Goldman Sachs’s has been considered the world’s leading investment bank for over 100 years. Through bear and bull markets the firm has traditionally outperformed its competitors and has managed to continue to remain extremely profitable. The firm has had a very turbulent history and throughout the 100+ years of Goldman’s existence, the investment bank has been forced to overcome stains on its reputation, scandal, regulation, internal turmoil, and major recessions. From the outside looking in, Goldman Sachs appears to be a company that is truly only focused on profit and posting solid returns for their investors; however, those who have worked or currently work at Goldman Sachs see the firm in a much different light. The question is, is Goldman Sachs truly a company that cares only about its shareholders, is it a stakeholder oriented firm, or is it a solid example of a firm that equally focuses on its stakeholders and shareholders?
Goldman Sach’s Brief Background:
Goldman Sachs was founded in 1869 by Marcus Goldman as a small commercial paper dealer which operated in a small one-room office. Goldman remained in this business for over 35 years and then in the early 1900’s Goldman becomes a major player in the IPO business and the initial equity sales for a variety of large companies, like Sears, Roebuck & Co. The firm was doing extremely well and during the zenith of investment banks’ reputations, Goldman Sachs was seen as the best. However, in 1929, during the stock market collapse, Goldman suffered massive losses by its investment unit, Goldman Sachs Trading Corp. The unit was basically a series of highly leveraged investment trusts created by one of the managing partners that allowed investors to “invest alongside the partners of Goldman” (Gruver). Goldman Sachs’s reputation as a firm was devastated to the point where they were the butt of many jokes by popular performers of the time. (Cohan) In 1930, Sidney Weinberg took over the investment bank in an attempt to rebuild its reputation. Goldman eventually turned its reputation around and began showing its dominance in the IPO and capital markets businesses after is became the lead underwriter for Ford Motor Company in 1956. In 1999, Goldman Sachs made one of the most highly debated decisions on Wall Street and decided to go public, valuing the firm at the time of its IPO at approximately $33 billion (WSJ). Many of the managing partners of the firm opposed the controversial decision claiming that Goldman Sachs would be “selling out” and that more bad than good can come when firms use “other people’s money” to invest (Gruver, OPM).
Since the controversial IPO, Goldman Sachs has continued its dominance amongst the universal investment banks, but there has been a great deal of scrutiny revolving the firm’s business practices. The firm has been portrayed as a “cut throat” firm that will do anything for a profit, including “tricking clients” into purchasing very sophisticated structured products that lead to clients losing copious amounts of money in their investments. These assumptions and generalizations have led to a great deal of regulation on Wall Street that limit and restrict a variety of businesses in which Goldman Sachs and other investment banks partake in. Goldman Sachs has been trying to come up with creative ways that it can generate more revenue and follow the guidelines the current regulations have in place. The issue with this is that Goldman tends to be “a step ahead” of the regulation, which basically means that some of the most recent practices they are getting into are so new that there aren’t any regulations to assure the firm is not “over-stepping” its boundaries. Like 1929, this is rarely brought up as a major concern until there is a major shift in the market and the business/product collapses and causes a great deal of hurt to many.
Greg Smith Article (Shareholder Theory):
The shareholder oriented theory suggests that firms operate strictly in the interest of increasing profits and returns for those who are financially invested in the company (Friedman). Though many firms claim not to be, the sad truth is that the majority of firms are strictly focused on generating profits. An Op-Ed from a VP, Greg Smith, in the London offices of Goldman Sachs sheds light on how some believe Goldman Sachs is strictly a “shareholder focused firm”. Greg Smith started the letter by announcing his resignation from the firm effective immediately and immediately stating that he believes the environment of Goldman Sachs is as toxic and destructive as he has ever seen it (NY Times). Greg Smith claimed that though Goldman is one of the world’s largest and most important investment banks, he sees the “interests of the client continue to be sidelined in the way the firm operates and thinks about making money” (Smith). Smith continues on and blames CEO Lloyd Blankfein and President Gary Cohn for allowing the culture of the firm to slip to the point where their only focus was profit and nothing else. He believes that the leadership of the firm is now encouraging practices that may not be to the benefit of the client as long as they benefit the firm. This Op-Ed caused a whirlwind of questions, criticism, and investigations of Goldman Sachs. The media portrayed Goldman as the “Evil-Empire” that ruled like a heartless tyrant and only cared about their shareholders and their “new” stock price. These allegations took a significant toll on the stock price of Goldman Sachs for quite some time and you have to ask yourself, “if Goldman Sachs was truly a shareholder firm, would it participate in businesses that it knew would eventually ‘blow up’ in their face”?
Goldman Sachs Stakeholder Theory:
Though Goldman Sachs has a relatively beat up reputation as the “bad boys” on Wall Street, I do not believe many people understand the amount of philanthropy, community service, etc. that Goldman Sachs supports and is involved in. A simple internet search of Goldman Sach’s official website would show Goldman Sachs’s dedication to its stakeholders. First and foremost, Goldman Sachs has 12 business principles that it prides itself on truly following and believing (Exhibit 1). The first of the business principles is “OUR CLIENTS INTEREST ALWAYS COMES FIRST”. Goldman Sachs recognizes the fact that their success, as a firm, is completely because of the clients that do business with them and that to knowingly participate in practices that will potentially impact clients is asinine. The other business principles mainly focus on how the firm aims to provide the best service possible and how the firms recognizes its responsibility to its share AND stakeholders.
Goldman Sachs has two programs that define its culture as a firm. 10,000 Women and 10,000 Small Businesses are programs that provide Goldman Sachs assets, capital, employees, consultants, etc. to help 10,000 Women and 10,000 Small Businesses create, maintain, change, etc. businesses throughout the world. Goldman Sachs recognizes that small businesses are what can help drive the economy, so it took it upon itself to create two major initiatives to assure that small businesses are being created and running efficiently during the major recession. These initiatives are free services that are given to businesses with little to no financial relationship to Goldman Sachs, which proves even more that Goldman Sachs is not leading these initiatives to benefit them financially in any way (Goldman).
The final initiative that Goldman Sachs participates in is the Community Team Works program. This program requires all Goldman Sachs Employees to take at least one day a year and participate in a Goldman Sachs Community Service event (Goldman). These events vary around the community in which the firm’s offices are located and they vary from park clean ups, school visits, painting, sporting events for children, hospital volunteering, etc. An interesting story about this program is that Goldman Sachs was offered by the state of NY to build its new offices at 200 West Street tax free to bring business back around the World Trade Center area. Goldman accepted the offer and since then the area has thrived as many shops and restaurants are opening to take advantage of the “Goldman traffic”. The firm noticed there was a great deal of building and development in the area, but noticed there was something missing. Goldman Sachs decided to build a large turf field next to Goldman Sachs for school children and adults in the community to participate in a wide variety of sports and games. Again, this initiative is in no way benefiting Goldman Sachs financially (actually hurting them), but they are doing it because the firm recognizes the importance of the community at large and the stakeholders of the firm.
The Perfect Mix?
In my previous paper, I discussed how it is very hard for firms to be a hybrid between shareholder and stakeholder focused firms, but I truly believe that Goldman Sachs is as close as it gets. Yes, Goldman Sachs is truly focused on returning profits to its shareholders and it does participate in some unregulated, very risky businesses, but honestly, what financial firm is not focused on generating more profit? It should not be considered a negative thing to be focused on returning profit to those who have invested their money in your company. I believe it is also important to notice that these businesses are not considered a negative thing until those who are involved are no longer benefiting from the practices. I think Goldman Sachs does a great job at recognizing that though their profits are the key to their business, they need to focus on helping those who do not have a financial interest in the firm as well.
Cohan- Cohan, W. D. (2011). Money and power: How Goldman Sachs came to rule the world. New York: Doubleday.