Trust: A capital idea in the Libor fall-out
Trust lay at the centre of Adam Smith’s vision for a free market. “Every man (and woman) lives by exchanging,” Smith observed. And trust – in one-another, in our financial institutions and our governments – is vital to the exchange necessary to free market systems. In the fall-out of Barclay’s $US360 trillion Libor rate-fixing scandal, trust in the systems which support free exchange has been shaken to its core. And possibly irreparably damaged.
The London Interbank Offered Rate (colloquially known as Libor) has, for decades, served
as the major global short-term interest rate reference point, setting a borrowing-cost benchmark for approximately US$800 trillion in loans, securities and derivatives. As the world’s largest foreign exchange market, lenders, banks, institutions and analysts look to London as the key global lending reference rate. This rate, however, was not fixed according to actual market interest rates (as in Australia), but according to estimates provided by a select panel of lending institutions, polled at 10.00am daily. And so the temptation arose.
Time for CSR professionals to assist: Rebuilding trust, growing social capital
The details of Barclays’ rabid indiscretions currently dominate the financial news pages, so I will leave it to those professionals to explain further the intricacies of fines, lending rates and the implications that many others (including other banks and Ministers) will inevitably prove to have been involved. Instead, I turn to the red flags which the scandal raises for CSR professionals: those concerning trust and the consequent detriment to social capital.
A much-needed capital: Social capital in a time of financial inscrutability
The failure of capital markets to uphold governance principles illustrates the importance of non-financial capitals, namely social and human capital. At a more philosophical level, the Libor scandal demonstrates that CSR and related business ethics concerns which are often pigeon-holed as ‘soft’ or ‘feminised’ business aspects have very material financial and professional implications. Disgraced Barclays’ CEO Bob Diamond would surely concur after a hard lesson learned.
CSR professionals and aligned thinkers have long espoused the value in understanding and measuring social capital and its intrinsic trust component. Francis Fukuyama sees trust as inseparable from social capital while Bowling Alone’s Robert Putnam sees trust as the very font from which social capital is drawn. Whichever perspective you hold, trust is essential to the construction of strong, respectful and functioning social relationships necessary for the conduct of business, and, in the case of the Libor scandal, for the functioning of free markets. The long-held concerns of CSR professionals are not, it seems, quite so soft after all.
A desire for trust, like pennies in a wishing well?
Adam Smith was no fool. He explored self-interest as much as the desire for a common good through free markets. But he ultimately concluded that trust in the finance sector and in those who govern it was both possible and critical to functioning free markets. Smith’s focus on trust in both The Wealth of Nations and his ethical text, The Theory of Moral Sentiments, affirms that an expectation for and a focus on the trustworthiness of those individuals privileged to lead our lending institutions is not a child’s simple wish. It is a market imperative.
Again, CSR professionals have an opportunity to contribute here. Findings like those of Ernst & Young’s recent Global Consumer Banking Study show a 40 per cent global decline in customer confidence in the banking industry, with frightening declines of 72 and 76 per cent, in Italy and Spain, respectively. Exceptional losses of trust, respect and reputation present a singular opportunity for CSR professionals to cement the relevance and meaningfulness of our practice. Robust measures of social capital, incorporating trust, listening and promise-keeping, and lessons in stakeholder engagement, strong corporate governance and the holistic building and maintaining of a social licence to operate are all means through which the CSR profession can play a vital and enduring role in reinstating fractured trust in financial markets. One small engagement at a time.
I do not mean to sound opportunist here. Instead, I mean to focus our attention on the extraordinary circumstances in which we find ourselves and to encourage practitioners to assert the progressively obvious relevance and necessity of CSR values and the tools which we can offer. Indeed, it is the responsibility of our profession to assist in the fragile rebuilding of trust, respect and transparency required to reinvigorate markets, repair the damaged social position of financial institutions and recapture a broken public trust.