THE DEEP LESSON OF THE GOLDMAN SACHS LETTER

March 16th, 2012

It’s about much more than Wall Street — it’s about the hazards of cultural evolution.


Lots of buzz everywhere about Wednesday’s NYT op-ed by Greg Smith, a mid-level guy on his way out of Goldman Sachs, and what it says about the modern culture not just of GS but of Wall Street.

To me it’s an illustration of an even more deep and serious problem — a problem with how we think (or don’t think) about culture itself.

Anyway, here is how Smith stated the problem at GS:

…the environment now is as toxic and destructive as I have ever seen it. 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….

What are three quick ways to become a leader [at GS]? … persuad[e] your clients to invest in the stocks or other products that we are trying to get rid of…  get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman… Find yourself sitting in a seat where your job is to trade any illiquid [i.e., high-commission], opaque product with a three-letter acronym.

Smith remarked that Goldman’s culture, not so long ago, “revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients,” but that it had changed lately, so that it was all about “mak[ing] enough money for the firm.”

In other words, he blamed the leadership — guys like CEO/Chairman Lloyd Blankfein — and appealed to the board to “[m]ake the client the focal point of your business again,” which almost by definition means replacing Blankfein and his top officers.

The way I see it, changing the leadership at GS or any company with this problem is like rearranging the proverbial deck chairs on the Titanic. Companies now are more likely to focus on the bottom line, to the detriment of their clients in many industries (especially banking) not because they have flawed leaders, but because they operate in a market which is freer — in the sense of being more globalized and competitive — than ever before. Especially if they are publicly traded companies, they feel extreme pressure to report bottom-line growth, and so that goal becomes the one to which all others are subordinated. The corporate culture adjusts accordingly. Others in the past have noted that GS began to change for the worse (from a client and social value perspective) when it morphed from a partnership into a public corporation and thereby became much more exposed to bottom-line pressures.

I think it’s not just something that affects corporations, though. It’s part of a more general cultural realignment of incentives, which is about wringing every possible bit of economic activity out of humans  — because growth has become the Big Goal of Western societies.

This is cultural evolution. And it’s happening more or less of its own accord. No one is directing it; its direction is emergent. In fact, here in the USA we have convinced ourselves that in general we shouldn’t try to restrict or direct culture; our constitutional law virtually rules it out. We keep saying to ourselves that we should just continue to “pursue happiness,” as individuals or corporations, in our own ways, and let our culture go where it will.

We should be able to see, from outbursts like Smith’s, where our culture really is going. But we don’t even acknowledge the problem. We tend to think in terms of individuals, so of course we blame individuals, like Blankfein in this case. In so doing, we avert our gazes from the deeper, more frightening reality.

______________

POSTSCRIPT (17 March 2012):

Joe Nocera has a piece in the NYT today contrasting the customer-friendly culture of Starbucks with the customer-unfriendly culture of GS.

Maybe the time has come for Blankfein to watch what Howard Schultz is doing at Starbucks. Sometimes, the best way to do well really is to do good.

I think that he’s missing a key point: In some industries, it’s possible to excel and keep shareholders happy by putting customers first. But in other industries, like investment and commercial banking, it seems that the interests of shareholders (who want to maximize profits) are less harmonious with the interests of customers. Thus the latter get screwed. And banks’ vast PR departments exist to conceal this basic conflict.

Comments are closed.

What's this?

You are currently reading THE DEEP LESSON OF THE GOLDMAN SACHS LETTER at HERETICAL NOTIONS.

meta