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October 12, 2009
The First Tycoon
Over the weekend, I read T.J. Stiles’ biography of Cornelius Vanderbilt, titled The First Tycoon. For those of you who pass through Grand Central Terminal in New York City, built by Vanderbilt to house his multiple railroad properties that converged at 42nd street, take a look above the clock on the south side of the building to see a giant statue of the entrepreneur (it was originally above his West Side freight terminal near our new office near the Holland Tunnel). Vanderbilt emerged from humble roots to dominate first steamships, then railroads, amassing a $100 million fortune before his death in the late 1870s. He perfected the modern corporation, using the public company structure to raise the vast sums necessary to build railroads or acquire weaker competitors.
As I finished the book, I pondered the relevance of Vanderbilt and his railroads to today’s economic issues. Stiles observes that post Civil War America was in transition from an agricultural economy in which business was “limited in size and personal in nature.” The huge amounts of capital required for rail infrastructure required “corporations that were a means of financing large public works without inflating the size of government---yet they were private property.” Stiles notes, “The power of the railroads gave rise to demands for a stronger government to control them…To the American public, Black Friday suddenly illuminated the way in which new corporate and financial reality inundated the national landscape. Now because of the increasing financial integration of the country, the fears and hopes of a few hundred men on Wall Street could shake the nation.
In the wake of the stock market crash and subsequent recession in 1873, Charles Francis Adams (grandson of one president, son of another) wrote an article on the Erie Railroad scandal, in which Wall Street tycoons Fisk and Gould battled Vanderbilt for control, stating, “The American people cannot afford to glance at this thing in the columns of the daily press and then dismiss it from memory. It involves too many questions; it touches too nearly the national life…Already our great corporations are subjecting the state to their own control…Vanderbilt has combined the natural power of the individual with the factitious power of the corporation….he is but the precursor of a class of men who will wield within the state a power created by it but too great for its control….As trade now dominates the world, and the railways dominate trade, his object has been to make himself the virtual master of all by making himself absolute lord of the railways.”
Ultimately, Vanderbilt became the benefactor of a new university bearing his name in Nashville, Tennessee, which softened his robber baron reputation. He also engaged with financial reporters to explain the Panic of 1873, decrying the use of excessive borrowing for reason of financial speculation. In the end, he is seen as a swashbuckler, a self-made man and unreconstructed capitalist. But the period that followed his death saw the Grange movement in the heartland, demanding rate regulation of railroads, and investigation of Wall Street practices.
The financial services industry is to global commerce what the railroads were in the 1870s. The bankers hold same power over farmers, entrepreneurs, and communities, given that access to capital is the key to business success. All business is affected by the negative perceptions of Wall Street. Financial innovation, from collateralized debt obligations to securitized investment vehicles, is now regarded with suspicion. Given the necessity of government bailouts of financial institutions a year ago, there is general resentment of outsized incentive compensation based on short term performance. Banks and insurance companies rank at the bottom in trust in our most recent Edelman Trust Barometer data from June, 2009, while reducing excessive compensation is the number one way for business to regain trust.
It is necessary for bankers to understand the need to explain the “how and why” of specific financial instruments (eg credit swaps) and the benefits of their activities. There is also public demand for shared sacrifice; the risk of populist backlash at the end of the year is substantial given that 2009 bonus accruals at Goldman Sachs are now at 2007 levels. I will be on a panel entitled ‘restoring trust in the financial sector’ at the Economist Magazine’s Buttonwood conference on Friday. I will post over the weekend to give you a sense of the discussion.
Posted by Edelman at October 12, 2009 5:40 PM |
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Comments
Richard,
The banks and insurance companies are easy targets as regards financial outrage and malfeasance, but this is not new. It has been one year, and you read the same things I do in the NYT-it is business as usual, and the lack of contrition by the banking heads has become a non-story.
There should have been a 9-11 styled commission to investigate what they knew and when, but it won't happen now, unfortunately.
For heads of multinational banks-who are paid a good sum to anticipate turns in the market-and engage the best minds to do such forward planning, it boggles the mind to have seen them sit in front of a Congressional panel, all say they had no idea, never saw it coming, if only they could have known better..Outrageous, and no one disagreed. How do you expect them to explain credit swaps, and at this point, who cares?
Restoring trust goes well beyond the scope of reducing excess compensation (and "excess" can be argued ad infinitum).
I suggest the only way to do it is from the ground up. Have those in financial service institutions who are not highly paid but highly motivated get actively involved with reputation management and take some of it away from the Comms people. Reputation management resides with each person within the company, not merely those at the top. If (and a big "if") they care about their company, theyre far and away the best spokespeople.
Curious what comes out of your roundtable.
Posted by: Neal Horwitz at October 15, 2009 4:12 AM