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Smith illuminates Wall Street’s flawed culture

CMU emergency notifications don’t reach everyone (credit: Juan Fernandez/) CMU emergency notifications don’t reach everyone (credit: Juan Fernandez/)
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If you’re interested at all in the affairs of Wall Street, then you’ve probably heard about Greg Smith. After resigning as vice president for Goldman Sachs, Smith published an opinion piece in The New York Times titled “Why I Am Leaving Goldman Sachs,” criticizing the company’s culture. Smith’s article points out two main flaws at Goldman Sachs: First, that the company is not working to help its clients but rather to make the most money off them; second, that it suffers from a culture of arrogance and disrespect toward clients.

Smith writes that Goldman Sachs wasn’t always like this, and, indeed, when he joined the firm 12 years ago, Goldman Sachs had just gone through a very momentous change. After more than 100 of years as a partnership, Goldman Sachs went public in 1999. That is when many like Smith think the company started to lose its moral compass.

The initial public offering only gave up a small ownership stake to traders, but after several more stock offerings in the following years, the company’s ownership became increasingly diluted with pension funds, investment management companies, and banks. With a few exceptions, shareholders like these manage many investments and only have the time and energy to worry about a company’s bottom line. In contrast, a private partnership might care about more than just revenues and may value intangibles like preserving a certain company culture or staying true to a certain ethical or moral code.

Any first-year business student can tell you that in a publicly owned firm, an employee’s primary responsibility is to the shareholders — not to the customers, not to a boss, and not necessarily to any code of ethics. In executive positions, employees act on the shareholders’ behalf. Since shareholders want a better return on investment, employees arguably have an obligation to do whatever it takes to achieve a better bottom line, even if that means exploiting clients for profits by recommending that they buy mortgage-backed securities while the company itself is shorting them.

Obviously, not all publicly traded companies are like Goldman Sachs, assuming Smith described the bank accurately. Southwest, for instance, comes to mind as a company with a widely admired culture. Moreover, not all private partnerships are beacons of morality. But you can imagine how in a company as driven, competitive, prestigious, and ruthless in bringing home profits as Goldman Sachs is, secondary concerns like caring about customers could get lost.

The culture of arrogance, however, may also be an indirect result of Goldman Sachs’ going public. Although shareholders’ pressure did not dictate that clients be referred to as “muppets,” it’s likely that it created an extremely vicious and competitive environment. Even in his article in Forbes criticizing Smith, former Goldman Sachs employee John Tamny confirmed this up-or-out, eat-what-you-kill culture: “Those who don’t produce are let go, and to produce they must beat their contemporaries at competing investment banks; many of those competitors eager to beat a Goldman Sachs that once neglected to hire them, or that once fired them.”

So, being employed and moving up the corporate ladder at Goldman Sachs is not just a source of income, but also implies that you are the best at what you do and “beat” the other people in your field, as you would in a sport. It’s human nature to feel just a little bit arrogant in this type of culture. Since clients are merely sources of revenue, it’s not hard to imagine how you could feel disrespectful toward them.

None of this, though, necessarily makes putting profits over customers or treating customers with disrespect right or even acceptable. These are exactly the type of attitudes that sparked movements like Occupy Wall Street.

However, given the fact that little has gotten better after the 2008 financial crisis, arguably a consequence of the culture on Wall Street, it’s hard to say if and how things might change.