Tag Archives: Goldman Sachs

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 Need for Hangings in the Village Square

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Are public hangings an essential feature of capitalism? Or, can we trust in principle based morality?

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This is not a trivial question. The child like and pseudo religious belief that the free market will, by itself, right all wrongs in time, a belief adhered to by Alan Greenspan and other groupies of Ayn Rand, is at the heart of our financial crisis and the crisis of capitalism. This Greek tragedy was played out at Enron, Lehman Brothers, and now Goldman and BP. It is the failed reliance on “rational self-interest” as a moral code.

The question is whether corporate executives are capable of adhering to principled behavior, behavior that supports a good other than their own, in the absence of punishment of significant severity to balance out the significance of potential rewards for unprincipled behavior.

Extreme rewards cause the mind’s eye to be severely out of focus and nothing serves as well to focus the mind as the anticipation of hanging in the village square at sunrise. So it appears that we must periodically publicly execute an executive to assist us to become principled. It would be nice if they didn’t make themselves such convenient and obvious targets.

I have been in the corporate world long enough to know two things: most executives are principled and do seek to adhere to fundamental values; and, there are companies and there are subcultures in which the value of “winning” as defined by financial performance alone, completely overwhelms any other morality.

On June 10th Goldman Sachs stock hit a one year low after another report of legal problems. This time the SEC is investigating a mortgage investment Goldman bundled and sold in 2006. They were already investigating possible fraud involved with an investment Goldman created called Abacus, a CDO, that was allegedly set up to enable Paulson & Co. to take short positions against this basket of what they believed to be distressed mortgage securities, while at the same time marketing this to their customers.

Goldman Sachs CEO Lloyd Blankfein

This was obviously not set up on the Deming philosophy of “delighting” your customers. If you are selling something you have created to your customers while at the same time betting against it, you are shafting your customers and you are, therefore, not trustworthy. The morality of this is simple.

What proves to me, beyond a reasonable doubt, that Goldman has not learned the lessons of principle centered leadership is not the above charges. It is the pathetic game being played with a Congressional Commission investigating Goldman’s dealings.This week the Wall Street Journal reported that…

A commission probing the financial crisis denounced Goldman Sachs Group Inc., saying the firm first dragged its feet over requests for information then dumped hundreds of millions of pages of documents on the panel.

This is an old and tired lawyer’s trick: You want documents? OK, here is a truckload of documents. See what you can find! And the investigators are so overwhelmed with irrelevant documents that they never find what they are looking for. As the police tell young thieves everyday, “If your not guilty, why are you running away and making yourself look guilty?” The Goldman legal team is either tacitly admitting guilt or is too dumb to know what “guilty” looks like.

The virtual collapse of every major Wall Street financial firm was not sufficient to awaken the spirit of moral conduct or the sensibility of moderation. The intervention of the government, required to prevent the collapse of the entire financial system, allowed many of these executives to obfuscate their own participation in the events that led up to that disaster and caused their minds eye to be blurred to consequences of their own behavior.

Before I was a parent, and a student of behavior modification and the power of positive reinforcement, I was convinced that I could raise my children without ever resorting to the “old way” of punishment for bad behavior. Nothing humbles one as well as parenting. I did resort to punishment, sparingly, as I realized that even the most superior children (my own!) occasionally needed to experience the pain associated with misconduct. But, you hope that as one matures, the intellect takes over, and the ability to adhere to moral principles, religious or otherwise, will be sufficient to keep behavior within acceptable control limits.

But, I fear that the more one is paid into the millions, the more one develops a childlike need to test the limits of the environment, to exceed the bounds of what is obviously “right conduct” until one once again one must contemplate the significance of a well constructed scaffold erected in the village square.