In God We Trust

The message is on every US dollar and one might say, “Sure - but who else?” By the small hours of the morning on Sunday, September 28, the US Congress announced that a US$700 billion lifeboat was in the slips, ready for launching to save the economy. It sank by midday Monday. The United Sates Congress plus that beleaguered nation's Federal Reserve and its Treasury Department returned to the table at once, seeking an answer, any answer. While even the Delphic Oracle cannot tell us what will transpire as the next few months or years unfold, there is one certainty: the rarest commodity in the market is trust.

Let us be clear. While each of us can recount a litany of the problems embedded in free-market capitalism none of us has or is likely to devise a better system. That said, free-market capitalism is founded on trust. Capitalism was born when wealthy Europeans discovered that they could multiply their clout in the market by entrusting their earnings to professional managers, skilful custodians who would treat that money as if it was their own. The standards of care required of those entrusted with another person's money became known as fiduciary duty, a code which placed the interests of the trustor above those of the trustee. The Oxford English Dictionary defines trust as “faith or confidence in the loyalty, strength veracity, etc., of a person or thing; reliance on the truth of a statement without examination”. What has happened?

Most of us know people whose word is as good as if it was bonded, who are reliable on everything from promptness to paying everything they owe. They are probably ordinary folk whose trustworthiness springs from unwavering values. They understand and agree with US Supreme Court Justice Potter Stewart when he said, “Ethics is — knowing the difference between what you have a right to do, and what is the right thing to do."

There are those who believe that if an act is legal, it is ethical. Justice Stewart obviously did not agree with that — and neither do many others, including me. Ethical behaviour goes well beyond merely complying with the law. Ethics is like good manners, it requires voluntary compliance. You may have a legal right to burn our nation's flag, but that does not make it the right thing to do. Racial discrimination was legal at one time, but it was always wrong and so is gross or insulting behaviour. What should one make of a blue-chip investment bank that peddled asset-backed commercial paper to its clients while simultaneously selling it short in the market? These “financial advisors” lent their names as assurance that the valuations were correct and the risks reasonable. It may take years of expensive wrangling in court to decide, or at least to conclude, that a given act was legal or not but those who bought a cleverly contrived derivative of ABCP for his or her nest egg know the truth.

Gazing backwards down the tunnel of history is instructive they say, especially the traffic signals along the way. Since the implosion of the US economy is threatening that of the globe we might pay particular attention to how it got that way. A few years after the British grabbed New York and Wall Street from the inventors of capitalism there was the fuss about Vanderbilt and his railways, then the manoeuvring that accompanied the building of the Erie Canal and of course the financing of two wars (the War of 1812 and the American Civil War). As we arrive at what might be called the modern era, we notice that roadwork to smooth the bumps had begun in 1934 when regulation arrived in the US capital markets.

Established by the US Congress via the Securities Exchange Act of 1934, the SEC is an independent, non-partisan, quasi-judicial regulatory agency. It came into existence in no small part as a reaction to the Great Depression, in turn caused by the Great Crash of 1929. It was created to regulate the stock market and prevent corporate abuses relating to corporate reporting and the offering and sale of securities. It is responsible for administering the six major laws (so far) that govern the securities industry in the United States. They are the Securities Act of 1933 (also known as the “Truth in Securities Act”); the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; the Investment Company Act of 1940; the Investment Advisers Act of 1940; and last but not least the Sarbanes-Oxley Act of 2002. Probably all are necessary, certainly they are not sufficient, for the Drexel-Milken scandals, the savings and loan scandals, the dot-bomb era and the Enron debacle all arrived between the fifth and the sixth.

Another arrival in this period was Fukuyama's book ^[1] in which he said, “- - these costs - - amount to a measurable percentage of gross domestic product - - a direct tax imposed by the breakdown of trust in society”. The author was referring to the costs of police protection, jail, and lawyers in the United States, emblems of a social system in turmoil. Perhaps the missing ingredient is the impetus to do the right thing, the qualities Justice Stewart referred to, those that create trust in a society. It is in short supply in commercial America circa so small wonder that the sardonic rejoinder to the quote on the greenback is, “All others pay cash.”

Those on the boards of smaller organizations caught in this riptide of events may feel a sense of futility, certainly of frustration, about what they can and should do. The old saw about minding the pennies so the dollars are safe may hold the clue, translated as a clear view of right and wrong in oversight at a very local level. We are responsible for the engines of our economy and we do face difficult choices, made complex but the conflicting signals from the many stakeholders of the organizations we guide. But deep down we all know right from wrong and if we are guided by that compass as individuals the companies for which we are responsible will stay on course. The sum of the parts will create a valid whole and the free-market system can thrive again when society which has regained its capacity to trust.