Stephen Foley: The nun, the merchant banker and a question of corporate ethics


US Outlook Nobody mentioned the name Greg Smith, though it is barely two months since the London-based trader quit Goldman Sachs citing a "toxic" culture where clients were regarded as "muppets" to be ripped off wherever possible.

Shareholders are, on the whole and by definition, a supportive bunch. None the less, it is surprising that they didn't want to test management on whether Mr Smith's portrayal might have some truth, and what the bank is doing to contain the reputational damage. Instead, the Goldman Sachs meeting, like most on the corporate calendar, has become a showcase for interest groups pushing "soft issues" such as environmental and social responsibility. These are vital issues, but it is odd that they overwhelm matters that are more pertinent to the share price on the one occasion in the year when smaller shareholders have access to management.

Goldman's stock is trading back at 2005 levels, having given back most of the bounce they got when the panic of 2008 subsided. That is because regulators across the world are closing off doors to easy profit, in the name of the safety and soundness of the financial system. In the main, this involves bringing new transparency to complex financial products – the ones where you can hide costs and dangers from the "muppets" on the receiving end – and pushing to eliminate short-term gambling from government-insured banks.

Wall Street brought this on itself, and incidents like the Greg Smith resignation and JPMorgan Chase's $2bn-plus loss in its proprietary trading arm embolden regulators and politicians further.

In fairness, there were questions in these areas. One shareholder asked if the JPMorgan blow-up had prompted Goldman to examine its own risk management. (Answer: "We are always examining our risk management practices.") Another was pushing for policies to force former employees to hold their Goldman stock for many years after they leave, to tie them to the consequences of their actions. (Answer: "That would put us at a competitive disadvantage in hiring.")

Sister Barbara Aires, representing a Catholic organisation that has Goldman shares, pushed Lloyd Blankfein, chief executive, to move faster to implement the 39 reforms promised by Goldman's business standards committee in the wake of the credit crisis. The eight outstanding items largely refer to the bank's activities in structured products, the very instruments where short-termism and greed overwhelmed Wall Street's responsibilities to clients, and where Goldman promised to try to consider the societal wisdom of each fancy new instrument. She got a charming response, but no answers. "You sound a lot like management at Goldman Sachs," Mr Blankfein told her, to reassure her that he was working on it. "Do you want to hire me?" Sister Barbara responded.

"I don't think we can outbid your current boss," was the chief executive's response.

The exchange raised a laugh, and sent everyone home happy, but it is a shame that these reforms and the matters raised by Greg Smith were not probed further. Shareholders ignore these cultural issues at their peril.

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