Alan Greenspan: Reputation, not new rules, must govern corporations

From a speech to the Financial Markets Conference, in Sea Island, Georgia, by the chairman of the US Federal Reserve

Recent transmissions in financial markets have underscored the fact that one can hardly overstate the importance of reputation in a market economy. Market transactions are inhibited if we cannot trust the reliability of counterparties' information. The ability to rely on the word of a stranger is integral to any sophisticated economy. A reputation for honest dealings within a business or financial corporation is critical for effective corporate governance. Even more important is the way outsiders view the corporation itself.

The reputation of a corporation is an exceptionally important market value that in principle is capitalised on a balance sheet as goodwill.

We should not be surprised to see a re-emergence of the market value placed on trust and personal reputation in business practice. After the revelations of corporate malfeasance, the market punished the stock prices of those corporations whose behaviours had cast doubt on the reliability of their reputations. Recent allegations on Wall Street of breaches of trust or even legality, if true, could begin to undermine the very basis on which the world's greatest financial markets thrive. Guilty parties should be expeditiously punished.

Some practices and rules have outlived their usefulness and require updating. But in so doing we need to be careful not to undermine the paradigm that has so effectively governed voluntary trade. Rewriting rules that have served us well is fraught with the possibility for collateral damage.