Restoring Integrity Through Action

January 11, 2012

Goldman Sachs has undoubtedly been under enormous pressure since one of its executives resigned publicly via an Op-Ed in The New York Times.1 Greg Smith describes how the culture at Goldman Sachs has become “toxic and destructive” and that the “decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.” Smith goes on to call upon the board of directors to make the clients the focus of the business again, instead of viewing them as “muppets” that they can rip off. But how did the Goldman Sachs culture come to this? Smith states that the decline came about under the watch of the current Chief Executive Officer, Lloyd C. Blankfein. If so, this situation is emblematic of how the “tone at the top” really does trickle down to the rest of a firm’s culture.

Historically, leaders of banks have not always thought like this. Indeed, J.P. Morgan, one of the first well-established Wall Street bankers, was a pioneer of personal integrity, believing that personal integrity was central to success in banking. At the end of his life, he was asked at a congressional hearing, “Is not commercial credit based primarily upon money or property?”

“No, sir,” replied Morgan. “The first thing is character.”

“Before money or property?”

“Before money or property or anything else,” Morgan insisted. “Money cannot buy it. . . . Because a man I do not trust could not get money from me on all the bonds in Christendom.”2

This notion seemed to have been engrained in Wall Street during that time, which is probably one of the reasons those large banks stayed successful for so long. As Greg Smith states, “[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.”

It is difficult to say when the toxicity entered into the culture of banks in general. Some would argue that in the last decade, with the predatory lending practices of subprime mortgages and the handsome executive compensation packages that followed, the culture of Wall Street eroded, and, as a consequence, the rest of America and the world would suffer. The “tone at the top” went from a culture of integrity and humility to a culture of hubris and greed. At present there seems to be no solution.

As legendary corporate governance expert Robert A.G. Monks has said, “There is no remedy for greed.” Despite the tenor of futility, our system does allow a way to reform corporate practices and recover the wealth we have lost due to others’ misdeeds. We can monitor, expose, and bring action against those who do harm. Rather than blindly trusting the market we invest in, we can be active in holding corporations accountable by closely monitoring our investments, taking action against those that have depleted our wealth through fraud or misstatements, and demanding reforms in their culture through corporate governance practices to restore the integrity of the market.

The story of Goldman Sachs is not unique; it is emblematic of a toxic culture that pervades not only Wall Street, but all of corporate America. We live in a time when many are beginning to wake up and take a stand against those who profit from our misfortune. We see it every day in the “Occupy” movements across the world. As a leader in the shareholder movement, Robert A.G. Monks has said that “the only effective enforcer of corporate governance standards is ownership. . . . The inability and unwillingness of institutional investors to effectively monitor and require accountability of management is one of the principal causes of the continuing financial crisis. . . . Institutions must take the initiative to protect their relevance as a wealth preserving energy in a free society. They cannot wait for others, nor can they decline to act.”3

Shareowners can address this conundrum by acting responsibly and effectively as stewards. We can no longer rely on the central normative premise of justice that all human beings are subjects of equal moral worth. Lord Acton famously pronounced: “Power tends to corrupt, and absolute power corrupts absolutely.” This is true whether the exerciser of power is the dictator of a political entity or the Chief Executive Officer of a corporation. Change requires confrontation of, not acquiescence in, powerful present realities. It is time to restore the traditional role of the true owners of corporations, the shareholders, to invest, monitor and fully engage in the optimization of value of the corporations in which they invest.

1     See Greg Smith, Why I Am Leaving Goldman Sachs, The New York Times (Mar. 14, 2012), available at http://www.nytimes.com/2012/03/14/opinion/why-i-am-leavinggoldman-sachs.html?_r=1&ref=contributors.

2     See John Steele Gordon, An Empire of Wealth: The Epic History of American Economic Power 233 (HarperCollins 2004).

3     See Robert A.G. Monks, L’Appel, ICGN Annual Conference (Sept. 12, 2011), http://www.ragm.com/libraryFiles/113.pdf.

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