Financial Crisis: Impacts on and Responses by Goldman Sachs
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-How it survived and keeps leading the financial services industry
1. Company Introduction
Goldman Sachs was founded in 1869 when Marcus Goldman, an immigrant from Europe, began a small enterprise to provide an alternative to expensive bank credit. In the 1950s Goldman Sachs already played a lead role in establishing the municipal bond market and in the 1970s and in 1999 it become the last bulge-bracket bank to go public by raising $3.7 billion (Cole 2008). Since then, with rapid globalization, Goldman Sachs Group Inc. has become a global investment banking and securities firm with headquarters in New York City with more offices throughout 23 countries in the major international financial centers including Tokyo, London and Hong Kong. The group is majorly involved in investment banking, securities, investment management and other financial services primarily with institutional clients. It is also engaging the trading and private equity deals as a primary dealer in the U.S. Treasury security market (Rezaee 2011, p. 509). During the financial crisis, the financial service industry faced great challenges. There were five major independent investment banks on Wall Street before the most recent financial crisis, but only two of them survived: Goldman Sachs and Morgan Stanley. Though forced to become commercial banks, the survival of these two investment banks deserve some explanations (Lasher 2011, p.228) which will be the focus of this study.
1.1 Organizational structure
In term of organizational structure, in the constantly changing and dynamic business of investment banking, Goldman Sachs has maintained its preeminence by finding, developing and dominating the fastest growing and most profitable parts of the business by adopting a unique organizational structure which is a flat and flexible and allowed it to capitalize on growth opportunities ahead of other competitors by faster reallocating capital and human resources on the new opportunities and new markets (Deans & Kroeger 2004, p. 124).
1.2 Corporate culture
In term of the strategic orientation in the corporate culture, a set of beliefs that value long term orientation, business growth, risk taking, team work and other business principles that are based on John Whitehead (co-head of the company)’s original principles (appendix 1.0) make the company distinctive from other competitors (Heskett 2011, p. 74). As suggested by Gurnek Bains and Kylie Bains (2007, p. 21) that Goldman Sachs encourages a strong sense of stewardship (leave the firm a better place than you found it) and the company has long been driven by a powerful sense of excellence and a view that doing right thing and building strong, enduring relationships with clients works out in the end which they describe as “long-term greedy”. And regarding the corporate culture of risk taking, one of the 14 business principles states that “We stress creativity and imagination in everything we do” by constantly striving to find a better solution to a client’s problems. And the company has kept risk culture by continuously attempting to fill the senior manager positions with those who understand risk taking from both a qualitative and quantitative point of view (Caouette, Altman, Narayanan & Nimmo 2011). And in order to maintain the quality of the decision making in a long time, the company promotes teamwork and communication as part of the corporate culture to better manage risks under a strong risk culture.
1.3 Leadership development & the role of change agent
In term of leadership development, Goldman Sachs similar to many other large MNCs is strongly committed to obtaining a competitive advantage of developing effective leaders. And principle element of leadership in the company is centered on the experiential, action-based learning (Whitney 2004). In addition the company has long been investing significantly in the executive training and coaching in the leadership development. For example, the company had established its learning center and hired the head of GE’s leadership development center at Crotonville to lead a group of eight professional who reported directly to the firm’s executive officers with the aims to make the development of outstanding leaders a core competency of Goldman Sachs (Goldsmith & Morgan 2004, p. 321).
A change agent is a behavioral scientist who knows how to get people in an organization involved in solving their own problems. His or her main strength is a comprehensive knowledge of human behavior, supported by a number of intervention techniques. The change agent can be either external or internal to the organization (Sharma 2009, p.236). As proposed by David W. Tschanz (2008, p.195), managing the kinds of changes encountered by and instituted within the organizations requires an unusually broad and finely honed set of skills that are grouped as: Political skills, Analytical skills, People skills, System skills and Business skills.
1.4 Business ethics and corporate social responsibility
In term of business ethics and corporate social responsibility, as one of the 14 business principles says that “Integrity and honesty are at the heart of our business” Goldman Sachs anticipates its associates to maintain high ethical standards in everything they do in term of both at work for the firm and in their personal lives (Goldmansachs.com 2011). With a high ethical demand, successful employees in the company are those who could be able to create and sustain positive working relationships with increased responsibility and maintaining high ethical standards (Lieber & Meltzer 2004, p. 105). But recently, there are some ethical problems appeared during the global economic crisis as the company was criticized as being contributing to the financial crisis as it had been the biggest packager and seller of collateralized debt obligations (CDOs), packaging thousands of mortgages together, 75% sub-prime, yet passing them off as AAA paper and when the market deteriorated, the company managed to make profit by betting against them and selling them short (Nytimes.com 2011).
2. Review of 2007 – 2009 Global financial crisis
The 2007 to 2009 global financial crisis (also known as global credit crunch or sub-prime mortgage) is considered as the worst economic crisis with significant and long term impacts on the international system since the Great Depression (Bottelier & Baru 2009, p. 3). The crisis started with the United States sub-prime mortgage crisis that happened in 2007 triggered by the bursting of a long accumulated real estate bubble in the late 2006, the sub-prime mortgage crisis soon emerge into a global financial crisis by causing a sharp rise in mortgage delinquencies and foreclosures, dramatic drop in the market value of sub-prime mortgage backed securities and also a severe drop in the capital and liquidity of many large banks and institutions as well as widespread tightening credit (Sun, Stewart & Pollard 2011, p. 2). With a domino effect, following the United States sub-prime mortgage crisis the stock market and financial systems in the major developed economies collapsed resulting in a global scale financial crisis with the impacts on the developing economies yet to be reflected in the relatively more self-closed financial system and economies. In one IMF (International Monetary Fund)’s Global Financial Stability Report (GFSR) in the late 2009, IMF said the total estimated cost of the global financial crisis as $4.054 trillion which includes $US2.712 trillion in losses in US-originated assets, estimated $US1.193 trillion of the European losses and $US149 billion of the Japanese losses (Abc.net.au 2009). This estimation is also exclusive of the indirect costs coming together with a slower economy growth worldwide which could be reflected in the world GDP growth trend in the chart below.
Figure 1 World Gross Domestic Product from 2001 to 2009
Source: World Bank 2010
There are many causes that had been suggested for the financial crisis by a lot of researchers, analysis and politicians, such as unrealistic assessment of the high risk financial products by market participants, complex and opaque financial products and failure of regulators and the malfunctioning of the credit rating agencies.
2.1 Unrealistic assessment of the high risk financial products
One of the widely accepted causes of the recent financial crisis is considered to be the mis-specification of the credit derivatives and their risk. According to Hawley, Kamath and Williams (2011 p. 34), the 2007 to 2009 credit crisis can be directly tied to the demand for high-risk and high return securitized mortgage-backed securities and investors’ confidence that they could diversity or hedge away the risks inherent in these financial products. And when the investors consider that the portfolio returns could be enhanced by increasing the percentage of the high risk securities but such changes of portfolio will add to the leverage which increases the possibility of a financial collapse.
2.2 Complex and opaque financial products
It is believed that excessive “innovation” in the financial sector had led to the proliferation of too many unsound financial products and too many complex financial instruments which are not familiar and well known to the investors (Saw 2010, p. 1). By slicing and dicing a mortgage, financial engineers created an array of investment products like mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized mortgage obligations (CMO) or collateralized debt obligation (CDO). And these exceedingly complex products are so opaque that very there were few people really understand them and how they work so that many people argue that the complexity of the derivatives products, which were developed from relatively simple mortgages, was a major contributor to the sub-prime crisis.
2.3 Failure of regulators, the credit rating agencies
As described by a senior executive at one of the large United State banks, there are plenty of regulators going over the books, and the failure of regulators to force financial institutions to follow sound risk management practices was one of the most important reasons for the financial crisis (Kunt, Evanoff & Kaufman 2011, p. 68). And according to The Securities and Exchange Commission (SEC), there were “apparent failures” at 10 credit rating agencies that include Standard & Poor’s (S&P) and Moody’s were not making timely and accurate disclosures or managing conflicts of interest (bbc.co.uk 2011). Though the SEC did not straightly relate the specific crisis to specific agencies, it did conclude that two of the big three did not have specific well prepared and implemented policies to manage conflicts of interest where they rated financial products issued by banks in which the agencies were large shareholders.
3. Report objectives
Identify major impacts of the global financial crisis on the global financial service industry and the individual company of Goldman Sachs
Identify the major management issues (ethical dilemma, leadership failure and etc.) reflected in the crisis
Conclude several major reasons for Goldman Sachs’s successful survival
Identify challenges, risks and ethical problems found in the crisis that exist in Goldman Sachs
Provide recommendations for Goldman Sachs to enhance the business success and further avoid financial uncertainties based on the analysis of the ongoing trends in the post crisis industrial and economy environment
4. Literature review
4.1 Company culture & business survival in crisis
Culture could be defined as the commonly held values and beliefs of a particular group of people (Weitz & Shenhav 2000, p. 78). Organizational culture refers to the values, norms, beliefs and practices that govern how an institution functions. And at the most basic level, organizational culture defines the assumptions that employees make as they carry out their work (Goodpaster 2007, p. 19). Kotter and Heskett (1992) suggested that an adaptive corporate is a facilitator of good organizational performance. An adaptive culture encourages employees to trust each other, to take risks, to act pro-actively and to continuously seek for opportunities, improvement and change (Alvesson 2002). In his point of view, when changes are needed in some circumstances such as crisis, it is important that the culture system of the company could be able to accept and promote such changes. And as an individual company tends to have its own and unique organizational culture, Tierney (2008, p. 25) many organizations will find themselves busy dealing with the organizational culture in an atmosphere of crisis management rather than focusing on reasoned reflection and consensual change. And in many situations, the lack of understanding about the role of organizational culture in improving the management and institutional performance will reduce the ability to address the challenges in the crisis situation. In another perspective, Pauchant and Mitroff (1992) understand the importance of corporate culture in crisis management as that because studies have long held that executive mindsets will drive the organization’s dominant cultural values and norms, the crisis management efforts may fail if the executives within the corporate culture take the lead to resist the changes needed to tackle the challenges.
4.2 Leadership development & successful crisis management
The old assumptions about the distribution of power are no longer valid. An emphasis on control and rigidity serves to squelch motivation, innovation and morale is more effective and leaders share power to increase the brain power of the organizations (Daft & Lane 2007, p.7). This view reviews the fact that it more important than ever to cultivate leadership in the companies to provide brain power to deal with the changing business environment and increasingly complex situations including the crisis scenarios. As suggested by Zaremba (2010, p. 44) leadership and organizational culture are 100 percent crucial for the successful crisis communication effort to the stakeholders which include the internal parties such as the employees and investors and external stakeholders such as the public media and the society. And much regrettably, despite having the right corporate culture, an organization’s inappropriate or unnecessary leadership changes can shift the focus of crisis preparedness and response from pro-active to reactive and cause the company to become more vulnerable to the challenges and difficulties. What is more, as crisis management is about clarity of understanding of the problem and clarity about what is needed to resolve it, it would be important to integrate sound crisis management arrangements and procedures into the leadership development to increase the preparedness of the organizations in case of crisis (O’Flynn & Wanna 2008, p. 65).
4.3 Business ethics & long term business success
According to Cleveland (2002, p. 242) ethics develop conscience which encourages appropriate behavior, and companies without ethics will not be able to sustain continuous improvement as they do not have a standard to decide what behaviors are right and fair and should be promoted in the company while dealing with customers, employees, creditors and shareholders. Business may sustain greater profits in the short term without a high standard ethics code, but long- term financial performance demands an ethical image for the well-being of customers, employees, lenders, shareholders and the public (Cleveland 2002, p.242). In our general understanding, there is an usual misunderstanding that ethical business practices and operations will definitely incur higher cost than the unethical practices, but as suggested by Christopher Megone and Simon Robinson (2002, p. 27) when business ethics is properly understood, it becomes clear that it has nothing to do with unproductive ‘do-gooding’ and business ethical behaviors would require the owner value to be maximized by reflecting the indirect, distant and qualitative effects of a business’s actions. And when the business is understood as maximizing long term owner value, it becomes entirely plausible that business performance should be enhanced by ethical conduct. And in the context of the business ethics of employment, a long term career path in the one firm would be created and offered to the employees where they are treated as valuable assets whose skills and insights count (Werhane & Singer 1999, p. 24). This means that in the long run the stability and sustainability in the employment relationship will pay off to the organizations.
One of the major ethics theories is the deontological ethics which could be defined as, “the view of obligation as immediately perceived and therefore independent of any reasons which may be offered in support of on duty as against another (Banner 1968, p.165). The research of the deontological ethics is also known as duty-based ethics. Immanuel Kant formulated a system of duty based ethics which includes the core idea that an ethical action is a matter of following absolute rules without exception (Edson 1997, p.58). Let us look at the duties that Goldman Sachs, as an investment bank, should have to the clients. According to Stefan Grundmann,Wolfgang Kerber and Stephen Weatherill (2001, p.35), there are three categories of duties which a investment bank owes its clients quite intensively: the duty of loyalty and the duty of care, the duty to give information and the duty to avoid conflict of interests.
Figure 2 The GAAP Oval
Source: Albrecht, Stice, E. K. & Stice, J. D. 2008, p.192
Though many people would vote for ethical business behaviors, the more practical issue is about application in the actual scenario. When ethical problems and dilemmas happen, it is not always convenient to review back to the think ethics books that contain complex and difficult to apprehend ethics theories, it would be important for us to use some analytical tools to come to conclusions. One of the analytical tools that we will be using later in the discussion is the GAAP Oval which is a diagram as shown above, it represents the flexibility that a company or a manager could make within the GAAP ranges to report the earning number based on the many accounting methods and assumptions. For example, while reporting the earning point D or E outside of the GAAP Oval will unethical due to it needs the creation of fraudulence as normal and legal accounting changes could not yield these two earning points. And according to the GAAP Oval, reporting earning point of A, B and C would be within the accounting flexibility and appropriateness. Based on the view of W. Steve Albrecht,Earl K. Stice and James D. Stice (2008, p.192), in term of credibility, when the overall operating performance is good and it could be ethically permissible to try to hide some lackluster performance by reporting a high earning point C rather than earning point A reporting which seems to be in accordance with the responsibility to report the most conservative, worst-case number.
5. Research methodology
5.1 Research design
This study will begin with careful descriptive research regarding the causes and impacts of the global financial crisis on the selected case study of Goldman Sachs and the management response from the company with the help from various surveys, government sponsored research, economic information and other data and indicators released by the government or institutions, and based on the findings of the descriptive research the study will use mainly explanatory research to answer the question why the company could have survived the global financial crisis can keeps leading the financial services industry followed by personal recommendations on how to deal with the risks and challenges identified in the case analysis.
5.2 Method of data collection
Based on the research design type of case study and the expected difficulties in getting first hand data from Goldman Sachs because larger and higher-quality databases would be unfeasible for individual researchers, secondary data which is collected by someone other researchers, institutions and organizations would be the major source of data. The secondary data could be obtained from two different research strands: Quantitative and Qualitative. Quantitative source data which could include various quantitative survey and publicized statistics and quantitative information from different reports such as the annual reports; Qualitative source data that could include independent evaluation reports, media reports, structured and unstructured interviews done by other parties. When conflicts happen between two different data, we will tend to use the more authoritative one to better increase the reliability of the data used.
5.3 Data analysis
In term of the quantitative analysis, measurement of the central tendency, means and other ways of analyzing the numbers and percentages obtained from the quantitative data could be used to study the descriptive statistics. Also calculation of some ratios such as the financial ratios would also be needed. In term of the qualitative analysis, methods such as constant comparison, analytic induction, logical analysis and narrative analysis with the help of figures and charts would be used.
6. Case analysis
6.1 Timeline of the major relevant events involved in this study
By July of 2007, when the financial industry had begun to observe the risks from the sub-prime mortgage market, based on Fitch (a famous international rating agency), all the five Unite States largest investment banks including Goldman Sachs were demonstrating “solid results despite the subprime challenges (Griffin 2010, p.92).
During the 2007 subprime mortgage crisis, Goldman was able to profit from the collapse in subprime mortgage bonds in the summer of 2007 by short-selling subprime mortgage-backed securities.
In September 22, 2008 the Federal regulators converted Wall Street’s then remaining stand-alone investment banks – Goldman Sachs and Morgan Stanley – into bank holding companies. The move allows Goldman and Morgan to scoop up retail banks and to streamline their borrowing from the Federal Reserve. The shift also aimed at removing them as targets of nervous investors and customers, who brought down their former rivals Bear Stearns, Lehman Brothers and Merrill Lynch in that year (Money.cnn.com 2008).
On November 11, 2008, the ”Los Angeles Times” reported that Goldman Sachs, which earned $25M from underwriting California bonds, had advised other clients to “short” those bonds. Shorting is essentially betting that the state will default on the bonds, which serves to drive up the cost of the issue to the state. Critics had pointed to the fact that employees and consultants of Goldman Sachs have taken the United States Government positions especially in the high ranking positions that resulted in the potential for conflicts of interest (Nypost.com 2010).
In December 2008 Goldman Sachs dubbed an orphan month. It changed its reporting schedule this year to follow a calendar year from a fiscal year that started in December. December 2008 was orphaned with a loss of $1.3 billion when Goldman Sachs switched fiscal calendars. The firm ended its 2008 year on Nov. 30 and started calendar 2009 in January. The first quarter of 2009, drawing on returns from March instead of December, showed a profit of $1.8 billion (Businessweek.com 2009).
In January 2010, despite a record 2009, the bank announced that it had set aside only $16.2 billion to reward its employees (Nytimes.com 2011).
On 28 April 2010 Lloyd Blankfein and other executives at the Wall Street giant were accused by a US Senate panel of acting unethically, while Americans lost jobs and homes, and Lloyd Blankfein insisted on no improper acting by Goldman (Bbc.co.uk 2010).
On June 9, 2011, Goldman Sachs has been fined $10million for tipping off favoured clients with trading ideas. The group was charged with violating state law in Massachusetts by dealing in ‘trading huddles’, where it would give priority clients tips which could have been at odds with research published publicly by the bank. As well as accepting the fine, the investment banking company has also agreed to stop the practice, which has been labelled ‘unfair’ and ‘preferential’ by critics (Dailymail.co.uk 2011).
6.2 Reasons for its survival
In concluding the reasons for the successful survival of Goldman Sachs, the Fortune magazine’s assessment pointed out that “the firm’s culture has kept it as nimble as a start-up” (Griffin 2011, p.94); some believe that it is the long established enterprise-wide internal risk management system that saved the company (Diebold, Doherty & Herring 2010, p.76); Grimshaw and Baron (2010, p.94) believed that it is the leadership behaviors, not bad performance based on the ethical standard and management decisions that ensure the company is focusing on the long-term greedy strategy. Below we will probe into the reasons for the company’s survival by checking these areas.
6.3 Ethics analysis
6.3.1 Change of accounting period and earning management
220.127.116.11 Review of the Change of accounting period
Accounting period refers to the time span over which the accounting data is recorded and reported in the financial statements (Minars 2003, p.6). As mentioned above, in December 2008 Goldman Sachs dubbed an orphan month by changing the account period. As a result, a fiscal quarter 3ME 11-30-08 was reported and the next quarter reported subsequently was the 3ME 3-31-09. The 1ME 12-26-08 was reported separately, as an “orphan month”, and not included in quarterly financial results. The creation of the orphan month had attracted wide range of criticism. In April of 2009, Morgan Stanley announced a net loss of 1.3 billion for the previous December and a 177 million loss for the 2009 first quarter, but since the earning of the first quarter was beyond the market estimation, there was speculation that the company had diverted some losses to December. It seems obvious that Goldman Sachs had used convenience of changing the account period from financial year to calendar year, and though the company’s chief financial officer (CFO) had particularly explained on the 10th page of the 2009 Quarter 1 earnings release documents about the outcomes of the December 2008 earning situation, the creation of the “missing month” that attributed to the widely criticized “misleading phenomenon” and information that made the investors believe that the company had made a timely turnaround. The change of accounting period like many other accounting techniques such as usage of different methods and assumptions will contribute to an effect of so call “earning management”, but are all earning management methods necessarily unethical? Below let us see how the GAAP oval could help us to decide the appropriateness and nature of ethics of the decision to change the accounting period.
18.104.22.168 The GAAP oval analysis
In the case of Goldman Sachs’ change of accounting period setting, it is within the GAAP Oval and thus ethical for the following reasons: firstly, there was severe lost in the December of 2008, by changing the accounting period, Goldman Sachs managed to avoid such loss to be computed into the next accounting period, there is no fraudulence incurred in this transaction. Hence, the management of earning is within the GAAP Oval though the earning point reported is very high, it did not went out of the oval; secondly, in April 2009, the company had already release the information about the loss in December to inform the relative party about the company’s earning situation in that single month; thirdly, it is reported that most of the financial analysts and the major media had known very well of the accounting change and a deteriorating market situation and they did expect significant loss in the investment banking industry.
22.214.171.124 Critical discussion
Though there are claims suggesting that there should not be a GAAP oval and there is only one single GAAP point that reflect the true earning number and thus the usage of earning management would be unethical especially when the amount that was involved in the case of Goldman Sachs in 2008 December is large, in my own perspective, the change of accounting period itself is not unethical. The reasons could be four folds: firstly, it is a common norm in the accounting departments of the business firms to usage accounting techniques such as changes of accounting methods and accounting period which was used in the case of Goldman Sachs and such techniques are widely accepted and known by the investors and analysis; secondly, Goldman Sachs changed the accounting period with full disclosure to the public, the full disclosure will be important as it reduced the chance the the investors and analysis will be misled by the quarterly financial reports that had not taken into consideration of the loss of December 2008, what’s more the loss of December 2008 as mentioned above had been released to the public separately; thirdly, the accounting change of Goldman Sachs is also not frequent indicating that Goldman Sachs did not use the accounting techniques so often that could be contributing to the abuse of the accounting changes; using a utilitarianism view which supports the view that actions and policies should be evaluated on the basis of the benefits (utility) and the costs they will impose on the society and the public and utility is any benefits produced by an particular action (Velasquez 2006, p.78), according to the reports in June 2009 that Goldman Sachs which was owing the US government USD $10 billion was already looking to break all-time records in 2009 in term of profit generation and created the most profitable year since its foundation; and looking back on the accounting period change, this change did contributed to the inconceivable turnaround and profit making in the difficult time by restoring the investors and market confidence to the company though it was not a piece of good news to the competing firms.
6.3.2 Issues of “trading huddles”
126.96.36.199 Problem definition
After a story by financial reporter Susanne Craig revealed that Goldman was holding meetings between its research analysts and traders at top hedge fund clients and clients considered less important were excluded from the meetings. Massachusetts regulators opened an investigation into Goldman (Cnbc.com 2011). The followed up investigations had reviewed that since year 2006, the company was found to be engaging in the “asymmetric service initiative” as a way to bring in additional revenue from the equity research in which clients were divided into four major “tiers” according to the trading commissions. The core part of the problem “trading huddles” is that the company by engaging in the “asymmetric service initiative” had actually create unfair treatments received by the clients by exposure by equity analysts of unpublished short-term trading ideas and thus put some biggest clients at an advantage over others smaller clients.
188.8.131.52 Critical discussion
Below we will apply the theory of deontological ethics and do the analysis of the ethics behind Goldman Sachs’s trading huddles issues. As mentioned earlier, according to Stefan Grundmann,Wolfgang Kerber and Stephen Weatherill (2001, p.35), there are three categories of duties which a investment bank owes its clients quite intensively: the duty of loyalty and the duty of care, the duty to give information and the duty to avoid conflict of interests. An investment bank has to provide information as to the financial instrument (product) and to the suitability for the particular client. The directive is quite specific in this respect and states that all “material” information has to be given and in an “appropriate”, i.e. understandable way. As in the case regarding the “trading huddles” in Goldman Sachs, its behavior to hold the information exchange and discussion meeting and provide advices to the key largest clients while excluding the participation of other clients is unethical and it broke the duties to the clients for the following reasons: firstly, the trading huddles were against the duty of loyalty and duty of care. By communicating the investment information of the small and medium sized clients to generate investment portfolios that were added additional income to the big clients, Goldman Sachs betrayed the small and medium sized clients and also the duty of care for them was not well implemented; secondly, the trading huddles were against the duty to give information. By engaging in the “asymmetric service initiative”, the information provided to the many clients were limited and incomplete and was thus contradicting with the duty of giving information to the clients which requires the provision of full information that the consultants had. Here the breaking of the duty to give information is not requesting the company to provide the same investment suggestions to all the clients, but knowingly holding back the information that could help the smaller clients to generate avenue is obvious breaking the duty to give information; thirdly, the trading huddles were against the duty to avoid conflicts of interests. As conflict of interests could be described as behaviors that can interfere with perceptions about a person’s objectivity and independence, for the investment consultants who should keep the investment information proprietary to the clients but exchange with other consultants in term of “trading huddles”, these behaviors had actually contributed to the generation of conflicts of interests because some clients’ information of investment activities were traded for other clients’ extra profit resulting in the conflicts of interests.
6.4 Corporate cultural analysis
Though the reasons for Goldman Sachs’ successful survival over a number of crisis and the most recent global financial crisis are considered to be numerous and also complicated, as pointed out in the Fortune magazine the Goldman Sachs business profitability and the durability are actually a testament to the company’s business culture which is an impossible-to-replicate bundle of “extreme aggression, deep paranoia, long term orientation, individual ambition and robot like teamwork (Griffin 2010, p.92).
In term of cultural feature of long term orientation, this feature has long been a part of the company culture and is enhance by the passed long history of having a private partnership organization. In the long history of the private partnership, the partners especially the full partners were usually employing the Goldman Sachs to manage their capital and assets for several decades. Because of the long term investment, from the perspective of the investors and clients, they would expect that the investment would be profitable in a long tern base rather than gaining a large sum of money in a sudden. Under such long partnership like investment relationship between the Goldman Sachs and its clients, it will also smooth the investment advisers’ professional work by reducing the clients’ anticipation of short term profit. While the investment analysis or consultants’ work are supported by the clients’ long term understanding, there is less pressure for the analysis or consultants to search for short term risk investments but focus on those portfolio investments that could create more overall profit to the clients.
In term of the extreme aggression, this cultural trait could be seen from the Goldman Sachs’ well known high risk high return culture. As mentioned above regarding the corporate culture of risk taking, one of the 14 business principles states that “We stress creativity and imagination in everything we do” by constantly striving to find a better solution to a client’s problems. And the company has kept risk culture by continuously attempting to fill the senior manager positions with those who understand risk taking from both a qualitative and quantitative point of view (Caouette, Altman, Narayanan & Nimmo 2011). And based on the view of Broderick (2007) before the happening of the global financial crisis, there had always been a focus of risk especially in the higher level of management in the Goldman Sachs in term of being aggressive of risk taking and reasonable risk management. The culture of Glodman Sachs always sends a message to its people that opportunities will come with risks. And the company encourages risk taking behaviors so long as the investment consultants and advisers know well about how the risks could be managed. And in term of the risk control, wide range of communications among the organization and open dialog about the risks are promoted as part of the corporate culture in Goldman Sachs. For example, as mentioned above Goldman Sachs investment advisers had long been adopting the “trading huddles” in the company in term of the behavior to hold the information exchange and discussion meeting and provide advices to the key largest clients while excluding the participation of other clients, irrespective of the ethical issues, the holding of the meetings between its research analysts and traders at top hedge fund clients actually helped manage the risks by offering counterbalance to the risks. Such strong risk culture well explains the fact that though the last month of 2008 was orphaned with a loss of $1.3 billion when Goldman Sachs switched fiscal calendars, the firm continued its leadership in worldwide mergers and acquisitions, ranking first in announced and completed transactions for the calendar year, the direct result of the bold risk taking investments soon after the outbreak of the financial crisis which brought significant risks and uncertainties to the industry and even to the company itself was that Goldman Sachs achieved net earnings of $13.39 billion in 2009 and produced a 22.5 percent return on average common shareholders’ equity (Fiercefinance.com 2010). The strong risk culture in term of the promotion of high risk high return concept could also be seen from the company’s compensation system as the company would not have any hesitation to use any means to compensate its talents when they really do a good job in bringing revenue to the company and the clients. As in 2009, Goldman’s employees are still well paid by any measure. If compensation were spread evenly among its 32,500 employees, each would collect about $498,000. That’s less than the $700,000 some had predicted several months ago. But in practice, pay at Goldman, as at other banks, is skewed heavily toward top producers, who stand to earn many millions while others collect much less (Nytimes.com 2011). Hence the survival and strong bounce back of Goldman Sachs had strong relationship with the company’s risk taking culture.
6.5 Leadership analysis & the role of change agent
As mentioned above, leadership performance has been a major source of core competitiveness that the company had relied on to survive the global financial crisis. Lloyd Blankfein, the CEO of Goldman Sachs was considered as the master of risks and under his leadership the company not only navigated the 2008 global financial crisis better than others on Wall Street but is set to make record profits, and pay up to $23bn (€16bn, £14bn) in bonuses to its 31,700 staff (Gapper 2009).
Looking back on the history of Goldman Sachs, in term of leadership as commented by the previous Chairman and Chief Executive Officer Henry M. Paulson that Leadership Development at Goldman Sachs is critical to the organization and excellent leadership has driven Goldman Sachs’ success for 130 years through sustained, superb execution across a range of markets and products. The best way to maintain that advantage is by recruiting, training and mentoring people as we always have—one at a time, with great care. Goldman Sachs is expected to be a magnet for the very best people in the world—from new graduates to senior hires. At the same time, the company is focusing on developing our very deep bench of talented people and improving and extending our skills (Annual Report 1999). Below we will examine the role of Lloyd Blankfein as a change agent to see how the CEO of Goldman Sachs had contributed to the successful survival of the company.
In the case of Lloyd Blankfein in Goldman Sachs, he was the internal change agent during the global financial crisis that helped manage the crisis and bring in positive change for Goldman Sachs to survive the crisis. As proposed by David W. Tschanz (2008, p.195), managing the kinds of changes encountered by and instituted within the organizations requires an unusually broad and finely honed set of skills that are grouped as: Political skills, Analytical skills, People skills, System skills and Business skills. In following we will analyze the some skills that Lloyd Blankfein exhibited during the financial crisis.
6.5.1 Political skills
As known to us, organizations are inherently political arenas (Mintzberg 1985). As defined by Ferris et al. (2005, p.127), political skill is the ability to effectively understand other at work and to use such knowledge to influence others to act in ways that enhance one’s personal and/or organizational objectives. Lloyd Blankfein like many other business leaders in the investment banking industry had political involvement. Blankfein is a contributor to mostly Democratic Party candidates and donated $4,600 to Democratic Party candidate Hillary Rodham Clinton in 2007. Goldman employees and their relatives contributed almost a million dollars to Barack Obama’s presidential campaign making it “the company from which Obama raised the most money in 2008” and Blankfein has visited the White House ten times as of February 2011 (Homelessinsb.org 2011). Though we may not know the content of the dialogues that Lloyd Blankfein had with the While House officials, we can logically assume from the result of the crisis that Lloyd Blankfein had well used the political skills to influence the government decision and strategy forming and make it convenient to the company though this had led to the charge that the company had been involved with the conflict of interests.
6.5.2 Business skills
Business skills refer to the abilities needed to understand and manage the business in term of profit making in term of where it comes from, where it goes, how to get it and how to keep it (Pathak 2011, p.159). During the financial crisis, under the leadership of Lloyd Blankfein, Goldman Sachs had made strategic changes to get adapted to the rapidly changing environment, for example on 9 Sep 2008, GS announced it had closed GS Loan Partners I with $10.5 billion in equity and leverage commitments, including more than $1 billion of equity from the firm and its employees. This is the first senior debt fund of its kind raised by Goldman Sachs and the 15th fund formed by the firm’s Principal Investment Area (PIA) since 1986 (Stockhouse.com 2008). And also there were many other deals that pushed forward the strategic change in term of business focus for example to contribute to the big turnaround that the organization had managed to achieve.
To summary the above analysis and discussion and in response to the proposed objectives of the report, conclusions are made as following:
First of all, the financial crisis had severe impacts on the global financial service industry and also on the individual company of Goldman Sachs in term of direct loss in the avenue and profit making which can be seen from the fact that in June 2009 Goldman Sachs was owing the US government USD $10 billion;
Secondly, there are several reasons behind the company’s successful survival over the severe global financial crisis. In the field of ethics, the company used an ethically safe technique to change the account period to manage the earning to boost the investor confidence, but it does adopted some unethical business behaviors such as the discussed “trading huddles” which had also contributed to the business success in the short run. In the field of corporate culture, the strong risk culture and teamwork and long term orientation had assisted the company to make a big turnaround one year after the global financial crisis that almost led to a cease of the business through a number of business activities such as some bold risk taking investments and focus on risky M&A (merger and acquisition) in a number of industries. And in the field of leadership, the big turnaround had been under the leadership of Lloyd Blankfein who was proved to be an excellent internal change agent during the global financial crisis that helped manage the crisis and bring in positive change for Goldman Sachs to survive the crisis. The change agent skills such as political skills and business skills that belong not only to Lloyd Blankfein but also to many other Goldman Sachs senior executive had contributed to the successful receiving of the government bailout and also the opportunities to change the bad situation in a good direction of development.
Thirdly, as we have reviewed earlier, when business ethics is properly understood, business ethical behaviors would require the owner value to be maximized by reflecting the indirect, distant and qualitative effects of a business’s actions and when the business is understood as maximizing long term owner value, it becomes entirely plausible that business performance should be enhanced by ethical conducts, and since in our disscussion the company, Goldman Sachs had been engaged in some unethical business behaviours, though some unethical decisions and organizational behaviors such as the trading hurdles did seem to be contributing to the profit generation in the short run, we still view such unethical behaviors as detrimental to the company’s long term business development and survival of the company. Below we will provide some recommendations for the group to enhance its business ethics performance throughout the company.
8.1 Encouraging whistle blowing behaviors
As analyzed and concluded above, Goldman Sachs had been engaging in some unethical business practices such as the “trading huddles” and conflicts of interest through political lobbying, and based on the literature review on the positive relationship between the promotion of the ethical behaviors and the long term business success, it would be recommended that Goldman Sachs adopts methods to eliminate such unethical business practices. One of the techniques to deal with the possible unethical business practices is to promote a culture and mechanism of whistle blowing. Whistle blowing policy in an organisation refers to disclosure by former or current employees of any illegal, immoral, or illegitimate practices involving its employees (Aswathappa 2010, p.710). And to be detail, there are three major suggestions in advising the company to adopt a whistle blowing policy to control and reduce the unethical business practices that the company could have get involved into. Firstly, the organizations should have policy to well protect the whistle blowers before the company could promote the whistle blowing behaviors. Secrecy management through ways of unethical and illegal behaviors reporting such as via corporate email and calls are widely used in the business sectors to make sure that the interests of the whistle blowers would not be scarified. Secondly, the whistle blowing policy should be stated with clarity in term of guidance on which department should be referred to while some unethical behaviors are detected by any individuals and what reporting methods would be recommended, and also the release of the policy should be made known to every employee in the company irrespective of what positions they hold. Thirdly, besides the communication efforts, Goldman Sachs should also set up a special mechanism to ensure that every single complaint of unethical behavior and whistle blowing behavior could be followed up by relative department with sufficient empowerment to make sure that the company structure supports such self-rectification procedures.
8.2 Integrate ethics performance into the factors deciding the strategic remuneration
I do strongly believe that Goldman Sachs have some of the best leaders and executives in the world as one of the top investment bank because it is almost every business graduate’s dream to work in a company like Goldman Sachs, and there is no way in their text books the business ethics have not been an important one, this means that every employees in including the leaders and followers are supposed to understand the content of business ethics. In my understanding about why there are still frequent recurrence of the unethical events not only in Goldman Sachs but also are found in other large MNCs (multinational corporations) which have the best talents in the world, I believe it is the design of the motivation system that are malfunctioning. From the above case, we can see that after the worst year affected by the global financial crisis, the company managed to bounced back with a record high revenue, the company had immediately return the employees and executives with the highest bonus and cash incentives, here is the problems, the money paid is relative to the profit making and thus there is no way someone would be hating to earn money. Hence the unethical problems happen time by time because individuals are looking forward to earning, and they are not the company or the owners. Because of this, I strong recommend the company to link the ethics performance into the factors deciding the strategic remuneration which will ensure the ethical behaviors through the design of the organizational systems.
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Appendix 1.0 Goldman Sachs’ Business principles
Source: Goldmansachs.com 2011