Investment purpose and you

Growing up, I always had dreams of becoming a teacher.  My mother was a teacher and I used to spend a lot of time at her school, wearing her oversized heels and pretending to teach imaginary kids mathematics while waiting for her to finish classes. Becoming an actuary, particularly one who worked in the investment sector, was far from my mind. But I was an eager and somewhat focussed math student and the rest is history. Like many I started working in the investment industry, very passionate about what I was doing, but not having a clear idea on what my purpose was or the purpose of the industry which I operated in.

But purpose is important. Morten Hansen in his recent book, Great at Work, argues that passion must be connected to a strong sense of purpose. He observes that people who are passionate about their work, but have no sense of purpose, do not perform as well as the top performers who have matched purpose and passion.

So where does this sense of purpose come from? As professionals we know that the investment industry is a highly complex, interconnected, reflexive and non-linear ecosystem. How are we as agents in the industry supposed to have a clear sense of purpose in an ever shifting environment and why does it even matter? Arguably, if we can improve our collective understanding of the industry’s purpose, as individuals we can develop a stronger sense of purpose. So what is the purpose of the investment industry? Let’s deal with this question first.

The purpose of investment

Saker Nusseibeh, chief executive of Hermes Investment Management, argues in his white paper, The why question, that the investment industry has concentrated so heavily on the mechanics of its function (beating an index, providing savers with above-inflation nominal returns) rather than its purpose that the financial system has become entirely separate from the world in which savers live and in which they will retire.

So what is the industry’s purpose? First, let’s get our terminology straight. When we talk about the industry’s purpose, I don’t mean to imply that this is something that we can all simply sit down and agree on. The industry is a collection of investment firms, asset owners, consultancies, and a host of other intermediaries, who contribute to its functioning and therefore define its purpose.  While the industry is a ‘thing’ – a complex ecosystem – it does not have top-down control over its agents; it is an emergent system with an emergent purpose. So it stands to logic that to fully understand the industry’s purpose, we must understand how it works.

Let’s start at the organisational level. Organisations use their capital to generate goods and services. These goods and services can be either progressive or regressive to contributing to the wealth and well-being of society (think solar farms versus tobacco). According to the CFA Institute, investment firms can be said to have two overlapping functions in this system: wealth creation (mobilising financial capital for jobs and growth) and savings and investment (deploying investment services for wealth and risk management). In short, investment firms’ primary export to other ‘real world’ firms is their portfolio outcomes.  In a previous article, we argued that investors are best served by a focus of the industry on the following activities:

  • Engaging with company management on the best ways to generate sustainable long-term growth, and manage the risks that might impair a company’s prospects (so stewardship and engagement have a fundamental prominence)

  • Allocating investors’ assets in a way that provides them long-term exposure to those sectors and companies that are best-placed to benefit from the evolution of society’s needs – the ones most likely to capture a growing share of overall consumption. With this reframing, it is reasonable to expect new investment solutions to emerge and existing ones to evolve.

So the investment industry’s purpose goes beyond the traditional view of efficient allocation of capital. The industry’s actions have impact, both through direct allocation to economic activity and through indirectly influencing the companies it invests in through stewardship and engagement.

While the industry’s effective purpose is an outcome of how organisations and individuals within it behave, that purpose can be shaped if there is broad enough consensus. The CFA Institute proposes in its 2017 Future state of the investment profession report that ‘the fundamental purpose of finance is to contribute to society through increases in societal wealth and well-being’. But there is one step further to be added as without an overarching and common target, society’s ‘wealth and well-being’ is subject to misinterpretation. For a clear statement of what societal wealth and well-being includes, a good place to look is at the UN’s Sustainable Development Goals (SDGs). These universal set of goals, targets and indicators have been agreed by 193 member states, cover a broad range of social and economic development issues and are expected to frame government agendas and political policies at least until 2030. The SDGs are arguably the most objective reference point for determining what is good for society, with unarguably beneficial goals such as ending poverty, hunger, achieving gender equality and improving access to clean water and sanitation.  In short, the SDGs point to a common language which the great majority of economies (and hence industries) can rally around. This can be used to focus the target for a purposeful investment industry – to enable the creation of sustainable value, through increases in societal wealth and well-being in support of the universal SDGs. 

Why your purpose matters to the wider industry

So back to the first question: how are we as agents in the industry supposed to have a clear purpose in an ever shifting environment and why does it even matter? It is useful to have a better understanding of the industry’s purpose, but as previously noted, the industry is an emergent system which is a product of the organisations and individuals within it. The industry’s purpose emerges from the purpose of the agents within it. A purposeful industry (aligned to the SDGs) can only emerge if there are sufficient organisations which align with that purpose (either through intrinsic or extrinsic motivations). And an organisation is only as good as the people within it. If the dials on the compass (purposeful people, organisations and the industry) do not align then parts of the industry ecosystem breaks down (sometimes to systemic proportions – think the Global Financial Crisis). So the SDGs offer a clear way forward for the industry as a whole. And the clearer the industry’s purpose, the more likely the individuals working within it will be able to develop the strong sense of purpose with which I started this piece. In doing so, we reinforce the sense of purpose at the industry level.

A sense of purpose – at both the individual and the industry level – is sorely needed. State Street Centre for Applied Research and the CFA Institute’s 2016 study, Discovering phi: motivation as a hidden variable of performance, notes that only 5% of industry professionals say they remain in the industry to contribute to economic growth; only 28% say that they remain in the investment management industry for the purpose of helping clients achieve their goals. These are worrying statistics. The study goes on the state that individuals that have a mindset to deliver performance that is driven by purpose and embedded by habits and incentives (‘phi’) contribute to better organisation performance, client satisfaction and are better engaged. This purpose-driven motivation is fertile breeding ground for the range of new skills needed by individuals to ensure the future sustainability of our industry: cognitive flexibility, creativity, ownership and corporate citizenship.

In short, understanding and connecting your role to the broader purpose of the industry and your organisation is important – it directs behaviour and influences results. Individual purpose is validated by a strong culture, underpinned by unselfish leadership and linked to an organisation’s passion for serving its clients, its people, its investors and the wider society. Purpose, trust and values are all connected.

The investment industry cannot thrive without the trust of wider society that it will obtain fair and sustainable results from its services. To gain this trust we, as building blocks of the industry, need to collectively agree the broader purpose of investment and better understand how our actions connect to this purpose. We need to shift the balance to improve the value proposition to society. Without that, we are in danger of losing our social licence to operate.