An absence of appropriate ethical culture at financial services firms has been the biggest contributor to the lack of trust in the finance industry, according to a global survey of CFA Institute members, which attracted more than 6000 responses.
Matt Orsagh, director of capital markets policy at CFA Institute, says to restore integrity in global markets, change must come from within and that ethical culture within financial firms needs to be addressed to solve systemic problems that led to fiscal crisis.
He says the focus on short-term incentives and behaviour has contributed to the problem and created a mismatch when culture is long term in nature.
“Culture takes a long time – a long time to get wrong and a long time to get right. It’s the super tanker metaphor,” he says.
But investment banks and investment managers are not the only participants that need a wake-up call, he says, pointing to the role of institutional investors in accepting their contribution to short-termism and changing their behaviour.
Institutional investors part of the problem
“Institutional investors need to examine whether they’re long term enough, and are they part of the problem,” he says.
Orsagh says a previous study by the CFA Institute, Breaking the short-term cycle, found that institutional investors bemoaned short-termism but also judged managers on a one-year basis, and were hiring and firing to chase returns.
“There needs to be people on the boards of pension funds that have expertise and understand decisions that need to be made, how markets work, fight for lower fees and be more long term. It is hard to be that in a political world,” he says.
Orsagh says the fact 56 per cent of respondents said that a lack of ethical culture within financial firms is the biggest contributor to the lack of trust in the finance industry is a wake-up call for industry.
Further, they also said that improved culture established and encouraged by top management and executives is the most needed firm-level action to help improve investor trust and confidence.
Six areas of cultural influence
A change of culture needs to come from the executive and board level, and the CFA Institute in its paper Visionary boards identifies six key areas where visionary boards and directors can influence to ensure to ensure their companies are well positioned for the long term:
- Quarterly earnings practices. A visionary board expects management to deliver investor guidance with a longer term bias and in greater detail by identifying long-term value drivers for the company. This approach helps to incentivise share “ownership” among the investors the board represents.
- Shareowner communications. A visionary board proactively listens to the concerns of its shareowners and consistently communicates its long-term vision and strategy.
- Strategic direction. A visionary board actively oversees and understands the corporate strategy and regularly monitors, along with management, the implementation and effectiveness of strategic plans. It also focuses on the relationship between corporate strategy and risks associated with that strategy.
- Risk oversight. A visionary board embraces risk as a board-level responsibility. It oversees robust processes for identifying, understanding and, when necessary, mitigating risks to the operations, strategy, assets and reputation of the company. At the same time, a visionary board understands that companies generate profits by taking risks.
- Executive/director compensation. A visionary board understands a company’s compensation policies and ensures that the underlying objectives consistently support the long-term strategy and performance of the company, as well as the appropriate company risk profile.
- Board and corporate culture. A visionary board not only understands the business and industry in which the company operates but also recognises that strong corporate and board cultures are essential to the achievement and sustainability of a company’s long-term value. Therefore, a visionary board diligently seeks to reinforce and build such cultures.
The survey respondents are cautiously optimistic, with 40 per cent of the members saying the economy will expand, up from last year’s 34 per cent who said they thought the global economy would expand.
Another signal of a positive outlook is that employment opportunities for financial professionals has slightly improved
Half of those surveyed expect equities to outperform all asset classes, up from 41 per cent a year ago.