It Doesn’t Change The Facts

Published today in CommPro.biz http://www.commpro.biz/news/tuesday-october-30-2012/ 

 

Remember last March when a Goldman Sachs executive very publicly resigned with a scathing OP-ED in the New York Times? Well, last week (2012.10.23) Greg Smith released a book fleshing out his description of Goldman’s decay over the twelve years of his impressive career from the heady time when he made the cut and became an intern. Prior to the book’s release, Goldman fired back. They deny that they play any of the smarmy games that Smith claims are routine.

The investment banking firm paints Smith as a disgruntled employee who left not out of disgust with a deteriorating culture, but because he was refused an increase in his annual bonus from a half-million to a million dollars. Smith doesn’t deny that request, but suggests that instead of select items, Goldman should release his entire personnel file. He says it will show twelve years of rave reviews.

While smearing Greg Smith may blunt his criticism, the fact is, Goldman has paid out more than a half-billion dollars to make charges of the very kind Smith hangs his arguments on, go away. Goldman CEO Lloyd Blankfein told the Times of London, that he is “just a banker doing God’s work.” Comedian Stephen Colbert noted that “Blankfein had not indicated which god. Perhaps Shiva, Lord of Destruction.”

Blankfein has hired a lawyer with a history of defending high profile corporate crooks; not what those working in God’s vineyards normally do. On the face of it Greg Smith has an impressive track record. During his twelve years at Goldman he rose from intern to a high ranking position in their London office. He was chosen as one of ten out of more than 30,000 Goldman employees to appear in their college recruiting video. He was certainly a key player.

A Congressional investigation detailed that Goldman routinely sold packages of crappy investment vehicles to their customers (AKA “Muppets”) all the while betting that they would fail. Testifying before a Congressional Committee, CEO Blankfein denied knowledge of these practices. However, the Committee trotted out internal documents putting his denial in “Pants on Fire” territory.

So it comes down to this. Greg Smith’s motivation for leaving may or may not have been pristine. However, his motivation does not make his claims untrue. Goldman Sachs is not a nice outfit. They are not doing God’s work. They grind out huge profits moving money around. In Goldman’s case not a role that contributes to the well-being of society.

Understand, many investment banks play an important role. They provide bucks to keep major organizations in business and serve as advisors to businesses and to institutional investors. Problem is Goldman Sachs and some other bottom feeders play both sides of the street. The game that regulators during the Great Depression decided was a really bad idea. The laws set up back then to protect against the activities Greg Smith sees as toxic were swept away in the 1980’s and 90’s, leading to the recession we are struggling to overcome. Bad idea? You bet! Once a bad idea, always a bad idea.

Chickens Roost

We sure are glad we haven’t been holding our breath waiting for those who drove our economy off the cliff to be called into account. While there is still not a lot of action on that front, various folks are finally going after the bad guys. Federal and some state prosecutors -notably the New York State Attorney General- are on the move. And the shoes are beginning to fall in the civil courts.

The American Civil Liberties Union (ACLU) filed a suit last week (2012.10.15) against Morgan Stanley.  The investment bank loaned billions to New Century, an outfit that specialized in sub-prime loans. Morgan Stanley pushed New Century to generate more and more of those high risk loans, then packaged them up and sold them -at astronomically high margins- to pension funds and other “suckers” as they were referred to. These toxic loan packages, along with similar packages peddled by other investment banks, went sour and were the major factor in the collapse of the world economy. An exercise in ethical ignorance.

What made the New Century loans particularly smarmy were the mortgage company’s targets. Poor folks, mostly black, who were not sophisticated enough to understand what they were signing up for. According to published reports the ACLU’s class action suit on behalf of these folks is based on “claims that Morgan Stanley violated the Fair Housing Act and the Equal Credit Opportunity Act.”

This suit joins a host of others by investors and government entities aimed at finally bringing to task the banks whose reckless behavior has caused incredible pain all around the world. In addition to the Morgan Stanley suit, Wells Fargo is facing an action claiming that their reckless lending practices ended up dumping bad loans on the taxpayers’ backs by sticking a government insurance program with the tab. Bear Stearns & Company, now a part of JP Morgan Chase, fell into the sights of the Justice Department earlier this month for reckless housing boom activities. One-by-one the guys who rolled the dice and hollered for help from the taxpayers when they came up snake eyes, have the law knocking on their door.

But where are the individuals, the executives who pushed to keep the bucks flowing from their subprime mortgage scams? Where are the big shots who took hundreds of millions in bonuses while the taxpayers suffered from the recession triggered by their reckless actions? People like Lloyd Blankfein, Goldman Sachs’ CEO who had his people betting against their own customers in a heads-we-win, tails-you-lose game that only Goldman Sachs could win. Unbelievable!

The same “Pants on Fire” Blankfein who mocked a Congressional Committee by denying knowledge of activities at Goldman Sachs when internal communications from the bank show clearly that he was in the loop. How come Blankfein has not been charged with lying to Congress, a felony? After all, we went after a baseball player for lying with little or no evidence, why not a banker with solid evidence?

Reputation Counts

Corporate Responsibility Magazine released its first corporate reputation study in advance of its annual Commit!Forum (2012.10.02>03) held at the opulent Wall Street venue, Cipriani. The CARAVAN® telephone survey of 1,032 adults in early September came up with some startling results; especially startling in view of the existing job market.

They found that among the unemployed in the study, 75% said they would rather keep looking than take a job with an organization with a bad reputation. Among those currently working, 58% would move to one of the bad guys for more money. How much more? On average they would hold their nose and change jobs if their pay were doubled. On the flip side, among the currently employed, 87% would take an offer from a company with an excellent reputation. More money? Yes, but not all that much, between 1% and 10% added to their paycheck.

“The results of the new survey underscore Americans’ desire to align themselves with organizations that do more for society than increase their bottom-line. Even during a time when Americans face many fiscal challenges, most people would rather continue their search for employment than work for a company that has questionable business practices or ethics,” Elliot Clark, the CEO of Corporate Responsibility Magazine, is quoted in a press release. “The survey demonstrates that there is a cost of bad business behavior, which significantly affects the ability to attract and retain people.”

Great people who stay with an organization are one of the markers not only of a nice place to work; they are makers of a profitable business. Businesses that care for their employees, their customers, their vendors, their community, and the environment get a much better shot at profitability than outfits that focus on the bottom line. The authors of Firms of Endearment found that companies that followed these markers racked up eight times the profits of the S&P 500 average over a ten-year period.

So those who would rather keep looking are wise. Better to keep looking until you find a decent organization to work for than go to work for a bottom-line focused scumbag outfit that’s likely to fail or kick you to the gutter at the first sign that their bottom line is shrinking. That leaves you with another empty spot on your resume to explain when you are back out on the street. Who needs that?

A good place to work attracts good people who stay long-term, who work really hard, who take care of your customers and your suppliers. Employees who are active in your community and alert you to its needs; employees who are alert to environmental issues and keep you caring about those issues. Employees who keep your lenders and your stockholders happy because those employees keep the bucks coming in and the profits piling up. That’s what an ethical business model looks like, what makes it a fun place to work, a great place to work, and a secure place to work.

Missing The Point

The Security and Exchange Commission (SEC) has broad powers to regulate our security markets and those who do business in this arena, commonly known as Wall Street. Last week (2012.10.02) the SEC convened a high-frequency trading panel to review this practice that creates as many as 70% of all investment market trades. We use the term investment loosely, that’s the last thing high-frequency traders practice; they could be more accurately described as pirates.

Using ever more sophisticated algorithms, the high-frequency traders search for various types of large trades, then race ahead of them buying up the target and less than a second later sell, raising the price and essentially stealing from the institutional buyer. That means that your 401K or Granny’s pension fund ends up paying more. While it’s legal larceny it’s neither ethical nor in any way beneficial to society. The traders will claim they have lowered the cost of trading. While that might be true, any savings vanish in the inflated pricing they add to the markets.

Given all the damage the traders flying the Jolly Roger inflict on the markets, there was great hope that last week’s meeting would bring some relief. Kiss that hope goodbye. The panel focused exclusively on the problems high-frequency traders encounter when their computer programs malfunction. In May of 2010 a trillion dollars in market value briefly disappeared. Three computer-gone-wild incidents have occurred this year. On August 1^st Knight Capital lost $440 million in the blink of an eye and the firm nearly went bust. Oh, those poor babies.

That triggered this SEC panel discussion, a discussion that focused on protecting the high-frequency traders from harm. There seems to be a consensus on creating “Kill-Switches” that could cut off destructive (to the Jolly Roger sector) computer glitches. The discussions centered on Kill-Switch access, who can push the button and should they be hair triggered or take a little longer. For its part the SEC has created an Office of Analytics and Research to study the issues. It will take time to get the office set up, hire the geeks to man it and give them enough time to study the issues – albeit all the wrong issues.

The issue the SEC should be studying is how to reign in this useless, destructive  practice. The stock markets exist to allocate capital. High-frequency traders do nothing to serve that purpose; actually they interfere with the underlying purpose of the investment markets. It’s time to send them packing.

Currently capital gains on investments held more than a year are taxed at the 15% level. We’d like to suggest some new tax brackets. For investments held twenty years or more, there would be no tax liability on capital gains. For ten to twenty years, 5%, five to ten years 10%, two to five years 15%, one to two years 25%, one month to a year 50%, one week to a month 75%, less than a week 95%. That will force these pirates to sail off into the sunset; or perhaps to Las Vegas where the odds are not stacked in their favor.

Don’t Close Your Hand 
                         on the Canary

Suddenly it’s October, and we are into the fourth and last quarter of 2012. This point in time gives us pause to examine why we are here; a time to remember that we are the canaries in the coal mine. Our job is to sniff out and head off the slightest hint of anything that might damage the reputation of our client(s) or our organization. The trick is earning a place of trust that gives us access to thinking and planning at the highest level. We need a place at the right hand of the CEO; a place where we can nip off reputation damage in the bud.

Over more than four decades in communications I have watched the consequences break bad when we lose our focus on this role. It never starts out as a big deal, just some little thing. An action that might escalate into a problem, but it probably won’t, so it’s easy to let it go. Anyway, every time you raise a point it challenges one of the other players and they may not see the danger.  It’s easier to let it pass, to close your hand on the canary.

A move that risks breaking the one rule that we should all have emblazoned on our conference room wall, Warren Buffett’s advice, “It takes 20 years to build a reputation and five minutes to ruin it.” Don’t allow anything stand in the way of your role as reputation guardian. I’ve had more than one client refer to me as their “Corporate Conscience,” and not always in a kindly tone. I even lost a client on one occasion when I raised ethical issues; never an easy outcome, but easier than losing a client because something that you let pass damaged or destroyed their reputation.

In recent years I have turned my focus to promoting the ethical business model. The idea that an organization that puts their employees, their customers, their vendors, their community, and the environment first has no need to worry about their lenders or their shareholders because the first five will assure them the best possible shot at profitability. Check out Firms of Endearment, a book detailing a study that shows that firms following those markers were eight times as profitable over a ten year period as the S&P 500 average.

Can anything guarantee profitability? Of course not, just that all things being equal you have a better shot if you follow the markers. It’s a message that resonates well and has given me consulting, speaking, and seminar opportunities, including an invitation to keynote a European Union banking conference on the Island of Malta. I even wrote a book, Play Nice, Make Money, that makes the case for an ethical business model as the most effective route to profitability. It’s a message we need to deliver to those entering the  business world, corporate communications and communications agencies. I welcome any chance to spread that message. Maybe we should all have a pretty yellow canary singing in our reception room to keep us focused on that message.

Shareholder Spring

 

Evidence is piling up that out-of-control “Carpet Land” compensation levels are not only unfair, they are counterproductive. It’s not news that paying corporate leaders outrageous amounts of money concentrates their focus on raising their paycheck instead of corporate health. We have known for decades that all the excuses in support of the multimillion dollar deals are just that, excuses.

Ten years ago (August 9, 2002) in a USA Today piece, management guru Jim Collins reported that in a five-year study his organization had been unable to find any connection between compensation levels and the success of the companies they studied. Collins said, “If you have the right people, they will do everything in their power to make the company great, no matter how difficult the decisions and largely independent of their stock-option packages.”

In the same article Collins noted that you don’t have to pay the big bucks to keep talent on board. “Retention” is the favorite “excuse” of Compensation Consultants brought in to advise the companies on what they have to shell out to keep their Carpet Land inhabitants in place. Collins noted that more often than not, an insider promoted into the top spot did a better job.

Today the evidence is piling up that skills from one job are not transferable to another organization. A study by the John L. Weinberg Center for Corporate Governance at the University of Delaware found that CEO skill sets do not move easily to another company. This cuts the legs out from the retention rationale and with it the Compensation Consultants’ favorite tool to feed the endless how-high- can-you-go pay scale race, the sacred “Peer Group Benchmark.” The consultants pick a group of companies that they feel are relevant and use their compensation levels to set their clients’ compensation; a method that keeps CEO paychecks on an ever upwards spiral. In a NY Times interview the lead researcher on the UofD study, Charles M. Elson, said, “It’s a false paradox, a peer group is based on the theory of transferability of talent. But we found that CEO skills are very firm-specific. CEO’s don’t move very often, but when they do, they’re flops.”

Apparently shareholders are fed up as well. Shareholder voting on compensation is growing increasingly negative in what’s being called “Shareholders’ Spring.” In Europe where executive compensation levels are considerably lower than here in America, the shareholders are outraged. New York Investor Relations Guru Gene Marbach writes that, “the French government is considering the imposition of pay limits on executives at companies in which it owns a majority stake. Pay will be capped at 20 times that of the lowest paid worker in the company.”  

That’s reminiscent of a few decades ago when ratios in America were 40 times the pay of the folks at the bottom of the pay scale. Today it can run as high as $1,000 to a CEO for every $1 paid the folks on the bottom. Ethically, morally, or for that matter practically, there is no way to justify this kind of wage disparity.