Reputation resilience

Goldman Sachs: reputation and regulatory risk

processes that govern ethical behaviour, has been clear for innovation, quality, safety sustainability and many years that its reputation is a security. In accounting jargon, these key corporate asset. But recent business processes comprise the intangible assets that speak for 70% of the market events have shown that having such value of the average traded company. awareness is not always enough Reputation drives intangible asset value. Reputation-relevant intangible assets impact By Nir Kossovsky on corporate financials in several ways. By affecting customers, they impact on pricing The probability that a CEO will sit down to power and sales revenue. By affecting breakfast tomorrow morning and suffer employees and vendors, they impact on headline shock involving his or her operating costs. By affecting creditors, they company is significant. The Economist impact on the cost of debt capital. And by magazine reported recently that Oxford affecting equity investors, they impact on Metrica estimates that executives have an earnings multiples and equity value. 82% chance of facing a corporate disaster There’s more. Another group of external within any five-year period, up from 20% stakeholders impacted by reputation, whose two decades ago. More than ever, rather actions can have life-altering consequences than shaping the news, companies are for most companies, are the regulators. This playing catch-up. Companies have reached issue’s case study on risk and reputation the limits of corporate branding and are management looks at what happens when realising the weaknesses in traditional executives at an iconic firm admired for its marketing. This is why. innovation in the financial services sector, Brand, the embodiment of a corporate Goldman Sachs (NYSE:GS), experience a promise, is more transparent. NGOs, loss of regulator immunity as a consequence Facebook, Twitter and anyone with access of a tarnished reputation for ethics. to a keyboard and a blog can quickly scratch below the veneer of a brand to examine its The company authenticity. Substance really matters. And, The Goldman Sachs Group Inc (NYSE: GS) is therefore, there is now a growing an iconic firm that has convergence of formerly separate corporate been active in the capital markets sector of functions – including marketing, risk the financial services industry for more than management, compliance and IP 100 years. The company operates as a management – seeking a coherent holistic leading global investment banking and solution to the stakeholder’s perception of securities firm with two main divisions: brand. That perception is called reputation. Global Capital Markets, which includes Reputation is how the brand promise is investment banking, financial advisory received and valued by stakeholders such as services, trading and principal investments; customers, vendors, employees, lenders and and Asset Management and Securities investors. Reputation is a set of expectations Services, a business unit responsible for based on past experiences. Today, these investment advisory services. Goldman expectations are most significantly affected Sachs’s clients include corporations, by how a company manages the business financial institutions, governments and www.iam-magazine.com Intellectual Asset Management July/August 2010 19 Reputation resilience

wealthy individuals. The company operates Last year, 42% of its 32,500 total staff were Table 1. Key Goldman Sachs financial over 40 offices across the globe. based outside the Americas and 44% of its performance indicators as of end of net revenues were generated outside of the 23rd April 2010 The first 100 years Americas. The company’s global reach is The company was founded by Marcus illustrated by the following: Market cap US$84.7 billion Goldman, a Bavarian school teacher who • It is a member of and an active (intraday) emigrated to the United States in 1848. participant in most of the world’s major Profit margin 30.97% After supporting himself for some years as , options and futures exchanges (ttm) a salesman in New Jersey, Goldman moved and marketplaces. Revenue US$48.52 billion to , where he operated a small • It is a primary dealer in many of the (ttm) clothing store. After the Civil War he largest government bond markets Qtrly revenue growth 35.5% moved to , where in 1869 he around the world. (yoy) began trading in promissory notes. In the • It has interbank dealer status in Gross profit US$45.17 billion morning, Goldman would purchase currency markets around the world. (ttm) customers’ promissory notes from jewellers • It is a member of or has relationships Beta 1.43 on Maiden Lane in lower and with major commodities exchanges from leather merchants in an area of the city worldwide. Data source: Yahoo Finance called The Swamp. Then, in the afternoon, • It owns commercial banking or deposit- Goldman visited commercial banks, where taking institutions organised or he sold the notes at a small profit. operating in the United States, the Goldman’s son-in-law, , United Kingdom, Ireland, Brazil, joined the business in 1882. The firm Switzerland, Germany, France, Russia expanded into a general partnership in 1885 and South Korea. as Goldman, Sachs & Co, when Goldman’s son Henry and son-in-law Ludwig Dreyfus Last, the company’s businesses are supported joined the group. led the by a Global Investment Research division. firm in new directions by soliciting business As of December 2009, it provided research from a broader range of interests located in coverage of more than 3,000 companies Providence, Hartford, Boston and worldwide and over 45 national economies. Philadelphia. In 1887, Goldman, Sachs began a relationship with the British merchant bank The investment banking and capital Kleinwort Sons, which provided an entry into markets business international commercial finance, foreign- The industry provides investment banking, exchange services and currency arbitrage. For trading and investment management the next 100 years, the partnership expanded, services to corporations, financial business operations increased in complexity institutions, governments and high-net- and leveraged transactions demanded an worth individuals. The larger firms provide ever-larger balance sheet. a full suite; smaller firms tend to specialise in aspects of the value chain. IPO and the past decade Classical investment banking comprises In early May 1999, the company listed on debt and equity underwriting and the New York Stock Exchange, raising associated advisory services. Investment US$3.6 billion. In 2002, then CEO Henry banks help clients structure and issue Paulson, who would go on to be the US equity and debt securities to raise general Treasury Secretary under President George purpose capital, to finance merger and W Bush, laid out the company’s strategy acquisition opportunities, and to support declaring: “We want to be the premier company restructurings. As an underwriter, global investment bank, securities, and investment banks also help place securities investment management firm. We want to with investors. Thus, the classical have a disproportionate share of the investment bank plays an important role as business of the most important clients in a trusted intermediary for both buyers and the most important markets.” Businessweek sellers of securities, and because it relies on magazine memorialised those words adding: trust, it is relationship and reputation- “The company must gain a lock on driven. We’ll circle back on this shortly. providing financial advice to marquee A second area of activity is trading and corporations, government authorities, and principal investments. Investment banks superrich individuals in the world’s major will make markets and trade a full range of economies – the US, Germany, Britain, fixed income, currency, commodity Japan and China.” This appears to have instruments, equity securities and come to pass. derivatives, and will offer forms of capital As of 31st December 2009, Goldman market-based risk transfer such as insurance Sachs operated offices in over 30 countries. and reinsurance. They may also make

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T`able 2. Risk and reputation management basics banks engage in significant amounts of market, company and geopolitical research. Management of these key business processes by fostering enterprise-wide conformance Some banks offer some of these research with institutional standards is a necessary condition for creating, preserving or restoring products as a fourth area of activity. reputation value There are significant synergies and potential conflicts among these areas of Create an ethical work Ethics are the moral principles by which a company activity. This is because all three positions environment operates; integrity is the act of adhering to those in any transaction are competitive. Sellers moral principles. Ethics are an integral part of governance that seek the highest price to maximise short- combine with integrity to affect the reputation value of all term profits; buyers seek the lowest price to other intangible assets. Additionally, ethics are the keystone maximise long-term profits; and intangible asset because they form the basis for trust intermediary market makers seek to and confidence. maximise arbitrage profits. Drive innovation Innovation is the design, invention, development and/or implementation of new or altered products, services, Goldman Sachs as market maker processes, systems, organisational structures or business As a market maker, clients expect Goldman models for the purpose of creating new value for customers Sachs to buy and sell financial instruments and financial returns for the firm. on their behalf and upon their initiation. Assure quality Quality is the extent to which: Goldman Sachs’ clients expect the firm to • A product is free from defects or deficiencies. do so regardless of whether counterparties • A service meets or exceeds the expectations of customers have been identified or are readily available. or clients. The lack of readily identified counterparties • Products and services conform to measurable and is a major source of risk. Indeed, in light of verifiable criteria. the global and complex nature of markets, it Uphold safety Safety is the state of being certain that a set of conditions will would be very difficult for companies, not accidentally cause adverse effects on the wellbeing of institutions and governments to raise people or the environment. capital, manage their risks and fund their Promote sustainability Sustainability means making, using, offering for sale or operations without financial institutions selling products and services that meet the needs of such as Goldman Sachs committing their the present without compromising the ability of future capital on behalf of clients. generations to meet their own needs. The exposures created through Provide security Security is the degree of protection that a company offers transactions with clients are part of the against events undertaken by actors intentionally, criminally or overall inventory of instruments that maliciously, for purposes that adversely affect the firm. Goldman Sachs generally carries as part of Because fear is the great disruptor of life and commerce, it its business. These risks – such as market is useful to think of security, the most ethereal of the intangible price, volatility and credit – must all be assets, as absence of fear. actively managed. Once the firm transacts with a client, thereby taking on an exposure, its most effective risk management tool is to enter into a transaction that principal investment in connection with counterbalances the risk it has assumed. merchant banking (private equity) activities. This is called hedging. In many cases, Trading is largely a business of betting. It however, this can be difficult because of is a business where mathematical models imperfect, mismatched or unavailable and technology integrate mass amounts of offsetting exposures. Investment banks rise data to yield predictions on the present and and fall on their willingness and ability to future prices of increasingly complex accept and manage these risks. financial instruments. It is an activity that is driven by innovation – raw intellectual Goldman Sachs, the residential prowess and technology. mortgage market and derivatives The third area of activity is asset Goldman Sachs’ residential mortgage- management and securities services. The related business consists of structuring, former comprises advisory, financial planning trading, underwriting and distributing and investment products across the full line mortgage and asset-backed related of asset classes, including all traded and products. These products include loans, investment banking products. The securities securities and derivatives backed by services provide prime brokerage services, residential real estate loans. The residential financing and securities lending – that is, mortgage-backed security (RMBS) is one lending the securities held on behalf of such product. Through an RMBS, pools of asset management clients. home loans are structured into a security, To support their advisory, trading and with the underlying mortgage loans serving asset management activities, investment as collateral and providing income to the www.iam-magazine.com Intellectual Asset Management July/August 2010 21 Reputation resilience

investors in the security. The value of RMB derivatives transaction, which references securities is tied directly to the value of the particular assets; (ie, cash flows from expected cash flows associated with residential mortgages. But none of the cash mortgage payments. flows go into paying holders of the CDO. A collateralised debt obligation (CDO) Rather, by the very nature of a synthetic pools various RMBS and other income- CDO, one counterparty must be long the producing assets into different tranches risk (ie, hoping to benefit from an increase with varying degrees of risk. The most in the value of the referenced assets), and senior tranches carry the least risk of default the other counterparty must be short the and, in turn, provide the lowest interest rate risk (ie, hoping to benefit from a decrease in to the investor. The value of CDOs is also the value of the referenced assets). Like tied to the value of the expected cash flows credit default swaps, these instruments can associated with mortgage payments; help a party exposed to principal risk to however, CDOs are more nuanced in that a offset (hedge) some of that exposure. But fraction is designated lower risk because they can also enable pairs of parties to they have first call on any cash flows arising speculate. And like credit default swaps, if from the pool, while another fraction is the mathematical modelling turns out to be designated higher risk because they have a off, they can spawn extreme winners and subordinated call on cash flows. Extensive losers. mathematical models help establish the Goldman Sachs has not been a expected probability of default among the significant participant in the market for various tranches and, absent information to originating mortgages. In fact, the number the contrary, to help set a reasonable asking of loans originated by Goldman Sachs, price when these securities are sold. which acquired a small originator in March Now it gets more interesting. In a 2007, never exceeded one-tenth of 1% of synthetic CDO, two parties enter into a total domestic residential mortgages and

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22 Intellectual Asset Management July/August 2010 www.iam-magazine.com Reputation resilience

CDO markets. In addition, Goldman Sachs • 14. Integrity and honesty are at the heart has maintained a hedged exposure in this of our business. We expect our people to market, neither making nor losing maintain high ethical standards in significant sums relative to its overall level everything they do, both in their work for of income. the firm and in their personal lives.

The Goldman Sachs business philosophy Issues with image management The company has a credo called The 14 The last quarter of 2008 and the first Business Principles. The first principle quarter of 2009 were especially difficult for affirms the primacy of the firm’s clients. the capital markets sector. They fell from the The second principle both defines this pinnacle of value to the depths of financial company’s real assets and affirms the despair, but with the help of a number of importance of reputation: “Our assets are national treasuries, returned to great levels our people, capital and reputation. If any of of profitability (Figure 1). these is ever diminished, the last is the Goldman Sachs’s reputation for most difficult to restore. We are dedicated innovation and ubiquity, as well as its to complying fully with the letter and superior return among the bulge bracket spirit of the laws, rules and ethical banks, made it a target for much of the anger principles that govern us. Our continued and frustration arising from the global success depends upon unswerving economic chaos. This is best illustrated by adherence to this standard.” the colourful descriptor penned by Matt The importance of risk and reputation Taibbi in Rolling Stone magazine in July 2009. management is clearly articulated in the In an articled titled “The Great American company’s 10-K: “We have a comprehensive Bubble Machine”, Taibbi charged: “From tech risk management process to monitor, to high gas prices, Goldman Sachs has evaluate and manage…market, credit, engineered every major market manipulation liquidity, operational, legal, regulatory and since the Great Depression – and they’re reputational exposures….” about to do it again.” He then characterised The foundation of Goldman Sachs’s Goldman Sachs as “a great vampire squid approach to risk management is twofold. wrapped around the face of humanity, Quantitatively, it consists of disciplined relentlessly jamming its blood funnel into mark-to-market accounting. This involves anything that smells like money”. the daily practice of valuing the firm’s assets The following month, the Financial Times and liabilities to current market levels – that reported that research it commissioned from is, the value one might expect to find on the Brand Asset Consulting comprising a survey open market. It was mark-to-market of 17,000 Americans found that Goldman’s accounting that spurred Goldman Sachs to stature – as measured by several gauges of reduce the firm’s risk in the residential brand strength – had suffered in 2008 and mortgage market near the end of 2006. 2009. A similar finding was reported in early Qualitatively, Goldman Sachs is acutely 2010 by Harris Interactive in its 2009 sensitive to reputation and two of its Reputation Quotient survey. This placed committees are charged with factoring Goldman Sachs near the bottom of a list of reputational considerations into their 60 highly visible companies. risk modelling. While risk management helps to One man’s scourge is another’s icon preserve value, Goldman Sachs recognises “All of this giant squid language they can that its reputation depends on two key pretty much brush off,” said William Barker intangible assets: its processes for driving of Brand Finance to the Financial Times. innovation and its process for fostering “My guess is that their customers are ethical conformance. Two of these are probably very happy with them.” Indeed, among the six major business processes they have been, reported the Wall Street that drive reputation value (Table 2). They Journal in early March 2010. Goldman Sachs are spelled out in the Goldman Sachs credo Group secured top rankings of investment – the fith and 14th of the 14 principles: banks by the dollar volume of deals advised • 5. We stress creativity and imagination in on, after landing mandates on half of the everything we do. While recognising that biggest deals for 2010. It was named as the the old way may still be the best way, we top adviser in Europe, the US and globally constantly strive to find a better solution by Thomson Reuters, and came first in to a client’s problems. We pride ourselves Dealogic’s US and global M&A rankings. on having pioneered many of the practices The same goes for potential employees. and techniques that have become standard The bonuses and profits that led Goldman in the industry. Sachs to be labelled the “great vampire www.iam-magazine.com Intellectual Asset Management July/August 2010 23 Reputation resilience

Figure 1. Three-year market returns for a number of capital market sector companies including Goldman Sachs (NYSE:GS), Credit Suisse (NYSE:CS) Deutsche Bank (NYSE:DB), Morgan Stanley (NYSE:MS) and Union Bank Switzerland (NYSE:UBS). The six months comprising Q4 2008 and Q1 2009 were highly volatile

+10% UBSMS CS DB +0% -10% -20% GS -30% CS -40% DB -50% -60% MS -70% UBS -80% -90% Volume 400 300 200 100 0 US$ millions M J J A S O N D 08 F M A M J J A S O N D 09 F M A M J J A S O N D 10 F M A

Data source: Bigcharts.com

Figure 2. Google trends charts for the past 12 months reporting searches (top chart) and media volume (bottom chart) for Goldman Sachs, Toyota, BP and Tiger Woods. From the perspective of the general public, Tiger Woods was the dominating spike issue in late 2009, followed by the Toyota spike in early 2010 and last, a perceptible rise only at the end of April 2010 for searches involving Goldman Sachs. From the media’s perspective, Tiger Woods was a short-lived minor story with a volume nowhere near the magnitude of searches; the big story in 2010 at this point remains Toyota. In mid-April, Toyota was eclipsed by Goldman Sachs (arrow) only to be itself eclipsed by stories on BP

Google Trends Search Volume index

A B C D goldman sachs toyota bp tiger woods E

F

July 2009 October 2009 January 2010 April 2010

News reference volume

squid” are cited by business school students level of earnings on 20th April 2010; they as proof of the company’s strength. rose 91% in the quarter, to US$3.46 billion, Bloomberg reported in January 2010 that while revenues increased 36% to US$12.78 the bank’s reputation remains strong among billion – largely on the back of their bond, aspiring MBAs. It was ranked the fourth commodities and currency trading activities. most desirable place to work in a survey of As one analyst noted: “Nobody is going to 6,207 MBA candidates at 67 business stop doing business with Goldman Sachs. schools from December 2008 through They’re just not going to do it – because March 2009 by Universum Group, a Goldman is just better than everybody else. Stockholm-based marketing company. And that’s the bottom line.” Finally, to affirm that this favourable reputation among key stakeholders is part Legal, regulatory and reputation risk and parcel of what creates value for the One group of stakeholders that should never company, Goldman Sachs announced a record be left out of any analysis involving a heavily

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Figures 3. The Steel City Re Corporate 1 1.4 Reputation Index ranking for Goldman 1.2 Sachs begins the trailing 16-month period at the 90th percentile and ends after a 0.8 1 precipitous drop in mid-April 2010 at the 0.8 56th percentile among 74 companies in the 0.6 Capital Markets peer group. Nevertheless, 0.6 over the period it outperformed the median 0.4 of its peers by more than 30%. 0.4 0.2 It also comfortably exceeded the period Return on Equity Reputation Index returns of the S&P500® index 0 0.2 -0.2 -0.4

0 -0.6 5/1/2009 2/7/2009 21/4/2010

GS Reputation Index GS ROE Through Median Capital S&P500 ROE Through 4/28/2010 4/28/2010 Markets Group ROE

Figure 4. The Steel City Re Corporate 1 0.3 Reputation Index ranking for Goldman

Sachs (NYSE:GS) and for the Capital 0.25 Markets peer group over a 16-month 0.8 period. Goldman’s precipitous fall in April 2010 was matched by a much smaller but 0.2 distinct drop for the median ranking for the 0.6 entire peer group. Also, the variance among 0.15 the members of the group decreased, indicating that the capital markets were 0.4

Reputation Index 0.1 meting out collective punishment across

the entire sector. Reputation Index Variance 0.2 0.05

0 0 5/1/2009 2/7/2009 21/4/2010 GS Reputation Index through Median ‘Capital Markets Group’ Variance of Capital Markets 28/4/2010 Reputation Index Group Reputation Index Data source: Steel City Re

regulated industry are, well, the regulators. issued by the Economist Intelligence Unit, Goldman Sachs understood the relationship compliance failures were identified as the between reputation and regulatory risk, as it biggest source of reputational risk. The explained in its 2009 10-K: “Failure to biggest threat to reputation, according to develop effective working relationships with the 269 senior risk managers interviewed, regulators could have a significant and was seen to be a failure to comply with negative effect … on our businesses … regulatory or legal obligations. Failure to [and]… on our reputation generally.” deliver minimum standards of service and In acknowledging the power of product quality to customers was a close regulators, Goldman Sachs was giving voice second. Last, the risk that unethical to a concern that has long been a factor in practices in the organisation would be corporate risk management. In April 2009, exposed followed closely behind. the NYSE-Euronext CEO Report shared that while three in four CEOs thought that Regulatory risk arises improved company practices and improved And so it came to pass. On Friday 16th April behaviour of corporate executives are the 2010, the United States Securities and best ways to ensure the ethical business Exchange Commission (SEC) sued Goldman behaviour of senior corporate executives, Sachs, alleging that the company failed to only one in four think that government inform investors in a 2007 collateralised involvement would have a positive impact. debt obligation that hedge fund Paulson & More explicitly, in late 2005, in a report Co, led by billionaire John Paulson, played a www.iam-magazine.com Intellectual Asset Management July/August 2010 25 Reputation resilience

Figures 5. Economic returns over the past 16 months for a select number of bulge bracket banks (Goldman Sachs-GS, Deutsche Bank-DB, Morgan Stanley-MS and Credit Suisse-CS), ranging between 70% and 120%, comfortably beat the S&P500 returns of 40% for the same period. The notable exception is Union Bank Switzerland-UBS with a period return of less than 20%. Note that Goldman Sachs was leading its peers until the SEC action of mid-April which helped remove in excess of US$20 billion in equity value

GS Weekly 4/30/10 +140% CS UBS DB MS SP500 +120% GS +100% +80% +60% +40% +20% +0% -20% -40% -60% Volume

300 US$ millions 200 100

0 09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 10 Feb Mar Apr role in choosing the mortgage securities the top, notwithstanding the Rolling Stone that underpinned the CDO and planned to magazine characterisation in July. But by bet on its failure. It was an allegation of a the fourth quarter of 2009, the index breach of ethics and a breach of law. showed that there was some measurable The allegation of a breach of law may be effect of going-forward doubt on difficult to sustain in court. The New York Goldman’s net reputation and a possible Times pointed out four days later that: impact on drivers of value. On 15th April “Rather than asserting that Goldman 2010, the day before the SEC sued Goldman misrepresented a product it was selling, the Sachs, the index stood at the 94th most commonly used grounds for securities percentile. The following week, Goldman fraud, the Securities and Exchange Sachs’s standing had dropped to the 56th Commission said in a civil suit filed Friday percentile. And even after giving up US$21 that the investment bank misled customers billion in market capitalisation, Goldman about how that product was created. It is the Sachs entered May 2010 still showing a rough equivalent of asserting that an return on equity that was 32% greater than antiques dealer lied about the provenance, the median of its peers (Figure 3). but not the quality, of an old table.” To the extent that Goldman Sachs faces The allegation of ethical breach, in view regulatory and reputation risk for activities of the above, may be the more compelling in a market in which it was a minority issue from the perspective of key participant, the sector as a whole could be stakeholders. As Alan Greenspan, a former expected to show some degree of chair of the US Federal Reserve Board, noted reputational decline. Indeed, Figure 4, which in 2008 during the market collapse, “In a provides both a reading on the median market system based on trust, reputation reputation standing of the sector relative to has a significant economic value.” Certainly, the entire market and a reading on the evidence suggests the current round of variance within the sector, shows that the issues with SEC is getting the media’s sector as a whole took a reputational hit. attention (Figure 2). This correlates with the equity return metrics shown in Figure 5 affirming the Reputation metrics downward movement of other major capital Turning now to the reputation metrics market participants such as Deutsche Bank, which reflect the collective views of all the Credit Suisse, Morgan Stanley and UBS. stakeholders, the Steel City Re Corporate As an aside, UBS, which underperformed Reputation Index shows that for most of the S&P 500® during this period and greatly the 16 months since January 2009, underperformed its peers, was the subject of Goldman Sachs’ reputation was on the regulatory risk and a deferred prosecution upswing from the 90th percentile among 74 agreement earlier in connection with companies in the Capital Markets sector to allegations of creating tax shelters to enable

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tax evasion. UBS had the unfortunate that the bank has received from Warren experience of appearing before the Senate Buffet are certainly helpful. Permanent Subcommittee on Investigations But the greater theatre is not in Omaha. – the same legislative body that hosted It is in Washington DC. For purposes of Goldman Sachs on Tuesday 27th April. public consumption (read key stakeholder consumption), the testimony before the Executive lesson points Senate that “we did nothing illegal” is far Goldman Sachs is an iconic firm respected less compelling than: “We have a code of for its innovation (and the cerebral power ethics that we uphold as our core value; and behind it), as well as its trustworthiness. we foster conformance in our code of ethics These two factors have enabled the throughout our company with specific company to build a powerful reputation and career and financial incentives. We do this reap the benefits. These benefits include because we know that our reputation superior pricing power, lower operating depends on maintaining an unshakable costs and superior credit terms. The latter bond of trust with our stakeholders.” are very important to an investment bank. The cost of being exposed can be great. Benefits arising are higher earnings For Goldman Sachs, raising the question multiples and equity value. alone has cost the firm US$21 billion in In the capital markets sector, a equity value, even in the face of recent reputation for innovation is an important statements claiming no loss in clientele (but differentiator. A reputation for ethics is a not necessarily no loss in pricing power). vital intangible asset. Surely, the costs of any system that would Goldman Sachs was well aware of the foster conformance would come in at less importance of reputation to its value and its than a reasonable fraction of that. And it ability to compete successfully. It had a could be worse. Just ask UBS. constitution that affirmed the importance of reputation. It had committees to oversee Epilogue risk with an eye towards managing its On 10th May, Goldman Sachs Group Inc reputation. So what was missing? reported that its traders made money every The answer is: authenticity. The missing single day of the first quarter, a feat that the element was, and still is, a means of firm has never accomplished before. Daily signalling to stakeholders an authentic trading net revenue was US$25 million or adoption of ethical principles. This means higher in all of the first quarter’s 63 trading the following: days, and the firm reaped more than US$100 • Authentically signalling the value that million more than half the time. The point is Goldman Sachs places on ethical that betting against Goldman may not be behaviour. Positioning a commitment to prudent. So while on 5th May, Fitch Ratings ethical compliance as the 14th point of a revised Goldman’s rating outlook (a lagging list of 14 Business Principles does not indicator) to negative from stable, eight days provide a strong signal to stakeholders. later the credit default swap spread (a While position number 14 was not an current indicator) for Goldman Sachs senior issue when there were no challenges, this bonds over a benchmark index dropped 20% placement did not support Goldman to 62.5 basis points. Sachs’s need to affirm its authentic adherence to ethical values when its Coming next. BP (NYSE:BP), safety, reputation came under regulatory assault. and sustainability. • Authentically signalling the processes by which the company drives conformance with ethical principles. Goldman Sachs has many committees to audit and review risk. These are disclosed in its extensively detailed and voluminous 10-K. Nowhere in this document does Goldman Sachs indicate Nir Kossovsky is Chief Executive what processes it uses to foster and of Steel City Re ensure compliance with ethical values [email protected] among its employee base. This series is inspired by the book, The SEC’s legal case may not hold, but Mission: Intangible®, published by the the reality is that Goldman Sachs is being Intangible Asset Finance Society (IAFS). tried in the court of public opinion. To that Visit the Society and its blog, Mission: end, the carefully chosen words of support Intangible, at www.iafinance.org. www.iam-magazine.com Intellectual Asset Management July/August 2010 27