Goldman Sucks?

It usually takes a crisis for the outside world to find out what is really going on inside a big corporation.  But on 14 March, the disillusioned Greg Smith, a middle ranking banker, left Goldman with a flourish - giving an insight into Goldman Sachs for the New York Times (also covered here in the FT).

Smith's point is simple.  Goldman's leaders may express good intentions in the shape of their Business Principles, but according to Smith, reality is different.

Internal incentives implicitly encourage Goldman teams to exploit the firm's clients to Goldman's benefit.  According to Smith, you become a leader at Goldman by:

• persuading clients to buy products that Goldman wants to be rid of; 
• getting clients, sophisticated or not, "to trade whatever will bring the biggest profit to Goldman"
• trading "any illiquid, opaque product with a three-letter acronym"

Reinforcing this picture, he reports that many leaders at Goldman apparently despise their clients:  "I have seen five different managing directors refer to their own clients as muppets, sometimes over internal email."

Making it clear that he does not accuse Goldman of anything illegal, Mr Smith concludes:

"It astounds me how little senior management gets a basic truth: If clients don't trust you, they will eventually stop doing business with you.  It doesn't matter how smart you are."

If Smith's narrative is right, Goldman is losing the moral compass that once inspired its alumni whilst its board claims good intentions but sets incentives driving amoral behavour.  If so, what does this say of Goldman's leaders?

The most obvious options are that they are, to use their own terminology, "muppets" who don't know what is going on in the Goldman engine room; or that they are somewhere between amoral and dishonest.  Neither is an attractive characterisation.

Survival for the long term becomes harder if people think you are untrustworthy or incompetent - the more so if you are untrustworthy or incompetent.  The toxic track record listed by Smith makes Goldman more vulnerable to a new crisis turning into a catastrophe.  And that's before thinking how angry, influential alumni, seeing their once valuable Goldman pedigrees transformed into an embarrassment, could seal Goldman's demise should they run into trouble in the future.

The question for clients is no longer "Can we do without Goldman?" It's become "Can we risk using Goldman?"  If clients (or their customers) think "Goldman Sucks", it could become as risky to hire Goldmans as it is for a retailer to sell products made with slave labour. 

Goldman is one crisis away from oblivion.  It could reform, but does it have the will to do it properly?  Their last attempt doesn't seem to have gone well.

Reputability Ltd
London
www.reputability.co.uk

Ethos and Leadership

The latest 'Index of Leadership Trust' survey by the ILM and Management Today makes worrying reading for those who recognise the importance of 'soft' risks.

"[H]alf the people surveyed thought that their organisation puts financial performance ahead of ethical considerations, and 48% and 44% say the same of their CEO and line manager."

One of the lessons from 'Roads to Ruin' is that ineffective leadership on ethos and culture is a major but unrecognised cause of corporate failure.

It doesn't only matter when the organisation is rotten at its core, as were Enron and the Independent Insurance Company.  It matters just as much when leaders have sound ethical ideas but fail to embed them throughout the organisation.  This seems seems to have been the problem at BP.  There, a disconnect on ethos and culture on safety between BP's aspirational board and the reality of its American operations led to a series of crises that came close to disaster for BP's shareholders.

Almost half the survey's respondents thought their leaders put profit before ethical considerations.  That probably means half the organisations surveyed had the same weakness.  Other results of the survey suggest that this type of weakness may be more prevelant in larger organisations.  Other findings from 'Roads to Ruin' suggest this is likely.

Many people see ethos as a nice-to-have.  The ILM puts it as a factor in earning trust of employees. Ed Milliband sees it as a way to divide the business world into "producers" and predators".  But 'Roads to Ruin' demonstrates that inadequate leadership on ethos and culture is an important example of a potentially catastrophic 'soft' risk.  It's hard to self-test on risks like these because of cognitive biases.  Self-testing can easily entrench dangerous self-delusions.

Risks related to ethos and culture may be soft by name, but 'Roads to Ruin' shows how easily they lead to disastrous consequences.  It's not just about dishonesty as discovered, too late, at Enron and Independent Insurance.  It's about effective leadership on ethos and culture - and how unrecognised incentives can derail the best intentions.  Ask BP's longstanding shareholders. 

Anthony Fitzsimmons


www.reputability.co.uk

 Anthony Fitzsimmons is Chairman of Reputability LLP and author of “Rethinking Reputational Risk: How to Manage the Risks that can Ruin Your Business, Your Reputation and You”

Chief Risk Officer becomes CEO

Congratulations to Amer Ahmed, the Chief Risk Officer of Allianz Re, the reinsurer, now appointed Chief Executive of his company.

This may be a better outcome than for RBS, the bank that lost CRO Nathan Bostock to a competitor. But promoting a CRO to CEO is not without risks.

It's not just a question of the incentives working on an ambitious CRO.  There is the question whether the new CRO can ever be in effective control of risks emanating from a predecessor so respected as to become CEO.

And there is a fundamental problem similar to but different from that of bank traders having back-office experence.  Jerome Kerviel's compliance team experience helped him to evade Soc Gen's risk controls; and UBS may have had the same problem with Kweku Adoboli.  Its a risky policy to allow risk people to acquire executive control.

The best solution remains persuading CROs that being CRO is a career destination.  Barclays Bank  seem to be having some success with Robert Le Blanc at a cost that is modest at least in in banking terms.

Anthony Fitzsimmons
www.reputability.co.uk

Musical Chairs

In March I wrote that Chief Risk Officers needed skills and intellegence to the level needed by CEOs - but that this would give Boards a challenge:  How do you keep the CRO in post for a decent length of time?

The problem is now illustrated by real life.  Nathan Bostok became CRO at RBS in March 2009, to sort out RBS' Augean Stables with their $380 billiion or so of toxic assets.

Having learned that Stephen Hester is not planning to leave his RBS CEO post any time soon, Bostok will be off to Lloyds Bank in the New Year, where he will be CEO of Wholsale Banking.  More stable cleaning will probably be involved, but the thrust of the new job is apparently to grow the wholesale banking business.  Further experience for a CEO job.  Well done Mr Bostock; but RBS loses his intimate knowledge of RBS' business after only 3 years in post.

A perpetual game of Musical Chairs - which will cause few losers among good CROs - will be bad for complex institutions.  They need CROs of great talent; but they also need continuity of leadership in risk management and risk strategy.    Achieving both will be an important challenge for Audit Committee Chairmen.

Channelling CRO ambition will be a part of the solution.

Anthony Fitzsimmons
www.reputability.co.uk

"Roads to Ruin" is published

What causes organisations to face existential crises? And what turns crises into catastrophes?  "Roads to Ruin", a new report from the Cass Business School for Airmic, the risk managers' association, analyses the entrails of over 20 major crises of various shapes and sizes.  The report was previewed here last month.

The conclusions are stark.  As Anthony Hilton summarised it in today's London Evening Standard, the reasons for failure often emanate from the very top.  Inadequate board skill and poor leadership on ethos are a recurring cause of crises.  And adapting the title of an earlier blog, he wrote: "Too many boards live in a rose-tinted bubble". 

He also highlighted poor internal communication as a source of much of the problem, made worse by the insufficiently high status of risk professionals.  This issue was flagged here last year as regards the financial sector.  Since then, RBS' Chief Risk Officer has taken the road to becoming a bank CEO, fulfilling a prediction of problems that are developing with the arrival of CEO-calibre CROs.

Nick Edwards' interview for Reuters is here.  And Carly Chynoweth wrote a piece on the implications for NEDs in the Sunday Times.

An executive summary of the Report is still available free of charge here; where you will also find a link to buy a copy of the full report from Airmic.  Its well worth reading.

Anthony Fitzsimmons
www.reputability.co.uk

Police seige intensifies

The reputation of the Metropolitan Police continues to be under seige as Sir Paul Stephenson's former personal PR consultant was arrested yesterday.

The Daily Telegraph reports that the Met's Commissioner Sir Paul Stephenson, employed a former News of the World Executive Neil Wallis as his personal PR consultant from October 2009 to September 2010.  A member of both the newspaper editors' code of practice committee and of the Press Complaints Commission, Mr Wallis was arrested yesterday on suspicion of phone hacking.  Calls for Sir Paul's resignation have begun.

The reputation of the Met is being eroded at an alarming rate.  Things will continue to get worse until its leaders acknowledge the full extent of what is wrong and set out to fix the fundamentals.  PR won't fix anything.  It will only store up more trouble for the future

The Metropolitan Police Authority faces a challenge.  They need a police chief who is not only competent but also sufficiently free of baggage and independently minded to be able to recognise and deal with the Met's fundamental problems.  These urgently need fixing by someone who is determined to see and understand what they are.  The question is whether any career policeperson can have enough detachment.

Time for a very senior commander of intelligence and integrity to be snatched from the Military?  Some have considerable experience of security issues if not of policing.

Anthony Fitzsimmons
www.reputability.co.uk

Police under Siege

It isn't just the News International that faces a whirlwind similar to that faced by BP.  London's Metropolitan Police faces one too.

The crumbling of the News of the World - or even its UK stablemates - may annoy some in the UK, but any gap will soon be filled by the market.  Indeed the Sun may soon start shining for NoW readers every Sunday.  But a collapse of confidence in the Metropolitan Police would be a calamity of a different order of magnitude.

Over the last few years, a succession of Metropolitan Police tactics have alienated increasingly large sections of the population. The use of "Stop and Search" powers alienated youths and visibly ethnic minorities. Use of  similar anti-terrorist powers has alinenated many muslims including some of the police force itself. The Met's reluctance to countenance the possibility of error - not to mention allegations of covering up - in response to the deaths of Charles de Menezes and Ian Tomlinson are just two examples of circumstances that have undermined trust with other sections of the UKs population.

The latest allegations are far more corrosive.  It is alleged that some policemen received large sums from the News of the World in exchange for inside information. There is also the possibility that something - whether more money, personal relationships, the desire for positive newspaper coverage, the scope for mutual blackmail or something else - led the Metropolitan Police to hold back from investigating the News of the World phone hacking allegations.  If true, this could easily cause trust in the police to plunge to depths not previously seen.  And to paraphrase Warren Buffet, you can lose trust in minutes but it takes years to build it.  Traditionally the UK's police were seen as trusted members of the community.  Without trust, traditional style policing won't work. 

Its no wonder that the Met has become obsessed with managing its reputation with the 'silent majority' that it relies on for support.  Brian Paddick, the well known former Deputy Commissioner of the Met, is quoted by the Financial Times as saying:

“The police tend to be obsessed with reputation management because British policing is based on the consent of the public and it is important to keep the trust and confidence of the public.”

Unfortunately, the Met is addressing the wrong problem.  Reputation management isn't the answer.  As Julian James, then trying to rebuild Lloyd's then battered reputation, perceptively put it:

"You soon discover that it can't be done by clever marketing or spin. You have to fix the fundamentals."

Fixing them doesn't mean fixing just the bribery allegations and the other historical grievances. It means fixing the causes: these probably include the culture, ethos and behaviour of the police and its leadership.

An imminent study of mainly private sector crises, will set out nearly twenty under-recognised but fundamental areas that can destroy both reputations and the organisations that own them.

From the outside, many - perhaps most - of the fundamentals highlighted in that report seem to need fixing at  the Met.  It will also have to exorcise the effect of what too many citizens see as a toxic track record.

The rehabilitation of the Metropolitan Police can't start too soon.

Anthony Fitzsimmons
www.reputability.co.uk