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…