Goldman has chance to top off Wall St governance

December 14, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Wall Street rivals usually follow where Goldman Sachs leads. It is unlikely to be any different when the findings of Goldman’s Business Standards Committee become public early next year. But on one important point Goldman lags some big competitors — the separation of the chief executive and chairman jobs. Now it has a chance to catch up.

Since May, the bank has been conducting the financial industry version of group psychoanalysis. The standards group chaired by veteran partners Gerald Corrigan and Michael Evans is scrubbing the bank’s business practices to “reinforce the firm’s client focus” and improve transparency.

The firm is examining, among other things, how it manages conflicts between its own activities and those of customers; how it discloses what it does; what responsibilities it has to clients; and, critically, how to inculcate a sense of professional ethics in its employees.

The results aren’t just highly anticipated among Goldman’s 35,400 employees. Every firm on Wall Street will pore over them. The firm’s public image may have been tarnished by reams of bad press and a Securities and Exchange Commission suit — since settled — alleging that the firm shortchanged some of its customers. But the bank is still considered the gold standard among its peers.

So if Goldman decides, say, to exit a business because it feels it creates conflicts of interest with clients, other banks will feel pressure to do the same — or risk expending considerable energy explaining to clients why they are different.
What’s not obviously on the business standards agenda, though, is Goldman’s own governance. This seems odd given the intensity of the soul-searching going at the firm. Goldman’s financial performance has not suffered in any obvious way from having Lloyd Blankfein hold both the CEO and chairman roles.

But Goldman, and specifically Blankfein, did take quite a beating in the public arena of late. Though some of the opprobrium was undeserved, the experience should have underlined the merits of separating duties at the top of the firm. The skills that brought Blankfein the top job at a competitive securities firm that consciously avoids the retail end of the market aren’t necessary the same ones that are effective in the unwanted glare of political and Main Street scrutiny.

Having a seasoned chairman would have given the firm someone to navigate the shifting political and regulatory tides while Blankfein focused on the firm’s operations and employees and, most importantly, on its big corporate and institutional customers. Executives at banks that did separate the top two jobs — a list that includes Citigroup, Morgan Stanley and Bank of America — say the move paid off at the height of the recent crisis and in efforts to shape the regulatory reform bill passed by Congress.

Of course, a division of responsibilities is not a substitute for strong leadership. A chairman who does a poor job of interfacing with politicians or the media won’t be able to offer a chief executive much cover. And it’s critical that the chairman and CEO have a consistent vision for the company, a good working relationship, and complementary skills.
That’s not always the case, as British energy giant BP amply illustrated during the months it spent trying to stanch the flow of oil — and attendant negative press coverage — from its leaking Gulf of Mexico well.

Carl-Henric Svanberg earned the sobriquet of “invisible chairman” for his low profile during the fiasco. And when the Swedish native did speak publicly, he did little to help gaffe-prone chief executive Tony Hayward, famously referring to the oil leak’s victims in the Gulf as “the small people.”

Blankfein is no Hayward. He has the confidence of shareholders, his board and his staff, and he survived antagonistic political hearings in much better shape than Hayward, if not completely unscathed. Having steered Goldman through the financial crisis and the annus horribilis the bank’s image endured in 2010, his job looks secure.

But that makes the timing right for a change in governance. The Business Standards Committee itself offers one possible candidate to step in alongside Blankfein in the form of Corrigan, a former president of the New York Federal Reserve. By proposing to add a chairman now, Goldman would avoid the common stigma of separating the two top jobs at a time of weakness. Doing so from a position of strength would set another example for its rivals.

Comments

My favorite Goldman story is how they sold Mortgage-backed securities to their clients while shorting them in Goldman’s own accounts.

Posted by feeweary505 | Report as abusive
 

I’m amused to see that anyone could characterize what happened to Blankfein as taking “quite a beating in the public arena”.

To the extent that the court system supposedly represents the public, I’d say he fared rather well. He should have been charge under RICO laws, fined and imprisoned.

Posted by breezinthru | Report as abusive
 

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