Integrity Matters
December 3, 2003

Restoring trust can take years

Question: (E-076)

Dear Jim:

Everywhere there are integrity issues: politics, business, education, organized religion and even in the family structure itself. The mutual fund scandal is over the top. Do you have any recommendations for where to turn in these turbulent times?


The places to turn for answers regarding restoring confidence and trust are to the very same institutions you mention as sources of problems. There is little doubt that most individuals are doing a good job - in government service, free enterprise, teaching, spiritual leadership and parenting. Yet, there are those who take advantage of the system and abuse their privileges. They must be rooted out, wherever they bring harm and abuse.

We know that trust has been broken and that confidence has been shattered for millions of investors, customers, religious believers, and the voting public. Fortunately, because of our free press, we have fortunate to have learned about many of these disturbing and sometimes illegal activities. Some of those individuals and institutions being dragged through the headlines may very well be guilty of compromising our culture, our society and even our value systems. How fortunate we are to live in a democracy in which courageous reporters accept the responsibility to blow the whistle on behaviors that are inappropriate.

Restoring trust is a key. Secretary of State, Colin Powell, last month suggested that
"trust" once broken - is hard to restore, harder even than restarting an economy." Powell's comments refer to Iraq and the multiple challenges its people must address. He states: "We must remember that the nightmare that Saddam Hussein inflicted on Iraq lasted longer than Joseph Stalin's tyranny in the Soviet Union. To expect the tragedy of Iraq's past to recede swiftly is unrealistic. Wounds take time to heal, and even when the physical scars disappear, often time psychological ones remain."

Powell's insight and sensitivity can be applied in other areas as well, perhaps nowhere more dramatically than with the recent mutual funds scandals.

Piggy-backing on Mr. Powell's "trust-restoring" comments, and what actions are most difficult to execute, think about how the Boston-based Putnam Investment fund responded to recent allegations. It seems that two senior investment managers at Putnam were charged with using improper trades to profit personally from mutual funds they oversaw. Putnam denied any wrongdoing but confirmed that four money managers had been fired. This scandal has tarred the reputation of mutual funds, traditionally viewed as safe and conservative. Will the recent crack down on mutual funds scare off some of the 90 million people who have invested in them? When might their confidence be restored?

William Donaldson, head of the Securities and Exchange Commission, understands how fragile trust can be when he addresses longer-term implications resulting from the recent wrongdoings of the mutual fund industry. Donaldson knows that until trust is restored and abuses are stopped, all too many innocent investors will lack investment confidence. If the securities industry does not act responsibly to restrain abusive trading, clarify conflicts of interest and demand better disclosure of fees, "You can be sure that...those of us in the government will."

Over and over, we remind our Integrity Matters readers: "It should be common knowledge that free markets must regulate themselves (including those working in mutual funds) or governments will."

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