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Ethics And Internal Culture

There’s a fascinating op-ed piece in the 3/14/2012 New York Times by Greg Smith, the former Goldman Sachs executive director and head of United States equity derivatives business in Europe, the Middle East and Africa. The author pours out his heart about the erosion of ethics and internal culture within the infamous firm since he joined 12 years ago (H/T Bruce Hembd), and it got me thinking about similar issues inside this business.

For example, outsiders looking into this field might have a difficult time wrapping their minds around the series of enormously contentious labor disputes initiated by concessionary driven budget cuts coupled alongside what could easily be considered generous improvements to CEO compensation/benefits/perks.

Now before anyone jumps the gun to assume this is a punching bag piece against CEO compensation, just slow down a bit.

There are plenty of executives in this business who do a remarkable job and are worth every penny they are paid. And to make sure everyone’s on the same page here, it is worth pointing out that executive compensation levels are calculated and approved by each respective organization’s board of directors.

At the same time, the numbers paint a clear picture that increases to average CEO compensation in this field have outpaced respective employee improvements by a considerable degree, even after the economic downturn.

So when examined alongside Smith’s op-ed, which chronicles an alarming decline in ethics and integrity within all levels of Goldman Sachs, it shouldn’t come as any surprise to anyone in the business that our cumulative reputation might be suffering in the wake of some high profile executive gains alongside employee cuts, which transpired before and after the economic downturn.

If nothing else, when it comes to internal culture, one sure fire way to poison the well for decades to come at any size organization is gross negligence of ethical standards.

What do you think; does Smith’s op-ed have any value for this business? Do you think there are any unethical practices with regard to executive compensation in the field worth noting? Likewise, how about exemplary ethical practices?

5 Responses to Ethics And Internal Culture

  1. A musician March 15, 2012 at 6:02 am #

    I think it’s not wrong to question executive pay within the non-profit world of orchestras.
    The ethical lapse is in the slight of hand accomplished by the executives themselves by lowering the fundraising bar and then being rewarded for exceeding the paltry goals that were set.
    The situation we have now is very much the tail wagging the dog where the organization exists to first benefit the upper management including the conductor. The CEOs get a pile of money for failing and the conductors get promoted to the hilt along with preposterous amounts of money for 11-14 weeks of work. Nothing wrong with those things except that the actual heart of the institution, the musicians who retain the intellectual and identity equity of the group, are handed the bad news that there isn’t enough money for them. Orchestras are groups of artistically interconnected musicians who need to be managed and led. It’s not an owner + star conductor who need people to make sounds for their great profit.

  2. Shoshana March 15, 2012 at 10:22 am #

    I never thought about it before, but a non-profit is set up in a fashion that does not have a check and balance for the Board.

    The Board is responsible for keeping the non-profit on track strategically. The Boards are allowing these CEO’s in question to have enormous compensation packages even if they are failing. It becomes quite obvious when cuts to budget are made and the CEO’s pay remains intact.

    Also, boards are responsible for raising the funds to make the organization work. One of the biggest reasons nonprofit organizations fail is due to lack of sufficient fundraising. Yes, this is a pretty stupid statement. However, if this statement is so obvious, it makes me wonder why more funds are not being secured by boards. These are difficult times, however, I do see some boards stepping up and making huge differences.

    As you can see, the Board is mainly responsible. Is there anyone in the organization to act as a check and balance for the Board? Not really. This means that a Board can make or break a nonprofit organization. It’s not simply a matter of blaming the “greedy CEO.” The Board itself would need to find their conscience and consciously make the decisions to right the wrongs.

    Perhaps a standard system of pay and increases for CEO’s needs to be established for nonprofits. People can be made responsible for the work they are doing, but until such a system could be established as standard, the Board would need to be, well, on board.

    • Drew McManus March 15, 2012 at 11:34 am #

      I think you’ve touched on one of the real problems within the business as a whole which doesn’t have a simple solution; the lack of independent review. Service orgs that advise boards are composed of former executives and managers and the growing list of consultants are stocked from the same sources. The result is a type of cultural-industrial complex.

      I did a WQXR podcast on the issue of exec compensation in the business and one of the other panelists mentioned that she didn’t expect things to change much unless execs want it to. It’s a good listen: http://www.adaptistration.com/blog/2011/09/19/whats-a-performing-arts-executive-worth/

  3. Janis March 18, 2012 at 10:50 pm #

    An honest question: if the mucky-muck CEOs of these orchestras are supposed to be hobnobbing with filthy rich people who can write big checks to the institution … can they do that if they don’t make enough money to meet these people and look them in the eye? “Come on over to my summer home and I’ll have the chef whip something up for you,” or whatever. If you can’t have those sorts of relations with the super-rich, will they write your institution a fat check? If you can’t come across as simpatico with them?

    I’m sure this is a fairly canned reason given for these sorts of paychecks, and I’m also sure that there is room for a lot of smaller orchestras that don’t have these considerations and hence can move into more innovative fundraising territory. But for a Big Five sort of deal, CAN these people do their jobs effectively if they are taking Daddy Warbucks out to a swank lunch in a 2006 Suzuki?

    I work for a nonprofit that is expected to — and moreover DOES — pinch pennies until they SCREAM. Our CEOs fly coach unless they get free upgrades. We accept NO meals, and especially NO alcohol. But we don’t have to cadge zeros out of anyone named Rockefeller, either.

    Is this a catch-22 for B5 CEO compensation? Is there a way for these organizations to handle this in a way that makes their CEOs effective check machines without outright offending anyone else who works there?

    • Drew McManus March 19, 2012 at 10:26 am #

      I think those are all good questions but probably not related to issues of ethics vis-a-vis improvements to compensation during periods when the institution is engaged in cutbacks.

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