Trust — a rare commodity
30 January, 2015
One of the lingering consequences of the global financial crisis was the loss of public trust in the business sector. Warren Buffett famously said that it took 20 years to build a reputation and five minutes to ruin it; 2008 proved him right.
It was because a small number of unscrupulous firms and individuals acted in their own interests rather than in the public interest. Post-GFC, business leaders became a target for anger and disillusionment because they were seen to have won while others lost.
They had breached the relationship of trust which is important in every facet of life and especially when money is involved.
Can we trust again and how do we know if a company or an executive is worthy of our trust?
Trust is gradually returning and regulators and financial industry participants understand the need to earn it.
A study conducted in 2013 showed that, five years out from the financial crisis, trust had improved but there was still a large gap needing to be closed. Investors surveyed in the US, UK, Hong Kong, Australia and Canada said they broadly trusted markets again – with 73 per cent optimistic about their ability to earn a fair return. Hopefully the trend has continued in the past 12 months.
Regulators around the world have established guidelines to ensure the financial industry puts clients first; the industry has committed to this mantra in much the same way as doctors adhere to the 'first do no harm' principle.
Feeling comfortable to trust people is one thing; knowing who to trust is quite another.
The internet has been a boon in telling us who to trust in many areas of our lives. Before the internet we had word-of-mouth, generally from people we knew. Today you can go online and read the opinions of multiple individuals; while you may not know them personally, the sheer number of views and ratings gives you a good steer. There are forums that allow you to check the reputations of all manner of professions.
But the internet is not quite as useful when it comes to considering the reputation of company executives ahead of investing in them. Here, trust still relies on gut feeling, instinct and kicking the tyres yourself.
A good investor will, through experience, learn to know what to look for, know what to avoid, and know what makes an executive trustworthy.
I have met business executives over the years who I found to be untrustworthy, inconsistent and unrealistic. But, for every disappointment, there have been many more executives who communicated candidly and fully, enabling me to know what to expect and monitor their delivery against expectations.
That is what trust is about... being able to verify information received can be relied on. It is also about being comfortable that the executive has the same interests as me and other investors, rather than being motivated by self-interest.
The most valuable business tool in our office is not our computer or calculator but our files containing notes of all conversations and visits that we have had with our portfolio company executives. These notes give us a road map, a framework for each company and its management team that we can monitor.
If an executive delivers what he said he would when we met him six months or two years ago, then we start to believe he is sincere and can be trusted. If he demonstrates his decisions are driven by a focus on shareholder value, rather than a desire to maximise personal reward, we can be fairly confident of his authenticity.
Like a lot of investors, we don't trust readily. Trust, like respect, needs to be earned and we have built buffers into our investment process to protect us from being too trusting, too early.
Trust is fragile and we know that, once broken, it can take years to re-build. However, we also know how good it feels to trust and to know our interests are aligned.