WILLIE THABE: On reputation stand or fall the pillars of our economy and society

When legal academic and former judge Mervyn King was asked to summarise the purpose and intent of his report on corporate governance, he responded with a blunt: “People should simply be honest.”

The allegations contained in the first state capture report delivered to the president by acting chief justice Raymond Zondo underscore that the importance of reputation in the marketplace cannot be overstated. Public and private corporations require a clearly defined structure and formal rules of engagement to ensure the proper functioning of the whole economic system.

These entail laws governing contracts, statutes on the financial soundness of counterparties, a code of shareholder rights and a law of consumer protection. But all of these elaborate rules cannot substitute for character. The word of whoever we are transacting with underpins virtually all of our engagements, whether it’s between customers, colleagues or even family members.

Without this underpin, goods and services cannot be exchanged efficiently. Trust buttresses the large volume of transactions that are priced and traded on a daily basis before legal confirmation. To paraphrase one of former US Federal Reserve chair Alan Greenspan’s remarks, “Rules are guides for the day-to-day transactions for business and financial managers, but the rest of the efficacy of these transactions is contingent on the personal code of values that these officers bring to the table”.

Effective corporate governance relies on a reputation for honest dealings within a business or financial corporation. Without trust in the reliability of counterparties’ declarations, the efficacy of market transactions would be severely constrained. But the most important issue is the observer’s perception of the corporation, which ultimately is captured in the intangible called “goodwill”, which is in effect capitalised on the corporation’s balance sheet.

The historic development of the free market economy was driven by laissez-faire capitalism; thus, caveat emptor (let the buyer beware) was the protection against unscrupulous market traders. Reputation and trust were the currency that was leveraged to get ahead. A reputation for honest dealing was particularly valued, such that those who were inclined to be unscrupulous in their private dealings were subjected to a market discipline, which demanded a more ethical standard.

Of course, this did not prevent the likes of James Fisk and Jay Gould of the 1869 Black Friday gold market conspiracy fame, and others, from sailing too close to the wind and over the edge of legality. But these were the exceptions rather than the rule.

In the 19th century US banking teemed with examples of the extreme importance of reputation. Many bankers of the time could in effect issue non-interest-bearing liabilities in the form of currency. It was encumbent on everyone to work hard to develop and maintain a reputation that their word was their bond. Prosperity and success were contingent on the trust people had in the institution’s promise to redeem banknotes in specie. There were bankers on the margin who issued currency and made redemption inconvenient or impossible, and these banks quickly fell into the flotsam of history.

On Wall Street there was fierce competition for reputation, and any bank with a history of redeeming their banknotes in specie, at par, were able to issue substantial quantities, in effect financing their balance sheets with zero-interest debt. History has it that JPMorgan marshalled immense power on Wall Street in large part because his widespread reputation for fulfilling his promises preceded him.

Since 1994 the SA government has established a number of agencies to protect the interests of the public and assist in vouching for the integrity of institutions. However, it would seem these are sometimes held as substitutes for business reputation. The market value of trust has thus paled compared to its traditional role.

The assumption is that these institutions and regulations better protect us. However, the three-part state capture dossier prepared by the acting chief justice’s office, coupled with recent corporate scandals, show that the myriad laws promulgated over the past 28 years have not eliminated the “less savoury” side of individual behaviour.

As South Africans we are left wondering how far we are from French economist Frederic Bastiat’s assertion that, “When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorises it and a moral code that glorifies it”

It is from this dark period of corporate malfeasance that the reappraisal of the market value placed on trust and reputation in business practice will re-emerge as corporates and the government seek sustainable solutions to the seemingly uncontrollable level of corruption. The value of board members who are neither “publicly exposed persons” nor tainted by the contents of the Zondo dossier and are upstanding in their personal conduct, will command a substantial premium for the foreseeable future.

Whereas the stock market swiftly punished the stock prices of those corporations whose behaviour rendered the reliability of their reputations questionable, the legal process has seemed to take an inordinately long time to even begin to bring to book those who have apparently acted outside the confines of legality. Guilty parties must be expeditiously punished, for they undermine the archetype that has underpinned the basis of our market system.

We are at a point where I believe the biblical comment of “a good name being better than riches” will contend with the fact that in the surrounding quagmire of malfeasance, trust and reputation are wealth in and of themselves. For we hope those of good ethical conduct will commit to Joseph Pulitzer III’s pledge: “We will illuminate dark places and, with a deep sense of responsibility, interpret these troubled times.” Their sustained commitment to rectitude will help others find the path from error to truth.

Thus, trust and reputation will again be valorised, as they are the appropriate antidote to the financial scandals of the recent past and augur well for a sustainable future for all.

• Thabe is managing executive of Angavu Ethical Solutions.