In the case of wealthy and influential investment banks this disconnect can be catastrophic for economies and for society.
This is not new. The very day that Lehman Brothers filed for bankruptcy in 2008, three top credit rating agencies rated the firm as an above average investment. Those who tried to articulate the human flaws in the underlying management systems were criticised. With the benefit of hindsight and documents which became publicly available after the bankruptcy, US House committee Chairman Henry Waxman said Lehman documents portray a company in which there was "no accountability for failure". CEO Dick Fuld ran Lehman in an authoritarian manner which created the kind of competitive culture that led to the bank's ultimate demise.
Both Goldman Sachs and Lehman Brothers had stellar corporate histories, (as did Enron, ten years before), with laudable values and corporate goals. Yet, when one turns a different analytical lens on such companies one finds that human capital indicators, such as leadership style and culture, help to explain the internal organisational functioning further.
Over the generations Goldman Sachs was considered a somewhat mysterious organisation and retained an almost mythical status in the banking sector. Its culture was linked to the traditional partnership structure upon which it was founded. This culture was predicated on organisational members sacrificing their individuality for the good of the company, underpinned by loyalty and trust.
The sacrifice asked of employees was validated over the years. In 1999 Goldman was ranked seventh in Fortune magazine's "100 Best Companies to Work for in America" and third in its "Top 50 MBA Dream Companies", the highest-ranked investment banking and securities firm in each case.
People from Goldman Sachs have been described as predictable, inflexible, and yet "very, very good." One Morgan Stanley Dean Witter employee commented in Lisa Endlich's book Goldman Sachs: The Culture of Success: "Goldman people have always been viewed by the rest of the industry as a bit strange. That's part of their strength - others are afraid of them and don't understand their success."
Yet, is this rhetoric of a collegiate, client-centric, highly trustworthy corporate culture distinguished from the reality of management practices, as claimed in Smith's letter to the New York Times?
Qualitative issues, including human capital systems such as culture and leadership, are more likely to expose a disconnection between rhetoric and reality. At Goldman Sachs, the rhetoric described above is not reflected in the reality exposed by Greg Smith, "I am sad to say I look today and see no trace of the culture that made me love working for this firm for so many years," he says. "Over the last twelve months I have seen five different managing directors refer to their own clients as 'muppets'."
How can this culture have changed so drastically during one man's career?
The shift could partly be attributed to Goldman Sachs' move from the unlisted public domain, (where the employees owned almost all the capital), to the public domain, (the stock market). In the stock market outside investors demand immediate results and human accountability. The changes in Goldman Sachs ownership structure have not been reflected in the human capital management systems and leadership culture.
The mood swing may also be in response to recent market conditions and regulatory changes, which could have potentially affected the culture and loyalty of the employees having to adapt. The economic crisis and radical downturn in banker's prospects might have caused the culture to shift from 'money making at the best cost' to 'money making at any cost.'
Given that the traditional financial metrics underlying the credit ratings systems were clearly insufficient as lead indicators of corporate performance, especially in the case of Lehman's, it is now timely to ask; how can outsiders analyse the gap between the rhetoric and the reality of life inside organisations? How is human capital being created and destroyed?
Researchers Carol Royal (Cass Business School and the University of New South Wales (UNSW)), Loretta O'Donnell (UNSW) and Chris Rowley (Cass Business School and the HEAD Foundation) have been investigating the role of human capital for some years.
They have found that it is possible to unpack elements of the reality, as distinct from the rhetoric, with judicious use of publicly available information on human capital within firms. Human capital analysis can be used to pinpoint a firm's unique configuration of management systems such as: culture, performance management, remuneration management, knowledge management, career planning and succession planning. These qualitative measures of value creation can serve as indicators of potential future value of the organisation.
It is important to note that there are many deceptive proxies for strong human capital: employee awards; engagement scores; philanthropic causes; simplistic metrics on staff turnover, or safety records. While these are useful, they are superficial, and do not represent the complexity of the functioning of highly sophisticated, global organisations. As one of the very few real management-influencing academics Dave Ulrich, noted: it is easy to fall into the trap of measuring what you can measure, rather than what you should measure.
Chris Rowley, director, Centre for Research on Asian Management, Cass Business School, City University and director, research and publications, HEAD Foundation, Singapore
