greg smith, goldman sachs and the morality debate by lawrence miller

| March 15, 2012 | 1 Comment
lawrence miller

Larry Miller – money vs morality debate

ebbf advisory council member Lawrence Miller offers this interesting reaction to the recent and “loud” repercussions caused by the New York Times editorial article written by Greg Smith following his resignation as executive director of Goldman Sachs. Below an extract of Lawrence’s full blog article that can be found here.

You can interact with the author, leave your comments on this topic on ebbf’s LinkedIN open conversation choosing the “Manager’s Choice” box here.

“the executive director of 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.

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.

Some years ago I was mentioning at a conference how 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. As soon as I had said that a hand shot up from the audience. I saw his name tag said “General Motors.”  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.”

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, and it drove GM to bankruptcy while Honda’s market share continually rose.

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 firms 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.

if you want to open the conversation with Lawrence, feel free to interact with him joining his open discussion on ebbf’s LinkedIN group here.

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  1. Having worked in the financial services industry for almost 15 years now in several functions (audit, internal control, financial analysis and fund manager) I have to say that in my opinion the problems that Greg Smith mentions in his letter are not exclusive to Goldman. I have seen them across almost all the institutions I have worked for over the years. There is a focus on short term goals and profitability which many times goes against the long term benefit of everyone involved (employees, shareholders & clients). There are also many conflicts of interest which are still not properly resolved which pressure employees to make the wrong decisions. Management oversight in financial institutions is very difficult to implement too. Work is of a very technical nature and has reached high levels of specialization which means that in most institutions it is very difficult to monitor real compliance with even basic moral values. The high rotation of employees across all levels of the organization also makes it difficult to implement and maintain an organizational culture that promotes stability and long term focus. It hasn’t always been like this in the financial services industry. Decades ago, the business model of these institutions was better regulated with an increased focused in separating custody & management activities from pure risk taking ones and also there were more employee owned institutions which tend to have a more conservative and long term focus on their behavior. Right now there are several attempts to try and go back to the old business model. In the US the Glass-Steagall act that separated investment from commercial banking after the Great depression but was later repealed is resurfacing in the shape of the Dodd-Frank / Volcker regulations and in the UK there is also a move from the FSA to ring-fence commercial banking from higher risk activities and prevent the existence of systemically critical institutions that have perverse risk taking incentives.

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