The value and values of markets: understanding the purpose of our financial system

7 June, 2016

“…there is little dispute that many money managers trade in and out of stocks with scant attention to whether the companies they invest in are well managed, whether they contribute to climate change or corruption, or indeed whether they are poised to trigger a market meltdown”, What They Do With Your Money: How the Financial System Fails Us and How to Fix It

The motto of the London Stock Exchange is Dictum Meum Pactum – My Word is My Bond.  This powerful motto speaks to the trust and integrity of capital markets the world over – markets that have achieved so much to create and spread wealth by putting money to work to solve the big issues facing the world.  Our healthcare system, our infrastructure, our pensions, are all dependent on the financial system sticking broadly to the values encapsulated by that ancient motto and to create productive, durable value.

Yet, as we all know, something has gone terribly wrong.

What They Do With Your Money: How the Financial System Fails Us and How to Fix It is such a timely publication by people with real experience and expertise in how capital markets work: Stephen Davis, Jon Lukomnik and David Pitt-Watson.

The authors force us to think about the purpose of the financial system and encourage us to think about the connection between incentives, governance, metrics and performance.  How many of us have thought deeply about intermediation in the financial system and its corrosive effect on value if it is not combined with a greater purpose than moving money around the system?  I certainly had not before reading this book and then exploring the work of innovative investment houses such as Inflection Point Capital Management who have coined the phrase ‘Strategically Aware Investing’, a forward-looking approach to investment that gives priority to issues such as innovation capacity, human capital and environmental sustainability.

The book is full of new insights, research and statistics I had not seen before and, crucially, it does not just provide analysis but also offers solutions and summarizes practical ‘takeaways’ at the end of each chapter.  The book could be summarized as a manifesto for a new financial system.  To take the vital issue of using the right metrics to measure performance, we would all agree on the need to manage and report on long-term performance – it is one of the tenets of Integrated Reporting.  Yet the book reveals that 90 per cent of large American companies measure the performance of their executive teams over a three year period or less and about a quarter do not have any long term performance-based awards at all.  This is something we must change.

I would encourage all those with an interest in correcting the imbalance we see in our global economy today to read this book and absorb its insights which I believe are essential to restoring the values of trust and integrity to our capital markets.  I hope the authority of its authors and the critical importance of its message will help to steer the discourse around the purpose of our financial system so that all those involved in it can share, with pride, the same enduring motto in future: Dictum Meum Pactum.