instability. A good starting point to
answer this question is to investigate whether organised (or institutional) social activism
promotes (or reduces) financialstability. Organised (or institutional) socialactivism refers to
the institutions established to promote gender equality, environmental sustainability and
social protection in a country. We focus on whether higher (organised) social activism is
associated with higher or lower financialstability –this is our contribution to the debate on
the effect on social inclusivityon financial stability.
In this study, financial stability was analysed from two complementary perspectives:
bank-led financial stability and financial system stability driven by sector-wide credit
supply to the private sector, while social activism was analysed from three perspectives:
gender equality advocacy, environmental sustainability advocacy, and social protection
advocacy. The findings reveal that social activismhas positive effects for bank-led financial
stability, and negative effects for sector-wide financial system stability, and there are
differential effectsfor country-groups.
Our contribution to the financial stability literature is threefold. First, our study
contributes to existing studies that explore the causes of instability in financial systems
(such as Allen and Gale, 2004;Fernández et al.,2016;Schaeck and Cihák, 2014;Segoviano
and Goodhart, 2009;Uhde and Heimeshoff, 2009;Ozili and Thankom, 2018, etc.). These
studies identify the risk factors or determinants of instability in financial systems. The
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28,2
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current study adds to this literature by showing that social activism is also a potential risk
factor which can influence financial stability. To date, studies that investigate whether
financial stability is influenced by social activism with a focus on gender equality,
environmental sustainabilityand social protection are non-existent in the literature. Second,
from a policy standpoint, insights gained from this study can help financial system
regulators to understand the importance of assessing not only credit risk and capital
adequacy in financial systems,but also the impact of institutionalised social activism and its
activities on the stability of financial systems. Policymakers are currently analysing crisis
scenarios to identify possible risk factors that could initiate a new crisis or prolong an
existing crisis in financial systems across countries. Our study is the first attempt in this
direction, focussing on three dimensionsof social activism[2]. Finally, our study contributes
to the Law and Finance literature which examine the impact of the quality of legal
institutions on the performance of financial institutions and the economy. Our findings
suggest that advocacy groups with legal backing (through institutionalisation), can have
both negative or positive effectsfor financial stability.
The remainder of the article is organised as follows. Section 2 presents the conceptual
framework for social activism. Section 3 reviews the recent literature on financial stability
and social activism. Section 4 presents the data and methodology. Section 5 discusses the
results. Section 6 concludes.
2. Conceptual framework and theory
2.1 Conceptual framework
Social activism is an intentionalaction with the goal of bringing about social change. Social
activism is at the centre of modern democracy. Several studies of social movements argue
that activists strategically target firms, universities, young people, other organisations and
local and state authorities to enforcesocial change on a range of issues ranging from human
rights to social protection to energy and to the environment (Rao, 2009;Schurman and
Munro, 2009;Sine and Lee, 2009;Soule, 2009;Zald et al.,2005;Vasi and King, 2012). These
studies conclude that organisational change is often a direct consequence of social
movement activism, caused by the potential threat activists make to their targets through
protest and other extra-institutional tactics (King, 2008a;King and Soule, 2007). Social
activists fight for a cause theybelieve would benefit society even though their activism often
benefits one group in societyat the expense of another group.
Recently, there are three mainstream causes of social activism: gender equality,
environmental sustainability and social protection. It is not uncommon to see individuals
and organised groups protesting[3] against corporations in these three areas, and such
activism if successful can affect the stability and short-term profitability of corporations,
requiring corporations to develop new strategies to deal with the impact of social activism
on their business operations or businessinterests. Consequently, corporations are changing
their policies and committing substantial financial resources to become more socially
inclusive in the areas of genderequality, environmental sustainability and socialprotection,
even though there is littleor no evidence to suggest that such social considerations improves
the stability or performanceof corporations.
Social activism can be moderate or disruptive. Disruptive social activism can have
devastating effects for the stability of the financialsystem of any country particularly when
members of the public deliberately by-pass existing “rules of engagement”guiding the
social movement, preferring to act on their own duringa crisis. During a crisis, members of
the public can take laws into their hands by engaging in violent protests, riots and can
deliberately inflict physicalharm on corporate executives who they feel are to blame for on-
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