Tackling the Trust Deficit

Amid frightening volatility and wrenching economic uncertainty, it's easy to understand why small investors seem to be fleeing the stock market. But after years of abuse and financial flameouts, these investors' lack of trust in Wall Street may be the biggest factor fueling their flight.

The last couple of years -- arguably decades -- have provided plenty of reasons for a building sense of mistrust. Goldman Sachs (NYSE: GS  ) and BP (NYSE: BP  ) have become the most recent high-profile examples of the many big institutions whose highly paid managers seem to be only out for themselves. The massive flameouts of Enron and WorldCom still linger in our collective memory as well.

Still, I hope small investors rethink how they view the marketplace. Instead of giving up, we need to take a stand -- and take the market back.

Scary deficits come in many forms
A recent Wall Street Journal article, culled from mutual fund data, suggested that small investors are bailing on stocks. The Journal noted that in 2002, small investors took more money out of the market than they plowed in. From 2007 through 2009, they once again pulled cash out for three years running. The market hasn't endured that long a stretch of withdrawals since 1979-1981.

Students of history know that in the 1970s, investors' aversion to stocks helped sink the market into a lengthy malaise. The WSJ article aptly pointed out that investors took roughly 10 years regain their comfort with stocks.

Negative economic conditions are a good enough reason to give small investors pause. However, the article noted another serious issue: investors' growing distrust of large institutions, including corporations, the government, banks, and of course, politicians. As citizens grow increasingly (and justifiably) worried about our public debt, they're correctly holding these entities responsible for a lot of the damage. No wonder a collective trust deficit seems to be growing in our collective psyche.

Big isn't always beautiful
It's easy to understand why many folks feel this way. Big entities of all stripes seem to easily lose sight of the little guy. Last week, I reported on research into executive pay, suggesting that the larger and more powerful a business (or arguably any entity) gets, the more self-serving, myopic, and even downright mean its leaders can become.

Back in March, one corporate leader had already tuned into Americans' growing disillusionment. Whole Foods Market's (Nasdaq: WFMI  ) founder John Mackey wrote a thoughtful op-ed for The Huffington Post, stating, "American society appears to be undergoing a crisis in trust." He discussed the transformational opportunity in building high-trust organizations now, another extension of his vocal advocacy of conscious capitalism.

As long as folks in the marketplace are trying to learn from their mistakes, and do right by their customers and investors, all is not lost. For all the big names now spattered with mud, there are plenty of other trustworthy and worthwhile companies in which to invest.

To find such businesses, Harris Interactive compiles what it calls The U.S. Reputation Quotient. In its latest iteration, six companies earned an "Excellent" rating: Berkshire Hathaway (NYSE: BRK-B  ) , Google (Nasdaq: GOOG  ) , Johnson & Johnson,  3M (NYSE: MMM  ) , privately held SC Johnson, and Intel (Nasdaq: INTC  ) .

Meanwhile, on the opposite side of the spectrum, nine out of the 10 lowest companies had received government bailouts. Freddie Mac fell to the very bottom.

Standing our ground
I hope that small investors won't entirely flee the market, and that those who have will return. We need to remember that the "invisible hand of the market" isn't just reserved for jerks; it involves all of us.

Let's search for the most trustworthy companies to invest in for the long term. Let's reject companies that seem hellbent on doing the wrong thing, or seem too focused on the short term. Better yet, let's engage in shareholder activism to help these companies clean up their act. Most of all, let's stop using the stock market like a speculative game, making bets without considering companies' true financial health, their ethics, and other important factors.

In addition, let's hold institutional investors accountable, since they've long failed to push back at corporate managers who needed reining in. Individual investors can also demand strong shareholder rights and corporate governance improvements at public companies.

It's undeniably hard to trust the stock market after a decade of damage and disaster. Still, giving up on investing doesn't seem like the right solution. Fighting back to change the market for the better does.

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Berkshire Hathaway, Intel, and 3M are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Berkshire Hathaway and Whole Foods Market are Motley Fool Stock Advisor picks. The Fool has created a covered strangle position on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Berkshire Hathaway and Google. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (15)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 14, 2010, at 4:40 PM, nexdec wrote:

    Alyce-I am the Executive Director of Trust Across America (www.trustacrossamerica.com). We are fighting back to change the market for the better by first building a much needed trust ecosystem with some of the country's top thought leaders. By using a holistic approach, our group is able to identify public companies by industry, who are the most trustworthy according to a collaborative and consensus definition of corporate trustworthiness. There are many companies that aren't just "doing things right" but are "doing the right thing". They should be highlighted, celebrated and given the opportunity to share best practices within their respective industries. With the media's help (and focus on the positive) public perception may begin to change and investor trust can be restored.

  • Report this Comment On July 14, 2010, at 7:56 PM, xetn wrote:

    nexdec: What is "doing the right thing"?

  • Report this Comment On July 14, 2010, at 8:51 PM, nexdec wrote:

    In the context of a corporation, "doing the right thing" involves giving consideration to all related parties, or stakeholders. It's a corporate culture that exhibits ethical behavior, respect and concern, and looks beyond quarterly earnings. Doing things right has more to do with efficiency of resources and/or compliance by the letter of the law, not necessarily what's in the best interest of all stakeholders.

  • Report this Comment On July 15, 2010, at 11:59 AM, catoismymotor wrote:

    + 1 Rec

    One thing I'd like to add is that small investor money will return once small investors have confidence and the spare cash to invest. In the mean time this small investor will continue to DCA as long as he has the cash to do so.

    DD + DCA + LTBH = Happy Cato

  • Report this Comment On July 15, 2010, at 1:03 PM, susan400 wrote:

    Can;'t disagree more "building sense of mistrust. Goldman Sachs (NYSE: GS) and BP (NYSE: BP) have become the most recent high-profile examples of the many big institutions whose highly paid managers seem to be only out for themselves""

    BP - things happen -- GS merchandises stuff, euro bansks do their DD, they wanted to buy that stuff.

    Peolple who don;t understand should be investing.

    susan400

  • Report this Comment On July 15, 2010, at 9:09 PM, catoismymotor wrote:

    At the risk of sounding harsh I would like susan400 to try again at making her point. Her comment sounds mumbled and jumbled.

  • Report this Comment On July 17, 2010, at 2:50 AM, MyDonkey wrote:

    "let's stop using the stock market like a speculative game, making bets without considering companies' true financial health, their ethics, and other important factors."

    TMF could lead by example in considering the ethics of a company such as Altria which sells products that cause cancer. And how fair is it for Altria to privatize profits while dumping the medical costs of smoking-related illnesses on society?

  • Report this Comment On July 17, 2010, at 2:30 PM, susan400 wrote:

    I think it comes down to many like to buy assurity and sell mistrust. For those who are investing with an objective of allocating capital to earn higher returns, obviously the more mistrust the more you want to be invested, the more trust the public has the less you want to be exposed.

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