Brendan Byrnes of Motley Fool interviews Jonathan Macey, Yale University’s Sam Harris Professor of Corporate Law, Corporate Finance and Securities Law. Jonathan has authored several books on corporations and the law. His most recent work is The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street (Applied Corporate Finance).
Macey: I think that reputation is still very important in the manufacturing sector. Where we see a retreat from reputation is for the Wall Street firms, the financial firms, the credit rating agencies, the accounting firms, the investment banks.
There, deregulation would help a great deal, but also I think that people dealing with these firms need to trust a little bit less in regulation. They need to think, “It could be possible, despite this massive overlay of regulation, that I could be dealing with a Bernie Madoff, or I could be dealing with a Stanford.”
When people stop randomly trusting firms, simply because they say, “Member CPIC,” or “Member FDIC,” or “Member New York Stock Exchange,” and really start to think that they have some due diligence obligations on their own, and that reputation really matters, firms will respond to that incentive. But we’re not there yet.
Three trends: (1) the growth of reliance on regulation rather than reputation as the primary mechanism for protecting customers and (2) the increasing complexity of regulation, which made technical expertise rather than reputation the primary criterion on which customers choose who to do business with in today’s markets ; and (3) the rise of the “cult of personality” on Wall Street, which has led to a secular demise in the relevance of companies’ reputations and the concomitant rise of individual “rain-makers” reputation as the basis for premium pricing of financial services.