Donald J. Walters, President & CEO, CEFLI
Good morning and welcome to the 2012 CEFLI Ethics Summit Meeting!
Thanks to all of you for your participation in today's event and your support of CEFLI. We are holding this event to acknowledge that March is Ethics Awareness Month and hopefully, by allowing us to review some key issues related to ethics today, we will be able to enhance our understanding of the issues and our ability to promote sound ethics practices within our companies and across the industry.
There are some familiar faces here today and others who may be here for the first time. We would like to extend a warm welcome to those who may be attending a CEFLI Summit Meeting for the first time. We hope you will find that our meeting format allows you to be a direct participant in the discussion of the issues under review today.
Before we begin today's session, I would like to share some personal reflections on recent developments.
I mentioned at the outset that March is Ethics Awareness Month. It may be that Greg Smith took that to heart.
As you probably know, Greg is the former Goldman Sachs executive director and head of the equity derivatives trading business in Europe, the Middle East and Africa, who announced his resignation from Goldman in a widely read Op-Ed article in the New York Times this past Wednesday.
In the article, Greg explained his rationale for resigning from Goldman. He reported being attracted to Goldman as a summer intern from Stanford University -- largely due to the culture of the firm which he described as being based upon "teamwork, integrity, a spirit of humility and always doing right by our clients." After 12 years with the firm, he now described Goldman as a culture that did not put its clients' interests first but rather viewed most clients from the perspective of the extent to which they could make a profit for the firm. He described the "client focus" as being "purely about how we can make the most possible profit off of them." He goes on to state that "it astounds me how little senior management gets a basic truth: If clients don't trust you they will eventually stop doing business with you. It doesn't matter how smart you are." He now describes the firm as one that has lost the very values that attracted him to the organization in the first place.
Mr. Smith's letter raises several issues we could all do well to reflect upon today.
First, why did Mr. Smith choose to go public with his resignation as an Op-Ed article in The New York Times? It takes courage to take such a step that some have described as "career suicide." But it also raises other potentially troubling questions as well.
Surely you would think that a prominent firm like Goldman must have had some way to report ethical concerns internally. Did Goldman not have or did Mr. Smith not have confidence in an internal reporting system within Goldman that he could access to report these concerns? If so, did he not have confidence that his "voice would be heard?" To what extent does organizational culture serve as a deterrent to those who might share similar concerns? Does it make sense to speak out under such circumstances or does the organizational culture suggest that silence and acquiescence may be the best strategy?
Was his lack of confidence in senior management at Goldman so manifest that he felt a sense of desperation in raising these issues that it would do very little to change the culture of the organization?
What steps, if any, will Goldman take to address the concerns raised in
Mr. Smith's New York Times Op-Ed article? Will he be simply characterized as a disgruntled employee or was he actually telling the truth? Isn’t there now pressure on the Goldman Board to do something?
The issues raised at Goldman by Mr. Smith may not be that uncommon at other organizations in the financial services industry. As long as human nature is what it is, questions related to ethical misconduct will continue. You may have seen that on March 6, we also had the conviction of Allen Stanford who orchestrated a 20 year -- $7 billion investment fraud scheme. So individuals with a morally challenged ethical construct continue to operate.
But it was interesting to note in some of the comments that were posted to the NY Times Op-Ed article that a current Goldman employee explained that many of these issues started to arise after Goldman went public shortly after Mr. Smith joined the firm. As a private company, there was very little oversight and scrutiny of Goldman. However, as a public company, Goldman and its inner workings are more under the spotlight more and more as the internal focus seems to be on attaining profitability targets and quarterly earnings estimates.
One could create an analogy to what has occurred in the life insurance industry over the past 12 years as well. 12 years ago, there were many more mutual life insurance companies that were owned by their shareholders. During the intervening time period, however, several of these major mutual insurance companies went public. Today, it is clear that these organizations are under increasing pressure to reduce expenses, meet revenue targets and attain quarterly earnings estimates in a manner that is somewhat different than existed several years ago.
In this type of environment, when there is greater pressure to meet organizational financial objectives, does a sense of individual and organizational responsibility to the reputation of an entire industry continue in the same way that it did over a decade ago? Or, is there a greater focus upon what I can do to assist the profitability of my organization because that will inure to the benefit of their earnings and also my salary, bonus and promotion opportunities?
The NY Times Op Ed also forces us to ask: Are there Greg Smith’s within your respective organizations? How would you handle such a situation?
We, as an industry, know that the questionable actions of selected individuals or individual organizations often reflect unfavorably on an entire industry. This is especially important in an industry like ours that is predicated upon delivering on long-term promises. We know that these market conduct issues posing reputational risk to the life insurance industry occur in cycles. Years ago, it may have been vanishing premium policies. Today, it's retained asset accounts and unclaimed property. Tomorrow only knows what the future will bring. However, what we do know is that these types of issues have occurred in the past will most likely occur in the future as well.
That's part of our mission at CEFLI. We hope to continue to establish Forums like these so we can engage in thoughtful dialogue and convene leading thinkers in the field to share their insights and expertise for the betterment of all.
We appreciate your commitment to ethics in the life insurance industry through your participation in today's Summit Meeting. We, at CEFLI, hope we can provide the leadership role in convening these types of forums to have a frank discussion about the ethics challenges facing the life insurance industry today.
We encourage your dialogue in all of our sessions today. We hope, through our discussions, you can gain insights on contemporary ethical challenges facing the life insurance industry that will help you to do your job more effectively and allow you to gain some insight on potential challenges that may lie ahead.
Some have suggested that ethics is a “soft” issue. But just ask any of the life insurance companies that have recently paid out multi-million dollar settlements whether ethics-related issues may have a “hard dollar” economic impact. These costs are difficult to estimate in advance but can be significant when they are ultimately realized. They can help to make the “business case” of the importance of what you do.
So we thank you for your participation in today’s event and your commitment to ethical practices in the life insurance industry.
The work you do is important and we commend you for your commitment to it.