Apparent outrage over sharp practices at Goldman Sachs reflects wider public revulsion over what we all knew was going on in the financial world, says Mallen Baker

So we now know that Goldman Sachs has a toxic work culture. We know this because one of the bank’s senior executives Greg Smith said so in a piece for the New York Times as he sailed out the door. And, to be frank, we know it because we all believed it to be the case anyway, and here was something that looked like a smoking gun to confirm what we all knew.

It’s a great story, but it’s the wrong story. We have to look a little deeper.

Firstly, it is fairly remarkable that the views of a single disgruntled middle-rank employee can make headlines in this major way. Those companies leaping to the defence of Goldman – as well as those quietly hoping it will all go away, instructing their sales people not to refer to the matter in public – are in truth terrified by the realisation that public discontent with their industry makes the words of a single insider headline news.

Show me an organisation of 30,000 employees that doesn’t have plenty of disgruntled employees. Other companies know that, at the toss of a coin, they could be next.

Of course that doesn’t make Smith wrong. One former partner in the firm, Jacki Zehner, wrote on her blog that “many people” in the past few years had told her that the firm was emphasising profits over character.

But at the same time, you would expect substantial evidence of a corporate culture that was rotten to the core. Goldman Sachs has appeared regularly in the “Best Places to Work” lists – which includes a substantial component of anonymous employee input.

It’s worth quoting the case study write-up of Goldman Sachs from 2009 by the Great Places to Work Institute. “Goldman Sachs is a special and unique company. The culture is strong, the employees brilliant and loyal, its reputation for top quality work untarnished and although its standing in the global community has been shaken by the economic crisis, it remains solid.”

Is there a world where both accounts could be true of the same organisation? Possibly.

Many of the people who work at Goldman believe it’s a great culture if you can accept it on its own terms – high pressure, deliver or die. Plenty of people can thrive in that environment. Others hate it. But it’s why the pay is so good – so long as you deliver of course. So the employee’s view of whether it’s a good place or not is not the whole story.

The wrong incentive?

What it really comes down to is how incentives work, and what kind of behaviour they are fuelling. And the incentives – for this century-and-a-half-old venerable firm – shifted sharply in 1999 when it converted from a partnership to a publicly traded company.

At that point, maximising shareholder return becomes the key goal. Internal incentives are rearranged to meet those objectives in the short term.

Not surprisingly, for Goldman Sachs this coincided with a diversification away from the safe and boring business of acting as an agent for customers and a massive increase in its trading activities.

When Smith described an individual firm losing its way as a result of poor leadership, what he was reflecting was how the shifting of incentives around a high-returns, higher-risk mission begins to affect the ethics and quality of decision making.

And this takes us to the heart of why so many people have become furious with the finance sector in the wake of the crisis. The system is broken. The incentives are creating outcomes that are patently harmful to society, but so far the sector remains completely in denial about the scale of change needed to fix this.

Denial will only take you so far. Goldman Sachs has seen its fortunes decline considerably over the past three years. Its net profit has declined from $13.4bn in 2009 to $4.4bn in 2011. Such companies feel invulnerable so long as times are good and the money is stacking up. But if you live by the short term, then guess how you die.

The revelation that investment banks are populated by arrogant and self-obsessed people who see business as a win-lose process where, in order for you to win, some sucker has to lose – well, that’s not news.

The reason Smith’s pretty undeserving text rocked their world is that it describes a status quo that people have decided they are no longer prepared to accept. And maybe the moment for that sentiment will pass, but until that has happened, broadsides like this, and the remarkably loud publicity they generate, push the sector closer and closer to the point where public outrage will encourage legislators to force some pretty abrupt changes on them.

Mallen Baker is founder of Business Respect and a contributing editor to Ethical Corporation.