Saker Nusseibeh is the chief executive of Hermes Investment Management and a regular public speaker, writer and commentator, appearing at leading industry conferences, contributing widely to the debate about how to improve the offerings of financial services to society, by challenging investment orthodoxy.
That the financial and economic model failed in 2008 is beyond dispute. Quantitative easing averted a financial and economic collapse. But we also witnessed a massive debt transfer from the failed financial system to ordinary citizens. This raises fundamental concerns about the systemic moral hazard embedded in the current economic world view. In turn that should lead to citizens questioning the purpose of the financial system, and to ‘professionals’ questioning the efficacy of the ‘traditional’ view of economics and the financial theory built on it.
Since the crisis three main trends have gathered pace. First, there is a growing realisation that modern financial theory is flawed. Markets are not efficient in discounting more than what is currently known, are limited by behavioral distortions, and are not efficient in predicting future movements. Likewise, volatility is no longer deemed a sufficient measure of risk.
Second, there is a burgeoning appreciation that neo-classical economics might also be flawed, although the alternative of viewing the economic system as an adaptive complex system is yet to mature into mainstream use.
Third, as a result of these concerns, concentrating on purely nominal financial returns ignores the environmental and societal cost of investment decisions and is therefore flawed as a means of allocating capital.
The financial community has lost sight of the fact that the beneficiaries whose money we invest are the customers of the companies we invest in on their behalf. We all have to live in the society shaped by the sum of the actions of these companies. Perhaps public stock markets no longer fulfil the function they were designed for, but companies ultimately control the architecture of the society savers will retire in, so it is in savers’ best interests to have a say in that architecture.
In other words, investment should not only look at short- or even medium-term financial return, but should incorporate an attempt at designing an optimal societal outcome for savers, possibly entailing a forfeiture of short-term nominal return in return for sustainability.
It is true that savers no longer provide the capital for most companies quoted on public markets, but it is dangerous and short-sighted to abrogate all responsibility of ownership; to participate in the financial directionality of markets without attempting to engage with companies about the long-term impact of their businesses. Doing so results in a world where companies operate in an environment of absentee owners and encourages management to concentrate on harvesting short- or medium-term rents.
We need to rethink the purpose of investment from the perspective of the savers whose capital we hold in trust; moving away from concentrating solely on nominal returns and shifting to thinking in terms of holistic outcomes; incorporating non-financial factors into our decision marking processes and recognising that unlimited financial growth may be unsustainable in the context of environmental or societal cohesion.
Ultimately, the social science of economics and finance is overdue a re-evaluation and we need to consider more carefully the purpose of our actions as investors.