“It was a wake-up call,” says E. Gerald Corrigan, managing director at Goldman Sachs, when describing the US$550m fine the firm was issued by the Securities and Exchange Commission (SEC) in 2010 for misleading investors about a product tied to subprime mortgages. “The reputational damage required great attention which we attempted to address through the Business Standards Committee report (BCS).”
Goldman’s reaction to the SEC fine was to launch a fundamental review of its business practices and culture, which US firms are required to publish. Many people blame the shift in Goldman’s culture on two things. First, after the bank moved away from its partnership status in favour of a stock exchange listing in 1999, it encouraged a more short-term, profit-centred approach. And second, its 1990s decision to grow in size to avoid being overshadowed by the likes of JP Morgan. That led to a number of deals marked by conflicts of interest: for example, in its work on private equity deals Goldman advised both the buyer and the target company.
The effort going into the review was extraordinary, says Mr Corrigan, consuming between one-third and one-half of the time of the firm’s 400 partners over a three-year stretch. The result of the BCS was a set of 39 recommendations, published in 2011.
But the review also highlighted some of the tensions faced by big investment banks such as Goldman Sachs. Alongside a commitment to prioritise customer service and behave ethically, the bank still lists the commitment to maximise shareholder returns, for example. A 2011 survey of 200 of the bank’s biggest clients found that some of them thought it placed its short-term interests above those of its clients. Some clients also thought the bank’s involvement in proprietary trading actually put it in conflict with its own customers. As a stock exchange-listed company it has little choice over this, but the tension between maximising short-term performance and maintaining a partnership’s long-term view remains.
There is little doubt that the review is a sincere effort at change, with senior managers going on compulsory courses to make them think about the ethics and big decisions, including involvement in any deals worth more than US$850m, now vetted by a committee including functions such as HR and risk, as well as the heads of the various business units. Mr Corrigan acknowledges the desire to return to something akin to the old, long term focused partnership model (pointing to the risk committee in support). But how long it will take to mend the damage done to Goldman’s reputation remains open to question.
