There once was a cafe in Palo Alto where Anat Admati and her Stanford GSB colleague Paul Pfleiderer often met when they were working on a paper. Sometimes they would spend whole mornings there drinking espresso and discussing what they were trying to prove, what was true, and which were the right assumptions to make.
“We would get quite animated,” recalls Pfleiderer, professor of finance. “If Anat thought something was wrong in what I was saying she would vociferously object. Eventually people would come over and ask us to be quiet because we were disturbing this whole room.
“She’s passionate about getting things right,” Pfleiderer says, “and doesn’t have patience for arguments that are — let me use a technical term — bullshit.”
It is not in Admati’s nature to remain quiet, especially not now when the problems are large and the stakes are high. Whether you are an economist or banker, lawyer or policymaker, Admati is a relentless communicator of inconvenient truths, determined to break you free from the intellectual silo in which you think and work, and which she believes contributes to the systemic issues that undermine capitalism. If that sounds like a quixotic pursuit for the professor of finance and economics to undertake, it might suggest those silos are deeper than you imagine.
Admati, too, once “lived in a bubble,” she says. When she arrived at Stanford in 1983, fresh from her doctorate at Yale, the walls of her bubble were made from basic assumptions so fundamental to corporate finance textbooks and the academic literature that they were no more noticeable than the air Admati breathed. To wit: That maximizing shareholder value fulfills a business manager’s social responsibility; that contracts, laws and their enforcement are an effective curb on corporate malfeasance; and that the only remaining corporate governance challenge was to align the interests of managers and shareholders. She studied information flow and its effect on price in financial markets, pioneered work in market microstructures, and investigated the workings of shareholder activism.
Then the world tumbled into the financial crisis of 2007–09. Millions lost their jobs, foreclosed homes littered the United States, and nations in Europe and elsewhere suffered devastating recessions. Admati discovered that she was not, in fact, in the stainless-steel models of the “free market” system and trying to understand what went wrong with it led her down Alice’s “rabbit hole,” where everything was “curiouser and curiouser.”
This was no abstract academic disagreement. “For me,” Admati says, “it was a major crisis of questioning what I assumed.” It became clear to Admati that the crisis resulted from poorly designed and ineffective regulation and could have been prevented. Without better rules, corporations “doing what we said corporations should do was really kind of dangerous. The rules tolerated and even encouraged recklessness whose ultimate harm became obvious in the crisis.”
The priority, she concluded, was to absorb the lessons the crisis had delivered and change those rules. First, however, it was necessary to clear the “fog of confusion and debunk the many flawed claims” that settled over the debate.
Advocating for Reform
In 2010, Admati teamed with Pfleiderer, Stanford GSB professor Peter DeMarzo, and Martin Hellwig, director of the Max Planck Institute for Research on Collective Goods, to write a paper, “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulations: Why Bank Equity is Not Socially Expensive.” Pfleiderer, who has worked closely with Admati for more than four decades, recalls that she was “incensed” by the false and misleading statements banks made to justify their practices, and by models and theories that distorted reality. “Anat,” Pfleiderer says, “wanted not to just write a paper and call out [the bogus arguments]… But she pounded the pavement, if you will, and went to Washington and went to the New York Fed and other places to challenge people and put herself out there.”
Pushback from the banking lobby and their allies was organized and hard-nosed — Admati came to see why Sen. Richard Durbin (D-IL) said in 2009 that bank lobbyists “own” Capitol Hill. Even more troubling, however, were what Admati calls the “enablers” that allowed the reform process to falter, especially policymakers and academics who advanced “flawed arguments” with impunity. “I witnessed with dismay and concern,” she later wrote “how distorted incentives, averted eyes, and insufficient accountability have led markets and governments to fail society.”
Admati spent months organizing petitions and writing op-eds, letters to editors, and policy comments. Then she teamed with Hellwig to write a book, The Banker’s New Clothes: What’s Wrong with Banking and What to Do about It, published in 2013 and painstakingly crafted for a broad lay audience. The book sought to debunk a range of specious claims and proposed both short-term and long-term steps to improve the system.
After the book was published, Admati testified before Congress, traveled to the World Economic Forum in Davos, and had a sit-down lunch with President Barack Obama and a handful of economists. In 2014 she made Time magazine’s list of the world’s 100 most influential people. “I had opportunities and met a lot of great people across the system, but I also had many disappointments and faced silent treatments from those who would not engage,” she says. “I persisted because I felt a strong sense of responsibility. But challenging people is difficult and no fun. I understand why people avoid it.”
Asked whether her years of advocacy to spur financial reform were successful, Admati gives a long and eloquent sigh. “Maybe I nudged the system a bit, and many appreciated the education and acted on it. But too many people had a vested interest in the system we have. The rules still tolerate a bloated, inefficient and opaque system.”
A New York Times profile of her in 2014 seemed to suggest Admati was a force to be reckoned with. It was headlined “When She Talks, Banks Shudder.” “Cute title,” Admati says, “but I don’t believe it is accurate.”
The Focus Enlarges
Gradually, Admati began to reflect on her experience pushing for reform and concluded that the issues surrounding the financial sector had broad relevance because of their intersections with society and with democratic institutions.
Companies that acted only to maximize profits and shareholder value have caused enormous and often preventable social harms, Admati says. She runs through a partial list: Purdue Pharma, Boeing, and Facebook in the United States; Carrilion in the United Kingdom; Volkswagen and Wirecard in Germany. “Governments routinely fail to protect the public and do better to prevent and deter harm by corporations,” she says. In effect, the forces of “free-market capitalism” seem to be undermining democracy itself.
Admati wonders whether business schools and universities are doing enough to address the challenges. “The GSB, for example, seeks to ‘change the world,’” she says, “but are we, as individuals or as an institution, doing all we can to achieve this objective? Or are we missing important opportunities and possibly making things worse by failing to look at the broad context?”
Seeking a more interdisciplinary approach and inspired by MBA students who wanted to engage more deeply in discussions of the big picture, in 2018 Admati created the Corporations and Society Initiative (CASI).
Along with Pfleiderer, whom she recruited to share a leadership role, Admati built CASI to “promote more accountable capitalism and governance.” At Stanford GSB and beyond, CASI policy comments, speakers, and events have addressed a spectrum of topics from financial regulation to cybersecurity to healthcare and the role of the media, investors, and other leaders. Admati links this broad approach back to legendary Stanford GSB Dean Arjay Miller, who in 1968 called for academics to “resolve the critical social problems our nation faces.” And it was Miller who created a public management program in the hope that Stanford GSB would produce leaders to improve public policy.
“The ability to break down silos and let in new perspectives is a prerequisite to getting anything achieved,” says Sarah Bloom Raskin, former deputy secretary of the Treasury Department and now a law professor at Duke who has been a frequent visitor in Admati’s classes. She calls Admati the “go-to in this regard.” Admati recently spoke to Raskin’s students about the relationship between corporations and the legal system.
“My main hope remains education,” Admati says. “The hard work is educating young people to connect the dots, understand the big picture, and think holistically about their role in the system.” She believes the inertia of the political status quo relies in part on a citizenry that struggles to understand its own economic system, and partly on experts specializing so narrowly that they miss the forest for the trees. “This crisis in capitalism and the crisis in democracy are intertwined.”
Admati developed several new interdisciplinary courses in the last decade. After the publication of her book with Hellwig, she stopped teaching basic corporate finance and created a Finance and Society elective for MBAs as well as a version for non-GSB audiences. To branch beyond finance, she taught a course entitled Is the Internet Broken?, which led to a cameo appearance in the last episode of the HBO series Silicon Valley. In fall 2021 she offered another new MBA elective with lecturer Robert Siegel, Business and Government: Power and Engagement in the 21st Century World which featured visitors ranging from business leaders to policymakers and media figures.
As an undergraduate at the Hebrew University of Jerusalem, Admati studied math, but very nearly transferred to law. Now she finds herself completing the circle and gravitating back to law as she wrestles with how to formulate “a general legal system that has truly incorporated corporate people.” In current research with her colleague at Stanford GSB, assistant professor of finance Greg Buchak, she is pursuing a data-driven effort to understand how corporations fit in the justice system — “exploring whether and how the outcomes of corporate wrongdoing in the justice system may depend on the type of law, offender, victim, harm, jurisdiction, or other factors.”
Admati wholeheartedly rejects the typical left-right dichotomies of American discourse: capitalism versus socialism; big government versus free markets. The point, she repeatedly stresses, is not the size of the government, but its effectiveness in providing the legal infrastructure essential for the functioning of corporations and the market and ensuring the efficient provision of essential services. What Admati is reaching for is a new cultural and legal framework that integrates corporations and society in a way that benefits all stakeholders, a “capitalism 3.0.”
In a 2019 essay in Harvard Business Review, Admati urges business schools to “practice and promote civic-minded leadership.” We must find a way, she wrote, “of conducting business and citizenship based on a holistic understanding of how individuals, corporations, and governments interact, one that emphasizes the importance of good governance mechanisms and seeks to create a system in which capitalism and the market economy can deliver on their promises.”
Photos by Elena Zhukova