Goldman: if the problem is culture, are incentives the solution?
March 14, 2012
Whether or not one agrees with his denunciation of Goldman, the resignation letter published by ex-employee Greg Smith in the New York Times makes painfully clear that a bank’s culture is of critical importance to its results. Goldman’s employees used to mention culture as the magic source of the bank’s prudent risk management –and its outperformance during the credit crisis. Now, Smith blames culture for his dissatisfaction with Goldman.
For good or bad, then, culture is crucial. But it is striking that almost every finance expert I talk to –including regulators and financial economists– refer to culture as a mysterious thing. Inexplicable. Miraculous. And non replicable when it works well, as well as poisonous and unsolvable when it does not. And after a minute or so of cultural reverie, the conversation rapidly turns to the safer matter of incentives, much in the way the proverbial drunk prefers to look for his keys under the well-illuminated lamplight.
So how does culture work? In what can it make you rip customers off?
As it turns out, there is a well established research technique to study culture. It is called ethnography, and that’s what I do. It entails studying people as if they were from a remote tribe, as well as conducting fly-on-the-wall style observations to produce “breakdowns,” or surprises.
I became aware of the powerful importance of culture in finance about a decade ago. During my doctoral fieldwork on a well-run Wall Street bank, I was shocked to see that the true obsession of the head of the trading room I was observing entailed shaping the traders’ culture — so that incentives would not get in the way of collaboration. He even spoke about Mennonite communities when organizing the traders. And he had a large bag of tricks for that purpose, from how he paid bonuses to how he arranged the furniture. (See paper here, written with David Stark). Now that trading room manager is the CEO of a huge international bank… apparently the stuff works.
But because I never saw first-hand a dysfunctional bank culture, until recently I never quite imagined how that would play out. Then came the credit crisis. And then, a few months ago, I saw a fascinating presentation by Karen Ho at Duke University’s Institute for Humanities. Karen is an ethnographer like myself. In her presentation, she focuses on an aspect of banks that I had missed: elitism. To her, elitism is the justification that bankers give themselves for their bonuses. To paraphrase: “We’re better. We’re smarter. We work harder. And we deserve it.” I highly recommend listening to her presentation (available here, episode 5).
Elitism and the resignation of Greg Smith
As soon as I began reading Smith’s letter, Ho’s theories came to mind. In the letter, Smith is careful to list his several (and notable) accomplishments. Ivy League degree. International competitions. The works. I was particularly curious to see that he took the time to explain that the table tennis competition he nearly won was akin to “the Olympics.” Duh? As if that mattered to Goldman’s CEO. Or to a resignation letter. Smith, in other words, is a true elitist.
But there’s more. Based on Smith’s letter, the relationship that Goldman’s bankers have with clients can be read as being shaped by elitism. They’re “muppets.” So we can over-charge them. This is interesting in another way, because it mixes the rhetoric of economics and rational decision making with the legitimation for bankers’ compensation. The banking elite is smart and informed, and the clients are uninformed muppets. Ripping off a human being might seem unethical. But ripping off an irrational decision-maker… somehow is more palatable.
The paradox then is clear. As much as Smith denounces Goldman’s culture, he shares much of it. And like a fish in the water (that is how culture permeates us), the more he tries to distance himself from Goldman, the more clear it is that he is a product of it.
The paradox extends to Goldman. So ingrained is elitism among Wall Street, that it is in fact the weapon used by some (including Goldman employees) against Smith. For instance, Matt Levine at CNN denounces Smith for… not being elite enough:
Part of my resentment comes from the fact that Smith is being touted as a high-level defector from the notoriously secretive ranks of Goldman Sachs. But calling Smith a senior Goldman executive, as many media outlets do, misunderstands the nature of titles at investment banks. Smith was an “executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa,” which certainly sounds fancy. But, as thefirm took pains to point out in response to the article, there are 12,000 employees with the title of “vice president” (in the U.S.) or its international equivalent, “executive director.”
If elitism is indeed at the root of the problem, several implications follow. For Smith, he might want to reconsider sharing accomplishments in the resignation letter. For Goldman, it might want to try and cultivate alternative sources of worth among the employees. Try, for example, good old employee citizenship, at the expense of sheer performance. Hire more broadly, not just among the Ivy League. And so on.
And for financial economists and regulators: it is time to take culture far more seriously. Incentives will not do the trick by themselves.