Goldman Sachs spent considerable resources and 8 months in an internal review of its business standards and practices, and this culminated in a 63-page report released on January 11th. In it, it highlights areas for improvements and lists some of the 39 recommendations that were approved and are being implemented. Leaving aside the obvious quip about their motivation for releasing this 63-page report (trying to stop the unending flak from the general opinion, politicians and even some customers since the crisis in 2008), we seldom see documents like these. This article on NYT’s Economix blog highlights what the report doesn’t say about systemic risk, and we comment on a few of the report’s items.
The report starts with the 14 Goldman Sachs Business Principles, which compared to reality paint an interesting picture. On the “walk the talk” part, there are items about doing the most to attract and retain top-notch people, of which they expect intense dedication and quality of work, and that employee stock ownership is vital. That much can’t be argued much in relative terms: Goldman does still have the clout of old days. Other items, however, read like a wish list – at best. While there’s a degree of goal-setting in all companies’ “mission” and “vision” documents, the 2008 crisis is all too recent and it’s no surprise that the report got skeptic reviews. Actually, reading the line that says “Our clients’ interests always comes first” in a Goldman Sachs report should not be any more irritating than reading it in any other company’s report – we should all know better, since the actual incentive systems of most companies are not tilted towards making that sentence come true.
By far the most interesting recommendation and mea culpa of sorts regards the businesses and products Goldman considers entering into – and their suitability to different customers. First, Goldman employees must now ask themselves “should we?” other than just “can we?” when designing new products or entering new businesses. Then they should ask themselves whether the customer should be delving into that product line. That can only work with the right incentives in place, which would have to accept some trade-off between the speed and quality of growth, and even so it requires a level of patience, excellence and relentlessness in oversight that should be hard to implement. When the next financial instrument bubble comes, will Goldman’s top people be happy to sit in the sidelines for a while (years in the housing/ credit boom’s case) while competitors make tons of money while the party doesn’t implode? Easier said than done.
Another set of interesting recommendations regards enhanced transparency and disclosure, which led to the reinstatement of Goldman’s Q3 2010 earnings in light of the new recommendations. That was a little disappointing, because it was ultimately a “reallocation of revenues” while the Q4’10 report promises a more complete overhaul.
Goldman Sachs may or may not be able to pull this one off, but the future of the industry seems to be heavier regulation internally and externally, with fewer profitable opportunities and more bureaucracy, as this LEX column argues. Heaven forbid an entire generation of bankers becoming asset managers…
Finnish lessons on principles for Goldman – FT.com’s Lucy Kellaway compares a finnish retailer’s principles to Goldman’s.