It seemed to me Goldman Sachs had forgotten the first rule of business stated by the late management guru, Peter DruckerThe Goldman Sachs fiasco should remind businesses the purpose of their existence
Whose business is it anyway - by John Zenkin
I WAS going to write about the rather dry subject of risk assessment this week until I watched the Goldman Sachs congressional testimony on Tuesday night and linked it in my mind with an article in The Economist of April 24 entitled “Shareholders vs Stakehol-ders: A New Idolatry” which deals with the old conundrum of where to focus in good governance: on shareholders, customers or employees.
The reason I changed my mind was that I was shocked to listen to three Goldman Sachs traders being unable or unwilling to answer a simple “Yes” or “No” question from Senator McCaskill of Missouri.
Her question was simple and to the point: did they have a fiduciary duty to their clients, which means looking after their clients’ interest first?
Only one of the panel of four said “Yes”.
The other three hedged their answers to the increasing anger of the senator as she repeated her question.
From the testimony it appeared that all that mattered was that Goldman Sachs made money at the expense of the clients it was supposed to serve, even going to the extent of shorting trades that they had sold to their clients as being good investments, even though internal memos described the assets involved as “shi**y”.
Whether their behaviour was illegal is the subject for the courts, though it certainly appeared that the senators believed strongly that what the traders had been doing was unethical.
As I watched, fascinated by the drama, it seemed to me Goldman Sachs had forgotten the first rule of business stated by the late Peter Drucker in 1946 in his book The Concept of the Corporation that “the purpose of business is to create and maintain satisfied customers”.
What is more, this rule of business was Goldman’s own rule as long as they were a partnership because they recognised that the long-term interests of the partners were to avoid alienating their customers in return for a short-term profit.
What seems to have happened since Goldman Sachs went public is that its employees have been able to look after their own interests at the expense of both customers and shareholders.
This is because the money they were playing with was no longer theirs, but that of other people – their investors and their shareholders.
This suggests that there are limits to how much a company can look after the interests of its employees, especially when they are paid enormous bonuses, apparently regardless of how much pain the shareholders are experiencing (as we have seen in the case of AIG or Merrill Lynch).
It is even more the case when the payout comes from the taxpayer in the form of bailouts.
It seems to me therefore that if there is an excessive focus on protecting shareholder or employee interests at the expense of the client or the customer, the company could put itself at unnecessary risk as far as its reputation and license to operate are concerned.
How soon Goldman Sachs will recover from the damage to its brand shown in the following quote from April 28’s Washington Post is anybody’s guess:
“There was a time when issuers would pay a premium to have Goldman Sachs underwrite their securities, just as there was a time when investors would pay a premium to buy into a Goldman-sponsored offering. Today, Goldman has fully monetised the value of its reputation, and anyone who pays such a premium is a fool.”
I was also struck by the fact that their style of defence bore similarities to those of Exxon in the Valdez case, Shell in the Brent Spar case and recently Toyota when it was found wanting on quality. When customers get upset or when NGOs go after companies, their argument is emotional – designed to be fought in the court of public opinion rather than in a court of law. Legal niceties, technical subtleties do not go down well with people who are looking for memorable soundbites.
What ordinary people want to see is someone who shows emotion and empathy, says he/she is sorry and that he/she will try to do better next time and then there can be closure. Lawyers, with their eye on court cases and damages, advise clients to never say sorry and to prevaricate and obfuscate. This merely increases the anger and frustration of the offended parties.
I have, however, yet to see a company suffer because it has focused too much on serving its clients or delighting its customers.
Perhaps a more correct approach in today’s world is that of the new boss of Unilever, quoted in The Economist article referred to earlier, where he says:
“I do not work for the shareholder, to be honest; I work for the consumer, the customer … I’m not driven and I don’t drive this business model by driving shareholder value.”
·The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.