From the Belly of the Beast: Goldman Exec’s Parting Words an Indictment of Investment Industry
Today the investment profession received the latest shot across the bow in the ongoing battle to reestablish investor confidence in the integrity of the investment profession — one that dramatically demonstrates the inherent difficulty in changing the culture of some of the leading firms in the industry.
In an op-ed piece in the New York Times, Greg Smith, former executive director and head of Goldman’s United States equity derivatives business in Europe, the Middle East, and Africa, penned a scathing indictment of what he claimed was an eroding culture of integrity at Goldman. He colorfully claims that Goldman, a pillar of the financial services industry that has lately been under attack for how it has treated investors, has moved away from a culture of integrity where client interests come first, to a business where clients are “muppets” to be fleeced for maximum profit.
While such accusations are disturbing enough when coming from “outsiders” such as the press, regulators, and former clients, the fact that a high-level insider has acknowledged what many have long believed is a devastating indictment of not just Goldman but, arguably, of the investment profession as a whole. As with the ongoing drumbeat of stories of Ponzi schemes, insider trading convictions, and taxpayer-funded executive bonuses splashed across the news, the damage in the eyes of the investing public won’t be limited to those firms immediately affected. Such revelations only work to smear the entire investment profession.
The vitality of global capital markets depends on the confidence of investors willing to commit their financial assets to entities they can trust. Smith points out what common sense dictates: People who view their clients as profit centers, sacrifice their clients for personal gain, and care only about making money will not sustain the trust of clients for very long. His call to action for Goldman could just as easily be a call to action for all individuals and firms who seek to restore the investing public’s faith in the integrity of capital markets, and those who work in them: Make the client the focal point of your business again.
But how do those who work diligently for clients and recognize that protecting client interest is the best long-term path to success distinguish themselves from the callous and “elephant hunters” described by Smith?
It starts with a commitment to the fundamental ethical principles embodied in the CFA Institute Code of Ethics and Standards of Professional Conduct and the Asset Manager Code of Professional Conduct. Adherence to a rigorous code of conduct that includes provisions on such topics as handling conflicts of interest, transparency, independence, and fair-dealing sends a clear signal to clients and potential clients that a firm has the clients’ best interests at the forefront of the investment decision-making process.
Firms should educate, train, and constantly reinforce this commitment with employees to build a culture of integrity within the firm. Establishing incentive structures to reward ethical, client-oriented conduct — not just performance — will also move the focus away from a solely profit-based mindset. Finally, firms that implement these measures will have the tools they need to proactively discuss ethics, integrity, professionalism, and client-centered practice with investors, thereby changing their view from the vision vividly painted by Mr. Smith.