A tale of two cities: IBM versus Goldman Sachs
A tale of two cities: IBM versus Goldman Sachs
This week, Goldman Sachs was dealt a twin blow: It was revealed that one of its directors, Rajat Gupta, is being investigated in relation to the alleged Galleon hedge fund fraud, and the firm itself is now under investigation by the SEC for alleged subprime mortgage securities fraud. According to the Wall Street Journal, Goldman “was charged with deceiving clients by selling them mortgage securities secretly designed by a hedge-fund firm run by John Paulson, who made a killing betting on the housing market’s collapse.” On Friday, its stock shed $12 billion in market value. The firm vigorously denies the charges.
In my recent book, All for One, I contrast the stories of IBM and Goldman Sachs. When Lou Gerstner became IBM’s CEO in 1993, he took the helm of an iconic American company that had become internally focused and lost its way. Gerstner oversaw a dramatic shift in the strategy and culture of the company, instilling a client-centered, collaborative ethos throughout its ranks. IBM has subsequently thrived, and today it is a leader in using collaborative technologies to connect employees with each other and with clients. Goldman Sachs, in contrast, had always cultivated and reinforced a culture of collaboration. Its compelling value proposition—tremendous financial rewards combined with a teamwork environment—was the glue that drew people to the firm and kept them there. In recent years, however, Goldman has focused more and more of its best people and resources on trading for its own account. In fact, in 2006, when it had a record year and paid many traders and bankers sums in excess of $25 million each, it derived 70% of its revenue and profits from its “Trading” revenue category, which is trading and M&A activity conducted on its own behalf. In his book, The Accidental Investment Banker, Jonathan Knee—who worked at both Morgan Stanley and Goldman Sachs—puts it this way:
“My experience…made me realize why my romanticized notion of being an old-fashioned relationship banker was so unrealistic. …The insurmountable problem…was that the fundamental premise of relationship banking was that the banker could deliver the firm for the client…There were simply too many other clients, too many other products, too many other external and internal constituencies.”
IBM, in short, emerged from its crisis by refocusing on the market and using collaboration to better serve its clients. Goldman Sachs’ fabled teamwork and collaboration, in contrast—or so it appears—has gradually been channeled more towards creating profits directly for the partnership.
Goldman’s partners are pretty smart. Does this mean that it no longer pays to always put your clients’ interests first? Or is this a peculiarity of the financial markets—that trading for yourself will always be more profitable than serving external clients?
For most of of us, there’s no question but that putting clients’ interests first is still the right thing to do the vast majority of the time.
