Goldman Sachs’ 2012 Problem with Culture

Posted On: Thursday, March 22, 2012

The love-hate relationship with Wall Street is complicated.

Great returns on investments are one side; examples of fraud, greed or throwing shareholders or clients “under the bus”  on the other. The global meltdown’s post traumatic stress and after shocks continue; ongoing investigations try to determine blame.
A firm’s culture and leadership are critical success factors in navigating challenges and avoiding loss of trust and reputation; or…they explain why it falls into difficulty.

Goldman Sachs continues in the hot seat. Included in recent developments are lawsuits, a Manhattan district attorney subpoena, a Financial Industry Regulatory Authority claim filed this week, insider trading investigation and an SEC probe for civil action.
On March 15, 2012 Greg Smith, an executive director and head of U.S. equity derivatives in Europe, Middle East and Africa for Goldman, resigned; expressing his reasons in a New York Times Op-Ed, he called the firm’s culture “toxic.” (Update: see his October 21, 2012 interview on 60 Minutes.)

He said Goldman was “still focused on making money over clients’ best interests. His message was that  the SEC investigation, Congressional hearings, the firm’s “rigorous self-examination” and efforts to restore reputation and  trust (see previous columns) have not moved the firm away from the attitudes that helped create the climate for the economic meltdown in 2008.

Goldman CEO Lloyd Blankfein and President Gary Cohn responded in an employee memo published on the firm website. Smith’s assertions, they said, do not “reflect our values, our culture and how the vast majority of Goldman Sachs think about the firm and the work it does on behalf of our clients.”  They pointed to favorable employee surveys as evidence. “We wanted to remind you,” the memo says, “what we, as a firm–individually and collectively– think about Goldman Sachs and our client-driven culture.”

The memo boasts that in March 2012 Goldman Sachs was named one of the best places to work in the United Kingdom, where Smith resided, and ranked highest in financial services firms for the third year in a row.

I’m reminded of the admonition (espoused by Kathryn Schulz) that “trusting too much in feeling you are on the right side of anything can be dangerous.”  It can lead to error blindness. When applied to Goldman Sachs, it suggests that believing in one’s own exceptionality can create blinders, screening out evidence to the contrary.

There is a danger when Goldman invokes its culture as some kind of shield. Culture is organic; shaped perhaps by a legacy, but defined by the mirror of the present, how we are doing things. The reflection others see is not who you were, or believe yourself to be.
Goldman’s self-examination in 2010 resulted in a review of its legendary business standards and practices; its report released in early January 2011 acknowledged that in a survey of clients, clients said “in some circumstances the firm weighs its interests and short-term incentives too heavily.”

While integrity, transparency, and addressing conflicts of interest were part of the self-review, Smith’s Op-Ed said nothing had changed in Goldman’s culture.

This was also the conclusion of Money and Power: How Goldman Sachs Came To Rule The World (2011) by William Cohan.
Cohan cites several critics who saw a pattern of Goldman putting its own interests ahead of clients, particularly in its evolution from a partnership to a corporation, from banking to trading, from longer- term to short-term gains as the firm became more aggressive in risk taking. Over the last 143 years, Goldman has become a mark to market firm involved in investment banking, securities, and investment management with 30,000 employees in 75 offices around the world.

The organization and its culture are complex.

Goldman’s challenge is the same as any company’s who has said all the right things in a code, brought it out to define who they are in meetings, but not known how to live it when the code and a business model are at logger heads.
Reputation and trust depend on the ability to integrate the code and the business model; to struggle with both until they are aligned and reflect how business is done.

That is the most enduring way for Goldman Sachs to strengthen its culture and stay out of the hot seat.

Gael O’Brien is a catalyst for leaders leading with purpose and impact. She is an executive coach with a corporate and public affairs background. Gael is President of Strategic Opportunities Group.

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