Gary H. Stern
Federal Reserve Bank of Minneapolis
Carlson School of Management
University of Minnesota
May 19, 2002
Almost immediately after accepting Dean Benveniste's invitation to speak at this commencement, I began to have second thoughts and to wonder whether my acceptance was such a hot idea. After all, what could someone like me, who has spent most of his career at the Federal Reserve in public policy, offer that would be meaningful and valuable, that would resonate with business school graduates looking forward to careers in the private, for-profit sector? From one perspective, answers to the question I just posed are not easy to come by, because the two worldsfor-profit business and public policyare distinct, with different objectives, responsibilities, accountabilities. And while I don't view myself as a bureaucrat, I can understand if bankers or prospective bankers out there see it differently. When our bank examiners show up at your institution, it is probably not comforting to hear we're from the Fed and we're here to help.
But the two worldsgovernment policy and the private sectorintersect, and one of the legitimate and significant roles for government is to establish the rules of the game and make sure they are followed. Where they are not, the consequences can be severe, and fortunes, but more importantly reputations, can be lost. The government may be an effective, after-the-fact policeman, but we all would do well to remember the importance of reputation in considering our business practices and decisions.
Let me continue these remarks with some perspectives on the role of government in our market economy. It may not be widely recognized, except by those of us who study macroeconomic data, but the U.S. economy has turned in a truly remarkable performance over the past 20 years, both absolutely and relative to the other major industrial economies around the world. Economic growth here has far surpassed that of Western Europe, Japan, the United Kingdom and Canada. Our standard of living is well above those of these other nations. Our unemployment rate is generally well below theirs. I don't point this out to sound at all self-congratulatory, but rather out of a sense of deep appreciation of what is possible in the United States. America still is, by almost every metric, a land of great opportunity.
But why has the United States outperformed these other significant economies for the past 20 years? It is tempting to answer this question by pointing to the amazing advances in technology over the period, but that, by itself, can't be the answer because the technology is available worldwide. Another appealing answer is the quality of American higher education, which is clearly the envy of the world and also something I am particularly pleased to acknowledge here. But higher education has been outstanding in the United States for a long time. No, there must be something unique about the American system which has emerged relatively recently and produced these results. Along these lines, I would suggest that a growing commitment in the United States to competitive, market-determined outcomes is part of the explanation for this performance.
Put another way, over the past 20 years or so, government has come to play a somewhat diminished role in the U.S. economy than it had formerly. There are numerous, relevant illustrations of this. For example, there has been a growing commitment to free international trade, and, on balance, trade restrictions have been reduced meaningfully in the United States. Moreover, a wide variety of domestic industries have been deregulated during the past 20-plus years and permitted to compete far more freely for customer business. And there has been a largely hands-off attitude toward merger and acquisition activity; not that all deals have worked well, but the government did not often prejudge their success or failure.
This experience might suggest that when it comes to government, less is more; less regulation, fewer obstacles to trade, diminished concerns about mergers strengthened productivity and U.S. economic performance. But I don't think we should stretch this point too far. The government has important responsibilities in a capitalist, market economy.
We often think of the appropriate role of government in terms of provision of so-called public goods like national defense, the interstate highway system, some aspects of health care and support for education and research, and so forth. These functions are important to be sure, but equally important is provision or regulation of what I call the soft-infrastructure in the economy: adherence to the rule of law, honoring of property rights, assuring equal access to credit, transparency of accounting standards. We generally can take the quality of this soft infrastructure for granted in the United States, which is a tremendous luxury and advantage. We assume that the rules of the game are in place and will be adhered to. In much of the rest of the world, and especially in many developing economies, this infrastructure is only partially in place at best.
Recently, of course, we have had several glaring examples of accounting, and more fundamentally, business ethics gone awry. The rules of the game have been violated. And it has been amazing to observe how quickly a firm can collapse once its reputation is called into question, as in the case of Enron. As Enron's business and accounting practices became suspect, it lost the ability to obtain funding in the financial markets and from banks and other traditional financial intermediaries and was forced to bankruptcy.
Make no mistake; if Enron-type problems are or become commonplace, they pose a serious threat. Confidence in financial reporting could be undermined, and this would adversely affect asset values, especially in all likelihood equity values.
Fortunately, an Enron-type problem should be largely self-correcting. Incentives are such that if I were a senior executive at a publicly owned corporation today, I would act quickly and aggressively to disclose as much information about my business as possible, without giving away competitive secrets or violating any laws, of course. The intent would be to get out in front on the disclosure issue so as to maintain and to bolster confidence. The last thing I would want is to have information, even if innocuous, dragged out in some sort of adversarial proceeding. Meaningful, voluntary increased disclosure strikes me as a very good idea at this point.
While Enron may recover and operate at a scaled-down level post-bankruptcy, its senior officers are unlikely to ever recover their reputations. This is a sobering observation, because at the end of the day none of us has much without our good name. And if you think about it, a solid reputation is absolutely essential in business, where so many transactions are concluded with a handshake at the end of a meeting or an OK over the telephone or the click of a mouse.
In the Federal Reserve, we pay a lot of attention to what we call reputational risk. We mean by this term risk to the Federal Reserve as an institution from the failure to fulfill our responsibilities well and to manage our resources responsibly, or the embarrassment we might cause the organization by the failure to conduct ourselves ethically. Our obsession with reputation risk is one factor which makes us a conservative organization; but so much of what we do in the Fed depends on our credibility, both as an institution and as individuals, and we cannot afford to compromise it.
Recent leaders of the Federal Reserve, namely Paul Volcker and Alan Greenspan, are I think widely and deservedly perceived as men of unquestioned integrity and ethical standards. Having served and worked with both, I sincerely commend them to you as models. They are very different personalities to be sure, but both are dedicated to public service. Both are uncompromising when it comes to intellectual and ethical commitment and both have gone beyond the call of duty in the interest of public policy. There is an old saying to the effect that the harder you work the luckier you get and I think there is something to it.
As you proceed in business, in whatever career, eventually you will have some tough decisions to make. Most, if not all, are likely to have an ethical component, and many will affect your reputation. I have found that difficult decisions really are not so daunting and complex once I can articulate the decision and the reasons for it clearly and convincingly, and in a few words or at most in a few sentences. If I can't pass this self-imposed test, then I need to think further, and perhaps consult further, before deciding.
And let me offer one other piece of advice as I conclude these remarks. Most of you have a 30- or 40-year business career ahead. This means that for at least five days a week, 200 plus days a year, for say 30 years, you will get up in the morning and go to your job. Given the required time and effort, make sure you do something you genuinely enjoy and find of value. I realize that real world responsibilities may interfere with this admonition for a time, because income has to be earned and bills have to be paid. But if you are going to do it virtually every day, make sure you like it. Look forward to going to work, not just because it makes life far more pleasant, although it does, but also because you will find that with enthusiasm and commitment, you will do a better job and will, almost automatically, be rewarded.
In closing, let me extend sincere congratulations to all the graduates and their family and friends here today. In many ways, graduation is just a beginning, but it is also a significant accomplishment. So I hope you will celebrate the occasion, because you deserve to.