The Federal Reserve Board eagle logo links to home page

Remarks by Chairman Alan Greenspan
Commencement address
At the Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania
May 15, 2005

Dean Harker, members of the faculty, Wharton alumni, friends and families and, especially, members of the 2005 graduating class. I have more in common with you graduates than people might think. After all, before long, after my term at the Federal Reserve comes to an end, I too will be looking for a job.

I am delighted to join in celebrating your achievements and promise. You are being bequeathed the tools for creating a material existence that neither my generation nor any that preceded it could have even remotely imagined as we began our life's work. What you must fashion for yourselves are those values that will enable you to contribute and thrive in a world that is becoming increasingly competitive and frenetic.

The creative abilities of this graduating class and those of your contemporaries will determine the magnitude and extent of American prosperity in this century. And the ideas and values that you employ in these creative endeavors will shape the future state of our cultural, legal, and economic institutions.

You will doubtless foster advances in science, engineering, and business management. But scientific proficiency will not be enough. Technology is a tool that, unless guided by a set of ethical principles, is of qualified value.

The principles governing business behavior are an essential support to voluntary exchange, the defining characteristic of free markets. Voluntary exchange, in turn, implies trust in the word of those with whom we do business. To be sure, all market economies require a rule of law to function--laws of contracts, rights to property, and a general protection of citizens from arbitrary actions of the state. Yet, if even a small fraction of legally binding transactions required adjudication, our court systems would be swamped into immobility, and a rule of law would be unenforceable.

Of necessity, therefore, in virtually all our transactions, whether with customers or with colleagues, with friends or with strangers, we rely on the word of those with whom we do business. If we could not do so, goods and services could not be exchanged efficiently.

Trillions of dollars of assets are priced and traded daily in our financial markets. Before recent technologies enabled transactions to clear and settle virtually in real time, most of the vast volumes of trades were not legally binding for days. Their validity rested on trust. Even today, much of business is transacted on parties' undocumented verbal agreements. We take this for granted and rarely pause to ponder how unusual this practice is.

Moreover, even when followed to the letter, laws guide only a few of the day-to-day decisions required of business and financial managers. The rest are governed by whatever personal code of values market participants bring to the table.

Trust as the necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation became a valued asset. Throughout much of that century, laissez-faire reigned in the United States as elsewhere, and caveat emptor was the prevailing prescription for guarding against wide-open trading practices. In such an environment, a reputation for honest dealing, which many feared was in short supply, was particularly valued. Even those inclined to be less than scrupulous in their personal dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.

To be sure, the history of world business, then and now, is strewn with Fisks, Goulds, Ponzis and numerous others treading on, or over, the edge of legality. But, despite their prominence, they were a distinct minority. If the situation had been otherwise, late nineteenth- and early twentieth-century America would never have realized so high a standard of living. Indeed, we could not have achieved our current level of national productivity if ethical behavior had not been the norm or if corporate governance had been deeply flawed.

* * *

Over the past half-century, societies have chosen to embrace the protections of myriad government financial regulations and implied certifications of integrity as a supplement to, if not a substitute for, business reputation. Most observers believe that the world is better off as a consequence of these governmental protections. Accordingly, the market value of trust, so prominent in the 1800s, seemed by the 1990s to have become less necessary.

But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice. After the revelations of recent corporate malfeasance, the market punished the stock and bond prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. But in the wake of the scandals, the Congress clearly signaled that more was needed.

The Sarbanes-Oxley Act of 2002 appropriately places the explicit responsibility for certification of the soundness of accounting and disclosure procedures on the chief executive officer, who holds most of the decisionmaking power in the modern corporation. Merely certifying that generally accepted accounting principles were being followed is no longer enough. Even full adherence to those principles, given some of the imaginative accounting of recent years, has proved inadequate. I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act's details points the way.

But the act importantly reinforced the principle that shareholders own our corporations and that corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use. But as our economy has grown, and our business units have become ever larger, de facto shareholder control has diminished. Ownership has become more dispersed and few shareholders have sufficient stakes to individually influence the choice of boards of directors or chief executive officers. The vast majority of corporate share ownership is, of course, for investment, not to achieve operating control of a company.

Thus, it has increasingly fallen to corporate officers, especially the chief executive officer, to guide the business, one hopes by what is perceived to be in the best interest of shareholders. To be sure, senior officers in today's corporations no longer have the dominance that they were able to achieve prior to the revolution in information technology. A decade ago, senior officers of a corporation could tightly control, if they chose, access to key information systems. Those senior officers could have far greater knowledge of the workings of their business than others and, as a consequence, were less subject to challenge when making day-by-day tactical and strategic decisions.

Arguably, with information systems now accessible to broader ranges of managers and other employees, the monopoly power that proprietary information affords has been significantly reduced. Moreover, the availability of vital information now often extends beyond the borders of the company to suppliers and customers as well. A generation ago, for example, a purchasing manager rarely divulged to a supplier the state of the company's inventory position. It was presumed that such information in the hands of suppliers would undermine the bargaining position of the purchasing manager. Today such information is broadly and routinely shared to facilitate just-in-time supply systems. In general, technologies may be in the process of facilitating a much broader access to information, with the consequence that CEOs could increasingly face more-careful monitoring.

It seems clear that, if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. Companies run by people with high ethical standards arguably do not need detailed rules on how to act in the long-run interest of shareholders and, presumably, themselves. But, regrettably, human beings come as we are--some with enviable standards, and others who continually seek to cut corners.

Rules exist to govern behavior, but rules cannot substitute for character. In the years going forward, it will be your reputation--for integrity, judgment, and other qualities of character--that will determine your success in life and in business. A generation from now, as you watch your children graduate, you will want to be able to say that whatever success you achieved was the result of honest and productive work, and that you dealt with people the way you would want them to deal with you.

* * *

I presume that I could offer all kinds of advice to today's graduates from my nearly six decades in private business and government. I could urge you all to work hard, save, and prosper. And I do. But transcending all else is being principled in how you go about doing those things. It is decidedly not true that "nice guys finish last," as that highly original American baseball philosopher Leo Durocher was once alleged to have said.

I do not deny that many appear to have succeeded in a material way by cutting corners and manipulating associates, both in their professional and in their personal lives. But material success is possible in this world, and far more satisfying, when it comes without exploiting others. The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake.

* * *

Our system works fundamentally on trust and individual fair dealing. We need only look around today's world to realize how valuable these traits are and the consequences of their absence. While we have achieved much as a nation in this regard, more remains to be done.

Prejudice of whatever stripe is unworthy of a society built on individual merit. A free market capitalist system cannot operate fully effectively unless all participants in the economy are given opportunities to achieve their best. If we succeed in opening up opportunities to everyone, our national affluence will almost surely become more widespread. Of even greater import is that all Americans recognize that they are part of a system that is fair and worthy of support.

* * *

Our forefathers bestowed upon us a system of government and a culture of enterprise that have propelled the United States to the greatest material prosperity the world has ever experienced. Today's Wharton graduates are being passed the standard to carry forward those traditions. I know you will improve upon this inheritance in ways that we have yet to imagine.

I offer you all my congratulations and wish you success in your chosen careers.

Return to topReturn to top

2005 Speeches