About Me

This blog carries a series of posts and articles, mostly written by Anthony Fitzsimmons under the aegis of Reputability LLP, a business that is no longer trading as such. Anthony is a thought leader in reputational risk and its root causes, behavioural, organisational and leadership risk. His book 'Rethinking Reputational Risk' was widely acclaimed. Led by Anthony, Reputability helped business leaders to find, understand and deal with these widespread but hidden risks that regularly cause reputational disasters. You can contact Anthony via anthony.fitzsimmons At cranfield dot ac dot uk

Wednesday, 12 January 2011

Whither Goldman Sachs?

These are torrid times for Goldman Sachs despite weathering the 2008 financial crisis better than most. The least of it was reports of its advice to investment clients to short Californian state bonds that it had helped to sell and of its help to the Greek government to 'mask' the size of Greek government debt.  More serious were the Massachusetts investigation of sub-prime mortgage sales in the state (settled for $60m) and CDO issues, which include a fraud case launched by the US SEC in April 2010 and settled by payment of a $550m fine.

All this has taken place against the background of a witch hunt against bankers by politicians who have persuaded themselves and the public that only bankers, not politicians or voters, are to blame for the financial crisis.  The result is that Goldman's currently excites a mix of emotions ranging from admiration and fear to scorn and hostility, packaged with a back-story that has a toxic potential that begins to rival BP's.
So at last May's AGM, Goldman's chairman, Lloyd Blankfein, announced Goldman's new Business Standards Committee (“BSC”). “Questions have been raised that go to the heart of this institution’s most fundamental value: how we treat our clients. ...There is a disconnect between how we as a firm view ourselves and how the broader public perceives our role and activities in the market”.

A good start.  It got better.  The BSC's mandate was to “ensure the firm's business standards and practices are of the highest quality; that they meet or exceed the expectations of clients, other stakeholders and regulators; and that they contribute to overall financial stability and economic opportunity”.

The BSC report  was published on 10 January 2011.  Referring to Goldman's Business Principles it correctly recognises Goldman's reputation as one of its most important assets and that reputation risk is important.  It admits that clients see some some shortcomings at Goldman's – questioning “whether the firm has remained true to its traditional values” and suggesting that “in some circumstances the firm weighs its interests and short term incentives too heavily”. But from that encouraging start, and despite its 39 recommendations, the report does not engage with the fundamental issues. Why?

The first clue is BSC membership.  Plenty of senior bankers and bank functionaries, a seasoning of lawyers - but who is the obvious omission?  Goldman's Chief Risk Officer, Craig Broderick.  Why exclude Goldman's most senior risk professional from the BSC, whose report mentions reputational risk more than 20 times?

Secondly, the report's focus is primarily on clients.  "The cornerstone of the [BSC]'s recommendations is the relationship between Goldman Sachs and its clients, and a deeply rooted belief that if our clients are successful, our own success will follow."  All beliefs, especially the deeply rooted variety, should be questioned regularly, and this is no exception.  Their client' success probably is important to Goldman's; but it is quite different to believe that client success necessarily leads to success for  Goldman's.

Looking back at the report's introduction reveals a third clue.  The report coyly refers to Goldman's recent “considerable scrutiny” and the arrival of an “opportunity to engage in a thorough self-assessment” and to “consider how we can and should improve”.  At best this is deliberate understatement driven by lawyers; at worst, it represents self-delusion, never the best starting point for recovery.

Against that background, it is no surprise that the BSC's 39 recommendations focus primarily on what its members understand well – clients, governance, committees, training, procedure and good intentions.

Whilst reputational risk management is mentioned 16 times, there is no reference to the importance or place of systematic reputational risk analysis or reputational strategy, without which reputational risk management is unlikely to be effective.  Avoiding these subjects may have been due to tactical coyness, but if so it has been taken to the degree of suggesting ignorance.  

Whither Goldman's?  Predicting the future is a mug's game, but without focus on these areas, Goldman's will remain perched uncomfortably close to the edge of a reputational abyss.  And Goldman's will miss a rare, valuable opportunity to become the world's most respected bank, set in a class of its own.  Since reputational capital can represent as much as 40% of market capital for a well respected company, its shareholders would be happy - and the more so if Goldman's improved reputation was built on rock-solid foundations.

Anthony Fitzsimmons

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