Goldman Sachs governance report

As an example of what leading financial service firms are doing in terms of their governance culture, this week's report from Goldman Sachs sets three interesting precedents for the sector.

1. The extent of the reputational damage when a firm's actions stray so obviously from its espoused business standards. 

Goldman's first business principle is: 'Our clients' interests always come first'. This ideal looks a little hollow as the details of Goldman's investment in Facebook have leaked out. Their last business principle is: 'Integrity and honesty are at the heart of our business'. Again, hard to square with the news that Goldman lost an additional $5bn in proprietary trading in 2008 but have only just announced the loss.

2. Getting your culture right is key to overcoming reputational woes. As the report notes (p. 6):

'The firm's culture has been the cornerstone of our performance for decades. We believe the recommendations of the Committee will strengthen the firm's culture in an increasingly complex environment. We must renew our ... constant focus on the reputational consequences of every action we take. In particular, our approach must be: not just "can we" undertake a given business activity, but "should we".'

3. Firms are right to be concerned about the intuitive link between culture, governance, and reputation. As the report says (p. 8):

'[Goldman's reputation] can be affected by any number of decisions and activities across the firm. Every employee has an equal obligation to raise issues or concerns, no matter how small, to protect the firm's reputation. We must ensure that our focus on our reputation is as grounded, consistent and pervasive as our focus on commercial success.'

Despite the poor reception the report has generally received on Wall Street, Goldman might again be ahead of the pack in one major aspect. Instead of addressing governance failures in a simple rearrangement of committee armchairs and more internal procedures, they have taken a more root and branch approach. Under the rubric of improving governance, they aim to address: improving client relationship management, making adherence to the Business Principles reportable, better oversight of new products, taking transparency seriously, and incorporating culture and values into KPIs.

At least Goldman is coming up with a public response to the seriously flawed culture of banking that led to the financial crisis. I hope, but don't expect, more international banks will follow Goldman's new approach to governance reform.