Leadership and Culture – Lessons From Goldman Sachs


The Financial System meltdown in 2009 thrust this nation into a deep recession from which only now there are slight glimmers of the light from economic recovery.  Many people lost their homes as housing prices reached lows never imagined, unemployment passed double-digit levels, and many older Americans had their confidence shaken as their once secure retirements were no longer seeming a reality.

Some of the most trusted names on Wall Street, including AIG, Citibank, Lehman Brothers and others were called into question.  Reading the final report of the National Commission on the Causes of the Financial and Economic Crisis in the United States is more than a little distressing.  The warning signs were there, but were ignored both on Wall Street and in Washington.   And why? Greed.  The prospect of making massive amounts of money selling toxic mortgages to people who had no business buying them . . . that’s what was behind this.   Greed on the part of the investment bankers who made massive bonuses, and on the part of consumers who scrambled to buy loans that were “too good to be true” . . . that’s what was behind it.

While it seems that there is plenty of blame to go around, we all saw the stunning consequences of this excess–and we’ve all learned from the experience, right?  Maybe not.

In March, one senior executive at Goldman Sachs stunned (me at least) with his Op Ed piece in the NY Times called Why I Am Leaving Goldman Sachs  Greg Smith became so disgusted by what he was seeing in the company he worked at for 12 years that he took the unprecedented step to publish this open letter to put world on notice about why he couldn’t take it any longer. (Mr. Smith was responsible for the U.S./Americas equity derivatives business in Europe for GS).  I believe this letter is significant and we should pay close attention to it.

Smith joined Goldman first as an intern from Stanford, and then as a full-time employee in 2001 working in New York, and then London.  Like many MBAs he was ambitious, driven, bright and excited about building a career.  But he lived through the first wave of crisis, and until recently stayed with GS until he concluded that nothing has changed in the way the company works since the meltdown.  Here are some of his observations.

“The environment now is as toxic and destructive as I have ever seen it.” The interests of the client continue to be sidelined in the way the firm operates and thinks about making money.  He says that the firm has veered so far from where it was when he joined them out of college that he can no longer identify with its evolving culture and values.  When he came, Smith saw the culture as a key strength of the company, rooted in humility, teamwork, integrity and an intense focus on doing right by its clients.  No longer, he says.   That culture is what made GS a trusted partner of clients everywhere for 143 years. Now there is virtually no support for the notion of advising clients to do what is best for them, if it reduces GS revenues.

“I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.”  Smith suggests that GS CEO Lloyd C. Blankfein, and president, Gary D. Cohn, lost hold of the firm’s culture on their watch.   We all know that is important to make money.   However, that alone is not what I would call a “noble purpose”.   People identify with that and it guides us to make decisions about HOW we will conduct our business.  When Disney says its purpose is to “provide happiness to families everywhere”, AMGEN talks about “curing cancer” as its mission, or even Wal-Mart says it seeks to “help ordinary people save money so they can live better lives”, the presumption is that doing THESE things well actually will cause the revenues to happen.  It is a matter of faith.  When money is the only thing that drives decisions, I think you set yourself up to face many risks.

“The firm changed the way it thought about leadership.”  Smith goes on to say that when he first joined Goldman Sachs, leadership was about setting a good example and doing the right things.  Somehow this was lost.   The reason was primarily due to the fact that the company started to promote only those people who generated the most revenue for the firm.   People pay attention to who we promote and demote.  They pay attention to what we pay attention to as leaders.  In the case of Goldman, Smith describes that you get to the top by persuading clients to buy products GS wants to dump because they no longer saw profit potential for themselves, or making large trades (on which the company would earn large fees, or push products to produce more transactions and fees regardless of how good the products were.)

“[We no longer ask] questions about how we can help clients.”  Sales and other meetings at Goldman were all focused on how to generate more revenues and profits. Period. Any company that loses its focus on serving client needs should not be rewarded with business.  Sooner or later clients figure out that you are not in their corner.   Smith recounts that it is notable that the most common question asked of him by junior analysts (presumably the future leaders of the company) is “how much did we earn from that client?”   So it seems that when you take even good moral people and immerse them in any environment, they will reflect the values that surround them.  That’s how they see they can get promoted.  The culture thus perpetuates itself.

What is Smith’s prescription (somewhat of a plea to the GS Board)?

1)      Make the customer the central focus of the business (as it once was)

2)      Weed out the morally bankrupt – no matter what

3)      Build a culture based on values that drive different behaviors

I don’t know whether this brash act of a young executive will simply be gone in the blink of an eye.   I wonder how many of us would demonstrate his courage to make this kind of bold statement in the NY Times?  Where is the line over which you wouldn’t cross?   At what point would you say no, or tender your resignation?

As for Goldman, I wonder what it takes for the Board and executive leadership to take notice.   This is a company that was sued by the SEC for Fraud.   When its executives were paraded to testify before Congress, they were generally adamant about their high moral and ethical standards.

There is evidence of growing public mistrust.  As reported by Nelson Schwartz, “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.  Only credit card companies, corporate chief executives, the federal government and lawyers fared worse.

When I graduated from Dartmouth’s Tuck School of business, half of my classmates accepted positions on Wall Street. We all thought it was an exciting and honorable career choice.  I saw one article recently suggesting that before the last financial melt-down, 47% of Harvard MBA grads pursued careers in the financial sector.  By 2011, that number had dropped to 29%. Similar trends are being experienced elsewhere in the Ivies.  While that says something about our newest graduates… what does it say about the guardians of our financial future?

Other related articles:

A Public Exit From Goldman Sachs Hits at a Wounded Wall Street

Goldman Sachs Responds

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