Greg Smith, Goldman Sachs, and Corporate Culture

By now everyone has heard that a guy named Greg Smith wrote a letter this week. Who is Greg Smith and why does anyone care? Why is Greg Smith’s letter getting attention from anyone who isn’t a Goldman Sachs employee, customer, or shareholder? Sure, he’s a mid-level executive at one of the world’s most powerful financial institutions. So he’s certainly not a nobody. And sure, Goldman, like other big financial institutions today, is seen by many as the corporate embodiment of evil, and so people are bound to be fascinated by an insider’s repudiation of the firm — especially accompanied, as it was, by a good dollop of juicy details. But there’s more to it than that, and the “more” here is instructive.

I think the key to understanding why Smith’s letter caused such an uproar is the fact that Greg Smith’s letter taps into the deep, dark fear that every consumer has, namely the fear that, somewhere out there, someone who is supposed to be looking out for us is instead trying to screw us. Smith’s letter basically said that that is exactly what is going on at Goldman, these days: the employees charged with advising clients about an array of complex financial decisions are, according to Smith, generally more focused on making money than they are on serving clients.

Now, first a couple of words about the letter. It goes without saying that we should take such a letter with a grain of salt. It’s just one man’s word, after all. Now that doesn’t make Smith’s account of the tone at Goldman implausible. He’s not the first to suggest that there’s something wonky at Goldman. It just means that we should balance his testimony against other evidence, including for example the kinds of large-scale surveys of Goldman employees that the company’s own response to Smith’s letter cites. Then again, such surveys are themselves highly imperfect devices. Either way: buyer beware.

(Note: one group that must take this stuff seriously is Goldman’s Board of Directors. A loyal employee taking a risk like Smith has is not a good sign, and his story deserves to be investigated thoroughly by the Board.)

OK, so let’s bracket the reliability of Smith’s account, and ask — if it accurately reflects the tone at Goldman — why that matters.

It matters because of this awkward fact: in many cases, in business, all that stands between you the customer and getting ripped off is that amorphous something called “corporate culture.” Most of us are susceptible to being ripped off in all kinds of ways by the businesses we interact with. That’s true whether the business in question is my local coffee shop (is that coffee really Fair Trade?) or a financial institution trying to get me to invest in some new-fangled asset-backed security. My best hope in such cases is that the business in question fosters a culture within which employees are expected to tell me the truth and help me get the products I really want.

Now culture is a notoriously hard thing to define, and harder still to manage. Culture is sometimes explained as “a shared set of practices” or “the way things are done” or “the glue that holds a company together.”

Why does culture matter? It matters because, other things being equal, the people who work for a company won’t automatically feel inspired to spend their day doing things that benefit either the company or the company’s clients. People need to be convinced to provide loyal service. In part, such loyalty can be had through a combination of rewards and penalties and surveillance. Work hard, and you’ll earn a bonus. And, Treat our customers well, or your fired. And so on.

But sticks and carrots will only get you so far. Far better if you can get employees to adopt the right behaviours voluntarily, to internalize a set of rules about loyal service and fair treatment. An employee who thinks that diligence and fair treatment just go with the turf is a lot more valuable than one who needs constantly to be cajoled. And, humans being the social animals that we are, getting employees to adopt and internalize a set of rules is a lot easier if you make it part of the ethos of a group of comrades. Once you’ve got the group ethos right, employees don’t act badly because, well, that’s just not the sort of thing we do around here! In the terminology used by economists and management theorists, culture helps solve ‘agency problems.’ Whatever it is that you want employees to be focusing their energies on, corporate culture is the key.

Of course, there’s still the problem of what exactly employees should be focusing their energies on. Should they be taking direct aim at maximizing profit? Or should they be serving customers well, on the assumption that good service will result in profits in the long run? In any reasonably sane market — one without ‘TBTF‘ financial institutions — the latter strategy would be the way to go, practically every time. And that fact is precisely what makes large-scale commerce practical. Consumers enjoy an enormous amount of protection from everyday wrongdoing due to the simple fact that most businesses promote basic honesty and decency on the part of their employees.

Unfortunately, it’s far from clear that Goldman operates in a sane market. So it is entirely plausible that the company could have allowed its corporate culture to drift away from seeing customers as partners in long-term value creation, toward seeing them as sources of short-term revenue. I don’t know whether Greg Smith’s tale is true, and representative of the culture at Goldman Sachs. But if it is, that means not just that Goldman isn’t serving its clients well. It means that Goldman embodies a set of values with the potential to undermine the market itself.

6 comments so far

  1. Attracta Lagan on

    You provide such fabulous insights,and meaning making Chris. The additional tragedy is that so many average CEO’s don’t seek to intentionally manage their cultures or even recognise that culture can be managed.

  2. Edison on

    Regrettably, it is a real problem but most of people keep on silence because the job, extra bonus, and prestige is on discussing, Ethics must propuse new forms to conciliate both economical and the rest of social objectives of the people

  3. jpbauer on

    Excellent well written post Chris.

    It would be interesting to have a survey carried out whereby GS’s top 500 client’s are asked on a scale of 1 to 10 ( with 1 being don’t care one bit to 10 being truly bothersome) what they think of the allegations made by Mr. Smith.

    I have an inclination what the results may reveal and that may be equally problematic. Your thoughts?

    • Chris MacDonald on

      Thanks, JP.
      I think such a survey would have to differentiate between categories of clients based on degree of sophistication. The worry is that a firm like GS has the opportunity to serve clients poorly without the client even knowing it.

  4. FK on

    I am writing a report on the corporate culture at Goldman, are there any other sources of information from employee or clients on their experiences with Goldman.

  5. Menina Dorada on

    As a former GS Contractor I was incredibly disappointed with the luke warm culture. If ever there is a “good ol’boys club” this is it. If you don’t or can’t work the required (unspoken expectation) 50-60 hour work weeks you hear things like “we are all going to dinner to recognize all the hard work everyone put into …..project. I’m telling you because you won’t be invited. I didn’t want to ask you because of the recent issues with your health…” I was actually told by an analyst in n.y. he was no longer in need of a report I’d been printing for him weekly; to find out later he’d asked a male colleague to take over. Another analsyt was speaking to a VP in the bank, explaining the concept of “contractors” he said “…like (myself), her contract won’t be renewed…”. I was aghast someone would actually discuss me with someone whose business it was non of. I left to gather myself due to being upset…the boss later pulled me aside and said “it’s not like you’re going to show up one day and your badge won’t work…”

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