Wednesday, November 15, 2017

Client-Centered Ethical Leadership: A Recipe for Trust at Goldman Sachs

With its incentive-structure that rewards a quick profit on the next trade even at the expense of advising clients in line with their long-term interests, Wall Street has its work cut out for itself even in maintaining trust, which, after all, is the basis of a market. On March 15, 2012, the New York Times reported that over all, “the percentage of people who have little or no faith in the fairness of investment companies rose to 41 percent in 2011 from 26 percent in 2008, according to Yankelovich Monitor 2011.” Even banks and insurance companies fared better, and household income played no role in the findings. At the time, Goldman Sachs was doing its industry no favors in terms of reputation. Indeed, the “best and the brightest” on Wall Street had created or enabled a rather narrow and self-serving corporate culture and a lack of ethical leadership that could otherwise turn around the bank by transforming its dysfunctional culture.

For support, I am not going to use the SEC investigation into fraud at Goldman (a case which the bank settled without admitting wrongdoing), or to the findings of Sen. Levin’s committee in 2010. Nor am I basing my conclusions on a Delaware judge’s criticism of the bank over the multiple and potentially conflicting roles it played in brokering an energy deal. I not even going off the charges made by the hipsters in Occupy Wall Street movement. Rather, I have in mind what is in my judgment an honest report made publically by a well-placed insider in Goldman—something that is exceedingly rare and thus potentially extremely enlightening.

In his stinging opinion-piece in the Wall Street Journal on March 14, 2012 issued just shortly after he resigned from Goldman Sachs, Greg Smith excoriated the bank where he had worked for twelve years, accusing it of moral turpitude if not sordid, short-sighted, greed. “To put the problem in the simplest terms,” he writes, “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.” He describes meetings in which the clients’ interests did not even enter into the equation. In fact, according to Smith, the grandson of Lithuanian Jews who had emigrated to Johannesburg, at least five of the executive directors at Goldman regularly refer to their clients as muppets. I suppose this means that the clients are deemed so stupid they can (and should) be easily controlled or managed by their “advisors” at Goldman, who are evidently the smartest kids in the room.

Even as government investigations and a protest movement can get far more press, an essay by an insider can be far more enlightening in terms of what is really going on behind a bank’s mission statement. Undoubtedly aware of this point, Lloyd Blankfein, the CEO at Goldman, and Gary Cohn, the bank’s president, referred in a letter to employees to Smith as “this individual” and to his essay as “an individual opinion.” Lest it be forgotten, leadership too is associated with individuals. Ironically, Smith rather than Blankfein and Cohn was exercising leadership—even ethical and I would say transformational leadership as against a ploy to deny and discredit in order to retain power. Leadership does not reduce to power. Indeed, the ethical, transformative leader must risk it, and Smith—being persona non grata on Wall Street—certainly risked more than that in having his essay published.

One Wall Street executive said it was “unforgivable” for Smith to make his opinions so public; rather, he should have taken them privately to the firm’s senior managers. However, he had doubtlessly done so only to be ignored, given the weight of the bank’s culture going against him. Indeed, as a middle-level manager, his complaint would not have gained much play. So the Wall Street executive’s advice can be rendered as enabling a dysfunctional corporate culture rather than being constructive. Ethical or transformational leadership cannot contravene the logic of power in a firm’s hierarchyand thus the intervention must be top-down rather than bottom-up.

As an alternative to ethical leadership, relying on customers to discern that they are not being adequately served and thus decide to leave may be advocated by others on Wall Street as the best solution as it makes use of the market mechanism. Thanks to Sen. Carl Levin’s committee, it was already widely known that at least one issue of the sub-prime-mortgage-based derivatives being sold by Goldman was referred to in internal emails as “crap.” The customers to whom it was sold had no basis to know that it was crap, or that Goldman’s sales people thought it was crap. It is not as if the marketing included: Tell the prospective customer that the security is crap. Perhaps the only customer buying that line would be a former governor of Alaska who could see Russia from her house.

Moreover, selling “crap” to “muppets” reflects not only a blatant disregard for customers, but also a marked level of disrespect of those who are ostensibly being served. It is as if the emails had read: “We could serve the idiots dog food and they wouldn’t know any different.” It is from such a haughty place that even the powerful today can fall so far and so unexpectedly fast. Yet it is not clear to me how many of Goldman’s muppets would walk from superior returns, if indeed Goldman has been out-performing its rivals, out of an overriding sense of self-respect. One would think that customers would prefer bankers who have their backs, but some undoubtedly believe in buyer beware (caveat emptor) and virtuously apply the strict doctrine to themselves as if in a Calvinist fit of self-discipline. The trade-off between even short-turn returns and self-respect is itself within a rather sordid corporate culture, and for it to be changed I think we need to consider the prospects for ethical, transformative leadership at the upper-echelons of the bank rather than rely on brave middle-managers or external protestors, investigators, or even customers. To make this case, I need to point to the salience of a firm’s culture—and in particular its ethical dimension.

Lest a firm’s culture be thought to be of marginal significance from the standpoint of the firm as a going concern financially, Smith attributes Goldman’s culture of yesteryear, which “revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients,” as the “secret sauce” that made the place work as a credible and trusted investment bank that thrived financially.  To be sure, the fact that partners had their own fortunes on the line gave them an incentive not to risk losing established clients by undercutting them by a focus on short-term profit über alles. Even so, a bank’s culture can play a large role in whether short-term or long-term greed is the order of the day. According to Gus Levy, who led Goldman Sachs in the 1960s and 1970s, with long-term greed, money was made with clients, not from them. Deciding whether to include or relegate customer interests is a decision or value that spreads like wildfire through an organization. This occurs by means of the organization’s culture. If Smith is correct, the culture at Goldman came to include a lack of regard for customers, or muppets. Because the customers were expecting that their interests would not only be considered, but also emphasized, Goldman’s violation of its corresponding obligation means that the ethical dimension of the culture is particularly salient here.

Lest the moral quality of a firm’s culture be presumed to be an unimportant element of a firm’s culture, Smith makes the startling claim concerning what had come of the bank’s culture: “I truly believe that [the] decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.” A single-minded effort to make money even at the expense of a customer’s immediate interests, such as in selling crap to muppets, turns out not to be a good strategy. Indeed, it is unethical. Indeed, I have been surprised at the positive correlations I have found in hearing of unethical companies, such as Days Inn for instance, being also not very competent, at least at the retail level. Unethical people tend not to be very good at their day jobs. Perhaps a character flaw is the common denominator behind unethical conduct at the expense of customers and incompetence.

However, Goldman Sachs has been financially successful even if its culture and leadership have been rather squalid. To be sure, Smith claims the bank is on borrowed time, given its lack of regard for its muppets. “People who care only about making money will not sustain this firm—or the trust of its clients—for very much longer,” he writes. In any case, the bank could doubtlessly be much better shape financially were ethical leaders installed who did not have such a vested interest in the extant dysfunctional culture.

Smith points the finger principally at Lloyd Blankfein, the sitting CEO who had bragged that Goldman was doing God’s work and yet defensively tried to discredit Smith as only an “individual.” More generally, Smith points to the dearth of ethical leadership at the bank. “The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.” Leaving the reference to axes aside, Smith’s point is that the ethical dimension of a firm’s culture is very important to the firm’s financial survival, and that ethical leadership is vital for the dimension. Culture, ethics, and ethical leadership are like a pyramid of sorts with the top setting the tone (and rewarding it). Promoting people for unloading toxic securities on unsuspecting muppets is not the way to build ethical leadership, and thus an ethical culture. Lest all this be reduced to practices of questionable legality—as if business ethics reduced to business law--Smith reports no such impropriety. The fatal flaw in Goldman Sachs is moral rather than legal.

If only the problem were legal in nature. Smith’s prescription is much more difficult to implement than catching cheats: “Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.” This medicine attacks the extant culture itself, which, after all, is based on making money for the firm. Unfortunately, the effort must come out of that culture. Therein lies the rub.

How to interlard ethical leadership even at the board level in the midst of moral turpitude is to ask something to renounce what it is in order to become the opposite. Cultures normally resist that sort of thing. The board would have to be sufficiently distant from the managerial culture as to be willing to expunge the extant tip of the managerial iceberg and replace it with an ethical leader who is known as a change agent. It might be that the chair of the board must go to stockholders for support in order to make changes in the board. In any case, a new CEO, one taken from afar rather than even from stakeholders, would be necessary. Once installed, he or she would have to work downward, rooting out the rot; this cannot be done from the middle-level of management. In fact, opposition can be expected from throughout the management structure. Bringing in a powerful change-agent (preferably an ex-marine) in human resources, such as the guy O’Neal brought in at Bank of America, could help the CEO systematically find and extract elements of the old culture and quickly replace them with new, solid oak. That would be God’s work, borne of ethical rather than defensive leadership. The clients would come to appreciate it and reward the visionary victors handsomely, whether in terms of bonuses, profits, or dividends.


Greg Smith, “WhyI Am Leaving Goldman Sachs,” The Wall Street Journal, March 14, 2012. 

Nelson Schwartz, “Public Exit From Goldman Raises Doubt Over a New Ethic,” The New York Times, March 15, 2012.
Susanne Craig and Landon Thomas, “Public Rebuke of Culture at Goldman Opens Debate,” The New York Times, March 15, 2012.