Trusted spaces, the pope and the JSE

The financial sector is not run for the community it supposedly serves

So, is JSE CEO Nicky Newton-king facing a tougher challenge than the pope? Both are trying to protect their institutions from the consequences of scandals, rumours and innuendo, which are threatening to destroy the faith needed to continue functioning.

Newton-king and her colleagues are hoping to persuade millions of desperate people that financial markets are “trusted spaces” where investors can feel comfortable about committing their hard-earned savings to strangers. (A secular version of what Pope Francis is hoping for.)

Because of the lack of alternatives most investors are desperately keen to believe markets are “trusted spaces”. Short of buying gold, burying it in the garden and hoping to avoid land expropriators, we have little choice other than to rely on financial markets that become increasingly complex by the day. The professional strangers on whom we rely generally pour the money into a fund, which will be invested in another fund and perhaps another until it eventually ends up as some form of exposure to a company of uncertain pedigree.

What could possibly go wrong? This long chain is watched over by what Newton-king calls the

“guardians of governance”. They include directors, asset managers, analysts and auditors. The JSE reckons there is scope for them to consider whether there are aspects of what they do that could be changed to help strengthen governance and “thereby investor confidence and trust”.

The problem is that these role players are all driven by short-term (less than three years) profit considerations. Few, if any, will reject the chance to make money on the grounds that it would not be in the best interests of an investor or even of the investment community.

In her book The Value of Everything, economist Mariana Mazzucato describes the dramatic growth of the global industry since the 1970s when national accounts first began to include the financial sector in calculations of GDP. She describes how the change in accounting treatment coincided with financial-sector deregulation and its growing lobbying power.

The industry has not become powerful by pausing to consider investor confidence and trust, which is why each new financial crisis has had more devastating consequences for the community it is supposed to serve.

In addition, the manner in which the sector has grown has made it extremely difficult for the ultimate beneficiaries of share investments to balance the power of the so-called guardians of governance. As one commentator noted, shareholders are the primary regulators of companies through voting at annual meetings on election of directors, appointment of auditors and so on. But in recent decades, the growth in complexity has led to this critical function being taken over by the fund management industry on behalf of millions of savers. Inevitably they are part of the problem the JSE is now trying to address.

Newton-king is facing an extremely difficult challenge: the financial sector is run for the benefit of its role players and not the community it supposedly serves. This must change before there is a destructive backlash. Ask the pope.

Because of the lack of alternatives most investors are desperate to believe markets are ‘trusted spaces’