Trusted spa­ces, the pope and the JSE

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

Financial Mail - - BOARDROOM TAILS - @an­ncrotty

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’

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.