Goldman Sachs and the Money vs. Morality Debate

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Yesterday, a young executive at Goldman Sachs, Greg Smith, resigned in a very public way. He wrote an op-ed in the New York Times titled “Why I am Leaving Goldman Sachs.” In essence he accused the leadership of Goldman Sachs of destroying the internal moral fiber of the firm, putting profit before meeting the needs of customers, and he cited the open contempt that Goldman personnel feel toward their clients. It is a sad commentary.

The readers of this blog who are most concerned with “lean” and continuous improvement may ask, “So what does this have to do with continuous improvement?” Trust me, it does!

Step back a moment to frame this issue. The material progress of a company, country or civilization is directly related to its moral character, its culture. But, not in an instantaneous and direct way. Rather, one is the antecedent to the other.

The historian H. G. Wells made the following observation about the decline of Rome: “After the fall of Carthage the Roman imagination went wild with the hitherto unknown possibilities of finance. Money, like most other inventions, had ‘happened’ to mankind, and men had still to develop – today they have still to perfect – the science and morality of money. What happened to Rome? Various answers are made – a decline in religion, a decline from the virtues of their forefathers, and the like. We, who can look at the problem with a larger perspective, can see what had happened to Rome was ‘money.’ Money had floated the Romans off the firm ground.”

Some years ago I was speaking at a conference and this was a time when I was involved at Honda American Manufacturing. I mentioned to the audience that every morning every Honda associate meets with his or her team for fifteen minutes to discuss how they could correct any problems discovered the day before, how they could improve their work.

Immediately after I said this a hand shot up from the audience. I saw his name tag said “General Motors.” I called on him and he said “Cost justify those meetings. I can tell you that at General Motors we know the costs of stopping that line for even one second. If you can’t cost justify it, it won’t happen at General Motors.” I could only reply by telling him that he had me, I couldn’t cost justify it, I only knew that they did it.

Of course, he was right. General Motors cost justified everything. GM was run by financial managers, with the Chairman drawn from the financial group and with a financial background. He knew money, not how to make cars.

A month later I was at Honda and asked Scott Whitlock then Executive VP of Manufacturing the same question. How do you cost justify those meetings? Of course, at this time Honda America Manufacturing was led by Iri Irimajir, an engineer and Formula One engine designer, who designed an engine being produced at the very time. Scott looked at me and said “Why would anyone ask such a question?” Which of course made me feel stupid! He then said, “We just have faith, that if every day, every associate thinks about how to improve his work, we will make better cars.”

At that same time the work hours required for auto assembly at Honda was about 12 hours per car. At GM it was in the range of 22-24. Yet, at GM it was about money.

Money had “happened” to GM and the dominance of money, versus serving customers with great cars, drove GM to bankruptcy while Honda’s market share continually rose.

In 53 BC Marcus Licinius Crassus, considered the wealthiest man in Rome, and who had gained his wealth through the lending of money, who knew money better than anyone, led the Roman army against the presumed to be inferior Scythians at Carrhae where they were led into hot sand and the immobile Romans repeatedly charged on foot the Scythian cavalry that circled and fired arrows into the legions. Twenty thousand Romans were killed and ten thousand more carried into slavery, among them the wealthiest of all.

When those who lead the operations of a company are more expert in money than they are in the operations that serve customers, you are likely in decline and will not recover until your leaders care more about customer service, are expert in the operations that serve those customers, than about money. Then, money will follow.

Greg Smith said of Goldman Sachs “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.”

“It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.”

I have no direct knowledge of the culture of Goldman Sachs. But the fact that an executive is sufficiently motivated, negatively motivated, to publish a piece like this in the New York Times is a red flag that should trigger intense self-reflection by that firm’s leaders. It should also be a cause for all corporate leaders to reflect on their own culture, the values they imprint on their associates, particularly their young recruits.

Social capital, internal trust among members of the firm, and external trust, or what may be called brand equity, are the leading indicators that precede a decline in innovation and service; and that in turn precedes the decline in financial success. You don’t get money by focusing on money. You get money by following the path of dedicating yourself to service, service to your customers and service to your associates, and then money will follow. Those who lead the firm must be expert in what precedes money, not in the counting of fruits after the harvest created by others.


Goldman Sachs and the Money vs. Morality Debate — 14 Comments

  1. Thank you for this post. I see time and again how in this country we are willing to nearly ‘sell our souls’ for money and then we moan what happened. Of course, this is also a good reminder for myself. What would I do if I were in a firm that made me rich regardless of what it sacrificed. I think you are saying that there are no short cuts to prosperity and that values matter.

  2. Excellent historical-current analysis around the value of and effects of failure of social capital in term of internal and external trust.
    I am sharing this piece with my industry colleagues and my MBA students.
    This commentary adds value to Larry Miller’s clear understanding of ‘new capitalism’ described in his book Lean Culture-the leader’s guide.

  3. I am puzzled that anyone would connect the decline of Rome to the fall of Carthage, which happened around 200 BCE, when no perceptible decline of Rome occurred for another 400 years. At the fall of Carthage, the Romans were barely hitting their stride. They had another 150 years of republic ahead of them, before creating an empire that was the best thing the ancient world ever saw, bringing centuries of peace, prosperity, and unprecedented development in the arts and sciences to the Mediterranean basin all the way to Britain.

    As for Goldman Sachs, I am shocked, shocked to hear that they have lost their moral fiber.

  4. Michel, you raise a good question. While I can’t speak for HG Wells, let me share my understanding of the connection between the fall of Carthage and the decline of Rome. Rome destroyed Carthage in 146 B.C., but that is beside the point.

    I have read the histories and analysis of the decline of Rome as presented by Spengler, Gibbons, Toynbee and Wells. Frankly, I consider Toynbee’s analysis of decline and fall most convincing. But, they all have something in common. They all attribute the seeds of decline to events, or cultural transitions, that happened hundreds of years before the material decline, the defeat on the battlefield or the loss of territory.

    To make the point, let me give a business analogy. What led to the decline and eventual bankruptcy of General Motors and Chrysler (and almost Ford)? When did it occur? I would point to several cultural antecedents that occurred many years prior to the loss of market share.

    First, the nature of the production system itself, taking workers from the family farm and small craft shops, which occurred early in the last century, carried the seeds of revolt against that very system. Rather than empowered and consulted, workers were isolated. That system violated the fundamental psychological need of human being for bonding. The union revolt was a natural and inevitable result of the nature of that system.

    Second, the professionalization of management, much exalted by Peter Drucker and a foundation of Alfred Sloan’s system, created an aristocratic class and a feudal class within the organization and that division always ends badly.

    I think what H.G. Wells is saying is that the cult of finance began with the fall of Carthage and that was the seed that carried the cancer of decay. That, at least, is my understanding. But, the meaning of history is always argued over and subject to interpretation.

  5. Pingback: greg smith, goldman sachs and the morality debate by lawrence miller : worldwork – ebbf – mindful people, meaningful work

  6. Larry, thank you for your response to Michel. Your reflection on the breakdown of the industrial model of last century is a sober observation of the human dimension of the systems capitalism built. Moral leadership is needed for ny organization to stay balanced and prosper. The world cannot function in a uni-dimensional system, it must be balanced after the example of Honda manufacturing.

  7. Pingback: Goldman Sachs and the money vs. ethics debate | David Henderson - author, journalist, communications strategist

  8. Toynbee:
    We have seen, in fact, that when, in the history of any society, a creative minority degenerates into a dominant minority which attempts to retain by force a position that it has ceased to merit, this change in the character of the ruling element provokes, on the other side, the secession of a proletariat which no longer admires and imitates its rulers and revolts against its servitude. We have also seen that this proletariat, when it asserts itself, is divided from the outset into two distinct parts. There is an internal proletariat, prostrate and recalcitrant, and an external proletariat beyond the frontiers who now violently resist incorporation. [p. 288 Vol. 1 Study of History, abridged]
    A good description f the unionization process at GM and elsewhere

  9. Thanks for correcting my hazy chronology of ancient Rome. As for historians being able to identify the seeds of Rome’s decline in its history of centuries before it happened, I don’t buy it. I don’t see how they could possibly have had the data to support such far reaching conclusions. H.G. Wells, if I am not mistaken, was not even a historian but a writer of fiction and science-fiction. Modern historians, like Barbara Tuchman or Georges Duby, show you the documents they have and draw cautious inferences.

    About the decline of GM, there are many possible explanations. Here is an alternative to the one you presented: simply aging. As decades passed, the admired structure conceived by Alfred P. Sloan became populated by individuals of decreasing caliber. Managers grooming successors who were at best as good as themselves resulted over decades in a ratcheting down of talent. Then, blinded by past success, these leaders were unable to make the changes needed. From that perspective, GM is an 80-year former olympic champion with a failing heart. Is that less plausible?

  10. Michel,

    This is a fun dialogue.

    About H. G. Wells: His Outline of History is actually very good and very readable. He was also a biologist, wrote textbooks, and finally ended up writing science fiction. But, there really are two types of histories. One is a more immediate, tactical if you will, history which one might write today about the Vietnam war or some other recent history. For this type of history one can support your analysis with documents, interviews, etc. However, if you are writing a grande history of civilizations, that is something very different. Toynbee, in his twelve volume A Study of History, analyzes the emergence and decline of twenty three civilizations including the Mayan, Egyptian, etc. long before there were many written documents. Some of his analysis includes things like the decline of creativity in pottery at different times in the civilization. This kind of long term or strategic history looks at much larger trends and seeks to find patterns from one civilization to another.

    But, most history, whether short term or long term is seen through they eyes of the particular observer and develops a thesis or theory, an explanation, that can be debated by someone else. Why does the history say we got into Vietnam and why did we get out? There are a number of theories about that, even though it is within our own lifetime.

    As to GM, the idea of aging is one I agree with. Bureaucracy is very much like aging. Becoming less flexible, less able to change, thinking more about the past than the future and a focus inward rather than outward are all characteristics of aging in people, companies and civilizations. At the same time one can see that when companies and civilizations are emerging they are integrating more people, more ideas, more territory. When they are in decline the are disintegrating, with more and more internal divisions, energy focused on internal competition, and this is associated with a loss of creativity. I, at least, can see the seeds of that fifty years before they actually lost market share.

    Of course, there are other interpretations.

    Thanks for your comments.

  11. I have not read Toynbee, so I am just going by what you say of him. You wrote: “Toynbee [...] analyzes the emergence and decline of twenty three civilizations including the Mayan, Egyptian, etc. long before there were many written documents.” He must have had superhuman powers to learn enough about 23 different civilizations. Both the Mayas and the Egyptians have left written documents, which, at least in the case of Egypt, scholars have spent careers deciphering.

    As I am writing this in Paris, staring at me from my late father’s bookshelf, are two 3-in thick books about the civilization of classical and enlightenment Europe by Pierre Chaunu, a historian who made his bones in the 1950s by analyzing the records of incoming and outgoing shipments in Spanish ports over 200 years, and figuring out what these records revealed about Latin-America in that period. To me, this is the benchmark for historical research. It is not about being tactical or grand, but about paying excruciating attention to the facts, and drawing whatever conclusions they support, without jumping to any.

    For manufacturing technology, I consider to be in that league. He may not be the most entertaining of writers but, when he says that Singer didn’t adopt the technology of interchangeable parts until the 1880s, he backs it up by showing you photographs of sewing machines made before and after. The older ones have serial numbers engraved on every part while the newer ones don’t, and that evidence is compelling.

    It is the polar opposite of cherry-picking history in support of theories, an attitude that is very common but that makes me wary.

  12. Michel,

    All I know is this… Oswald Spengler, Edward Gibbons and Arnold Toynbee are well recognized as among the greats of historians. There are different kinds of history that serve different purposes. I understand your point of view. But, there is another point of view which is that it is worth taking a macro rather than micro analysis, and attempt to see patterns in the rise and fall of civilizations, countries, or companies for that matter.

    The history that you are referring to is very recent history and can be studied in a more micro way. Spengler and Toynbee asked the questions “is there a pattern, a cause, to why civilizations emerge and decline?’ It is a huge question. They studied the effect of the environment as a stimulus to emerge, creativity, etc. They studied the role of religions in both the period of birth and the periods of decline. They looked for patterns. It is, of course, only one view of history and there are others that are useful for different reasons. I enjoy reading biographies of great leaders and that provides a different kind of insight. So, it is all good.

    It is interesting that you are advocating and different point of view. This may have something to do with the fact that your emphasis in lean manufacturing is geared more toward the mechanical/technical side of things (although not exclusively) while mine is focused more on the cultural/human side of things. I think it is why one type of history appeals more to you and another to me. But, again, it is all good.

  13. Of course, we have more data about the recent than the distant past, which means that there are things we just can’t know. We cannot derive general theories from facts we don’t have. Among the three historians you quote, Toynbee, died in 1975, Spengler in 1936, and Gibbon in 1794. Data access capabilities have changed so much since the days they were active that I would consider work that old to be only source material for new research. I question neither these author’s talent nor the relevance of their questions, but I wonder how they could conceivably have had the data needed to answer them.
    Regarding Lean manufacturing, the approach I was taught by Kei Abe in Japan was that management and technology were always to be considered jointly and equally. What I say him do on occasion was review a line transformation project with a team on a production shop floor in the morning, and the business strategy of the company with its board after lunch.

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