I recently re-read “The Economics of Integrity: From Dairy Farmers to Toyota, How Wealth is Built on Trust and What That Means for Our Future” by Anna Bernasek and it is a book that I recommend reading. Bernasek wrote the book after the 2008 Global Financial Crisis, which largely resulted from the meltdown of American subprime mortgages. This backdrop is reflected in how she wrote the book.
She asserts that economies are made up of microeconomic transactions that are underpinned by trust and that greater nationwide trust results in improved efficiencies that, in turn, lead to economic growth. Data from Transparency International supports this theory as Bernasek demonstrated a strong inverse relationship between a nation’s wealth and its level of corruption based on Transparency International's Corruption Perception Index. As a result, she argued that instead of catching those with poor integrity, we should reward those with greater integrity.
What I especially like about the book is that Bernasek was able to bring this theory down to an understandable level using the example of milk. Throughout the value chain of milk, from the dairy farmer to the end consumer, examples of trust are essential as consumers need to trust the quality of milk in order to keep purchasing milk.
I started my career as a trader and one of the first phrases that traders learn is a Latin phrase “Dictum Meum Pactum” or “My Word is my Bond.” This is paramount because once a trader accepts a transaction, they are required to make good on it. Large volumes of trading occur as a result of the trust between two traders, often involving transactions over the phone or via messenger prior to formal confirmation. This enables traders to act nimbly and to open or close positions, enabling our financial markets quickly.
Unfortunately, the current global environment seems to be one where trust and integrity are eroding. Between wars, political turmoil, and corporate scandals, volatility is increasing faster than ever. In this environment, how can we incentivize investors?
I return to Bernasek's point, we can do this by rewarding greater integrity. On the financial part, investors can and should look for companies that they can trust due to strong corporate governance and shared values. This is why Environmental, Societal, and Governance (ESG) investing is gaining ground, especially with institutional investors demanding that corporations follow global best practices. There are also initiatives to standardize the sustainability reporting of Philippine corporations to ensure that adequate information is provided to investors. My hope is that investors by directing their funds, will vote for good corporations and that as a result, the cost of capital will go down for these companies. Aligning with global best practices will also enable regional investors to compare apples to apples between Philippine corporations and those of other countries.
In this increasingly volatile investment climate, corporations are responsible for being transparent and staying true to their values, setting the right example, and making investments that benefit society. As individuals, we can do the same and hopefully start a chain effect of people doing the right thing, leading to more economic growth for our nation. After all, the value chain of trust starts with the dairy farmer, and it starts with each of us.