Archive for October, 2014

Sylla & Steiger: Corporate Morality

October 31, 2014


October 31, 2014

Richard Sylla wears many hats. He is the Henry Kaufman professor of the History of Financial Institutions and Markets and a professor of economics, entrepreneurship, and innovation at New York University Stern School of Business where he teaches multiple courses. He is the author of several books, including co-authoring an industry classic, A History of Interest Rates. His writing has appeared in numerous publications. He is on the editorial board of many publications and he is the Chairman of the Board of Trustees of the Museum of American Finance, a must see museum located at 48 Wall Street in the old Bank of New York building, the bank founded by the nation’s first Treasury Secretary Alexander Hamilton, who is the focus of his next project.

Watch the related WEALTHTRACK episode.

Read The Paper ‘The American Corporation’

October 31, 2014

Read The Paper ‘The American Corporation’

Download it here. [.pdf]

Watch the related WEALTHTRACK episode.


October 31, 2014

How would you rate the overall state of moral values in this country today? That’s the question the Gallup organization asks Americans every year. This year’s answers were not atypical. Only 2% of Americans surveyed rated our moral values as excellent – 42% said they were poor – and 74% felt that values were getting worse, not better. How does this translate to the business world? We’ll discuss the state of corporate morality. Financial historian Richard Sylla and award-winning financial editor Paul Steiger discuss how companies have become fixated on short-term stock prices to the exclusion of broader, long-term goals. Continue Reading »


October 31, 2014

How would you rate the overall state of moral values in this country today? That’s the question the Gallup organization asks Americans every year. This year’s answers were not atypical. Only 2% of Americans surveyed rated our moral values as excellent – 42% said they were poor – and 74% felt that values were getting worse, not better. How does this translate to the business world? We’ll discuss the state of corporate morality. Financial historian Richard Sylla and award-winning financial editor Paul Steiger discuss how companies have become fixated on short-term stock prices to the exclusion of broader, long-term goals.

CONSUELO MACK: This week on WEALTHTRACK, the state of corporate morality. Is the primary responsibility of American companies to their stockholders, or to a broader set of stakeholders as well, including employees, customers and the community? Financial historian Richard Sylla and award-winning financial editor Paul Steiger share their perspectives next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. How would you rate the overall state of moral values in this country today? That’s the question the Gallup organization asks Americans every spring. The latest answers were not atypical. Only 2% of Americans surveyed rated our moral values as excellent, 19% rated them as good, 36% said they are fair, and 42% said they were poor. And 74% of Americans surveyed felt that values were getting worse not better.

Well, how does this translate to the business world? What is the state of corporate morality?

We don’t have a poll but we do have a research paper on The American Corporation written by two NYU Stern School of Business professors, Ralph Gomory and Richard Sylla. Dick Sylla has been a regular on WEALTHTRACK over the years.

It’s a history of the American corporation and how it has evolved since the nation’s founding in the late 1700s. According to the paper: “The United States from its earliest years led the world in making the corporate form of business organization widely available to entrepreneurs. Starting in the 1790’s, corporations became key institutions of the American economy, contributing greatly to its remarkable growth.”

Sylla and Gomory provide a brief history of how the mission and responsibilities of corporations have changed over the last two centuries, particularly in recent times, which brings us to the topic at hand – values.

They quoted two paragraphs which highlight the changes in attitude that have occurred among corporate managers about what their primary responsibilities are.

In 1981 the Business Roundtable, an organization of the top executives of large corporations issued a statement recognizing the stewardship obligations of corporations to society. “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs and build the economy.”

Gomory and Sylla then contrast that to a Business Roundtable statement made in 1997. “The principal objective of a business enterprise is to generate economic returns to its owners…if the CEO and directors are not focused on shareholder value, it may be less likely the corporation will realize that value.”

In less than twenty years prominent executives had narrowed their primary mission statement from providing quality goods and services, creating jobs and building the economy to maximizing shareholder profits.

To discuss this evolution, and some would say revolution, in corporate priorities we are joined by Richard Sylla, the Henry Kaufman Professor of the History of Financial Institutions and Markets and a Professor of Economics, Entrepreneurship and Innovation at the New York University Stern School of Business. Sylla is also the Chairman of the Board of Trustees of the wonderful Museum of American Finance of which I am also a member.

Our other guest is Paul Steiger, Executive Chairman of ProPublica’s board where he was the founding Editor-in-Chief, CEO and President. Prior to that Steiger was the Managing Editor of The Wall Street Journal from 1991 to 2007 where I had the privilege of working with him. During his tenure the Journal won 16 Pulitzer Prizes and personally he has earned just about every award given in journalism.

I began the interviewing by asking Sylla for a brief history lesson. How did corporations get from their broad mandate of responsibility to many stakeholders to the current narrow focus on shareholders?

RICHARD SYLLA: I think it began perhaps with Milton Friedman writing a famous essay around 1970 or ’71. I think it was in The New York Times Magazine, and his point was that a corporation’s sole duty is to maximize profits, and a lot of other people thought, well, corporations do other things. They may help the art museum in the town, or they may build a baseball diamond for the kids. Milton Friedman said that’s not what a corporation should do. It might be a good thing to do. Let philanthropy do it. Let the government do it. Then American corporations in the 1970s suffered a lot of competition from overseas that they didn’t have in the ‘50s and ‘60s because of the devastation of World War 2. In the ‘70s they had a lot of competition and…

CONSUELO MACK: So globalization was a factor. Right?

RICHARD SYLLA: Globalization was a factor in making corporations for the first time in some decades have a lot of international competition, and they suffered a little bit from that, and I think then as they were suffering, academics said, “Oh, the corporations really need to do a better job, and the way to do it is, picking up on Milton Friedman, they should focus on maximizing shareholder value. They shouldn’t do all these other things. They shouldn’t think about the workers that much or the suppliers or the community. Just maximize profits”, and this was an academic thing. I’m an academic. I saw it happen.

CONSUELO MACK: So Paul, from your perspective as a financial journalist having seen the evolution that’s occurred, what do you see as the drivers behind this?

PAUL STEIGER: Well, I subscribe to everything that Dick just said, and in addition to that, Wall Street got into the game, first putting a few toes in the water and then whole hog because they saw an opportunity to shine a spotlight on underperforming CEOs and show all the money that went to their golf clubs and the money given to the symphony and the baseball stadium and the other things that Dick cites, and to say you should let me run the company instead or some people that I designate.

CONSUELO MACK: So these are the corporate raiders. Right?

PAUL STEIGER: Corporate raiders come piling in, and they see a great opportunity to make huge sums of money, and they start doing tender offers, doing a variety of actions to dislodge what they regard as inept or lazy management, and first they’re blocked by a variety of legal strategies, you know, the poison pills.

CONSUELO MACK: Poison pill.

PAUL STEIGER: Where is your company headquartered? So what laws apply? The Wilmington courts, because so many companies are incorporated in Delaware …

CONSUELO MACK: in Delaware.

PAUL STEIGER: Got to play a role, but step by step the raiders figured out how to get around these provisions, and Michael Milken and his junk bonds came into the game to be used to finance takeovers, and all of a sudden there was an opportunity for Wall Street to get rich, and then there was an opportunity for corporate executives to get rich because there’s this notion that’s very big in your paper of assigning options to corporate executives, and because the options would not cost the company anything unless the profit surged, the stock price went up and the options were exercised, it was kind of free money for the company to play with. So all of a sudden you had corporate executives benefiting from this trend, too. Instead of cowering and trying to get their lawyers to get defenses against being raided, they said, “Hm, just incent me, and I’ll raise your profits.”

CONSUELO MACK: So what went wrong, Dick? I mean, it just feels like there’s a lot that is imbalanced now.

RICHARD SYLLA: Well, a quarter century ago we economists thought stock options were really great because people were saying you want to maximize shareholder value, but the shareholders are one entity. The management of the corporation is another entity. So how do you align the interests of the stockholders and the highest stock price with the interest of the managers? And the solution was to give the managers a lot of stock options, because then they got rich too as the stock went up. What went wrong I think… so this was considered to be a solution to a problem. It became a problem roughly a decade later when we found out that managers sometimes were manipulating the books of corporations just to make the stock price go up in the short run so their options would be valuable, and they cashed them in.

CONSUELO MACK: What should the responsibilities of the corporations be? As an historian, Dick, so looking back, what have they been historically and what are they legally?

RICHARD SYLLA: Well, part of my work as an economic and financial historian is to go back and look at the corporation from its earliest days in the U.S., and at that time to become a corporation you had to get a special act of a state legislature, and often the corporations were not lasting forever as they are today, or at least until they fail. Then they would say, “Well, we’ll give you a corporate charter.” New York might give a company a corporate charter for 20 years and then re-examine it a bit later, and into the charters they could sort of write some responsibilities. It’s very interesting. Often they were for banks, but banks were among the earliest and biggest corporations. When Citibank was founded, it had been charter-specified that it had to spend $100,000 on education in New York.


RICHARD SYLLA: The state might have done that. Baltimore banks I think were asked to … it was a part of their charter to sponsor an orphanage or to build a turnpike, maybe even manage the turnpike, and since these companies wanted corporate charters, they were willing to take on these responsibilities. Over time, we got away from that. You know, the corporations seemed to have responsibilities in its early days to go along with its privileges, but over time it seemed like we’ve moved in the direction of the corporation has more and more privileges or rights and fewer responsibilities. That’s been a trend in American history.

PAUL STEIGER: I think one of the eras that is frequently compared to today is the Gilded Age of the late 19th century into the early 20th century. I mean, I’ve read about how Teddy Roosevelt, you know, the great trust buster. Well, his first view was that government shouldn’t be messing around in…

CONSUELO MACK: Private enterprise?

PAUL STEIGER: Corporate decision making. They should make their own decisions. He became influenced by what he saw, you know, his relationship with the muck-raking journalists that showed the abuses that came with the great industrialization in that period and great income inequality in that period, just as we have today. And he became a famous striver for setting up government regulation to counteract the naked power of companies. He was not so much calling for corporate responsibility as calling for oversight of companies, but by that time the structure that Dick was referring to had already been peeled back, at least for some corporations, and the railroads and Rockefeller’s oil trust could operate pretty much as they chose.

CONSUELO MACK: And that’s when the pendulum swung to the government getting involved, Dick. But moving fast forward to the 20th century and now the 21st century, what is it that corporations should be expected to do? If it’s not focused on the shareholders, who are the other stakeholders that corporations should be paying attention to, and do they have any sort of legal requirements to do so?

RICHARD SYLLA: Well, some people think that there’s a legal requirement to maximize shareholder value. That turns out not to be true.

CONSUELO MACK: So it’s not a legal requirement.

RICHARD SYLLA: It’s not a legal …I think the laws actually say that the responsibility of the directors of a corporation is to the corporation. It’s more or less like what is in the best interest of the corporation. If you’re a director of a corporation, your fiduciary duty is to move the corporation to decisions that are in the best interest of the corporation. Notice that that doesn’t say the best interest of the stockholders, and so people say, well, what is in the interest of the corporation? It’s interesting that recently we had the IPO for Alibaba, the Chinese company, and the head of that, a man named Jack Ma, said when they were going around in the …

CONSUELO MACK: Doing the circuit.

RICHARD SYLLA: The circuit to get investors interested in the stock, he said, “I want to tell you right now that stockholders don’t come first in my company. They come third. First comes the customers. Second comes the employees. Stockholders then come third,” and back in the days when we talked more seriously about stakeholder values, people added, “Well, the community and the suppliers of the corporation, maybe the general government or society. They’re stakeholders in a corporation”. So there have been maybe five or six stakeholders in a corporation, not just stockholders that have been identified over the course of history.

CONSUELO MACK: And Paul, looking at the Alibaba for instance, well, we’ll see whether or not Jack Ma actually lives up to his philosophy and his priorities, but have you seen … do companies get rewarded for this kind of a more enlightened sense of a larger idea of many constituents as opposed to the shareholder, or is it possible for a CEO to emphasize those instead of putting the shareholder first in this day and age?

PAUL STEIGER: I think it depends on the era you live in and the industry you live in. If you have a company that is dominating its industry, you know, Google for example, walk through any of Google’s offices and the things they provide to employees. I mean, the office in New York has got multiple little restaurants with different chefs.

CONSUELO MACK: So it’s very employee-friendly.

PAUL STEIGER: It’s very employee-friendly, and they started off first do no evil. This is our rule. Now I was just in Germany. The Germans are terribly afraid of Google, and they think Google is doing all kinds of evil collecting information about them, but the point is that the company is very robust financially, and it’s growing, and it takes a very employee-favorable point of view. In the era that Dick was talking about, you know, in the ‘50s and ‘60s when the U.S. was the only economic power in the world after World War 2, nobody could compete with our companies until we got into the ‘60s, and then they could compete like crazy, but that allowed all kinds of CEOs to act as corporate citizens, community citizens, and they were rewarded cyclically for doing this, but when you get into an industry that is under pressure at a time which is saying you either meet your quarterly numbers or …

CONSUELO MACK: Or you’re out.

PAUL STEIGER: You’re out, then the focus becomes on meeting those quarterly numbers.

CONSUELO MACK: Is it desirable to get back to the broader sense of companies being good citizens as well?

RICHARD SYLLA: Well, I think that’s what we want to happen. I mean, for one thing, what is a corporation? I mean, it’s not something that is just natural living in the forest and comes out. It’s a creation of government, and when I go back and look at those early American corporations, they were created by governments, and the government said you have a certain social responsibility. Of course, we got away from that system because we put in what were called “General Incorporation Laws”. It turns out that the legislative chartering of corporations on an individual basis led to certain amounts of corruption. The companies in the business tried to bribe the legislators not to create competitors, and the ones who wanted in would bribe the legislators to get a charter, and so that become a bit of a corrupt system which is why we moved to the modern system and made it an administrative, not a legislative function of government. If I want to incorporate, I go on the internet and print out a two-page form from Albany, New York and fill it out and send it in with a check, and five days later I’m Dick Sylla Incorporated. So that became easier, and I think somewhere along the way it’s probably a good system. It’s very easy to form a corporation, and the U.S. has by far more corporations than any country in the world, but we lost a little bit of that sense of corporate responsibility when we moved to this system.

PAUL STEIGER: So the thing is, what’s important? What do we want to emphasize that we want to alter the behavior of companies. When I read your paper, I mean, one of the…

CONSUELO MACK: This is The American Corporation which is on WEALTHTRACK’s website.

PAUL STEIGER: One of the things that fascinated me was your argument about how the shifting of the American trade balance in the face of classic mercantilist policies…

CONSUELO MACK: From China largely.

PAUL STEIGER: From China and aided by Wal-Mart and others distributing increasingly well-made and increasingly cheap goods has worked to the benefit of lots of U.S. based multinational corporations, but it has not just the normal fear of imports that we learned to dismiss, but it’s systematically weakened the fabric of U.S. society, the U.S. economy, and that if you change the structure of the corporation, you could make those incentives change

CONSUELO MACK: What’s the solution really is the question.

RICHARD SYLLA: Well, I don’t think we can expect our corporations to do things differently just because we tell them it’s a nice thing to do.

CONSUELO MACK: Absolutely not.

RICHARD SYLLA: I think we have to create sort of incentives to make it in their interest to do things. In our paper, Ralph Gomory and I actually talked about, there can be tax incentives. Maybe you lower your tax rate a little bit by creating more jobs in the United States, more good jobs.

CONSUELO MACK: In the United States.

RICHARD SYLLA: If we actually had a tax system that said you can lower your tax rate if you create more good jobs in the United States, corporations would probably say, “Okay, now we can benefit by doing that.” We don’t have that right now. So I think basically corporations will respond to economic incentives, and so we can talk about designing taxes, maybe trade regulations that will make it in the interest of corporations to do what we think as a society would be better for our society.

CONSUELO MACK: We at the end of every WEALTHTRACK have a question that we ask our guests, and that is if there is one thing that all of us should own in a long-term diversified portfolio what would it be? And maybe in this case it’s if there’s one thing that we should do, a company should do or the government should do to encourage corporations to consider being a broader citizen as opposed to a maximizer of shareholder value, what would it be? Paul, do you have one suggestion?

PAUL STEIGER: I’m glad you didn’t ask me to pick a stock. That would really…

CONSUELO MACK: That comes next.

PAUL STEIGER: That would really be a problem for me, but I think that the one thing in the economic sphere that I would like to see government do is to revive the notion of antitrust but for the 21st century. I mean, I look at certain industries which are increasingly important and increasingly dominated by…


PAUL STEIGER: Well, cable is one.


PAUL STEIGER: I mean, if this merger between Comcast and Time Warner Cable goes through, the combined company will have close to half of the cable business in America. Verizon is getting an enormous share of the telecom’s business. Google has a huge share which admittedly it earned with terrific importance…


PAUL STEIGER: Of search. Facebook, which is a brand new company but is operating in a way to try to dominate the social media landscape, and what is good behavior? What is sort of earned monopoly? And even when the monopoly is earned, should you be allowed to keep it?

CONSUELO MACK: Your recommendation. What’s the one thing that could be done to bring … ?

RICHARD SYLLA: Oh, I’m going to be bolder and more reckless than Paul. Since I was impressed by Jack Ma’s statement that in my company the customers come first, the employees come second …

CONSUELO MACK: Employees second.

RICHARD SYLLA: And the shareholders come third, I’m going to say …but with a qualification … I’m going to say maybe I would buy some Alibaba stock as a small part. You get diversification with China. You get this notion of corporate responsibility stated by the head man of the company, but I’m a little worried that our stock market’s been going up for five and a half years now, that it may be a little high, and so these things don’t go on forever. I’m thinking that maybe you’ll be able to buy your Alibaba stock a little cheaper down the road than you can now. So don’t rush out and buy it tonight or tomorrow, but wait for that next drop in the stock market

CONSUELO MACK: Back to first principles. Thank you, Dick Sylla. Thanks so much for being on WEALTHTRACK. Paul Steiger, it’s great to have you back as well.

RICHARD SYLLA: My pleasure.

CONSUELO MACK: At the close of every WEALTHTRACK we try to give you one recommendation to help you build and protect your wealth over the long term. This week’s Action Point is a simple one: Read the paper The American Corporation by Professors Sylla and Gomory. It’s educational and thought provoking.

It also might help you become a better investor by thinking about how companies treat all of their constituents. Those that think and act in broader terms tend to be the best managed, and most enduring. The paper is available on our website.

While you are there you can also click on our EXTRA feature and hear about Professor Sylla’s next project which begins with Alexander Hamilton, a largely unrecognized financial genius.

Thank you so much for taking the time to visit with us. Have a great weekend and make the week ahead a profitable and a productive one.

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