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Overview of Organization/Introduction:

The organization that I chose to discuss for my final project paper is Goldman Sachs, the renowned American bulge bracket investment bank. In addition to bringing many companies public, Goldman is also a publicly traded financial institution headquartered in New-York city. The company’s main line of business is in helping corporations and government institutions raise capital, providing underwriting services and mergers and acquisitions advice. More specifically, Goldman Sachs specializes in investment banking, asset management, and trading and securities transaction services. Goldman has an employee head-count of approximately 35,700 people and operates mainly in the U.S, Asia and Europe. The company trades on the New-York Stock Exchange; using the ticker symbol GS.

Similar and in some respects worse than other investment banks, Goldman Sachs profits fell in 2011; reportedly by as much as 58% in the final quarter when compared to the same period a year earlier. It is well documented that the financial services industry has been cutting jobs post 2008 financial meltdown. Just last year, Goldman Sachs slashed some 2,400 jobs while setting aside an approximate $367,000 in compensation per employee, down 15% from an average of $430,000 in 2010. One distressed employee referred to the reward/compensation cut as a ‘bloodbath’. From all reports it seems like the culture and morale at Goldman, the most profitable bank in Wall Street history, is at an all time low; particularly since management has taken a decision to cap cash bonuses at $125,000. Goldman went from having perhaps the most envied compensation/reward benefits package to having a barely decent benefits package in the past year.

Goldman has lost a lot of their top rainmakers and seasoned executives with the economic downturn. The company has really been focusing on cost-cutting measures the last couple of years post 2008, particularly since new regulatory laws have impacted its proprietary trading unit and therefore its profitability. Almost everything that set Goldman apart from its competitors has seemingly disappeared.
Problem Statement
Goldman seems to have set their top company priority as cost savings while trying to return to profitability. They have started laying-off people, reducing compensation and expecting more output from its employees. It is clear that the Dodd-Frank Wall Street Reform and Consumer Protection Act, particularly regarding the Volcker Rule, has impacted Goldman Sachs and other bulge bracket investment banks’ ability to rake in the huge profits that they normally enjoyed prior to the 2008 financial crash. The Volcker Rule essentially requires regulators to implement regulations for banks to prohibit proprietary trading. Proprietary Trading, popularly referred to in the industry as ‘prop trading’ is where a bank’s trading desk executes trades in various instruments by using the bank’s own capital. Considering Investment Banks make trades on behalf of its clients but also for itself; a conflict of interest exists and therefore the intent of the Volcker Rule is to address that issue. I will be examining this study using course TCO H: Given a requirement of organizational change, apply a framework for managing change, diagnose the forces for and against change in a situation, and recommend strategies for dealing with resistance to change. My paper will therefore look at how to help Goldman Sachs address the internal breaches that led to the need for regulatory reform while simultaneously navigating past the challenges presented by the Volcker Rule and returning to profitability. I will research ways in which the company can adapt and apply a framework for managing change, assess the forces for and against change and recommend strategies that Goldman Sachs can implement for dealing with resistance to change.
Literature Review
In my first scholarly resource: Watkins, J.P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues, Vol. XLV, I examine Mr. Watkins views on the prevailing culture and ethical values at Goldman Sachs that helped contribute to the financial meltdown and the subsequent implementation of the Dodd-Frank Act by the United States government. The Goldman Rule is described as pursuing profits at the expense of others, regardless of the damaging outcomes to clients and society at large. When this ingrained habit is combined with an institutionalized banking ethic; the results are questionable practices that not only harm society but damage the firm’s brand (image) and profitability in the long run. Watkins states” …The continued reign of pecuniary values leaves intact the Goldman Rule: pursue profitable opportunities regardless the effects on others. Within a culture dominated by pecuniary values, profitable opportunities present a coercive force. Laissez-faire policies allow profitable pursuits without restraint.” (Watkins, 2011). This article paints a picture of a firm that has a decision-making style that disregards its social responsibility to society in its pursuit of profits. The author indicates “…In April 2010, the Securities and Exchange Commission claimed Goldman Sachs “sold investors a subprime-mortgage investment that was secretly designed to lose value.” (Watkins, 2011)
My second scholarly source: Kranacher, M.J. (2011). Financial Market Alchemy, Turning Junk Into Gold. The CPA Journal provides additional insight to Mr. Watkins’s summation of the questionable and unethical practices of Goldman Sachs. This article particularly references the vulnerability of unsuspecting investors, high risk lending, the slipups of CRAs (Credit Rating Agencies) and how Goldman Sachs exploited the system to their advantage. Kranacher states “…most investors, especially sophisticated ones, should be able to tell a good investment from a fraud: but when their judgment and instincts fail, the U.S. regulatory system should be expected to protect their interests.” (Kranacher, 2011). It is common knowledge that investment banks are in business to make a profit and thus fulfill the expectations of their shareholders. However, it can be argued that practices and decisions taken should be in the best interest of all interest groups; not just one or a few. Goldman Sachs seized on the slipup of CRAs that gave mortgage backed securities incorrectly high ratings and unloaded these toxic (junk) assets into the market-place before the CRAs corrected the ratings. The article also indicates “…After selling billions of dollars of risky mortgages into the financial markets, Goldman then used credit default swaps to benefit from the failure of the same securities it sold to investors… according to the Levin report, Goldman also promoted "its own interests at the expense of investors" by trading "for the benefit of the firm without disclosing its proprietary positions to clients.” (Kranacher, 2011) Based on the profits Goldman reaped from their actions of selling toxic assets to investors, it’s no surprise that the title of Kranacher’s article states turning junk into gold.
In continuing, my third scholarly source is taken from: Holbrook, E. (2011). A Year of Fines. Risk Management (00355593), Vol. 58 Issue 10, p14-15, 2p. In this article, Holbrook follows on the unethical behavior of banks highlighted by Watkins and Kranacher and highlights the many hefty fines that most banks incurred throughout 2011. Perhaps not surprisingly, Goldman Sachs made history and was hit with a $550 million penalty; the largest ever handed out by the SEC (Securities and Exchange Commission). As seems to be the norm, the article indicates that the bank’s agreement to pay the fine was not an admission of wrongdoing (fraud). Other renowned banks such as JP Morgan, Bank of America and Wells Fargo were also fined by the SEC for various indiscretions. Holbrook understandably contends that “…whether or not the punishments will serve as a lesson remains to be seen, but those on Wall Street learned this year that their actions have consequences.” (Holbrook, 2011) Holbrook goes a step beyond just highlighting Goldman Sachs’s immoral behavior to also inform us on how that same behavior has cost the bank a huge sum of money as well as damage the favorable brand the institution once enjoyed. This sets the ground-work for the need for changes and adjustments to Goldman Sachs internal structure and culture.
Next, my fourth source comes from Myles, D. (2011). “Volcker to “dramatically affect” equity liquidity. International Financial Law Review. Myles turns our attention to the uncertainty banks face by the implementation of the Volcker rule in its proposed form and its possible negative impact on equity capital markets. She quotes Goldman Sachs’s head of US equities trading as saying that “…The planned limit on bank capital used for proprietary trading will impact liquidity in securities generally, but it exacerbates equity markets' existing liquidity and volatility issues being tackled through the Securities and Exchange Commission's (SEC) market structure reforms. “ (Myles, 2011). Whereas my previous sources, Watkins, Kranacher and Holbrook, all mostly focus on Goldman Sachs questionable practices; Myles highlights the concerns of a Goldman executive who indicates that the Volcker Rule will only add more stress considering the SEC is already addressing structural reform issues in the market. Another main issue raised is the uncertainty regarding what exactly qualifies as proprietary trading. Many bankers throughout the industry have voiced concerns that the Volcker Rule does not clearly explain/interpret its definition of proprietary trading which has lead to widespread uncertainty and hesitation across several different divisions. One senior vice president at an undisclosed bank indicated “…It's one thing to define it using words, but from a trade level it's really hard to do," the VP said. This makes it a struggle to determine what businesses a bank should invest in. “(Myles, 2011).
My fifth source is taken from: Sharfman, B.S. (2011). Using The Law To Reduce Systemic Risk. Journal of Corporation Law, Spring2011, Vol. 36 Issue 3, p607-634, 28p. In this article, Sharfman brings to the surface entrenched ideals within investment banks that pose systemic risk. Specifically, he highlights a mainstay of the industry’s culture where controversially large bonuses are normally paid to employees. The author states “…. one possible practice originates from the large, frontloaded bonus arrangements provided to Wall Street employees (traders, investment bankers, and asset managers). These arrangements provide incentives for employees to focus on maximizing their personal short-term returns at the expense of their employers‘and society‘s long-term interests.” (Sharfman, 2011). In contrast to Watkins and Kranacher, Sharfman focuses beyond the unethical practices of banks like Goldman Sachs and examines the bonus arrangement at such firms and the role it has played in causing employees to put self-interests above all else. Sharman points out that the Dodd-Frank/Volcker rule will undoubtedly change how the industry operates but this approach toward reducing systemic risk is incomplete unless measures are put in place to dissuade ingrained practices; such as the industry’s bonus culture. Sharfman reveals “…. On Wall Street, 60% of a Wall Street employee‘s compensation comes from an annual bonus, a large amount of which comes in the form of cash. For example, annual cash bonuses for securities industry employees who worked in New York City averaged between $99,200 and $191,360 for the years 2005 to 2009. But those bonus numbers really underestimated the short-term potential rewards of certain Wall Street employees who were compensated above the mean.” (Sharfman, 2011)
Rounding out my list of scholarly sources, my sixth is: Holleman, L. (2011). Protecting Goldman’s reputation in Europe. International Financial Law Review; Vol. 30 Issue 7, p134-134, 1p. Holleman holds the position of general counsel for Goldman Sachs and is touted as one of the persons that helped guide navigate the bank during the financial meltdown. She states “…We've needed to develop ways to be competitive and at the same time protect our reputation and protect ourselves from liability." (Holleman, 2011). In addition, “…She admits that people intent on committing fraud are generally able to commit it. So the best they can do is put a structure in place to identify any wrongdoing.” (Holleman, 2011). Holleman seems to acknowledge, albeit indirectly, that fraudulent practices do occur at Goldman Sachs; to which most of my previous sources would agree. I think Watkins and Kranacher, in particular, would inquire of Holleman as to what are the structures that Goldman Sachs has put in place to identify wrongdoing which has unarguably damaged the firm’s image. Although this article’s title makes reference to protecting Goldman’s image in Europe, the same issue applies to the firm’s image in the U.S and across the globe.
Analysis
Taking into account the problems Goldman Sachs is facing along with my literary review, I have identified three root causes of the issue which are: ethics, culture and leadership. There are undoubtedly a host of different issues at play but the aforementioned three zoom in as to the root causes of what we have seen manifest in Goldman Sachs and played itself out in the public domain. Our text indicates that Ethics is a philosophical study of morality in relation to conduct and good character. This drives at the heart of Wall Street in which firms like Goldman Sachs who provides the full spectrum of financial services; grapple with huge conflicts of interest and frequently face moral problems and dilemmas. Our text suggests: “A preferred approach is to carefully examine the consequences of each alternative for all decision stakeholders, and make choices that minimize negative impact and maximize respect for everyone’s rights.” (Organizational Behavior, 11th Edition. John Wiley & Sons p. 208) This problem of unethical behavior exhibited by Goldman Sachs runs deep when considering that the organization and industry is highly mechanistic and competitive in nature. The prime objective and mindset is to make profit first and foremost for the firm which would likely mean increased compensation/bonuses for employees. Consider my first scholarly source, Watkins, who made mention of the Goldman Rule where pursuing profits at the expense of others seems to be the norm. Holbrook highlights the record fine that Goldman was slapped with by the SEC and indicates that the bank’s agreement to pay was not an admission of wrongdoing. This strengthens Watkins’s Goldman Rule theory as well as reveals a prevalent mindset in Goldman that is disconnected from and contrary to the wider public.
Culture is inextricably linked to ethical behavior within an organization and perhaps is an even deeper root than ethics. Our course text describes organizational culture as: “…the system of shared actions, values, and beliefs that develops within an organization and guides the behavior of its members. (Organizational Behavior, 11th Edition. John Wiley & Sons p. 366). I would contend that the unethical behavior exhibited by Goldman Sachs is directly influenced by the culture of the firm and the industry. My fifth source, Sharman, brings to the fore a major component of Goldman Sachs’s culture which is its bonus/compensation structure. This ingrained system has undoubtedly guided the behavior of the firm’s bankers & traders leading them to pursue personal short-term gains above the interests of clients and the society. In examining Goldman Sachs’s culture even further, we can take into account our text: “Some aspects of organizational culture are easy to see. Yet, not all aspects of organizational culture are readily apparent because they are buried deep in the shared experience of organizational members.” (Organizational Behavior, 11th Edition. John Wiley & Sons p. 371). Our text describes three layers of cultural analysis which consists of (1) Observable Culture, (2) Shared Values and (3) Common Assumptions. Observable culture refers to the way things are done which is partially reflected in daily activities but also recognized through the organization’s stories and rituals. Shared Values is the second layer described in the text that references shared values that are commonplace and adhered to. Relating to Goldman Sachs, common shared values would include a strong work ethic and profitability. Common Assumptions is the deepest layer and a potentially dangerous one that is formed from a collective belief based on shared experiences. These shared experiences sometimes form incorrect assumptions which are used as a frame-work or starting-point toward making important decisions. One such possible example in a firm like Goldman Sachs is that their activities are in sync with market activities which generally lead to unbiased outcomes. The CEO of Goldman Sachs during an inquiry-hearing seemed convinced and articulated that he was “doing God’s work” and added that his firm was serving society well by helping companies expand and increase capital. It can be argued that his views and mindset are indicative of a Wall Street Culture that is driven by fierce competition among firms along with increasing the “bottom-line”. This is also reflective of a firm and industry that is highly competitive and oppositional in nature. Considering that this forms part of the firms culture, it would indeed be a challenge to move Goldman Sachs toward a more affiliative and humanistic/encouraging style.
Recently, an ex Goldman Sachs Vice-President openly criticized the firm and made mention of the firm’s deteriorating culture and poor leadership. Leadership as defined by our text: “…Leadership is the process of influencing others and the process of facilitating individual and collective efforts to accomplish shared objectives.” Our text also highlights several behavioral traits and situational contingencies regarding leadership in organizations. For purposes of this research, I wish to reference from the text House’s Path Goal View of Leadership which focuses on a leader’s influence over employees’ perception regarding personal and work goals. Four leadership factors are outlined which include: directive, supportive, achievement-oriented and participative leadership. The leadership at the helm of Goldman Sachs and most investment banks is directive which is described according to our text as “…spells out the what and how of subordinates’ tasks.” (Organizational Behavior, 11th Edition. John Wiley & Sons p. 313). Considering the firm is mechanistic as opposed to organic, it’s not a surprise that the leadership style is directive. However, given the uncertainty that now exists, particularly due to the Volcker rule and other legislation, it will be interesting to see if Goldman Sachs’s CEO and others move toward a more participative style of leadership. Watkins and particularly Sharfman might contend that in order for that possibility to occur, the entrenched culture must first be changed as the current CEO is part of and a product of the existing culture. This is an important consideration toward addressing the purpose of this research which is to help Goldman Sachs address the internal breaches that contributed to the financial meltdown and to help navigate the firm past the regulatory challenges presented by the new financial landscape. Ideally, the leadership at Goldman Sachs would need to gravitate toward a more transformational leadership style. Our text indicates that “…transformational leadership occurs when leaders broaden and elevate their followers’ interests, when they generate awareness and acceptance of the group’s purposes and mission, and when they stir their followers to look beyond their own self-interests to the good of others. “ Key to our text’s definition of transformational leadership is the aspect of stirring followers to look beyond their own self interests for the good of others. A strong, charismatic leader who knows how to strategically use position power is needed to guide the firm in the right direction. I would also incorporate here the example from the text where Ford Motor Company hired an outsider in Alan Mulally to “…retool the automaker and put it back on a competitive track”. Key point here is that Alan Mulally, as an outsider, was a stranger to both the company and industry’s culture. He therefore was immune from the shared values of the company which enabled him to strategically use his position power and refocus the company on important issues such as transparency. I think the Chairman /Board of Goldman Sachs and other banks desiring to make decisive changes should consider the approach of Ford Motor Company.
Solutions
My first workable solution would be to adjust the method in which compensation and bonuses are awarded to employees. This would be done with the intent of changing a culture of greed that puts self-interests above other interests. Specifically I would take the following steps to accomplish this task: * Put a cap on the amount that an employee can receive; irrespective of the employee’s job role. * Ensure that the bonus comprises a balanced amount between cash and stock options. * Pay bonuses semi-annually instead of annually. * Place more emphasis on quality rather than quantity. Shift focus away from the number of clients gained and place more emphasis on the retention and feedback from clients.
Pros: There is potential in this solution for repairing the image of Goldman Sachs and tackling compensation and culture which is perhaps the root cause of the internal breaches in the firm that assisted in the global financial crisis. Also, this can help in moving the firm form mechanistic to more of a hybrid organization where teamwork would be valued more highly.
Cons: Resistance from executives and subordinates who have been accustomed to and look forward to high bonus payouts. Also, bracing for a possibly long process in order to fully implement this change.
Second workable solution would be to propose and promote the creation of a special cross-collaboration team of seasoned professionals from other banks that would cooperate with the SEC, Government by submitting to them a proposal of innovate solutions that would reduce systemic risk. This team should comprise of not only bankers and traders but also accounting and legal personnel.
Pros: This form of active cooperation with the authorities may help mitigate future fines already in the pipeline. Also, it could both soften yet strengthen Dodd Frank’s Volcker rule. Finally, this too can help repair the tainted image of the industry; particularly for Goldman Sachs if they spear-head this initiative.
Cons: Some banks may reject this proposal if they perceive that this initiative doesn’t benefit their firm which may be enjoying less public scrutiny than Goldman Sachs.
Finally, my third solution suggests the implementation of a new and dynamic recruitment drive geared toward attracting the most innovative and skilled talent. In addition to the Ivy League Universities, I would target recruits from other universities who have unique backgrounds & experiences and are capable of “pitching” their skills and attributes to the organization. The intent here is to bring in a new generation that would be the future “change-agents” of the firm and industry. There is a lot of untapped student potential out there that couldn’t afford to attend the Ivy League Universities but carry innovative ideas and suggestions that could help improve the way business is done on Wall Street.
Pros: Widening the “net” of recruits increases the likelihood of acquiring more divergent thinkers which would add value to the firm’s culture and profitability.
Cons: More resources needed to cover more universities. Also, figuring out how much and which universities to include on the bank’s target list.
My solution of choice would be my first which is to adjust the method in which compensation and bonuses are awarded to employees. This would include and affect all employees throughout all the divisions in the firm. First step would be to include managers and personnel from all divisions to acquire feedback. The unfreezing, changing and freezing stages should be carefully observed. This solution was chosen above others because it addresses the root cause of most of Goldman Sachs’s problem which is a corrosive culture and compensation structure. This has led to unethical behavior, intense competition among peers and continuous corrupt practices throughout the firm that has hurt clients and destabilized the economy. I believe the intent of this solution will help address internal breaches and increase profitability in the long run. A change in this vital aspect of the firm’s culture would foster a new organizational mindset that would help the firm adapt to regulatory reform. Should my second proposed solution be combined with my solution of choice; then navigating past the challenges presented by the Volcker rule would be easier for Goldman Sachs.
Reflection
Personally, this assignment helped me consider the importance ethical behavior and morality as well as the harmful impact it could have on my character if not closely observed and adhered to. A leader and manager who place ethics and morality at the forefront of decisions would gain the respect of subordinates and “outsiders”. I have learnt that while it’s easy to criticize and judge an individual or institution, careful consideration must be given to the prevailing culture and the impact that it can have on people. Leadership, culture and organizational behavior are all inextricably linked and cannot be looked at in isolation when examining an institution.
References
* Kranacher, M.J. (2011). Financial Market Alchemy. The CPA Journal. * Watkins, J.P. (2011). Banking Ethics and the Goldman Rule. Journal of Economic Issues, Vol. XLV. * Holbrook, E. (2011). A Year of Fines. Risk Management (00355593), Vol. 58 Issue 10, p1 4-15, 2p * Sharfman, B.S. (2011). Using The Law To Reduce Systemic Risk. Journal of Corporation Law, Spring2011, Vol. 36 Issue 3, p607-634, 28p * Holleman, L. (2011). Protecting Goldman’s reputation in Europe. International Financial Law Review; Vol. 30 Issue 7, p134-134, 1p. * Myles, D. (2011). “Volcker to “dramatically affect” equity liquidity. International Financial Law Review.