Ethics And Compliance Lessons From Greg Smith’s Goldman Sachs Resignation Letter

Ethics And Compliance Lessons From Greg Smith’s Goldman Sachs Resignation Letter

Ethics And Compliance Lessons From Greg Smith’s Goldman Sachs Resignation Letter

The March 14 resignation announcement by Goldman Sachs’ executive Greg Smith is already being widely discussed as an indictment of the business practices of Wall Street in general and Goldman Sachs in particular. Good. Just as the outgoing tide of recession and financial catastrophe exposed underlying problems, the rising tide of stock prices and Wall Street profits hides them. Continuing analysis and self-reform will strengthen the long-term vibrancy of our capital markets.

But there are lessons here for any organization that cares about its reputation and ability to thrive in a complicated business environment.

1. Principles matter.

Goldman Sachs has fourteen business principles. They tweak them a bit from time to time. But the first is “Our clients’ interests always come first.” When you read Greg Smith’s letter, it is divergence from this principle that most troubles him. He closes with “Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist.”

Principles serve as a North Star for employees through all times. And they are troubled when they believe that their employer is diverging from them. So articulate your principles or values with care. Your employees—and others—may believe that you mean them.

2. Compliance is not enough.

As a financial services firm now regulated as a bank, Goldman Sachs has one of the largest and most sophisticated compliance operations on the planet. Greg Smith notes  “I don’t know of any illegal behavior, but will people push the envelope…”

In 2011, Goldman paid $550 million to settle U.S. SEC charges on issues regarding transparency and conflict of interest in marketing a credit instrument to sophisticated investors. Many smart lawyers I know believe Goldman probably could have defended its actions successfully in court. But evidently the reputational cost in the court of public opinion would have been too high.

What is the reputational cost of Greg Smith’s New York Times piece? Ethics and integrity must be the fundamental objectives, with compliance supporting them, not driving.

3. Sustaining a culture is not automatic.

Greg Smith describes the “old” Goldman Sachs culture in his piece: “[C]ulture 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.”

The firm grew. A firm with a few thousand people concentrated in New York and London became global. Goldman Sachs did recognize this. Over the years they discussed culture and integrity with every one of their employees and leaders multiple times. But according to Greg Smith (who, it must be noted, was one employee out of thousands) these efforts were not enough. Perhaps because…

4. Incentives matter.

Investment bankers are paid to be “long term greedy.” The PR people at Goldman do not like this phrase. I love it. Isn’t it a primary job of a publicly traded, for-profit enterprise to make money, a.k.a. be greedy? But it is a long-term profitability, one driven by lasting profitable relationships with clients, which must be based on trust.

As Smith notes, “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.”  The perception is that traders are rewarded based only on the short term—and that trusted relationships mean less.

When the numbers in question are as large as they are at Goldman Sachs (successful traders earn in the millions to the tens of millions) it is easy for most people to understand why they might assign lower priority to a principle than a payout.

5. Listen to the outsiders.

Goldman Sachs is a very diverse global firm. But the majority of its leadership remains American and British. I don’t know Greg Smith, but, according to his biography, he was raised in South Africa. This is going to provide a bit of an outside perspective, even if his Stanford education may have softened it.

Many of the prominent whistleblowers of the past decade were outsiders. Time Magazine’s “People of the Year” in 2002 were whistleblowers Sherron Watkins of Enron, Cynthia Cooper of Worldcom and Colleen Rowley of the FBI.  From Alexis deToqueville to today, outsiders may help organizations see cultural truths better than insiders can.

Whenever a story like this takes off, the first reaction is to look for villains—preferably only a few—and causes—preferably one simple one like greed.  Greg Smith does this for us: he attributes his take on the Goldman Sachs culture to leadership—and the belief that now one becomes a Goldman Sachs leader by making money for the firm, period.

The reality behind failures in organizational culture is almost always more complicated and hence less satisfying. And turning around a culture takes a lot of work by a lot of people for a long time. But it can be done. It won’t happen by new or more government regulations—these only reinforce compliance practices that benefit no one but lawyers and consultants. It will be done by organizations that understand that their own enlightened self interest will drive efforts to strengthen cultures of integrity and trust.


Steve Priest, senior advisor at Global Compliance

About the Author

Steve Priest was described by The Wall Street Journal as “one of the most sought consultants to keep companies on the straight and narrow.” For seventeen years Steve was president of the Ethical Leadership Group (ELG), a consulting firm that specializes in ethics training & communications and compliance assessments. Steve now serves as founder of ELG and senior advisor at Global Compliance, the compliance solutions firm that ELG joined in 2007. For more information about his work, visit Steve’s CCI author page.

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About the Author

Steve Priest

Steve PriestSteve Priest was described by the Wall Street Journal as “one of the most sought consultants to keep companies on the straight and narrow.” Prior to his recent creation of Integrity Insight International, Steve founded and ran the Ethical Leadership Group, an ethics consulting firm that he sold to Global Compliance in 2007 (now NAVEX Global.) Steve has

  • Consulted “on the ground” in 50 countries on every continent with over 25% of the Fortune 200.
  • Trained forty Boards of Directors and senior leadership teams, including Nobel laureates, CEOs and (retired) senior politicians.
  • Served as the trusted, “go-to” adviser for CEOs, GCs, and Compliance Officers when organizations are in trouble, assisting with assessments, strategies, and communications within and outside the organization.
  • Been relied upon by the Securities and Exchange Commission, the Department of Justice, the Department of Defense (US) and Ministry of Defense (UK) and other government agencies to objectively assess organizational culture and compliance programs.
  • Been approved by the government of India to conduct anti-bribery training and coaching in a sensitive case.
  • Written the most widely imitated Codes of Conduct in the world, read by millions of employees.
  • Informed and entertained hundreds of audiences with his skillful blend of facilitation and platform skills as well as conveying serious messages with a sense of humor.
Prior to founding the Ethical Leadership Group in 1993, Steve Priest was for three years executive director of the Center for Ethics and Corporate Policy, a Chicago-based ethics think tank. Priest received his ethics training both in the real world of business and inside the ivy covered walls at Harvard University’s Divinity School, where he received a Master of Theological Studies degree. He has his MBA and BA from the University of Chicago, and studied international organizational development in the Graduate Business School at the Katholieke University of Leuven in Belgium. Contact info: 312-799-9586    Steve@IntegrityII.c