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By Robert F. Hurley

Greg Smith’s March 14, 2012 op-ed piece in the New York Times, “Why I am Leaving Goldman Sachs” is a familiar story for those who follow the betrayal and repair of trust. Smith tells a story of his frustration and disillusionment at Goldman changing from a culture that valued service to clients to one that rewarded those who made the most money for the firm even if it betrayed client interests. To be clear, from a trust violation standpoint, Smith suggests that Goldman lacks integrity because it holds itself out to clients as being their servants when in reality the firm is focused on manipulating clients to buy or sell securities that benefit Goldman’s interests more than the clients’. If this is true, Goldman is saying one thing but doing another, which is duplicitous and lacks integrity.

What is interesting about Smith’s resignation letter is that it tells the all-too-common, inside story of how firms lose their way and violate trust. The message here, and one that is consistent with the BP, News Corporation, Toyota, and Lehman violations, is that these betrayals of stakeholder trust have root causes that are embedded in the organizational system. At BP there was rhetoric about safety after the 2005 Texas oil refinery explosion, but real currency of the realm continued to be profit; so they chose to save 7 million dollars to drill a Deep Water Horizon well that they knew was not the safest option. At News Corp, they said that rogue employees were responsible for the first hacking scandals (that it was not inherent in the system), but it was later revealed that hacking was a strategy used in the News Corp system to gain advantage among news outlets. Toyota had a strong quality culture, but a flawed and Tokyo centric recall system that failed to notify US drivers about cars that had been recalled in other countries. Lehman systematically overrode its own risk management practices because growth and profit is what really mattered.

Betrayals of trust by tyrants and government agencies show similar patterns. Time and time again incongruence in the organizational system cause major trust violations, which lead to demonstrations of trustworthiness by some aspect of the system, only for some other aspect of the organization to undermine it. A failure to align all elements of the organization’s architecture toward achieving its stated mission and values is what causes these betrayals of stakeholder trust.

High trust firms like Zappos, Google, Proctor and Gamble, and QuikTrip don’t fall into these traps. They do the hard work of clarifying mission and values, and they align leadership, culture, reward systems, and all of their core processes (product development, supply chain, etc.) toward serving stakeholders’ interests. These stakeholders — customers, suppliers, communities, and employees — know that these firms can be counted on reliably. The data is clear that these high trust firms derive many competitive advantages in lower employee turnover, more customer loyalty, more organizational resilience, and even higher stock price from this service. Doing the right thing and doing it consistently is a virtuous and effective way of doing business.

The good news for Goldman Sachs is that trust failures can be repaired and reputations restored. Mattel recovered brilliantly from its lead paint problem in toys made in China; Bill Clinton went from the disgrace of the Monica Lewinsky scandal to being a leader in global causes and presented as the world’s CEO in the media . But the path is not easy. Real trust repair requires

Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at the implications of the charges against Goldman Sachs. See Lim’s previous OUPblogs here.

The Securities Exchange Commission has filed charges against Goldman Sachs as the Obama administration has taken up regulatory reform of the financial markets. The two events are not unrelated. They reveal the perception that the economy has turned the corner, and that the Obama administration is now ready to mean business, literally.

For a year now we have heard about the potential for a “double dip” in the economy. Fortunately, the conventional wisdom hasn’t materialized. Wall Street has a way of swinging between extremes, between the ridiculous hubris that created the housing bubble (or the dot com bubble) and the abject despondency whenever a bubble is burst. If only businesses and investors could find the Aristotelian mean between irrational exuberance and paranoid pessimism.

By most indices, the economy is on its way to recovery. The chances of a double dip on the economy are now so near zero that the Obama administration has switched mottos from “too big to fail” to “big enough to punish.” For the fact is there is a cosy relationship between government and business, and a correlation between the Dow Jones and Gallup. Obama could not afford to regulate the big banks while the economy was spiraling out of control, but he and Geithner appear to think that the coast is now clear to do so.

It would appear that the SEC parts company with unregulated capitalism at the 11,000 mark. Last Friday, federal regulators filed fraud charges against Goldman Sachs over its dealings in subprime mortgages, precipitating a 125-point drop in the Down Jones.  Consider the confidence of the SEC when these charges against Goldman Sachs occurred in the middle of the day on Friday (and not at the start or end), and also at a time when options were expiring for the month (so investors who took out earlier plays on Goldman were left unable to hedge).

Meanwhile, a war is brewing between the two political parties about financial regulation and a bill coming out from the Senate Banking Committee which would, among other things, give federal regulators the authority and a $50 billion fund to control and wind down too-big-to-fail banks at imminent risk of destabilizing the wider economy. Republicans are pushing back hard against what they call “bailout authority” but their real beef is not with bailouts, which Democrats say that the fund would prevent, but the bill’s provision to regulate financial derivatives: the instruments of mischief that led to last year’s recession. This is at the heart of the bill, so important that President Obama has issued a (rare) veto threat against any bill that does not regulate what Warren Buffet calls “financial weapons of mass destruction.”

Now that the market is stable enough to weather regulatory intrusion, Obama means business. With the health-care issue out of the way, regulating Wall Street has become Obama’s next top priority.