Monthly Archives: April 2010

The Week in Ethics: Ethics Sold Short at Goldman Sachs

Protesters in Senate hearings on Goldman Sachs (Photo by Reuters)

The good news is that ethics was on the front burner April 27, 2010 when U.S. Senators grilled current and former Goldman Sachs executives about Goldman’s role in the financial crisis.

Questions about how Goldman resolves conflicts of interest, handles transparency, whether executives believe the firms’  incentives led to ethical behavior, what Goldman’s code of conduct is, and how executives view their ethical responsibility to clients were issues that senators kept raising, dissatisfied with the answers received.

The Tiffany reputation Goldman has built over 140 years took a beating during the nearly 11-hour hearing of the U.S. Senate Permanent Subcommittee on Investigations.  The most graphic anti-Goldman sentiment was expressed by protesters dressed in prison costumes, draped with crime scene tape, and carrying signs saying “Shame.” They paraded around the hearing room during brief recesses.

Seven current and former Goldman executives including CEO and Chairman Lloyd Blankfein testified, all reinforcing each others’ sentiments that Goldman had behaved appropriately, sidestepping questions about moral obligations, and disputing the facts in the SEC fraud charges.

The hearing exposed an abundance of red flags, some seemed unique to Goldman; others are industry wide. They include:

  1. Goldman’s 14 Business Principles were described as their code of conduct — as if saying “Integrity and honesty are at the heart of our business” and “we expect people to maintain high ethical standards” makes it so. It doesn’t.
  2. The Principles also affirm that “our clients’ interest always come first.” However, using Goldman’s own documents, senators repeatedly challenged that assertion, citing apparent conflicts of interest when Goldman acted as market maker and clients’ interests didn’t come first.
  3. The market maker role was also where Goldman’s actions appeared the most vulnerable to ethical scrutiny.
  4. Fabrice Tourre, named specifically in the SEC suit and discussed in an earlier column, rejected any notion that he had done anything wrong. No one seemed to think they had done anything wrong; the system worked. Questions about ethics were parried back with platitudes.
  5. When Sen. Tom Coburn (R-OK) asked “could a non-biased person look at the facts and raise ethical questions on a deal,” he didn’t get an answer, leading the senator to conclude, “there is a question of unethical behavior here.”
  6. The various roles that rating agencies play, the compensation they receive for rating a Goldman product and the inherent conflicts of interest raised were not seen by those testifying as an issue.
  7. After a few hours of Blankfein’s testimony, it was unclear what ethical standards Goldman stood for, and what Blankfein’s tone at the top really was.

The televised hearing raised questions, many of which remain unanswered, evidence of the complexity facing legislators working on regulatory reform.  However, the intense scrutiny Goldman faces takes the ethical issues identified in one Wall Street icon and illuminates industry-wide ethical issues.

Before Goldman’s next public testimony, whether in Congress or in court, it would be a good first step for them to be able to articulate what they mean by “integrity and honesty are at the heart of our business.” You can’t use what you can’t define.

Gael O’Brien, April 27, 2010

The Week in Ethics


Goldman Sachs: The Ethics of Reputation

Update: August 2, 2013, Fabrice Tourre is found liable in the SEC’s charges against him.

Update:  March 15, 2012, Calling Goldman Sachs’ culture toxic and still focused on making money over clients’ best interests, Greg Smith– an executive director and head of U.S. equity derivatives in Europe, Middle East and Africa — left the firm yesterday. His message was that the SEC investigation, Congressional hearings, the firm’s “rigorous self examination” and efforts to restore reputation and  trust, all of which I’ve written about in several previous columns have not moved the firm away from the attitudes that helped create the climate for the economic meltdown in 2008.

Goldman Sachs, who just a few months ago sparked outrage over the size of bonuses it intended to pay out, saw new relevance to T.S. Eliot’s line “April is the cruelest month.”

On April 16, 2010, the SEC charged Goldman with fraud. Its stock price immediately dropped nearly 13 percent. International media coverage has been unrelentingly negative. The first shareholder suits against Chairman and CEO Lloyd Blankfein, VP Fabrice Tourre, its board of directors and others were filed at the end of last week. And, as the month ends, April 27, Blankfein and Tourre join other Goldman Sachs executives called to testify before the U.S. Senate Permanent Subcommittee on Investigations.

The Subcommittee is looking into the role of investment banks on the financial crisis. Saturday, April 24, the Subcommittee released selected internal Goldman Sachs emails about instruments (residential mortgage backed securities and collateralized debt obligations – CDOs) that the Subcommittee said were culprits in the financial crisis. The Goldman emails talk about money the firm stood to make by taking short positions or essentially betting against its own investors.

Tourre, a 31-year old trader, is named in the SEC suit as being principally responsible for structuring and marketing the CDO that hedge fund billionaire John Paulson wanted that Paulson’s fund could bet against. Paulson, who paid Goldman approximately $15 million for the product, also approached Bear Stearns. However, Bear Stearns passed, saying it didn’t pass its ethics standards. “It was a reputation issue, and it didn’t pass our moral compass. We didn’t think we should sell deals that someone was shorting on the other end,” Scott Eichel a senior Bear Stearns trader told Gregory Zuckerman for his book on Paulson, The Greatest Trade Ever.

Goldman Sachs has denied any wrong doing saying that their clients were sophisticated investors and were given the information they needed.

Goldman has prided itself on its Tiffany reputation. “Clients First” it proclaims on its website: “Our success depends on one thing: our clients’ success.” Whether fraud is proved, Goldman will have to live down the ethical failure of being accused of betting against its own clients, a repudiation of what Goldman has said it stands for.

The impact on Goldman’s reputation and credibility is huge. That tidal wave also splashes its mud on its A-list Board of Directors. They must answer to investors on May 7 at Goldman’s Annual Shareholder meeting.

There are unsavory characters in this debacle. Tourre is currently on indefinite paid leave. Paulson has insisted to his clients he acted in “good faith.” Good faith, used in that context, is an oxymoron. This is a tale of hubris and another example of why the widening gap in Main Street’s trust of Wall Street.

Who would have thought the hero in this story, if there can be one, is much maligned Bear Stearns?

Gael O’Brien,  April 25, 2010

The Week in Ethics

Character Counts, Just Not So Much at Nike: Ben Roethlisberger’s Fumble

Update April 21, 2010: The NFL announced it is suspending Roethlisberger for six games as a result of violating its “personal conduct policy.” Steelers President Art Rooney hedged on answering whether the team was shopping the quarterback. Will Nike continue to stand behind bad behavior?

Nike’s ads have long captured winning athletes and sports “heroes” as symbols of inspiration, tenacity, and personal empowerment. Increasingly the message from the thought-to-be role models has been torpedoed by their behavior off camera; the consequence of bad behavior hasn’t led to Nike dropping them from their marketing strategy.  Think Kobe Bryant and Tiger Woods.

Nike’s most recent bad boy is Pittsburgh Steelers quarterback Ben Roethlisberger who has been involved in two different sexual assault investigations in the last year . Earlier this week, Fred Bright, a Georgia District Attorney, said Roethlisberger would not be prosecuted for rape because while significant questions persist about what happened, the evidence was insufficient to prove the case beyond a shadow of a doubt.

Nonetheless, Bright had a message for Roethlisberger: “Ben, grow up. Come on, you’re supposed to stand for something. I mean, you’re the leader. You should be a role model…. You need to be a role model for your team, your city, the NFL. You can do better.”

Not all goes well for Roethlisberger. Big Ben Beef Jerky has been pulled from the website of food marketing company, PLB Sports. While no criminal charges were filed against the quarterback, President Ty Ballou said PLB Sports was dropping its endorsement of Roethlisberger because he is “falling short” of company standards. Roethlisberger, faces potential disciplinary action from the Steelers and the NFL. Steelers President Art Rooney has said Roethlisberger’s conduct didn’t live up to team standards.

The bad boy as marketing draw is a business strategy that has failed to appeal to brands including PLB Sports, Accenture, AT&T, and Gatorade who’ve cut their ties to sports icons crippled by their own bad judgment.

Women are a huge market for Nike. It isn’t enough to market to women inspiration for what they can do wearing sneakers when the company stands by athletes like Woods and Roethlisberger who’ve operated with little evidence of character. Nike apparently has a different approach to falling short of company standards. Incensed at inhuman treatment of animals, Nike dropped Michael Vicks in his canine abuse scandal; dogs seem to rate higher here than women.

The Week in Ethics: Mine Safety and Don Blankenship’s Leadership Lessons

Update, December 7, 2011: Alpha Natural Resources, which purchased Massey Energy earlier this year, settled with the federal government December 6, 2011, agreeing to pay $209 million in penalties (civil, criminal, and restitution) to avoid Alpha’s facing criminal charges for the explosion 20 months ago in Massey’s Upper Big Branch Mine that killed 29 miners. However, Massey executives, including former CEO Don Blankenship are not covered by the settlement and may face criminal charges.

Update May 30, 2011: Blankenship retired in December 2010 and in May 2011, the first investigative report was issued. This one is by the former West VA Governor’s Independent Investigative Panel, see May 2011 column.

The Massey Energy disaster last week bottom lines the question of how much risk a company will take on at the expense of their workers in pursuit of aggressive production goals. It is also a story about the obsolescence of paternalism and failures of leadership.

Funerals are happening, searchers are still looking for the last nine miners’ bodies, and federal investigators are on site to investigate what caused the explosion at Upper Big Branch that killed 28 miners and one construction worker in the worst mining disaster in decades.

Meanwhile Massey chairman and CEO Don Blankenship is chronicling his ministrations to the bereaved families on twitter. Yesterday he wrote, “We will be doing all we can to figure out what happened and to greatly lessen the chance of it ever reoccurring.”

“Greatly lessen” is that the best Blankenship’s got?

You couldn’t ask for a more striking contrast in leadership than Blankenship to former Alcoa chairman and CEO Paul O’Neill (who went on to be U.S. Treasury Secretary). From his first day, O’Neill committed that Alcoa would be a place where no one would be hurt at work. Safety was at the top of his agenda. He created accountability and when accidents did occur in a plant anywhere in the world, within 24 hours there would be an analysis of what went wrong and how a process could be changed or people trained differently to eliminate the possibility of it happening again. O’Neill also took Alcoa’s profitability to record levels while still focusing on the safety of Alcoa employees.

Strategically positioned on the board of the U.S. Chamber of Commerce, Blankenship has been a vocal critic of politicians and regulators knowing more about how to keep miners safe than he or Massey does. Arrogance isn’t a proven method for saving miners’ lives.

There is something feudal here: the portrayal of a benevolent company building loyalty over years by “being there” on its own terms for employees and their families in life’s ups and downs. In this explosion, which may prove to have been preventable, rather than feeling employees’ pain, workers would be far better off if Blankenship used his authority to demand hazards in the environment be removed or mitigated. Instead, in its 35 underground mines and 12 surface mines, the company decides what regulations it will take seriously.

Massey’s Upper Big Branch mine had more than 600 safety violations in the 16 months prior to the explosion, a period when production had been ramped up significantly to meet aggressive goals. To complicate the ability of violations to be corrected, Massey has contested about one-third of the violations, further undermining the enforcement capability of the Mine Safety and Health Administration (MSHA); a tactic not unique to Massey. MSHA has its own work to do to determine how to better analyze and act on perceived risk.

Don Blankenship’s focus on production over everything else is grist for those who would challenge his leadership at the Annual Shareholders’ meeting in May. The immediate question is that if Massey planned to increase production 66 percent this year to reach 2 million tons of coal, with Upper Big Branch closed since the explosion, will the 34 other underground mines and 12 surface mines be pushed further to make the target while safety violations are ignored, danced around, or contested?

The best tribute to the 29 Massey workers is that safety really becomes Massey’s top priority and that going forward, no one should ever be injured or die in a Massey mine from issues the company can prevent. There is no acceptable tolerance level for deaths in the workplace; to operate as if there is constitutes a failure of leadership.

Gael O’Brien, April 13, 2010

The Week in Ethics

The Week in Ethics: The Hidden Costs in Excessive Executive Compensation

The recently released Wall Street Journal’s CEO Pay Survey, the New York Times Executive Pay tables and other headlines about CEO pay increases found in proxy statements brought home again how the extreme imbalance of CEO pay compared to their employees’ can undermine a corporate culture, especially where values like trust, loyalty, and fairness matter. For years, the multiple of CEO compensation in public companies in the U.S. relative to the average worker has been talked about as around 300 to one, with the CEO often earning in a day what his or her average employee earns in a year. How can boards of directors think that is justifiable?

Whole Foods has gained attention for having a 19-to-one ratio for executive compensation. John Mackie, Chairman and CEO of Whole Foods wrote recently that because of the great pay gap between leaders and the led, employee morale, loyalty, and strategy and execution are suffering at American companies.  Mackie claims Whole Foods has not lost employees it wanted to keep because of higher salaries elsewhere. He believes that once basic financial needs are met, “deeper purpose, personal growth, self-actualization, and caring relationships provide very powerful motivations and are more important than financial compensation for creating both loyalty and a high performing organization.”

Boards of directors get carried away by what they believe they need to do financially to reward and keep top executives; in doing so, they create a seismic disconnect within the company, especially given the economic times. And especially when the company lacks the resources to acknowledge employees for great work at all levels of the organization.

Directors in companies in Europe and other parts of the world have a far smaller CEO compensation ratio to average worker salary than does the United States. However, it is creeping upward, influenced by what has been going on in America.  U.S. directors are driving a movement of  widening disparity between salaries at all levels and the CEO; the repercussions of this is like isolating the head from the backbone.

Irene Rosenfeld was among the CEOs in 2009 rewarded by her board with a significant increase in compensation, 41 percent; this included increasing her pension 55 percent to $4.2 million. One of her “achievements” was the hostile takeover of Cadbury.

Kraft has recently told 3,600 of Cadbury employees who are in a special pension plan that they will face a three-year pay freeze unless they opt out of that plan into another Cadbury plan that is less costly.

The timing here is awkward, at best.

There may be justification for Rosenfeld’s pension increase. How the pension issue plays with Kraft employees will depend on how they are affected by pension rules. However, to a few thousand Cadbury employees this CEO perk has got to rankle. These are the very issues of perceived fairness that create distrust especially in a merger of cultures.

Kraft’s directors have adopted and expanded on the employee code of conduct to guide their behavior. One of the first values is earning and keeping trust of its stakeholders, including employees. It is an important document for directors to keep on the front burner.

Rosenfeld has achieved great success in her time at Kraft. She has set very ambitious financial targets. She also faces all the challenges of leading the world’s No. 2 food company, including  the addition of debt from the purchase of Cadbury to retire. Not to mention the need to re-establish goodwill with the British government – wary about Kraft’s reneging a week after buying Cadbury on a promise to keep a particular plant open in England.

Kraft is but one example.

The imbalance in CEO compensation creates hidden costs that can come due when a company can least afford to pay them. Do boards of directors even consider the impact of executive compensation awards on a corporate culture? Do directors take the time to know what the ratio in their company is of average employee salary to CEO compensation? Do they consider how their actions might, no matter how well intentioned, erode trust in the organization?

Kenneth R. Feinberg, Special Master for TARP Executive Compensation, said recently, “Compensation is not simply about material gain or greed….compensation is, to most people, about self-worth.”

As long as one’s self worth is tied to title and income, can one ever be rich enough? “Enough” then has no boundaries. And the mirror used to tell what is reasonable and appropriate in a given organization has long since lost its reflection.

Gael O’Brien, April 4, 2010

The Week in Ethics