“The failure of belief in doing right by the client is the most serious threat to its survival” – Greg Smith, a former employee of investment bank Goldman Sachs laments about the culture of profit-first in financial corporations.
By Greg Smith, Published/sourced from TODAYONLINE, 16 Mar 2012
After almost 12 years at the firm – first as a summer intern while at Stanford, then in New York for 10 years, and now in London – I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that 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.
It might sound surprising to a sceptical public, but culture was always a vital part of Goldman Sachs’ 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 organisation.
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.
DECLINE IN MORAL FIBRE
But this was not always the case. For more than a decade I recruited and mentored candidates through our gruelling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world.
In 2006 I managed the summer intern programme in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Mr Lloyd C Blankfein, and the president, Mr Gary D Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fibre represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia.
My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm.
This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
ALL ABOUT THE MONEY
How did we get here? The firm changed the way it thought about leadership.
Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader?
(a) Execute on the firm’s “axes”, which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit.
(b) “Hunt Elephants.” In English: Get your clients – some of whom are sophisticated, and some of whom aren’t – to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them.
(c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly 0 per cent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them.
If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets”, sometimes over internal email.
Integrity? It is eroding. I don’t know of any illegal behaviour, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
A WAKE-UP CALL
These days, the most common question I get from junior analysts about derivatives is: “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave.
Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets”, “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.
My proudest moments in life – getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics – have all come through hard work, with no shortcuts.
Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.
Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons.
People who care only about making money will not sustain this firm – or the trust of its clients – for very much longer.
Greg Smith resigned on Wednesday as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.
I was very sad to read Mr Greg Smith’s bitter departure letter about the disintegration of the “culture” at Goldman Sachs.
I was fortunate to have worked for the firm for 34 years in two divisions, fixed income and investment management. During my career I had the privilege of working with outstanding people who exhibited the highest business standards and integrity.
The firm’s leadership from the days of Gus Levy, John Whitehead and John Weinberg through present management always stressed the importance of the client’s coming first.
All of us in leadership positions were expected to live by a very high standard of excellence and to be role models for our younger colleagues.
Goldman Sachs continues to be a leading market maker in thousands of global securities, and its willingness to risk its own capital on behalf of clients is unparalleled in the industry. Mr Smith’s comments are inconsistent with the firm I proudly knew.
Mr Smith, who was executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa, does not go into details in his already notorious op-ed article in Wednesday’s New York Times, Why I Am Leaving Goldman Sachs. But one imagines Goldman bankers spending their days delivering fresh flowers to elderly shut-ins and providing shelters for abandoned cats.
Serving clients was paramount. “It wasn’t just about making money,” Mr Smith writes. “It had something to do with pride and belief in the organisation.”
It must have been a terrible shock when Mr Smith concluded that Goldman actually was primarily about making money. He spares us the sordid details, but apparently it took more than a decade for the scales to finally fall from his eyes.
He says that Goldman’s culture has changed. “It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients.”
And he warns: “Without clients you will not make money. In fact, you will not exist.” It’s tragic that Goldman is losing an employee who realizes that you need customers to stay in business.
We have some advice for Mr Smith, as well as the thousands of college students who apply to work at Goldman Sachs each year: If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be.
Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so. (Or if you want to make your living selling derivatives but don’t know what a derivative is, as Smith concedes in passing that he didn’t at first.)
Goldman and other investment banks do perform an important role in our economy, and Goldman bankers – most of them, at least – can hold their heads up high. But it is not charity work. Goldman’s clients are mostly very well-off. Mr Smith’s lament that the bank no longer serves their needs above and beyond its own does not tug at our heartstrings. BLOOMBERG