Return on Integrity: The New Metric for Financial Performance

Return on Integrity: The New Metric for Financial Performance

By Barbara Stewart, CFA Posted In: Drivers of Value, Economics, Leadership, Management & Communication Skills, Portfolio Management, Standards, Ethics & Regulations (SER)

What is integrity?

From Wikipedia:

“The word integrity evolved from the Latin adjective integer, meaning whole or complete. In this context, integrity is the inner sense of ‘wholeness’ deriving from qualities such as honesty and consistency of character. As such, one may judge that others ‘have integrity’ to the extent that they act according to the values, beliefs and principles they claim to hold.”

How can personal integrity influence business success?

Kim Shannon, CFA, is the president and co-chief investment officer (CIO) of Sionna Investment Managers in Toronto. Shannon’s biggest business risk is a perfect example of leading with integrity and also shows how integrity comes in different flavors. Sometimes it is about ethics; sometimes it can be about fair dealing among business partners:

“When I started my own firm, the biggest risk we took was firing our founding client who we sub-advised on mutual funds: They represented 90% of our revenues. After a successful string of years with solid outperformance and significant growth in assets, they demanded a 40% fee cut from our original contract. The suggested fee would have been the lowest fee in the industry and unreasonable given the quality of returns and sales support. After discussing the issue with our board, we saw they were not acting in good faith as long-term business partners, and we decided we were better off severing our relationship with them. Two weeks later, they offered to return to the original contract, but we refused as we had already made a new commitment. I personally funded the firm for over a year and we kept all our staff.

“Today we are 50% owners of our mutual funds and share all the revenues and expenses and profits. No client represents more than 15% of our business, and our business is largely institutional relationships. Now, with just over $5 billion of AUM, we have the most AUM of any female-led asset firm in Canada, over half our portfolio managers are women, and three quarters of our executive team are women. For reference, the industry norms are that around 10% of portfolio managers and executives are women.”

Obviously, this kind of integrity can have a big payoff, both in terms of money and in terms of redressing the gender imbalance in finance.

Why does the financial industry need to care about integrity?

Rob Lake is the founder of Authentic Investor, a consultancy firm based in London. Lake explains why integrity needs to be a crucial component of today’s investment decisions:

“Integrity for an investment professional now means paying full attention to the impacts of the way we invest — climate change, human rights, diversity — the whole agenda of ESG and the UN Sustainable Development Goals. For example, is a portfolio helping to reduce global greenhouse gas emissions or increase them? We now have increasingly sophisticated ways of measuring this: e.g., we can calculate how many tons of CO2 a given investment generates or saves. And we have mounting evidence that investments with this lens generate superior financial returns.

“This is really about purpose — why are we investing, and for whom? I find in my advisory work that this is a question that more and more investors and asset managers want to engage with. We want to make values permissible and visible in investment and finance; to enable people to align their purpose and values with their work; to change the culture of finance.”

Today’s focus on integrity and purpose is forcing the financial industry to redefine what it needs to look like.

Why do our financial metrics need to evolve?

Marlene Nørgaard Carolus is the CEO of MyBanker in Denmark. Nørgaard recently made a bold career shift, moving from a senior executive leadership position with a major Nordic bank to running MyBanker — a fintech company whose tagline is, “Let the banks compete to get you as a customer.” This is about “greater good” and “purpose.” She has a clear vision of what the future holds for the financial industry.

“In my opinion, financial institutions have gone way over the top to satisfy institutional shareholders on ‘return on investment.’ This myopic focus on a double digit ROI may please shareholders, but it has resulted in employees becoming redundant and customers who have been unhappy for a very long time. Banks and investment firms might have forgotten about social impact. For whom are you running the bank?

“In the old days, you trusted your bank to deposit your money and give you back interest or dividends. Today, the bank reassigns your money to hedge funds or the like. The exclusive goal is to profit as much as possible on the customer’s money . . . and the customers are paying for it. With the current model, it isn’t possible to keep shareholders, customers, and employees happy at the same time. It’s a catch-22.”

Is Return on Integrity the new metric for business performance?

Paul Ross is the director, Middle East, for LONDON Advertising, which is based in Oman. He also happens to be my brother. Ross believes that a CEO’s main job today is building brand and reputation:

“The context for corporations putting more emphasis on integrity is convincing. Governments are failing to prepare us for the future and are less trusted — particularly in the US — and businesses are expected to lead on some of society’s most pressing issues.

“A strong brand is a business’s most valuable asset. You only need ask consumers. A CEO’s number 1 task is ensuring their company is trusted, according to respondents in the Edelman Trust Barometer. In other words, consumers believe your CEO’s number 1 task is building brand and reputation. And Return on Integrity can help redefine how business operates.

“It’s no marketing secret that integrity plays a critical role in how you go about building relationships with consumers — and that translates indirectly to financial performance.”

Can we calculate Return on Integrity?

Up until now, the measure of a brand’s reputation was simply its stock price. Regardless of whether you personally approved of an “integrity-focused” ad campaign, such as recent initiatives from Nike and Gillette, the stock market was the only official judge.

What does the future hold?

According to Nørgaard:

“We are seeing a paradigm shift where millennials, women, and entrepreneurs are now valuing integrity. They want something different from their banks and in society. If you believe in integrity, you might not achieve a double digit ROI — you would be happy with an ROI of 4%–6%.

“Financial institutions will be scored on ethics. What if you knew that a company had the highest ranking for ROI as Return on Integrity? Wouldn’t you be way more interested in buying their stock? The concept of integrity should be number 1 for any financial institution.”

Return on Integrity is the new ROI.

Whether we are talking about leading with personal ethics or corporate brand reputation, Return on Integrity will be the new metric for financial performance. Importantly, the two ROIs don’t have to be unaligned.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/kmlmtz66

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