Lessons from a Former Goldman Sachs Executive

Greg Smith, the former Goldman Sachs (GS) executive who hammered his former employer in The New York Times in mid-March, inadvertently did a great service to senior management everywhere.

April 2012 

By Peter Goldmann, CFE 

Greg Smith, the former Goldman Sachs (GS) executive who hammered his former employer in The New York Times in mid-March, inadvertently did a great service to senior management everywhere. As a refresher, you’ll recall that Smith berated GS for its “toxic” environment of putting itself before its clients, some of whom GS managing directors referred to as “muppets” (British slang for “idiots,” according to numerous Internet writers).

Interestingly, in his Times article, Smith admitted to knowing of no actual illegal activity at GS. But his choice of words suggested that much of what he saw could be interpreted as being outside the law.

Illegal or not, the destructive business conduct and culture at GS is what counts the most. It is a perfect example of how not to establish “tone at the top.” Even if no crimes were committed by its traders and other sales executives in the fast and furious “sell or die” days of the pre-2008 years, the atmosphere to justify doing so certainly was ripe.

And for those who doubt that Greg Smith is a responsible, ethical professional, it should be noted that he is by no means the only Wall Streeter to have come out recently with what ethics professionals deem to be the truth about today’s financial profession.

For example, an anonymous Internet commenter about Smith’s Times letter wrote “In 2008, I worked for JPMorgan Chase, albeit at a lower level than Mr. Smith. I spent a year trying to tell managers that there were all kinds of abuses going on with respect to disclosures about mortgages and home equity loans. All paid me nothing more than lip service. They couldn't have cared less about the client; it was all about their bottom line. Then the housing market crashed. Surprise. I wrote a letter to [CEO] Jamie Dimon, expressing my concerns. I got a call from one of his flacks in personnel. And instead of saying we'll look into this and fix it, her question was "Well, what do you want?" -- corporate speak for ‘What do we have to do to shut you up?’”

“Ultimately, I left of my own accord, and permanently said goodbye to any kind of ‘financial service’ enterprise. It may sound quaint, but I'll take my personal ethics over the almighty buck any day; it beats feeling like you need a perennial shower.”

Back in the Day...
Here’s the frustrating part… and the part that glaringly dictates where American business and political leaders need to focus their energies now. Smith’s Times column included the following assessment: “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.”

In other words, GS was, for many decades, an institution of utmost respectability and integrity.

And it wasn’t just GS. Throughout most of the 1900’s, with the unfortunate exception of a few years leading up to the 1929 Crash, American financial services was in fact a reputable and law-abiding industry.  John Bogle, the revered founder and long-time CEO of the Vanguard Group of Mutual Funds, explained the change this way in a 2009 Wall Street Journal column: “Unchecked market forces overwhelmed traditional standards of professional conduct, developed over centuries. The result is a shift from moral absolutism to moral relativism. We’ve moved from a society in which ‘there are some things that one simply does not do’ to one in which ‘if everyone else is doing it, I can too.’ Business ethics and professional standards were lost in the shuffle.”

How Do We Get Back on Track?
Which brings us back to the familiar, but still widely unheeded, fact: Without a strong tone at the top, any organization will without question be a victim of fraud -- sooner or later. So again, the message to business leaders is: why wait to reset your organization’s ethical compass if it needs resetting? Why wait to find out if resetting is needed to begin with? Don’t live in denial, thinking that everything’s OK on the ethics front in your organization.

Clearly, it is very easy for organizations to lose their way. Plenty of them certainly did in the years leading up to the financial crisis of 2008. Major legal actions and financial penalties against GS, JP Morgan, Bank of America and other Wall Street giants for a smorgasbord of illegal business actions attest to that.

Why risk having your organization’s reputation dragged through the mud like these did? Though they’re still making huge profits, their current success is certainly in part due to the largesse of the federal government’s TARP program.

Yet they have not contributed to the restoration of confidence on the part of their customers. Nor have they done much more than provide window dressing to reinstate the dignity of the industry they lead. (GS’s recent appointment of a “lead director” to appease shareholder groups that have been calling for the ouster of long-time CEO, Lloyd Blankfein, is the latest example).

As fraud fighters, compliance enforcers and ethics advocates in all U.S. industries, we must collectively pressure the leaders not just on Wall Street, but in other major American companies and in Washington, to collectively restore the bedrock of integrity, fair dealing and respect for the clients and customers they rely on. Failure to do so will further ensure our job security as anti-fraud professionals... but is that the way we really want to attain it?