By Joseph Neu
Goldman Sachs’ Business Standards Committee report is a case study in reputational risk-management redress.
For Goldman Sachs, reputational risk was like the weather: everyone talked about it, but no one could do anything to stop the rain. According to someone familiar with Goldman’s internal risk-management framework, one of the only risks that the bank was really ever concerned about was reputational risk. In part this was because it is the kind of risk that’s not easily calculable, so even the savviest of Goldman risk quants couldn’t price it.
Seen in that context, it is somewhat understandable that this risk was never adequately addressed. No longer. The recently introduced Goldman’s “Report of the Business Standards Committee,” represents a comprehensive effort to redress this critical risk-management lapse. More than anything, the financial crisis exposed how Goldman had failed to safeguard its reputation which has long been its chief asset. Financially it breezed through the crisis; reputationally, it stumbled badly—a fact revealed by the client survey described in the report.
Be true to your school
Goldman’s findings were likely painful, but given the press on several of its practices before and during the crisis, probably not unexpected.
For instance, it was only in December that Senator Carl Levin, chairman of the Senate permanent subcommittee on investigations, accused the bank of trading abuses. He also charged that in 2007 the bank sought to drive down credit default swap prices on troubled mortgage-backed securities so they could buy them back at artificially low prices.
Its aim is to abolish the root cause of such allegations: the view that it put its interests first. According to the Business Standards Committee report’s summary of the survey:
“Clients raised concerns about whether the firm has remained true to its traditional values and Business Principles given changes to the firm’s size, business mix and perceptions about the role of proprietary trading. Clients said that, in some circumstances, the firm weighs its interests and short-term incentives too heavily. These concerns pointed to the need to strengthen client relationships which, in turn, will strengthen trust. Clients recommended that we communicate our core values more clearly, both through individual interactions and through corporate communications. Clients also said they would like us to communicate more clearly about our roles and responsibilities in particular transactions.“
Second on the core business principles list (after “our clients’ interests always come first”), codified 30 years ago, is the following:
“Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. We are dedicated to complying fully with the letter and spirit of the laws, rules and ethical principles that govern us. Our continued success depends upon unswerving adherence to this standard.”
Having let its reputation be diminished, the report reveals what Goldman thinks it will take to restore it. It is much more than a verbal re-commitment “to reputational excellence associated with everything the firm does.” These days it takes risk governance supported by education and training. (see sidebar below).
a teaching moment
Like most companies implementing a risk program, Goldman realized that it must create a risk-aware culture throughout the company—that is, people must be thinking risk constantly in their day-to-day jobs. This is no different for reputation.
To this end, Goldman over the next year, as described in its recent Business Standards Committee Report, will embark on a “global program… to reinforce the most important attributes of our culture.” These include:
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Client Orientation
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Reputational Excellence
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Personal Accountability
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Teamwork
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Long-Term Focus
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Professional Excellence
There will also a be a program to communicate and train employees to ensure that the “critical themes and messages” of the newly-formed Firmwide Client and Business Standards Committee are disseminated throughout the firm.
This will apply both inside and outside the firm:
“We expect the firm’s leaders to emphasize our values to our people at conferences, townhalls, other group meetings and in their day-to-day business activities.”
And perhaps be the path to salvation: “These values are fundamental to earning the trust of clients, the confidence of stakeholders and the respect of the public at large.”
The language of the Training and Professional Development portion of the Goldman report—”repeatedly emphasize,” “constantly and rigorously emphasize,” “reinforce”—is likely due to the short tenure of most of its employees: a majority of the firm’s employees have been with the firm less than five years, the report noted.
A new governance template
The report goes on to describe a series of new committees to complement its existing committee structure. In effect, Goldman has created an entire branch of its risk governance framework (see chart below) devoted entirely to reputational risk management, along with the business practices and client services that support its reputation. This branch is headed by a Firmwide Client and Business Standards Committee that reports directly to the management committee and oversees with the help of a Committee Operating Group a variety of subcommittees ranging from those governing business standards for regional divisions and client product groups to the suitability of new activities.
Click on image to enlarge.
Warren Buffet once said that it takes 20 years to build a reputation and five minutes to ruin it. Perhaps it was partly due to Mr. Buffet’s belief in the institution’s remaining reputational value—he invested $5bn in the bank during the height of the financial crisis—that it now aims to change perceptions of this fundamental value source.