Thursday, March 15, 2012

Goldman, Wall Street and A Culture Crack-up

Andrew Goldberg, EVP and Head of the Change Management Practice at Makovsky + Company is today’s guest blogger.

The recent allegations of a mid-level banker at Goldman Sachs, Greg Smith, that the firm relegates client needs to its search for quick profit is only the latest in a number of events since before the financial meltdown that highlights a culture of greed. For Goldman, what seems to be the expression of heartfelt emotional pain of a long-term employee conflicted over ethics, this places it at a reputational crossroads.

Goldman has weathered and rather successfully survived outside criticism from regulators and the media, even as it fends off legal challenges from the SEC and others. But when your own people, occupying critical positions in your core trading business, begin to lose faith or react in anger against the firm, it is an indication that the internal system is cracking. And when your people lose confidence in your business model, your clients will also. The survival of the firm is then put at risk.

The question for Goldman now is how to contain its reputational damage.

The first step was a letter from CEO Lloyd Blankfein and President Gary Cohn to their employees which was on its face self-contradictory. The letter first makes the critic and his claim seem unimportant—as just one of thousands of employees rather than one who worked his way up over twelve years with long-term client relationships—and his experience unreflective of the larger culture of the bank. But then it goes on to say that the senior Goldman executives would now examine Smith’s claims of callousness toward client interests. This indicates the claims might have some credence. These language contortions raise doubts as to how thoughtfully Goldman is addressing what could be similar concerns on the part of others at the bank. Nor does it seem that Goldman was considering how outsiders, including the media, would interpret the letter.

Such an ambivalent approach cannot work easily, given the pounding Goldman has already taken. A clearer direction is needed:

First—the company should avoid acting in a punitive way toward an employee who on the face of his claims actually has the interest of the firm at heart. Although it is reported that the company has tried to reach Smith, it is not clear how and under what circumstances. Instead, he should be publicly invited in to meet with top management and speak frankly regarding his concerns—along with the knowledge that the company will hold him harmless from legal action arising from his open letter to the Times.

Second—and a much bigger challenge to address, is creating internal structural barriers to the embedded conflicts that face many trading houses. One step would be contracting with a prominent outsider such as a former Justice Department executive, who can dispassionately assess potential conflicts and has the ability to go directly to the Board of Directors with any findings of abuse.

Finally—the Goldman board itself needs to take an activist role in sustaining its reputation. Since the financial meltdown and subsequently the recent boom years of record profits, Goldman’s board has played a quiet role despite continued reputational hits. Taking the lead in a thorough audit and correction of cultural risks and conflicts at Goldman is an essential role for Goldman’s board at this critical time.

What happens now is a test-bed not only for Goldman, but for Wall Street. As the biggest player, how it handles its suggested cultural crack-up will be benchmarked by its peers. It can be hoped that Goldman will act with the health and integrity of its industry in mind.

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