Culture and Ethical Misconduct: A Tale of Two Banks (Round 3, Last and Final Round)

TL;DR: JPMC has done some things right, but Goldman Sachs is winning the reputational race. 

Disclaimer: The observations below are purely intended as intellectual exercise and are only meant to contribute to the continuing public discourse on banking culture. This analysis should not be taken as investment advice

Both banks have addressed critical indicators such as preventing conflicts of interest, transparency in structured products, integrating risk management into remuneration policies, and duty of care of financial products. Both reports indicate enhancements in these metrics as part of broader risk management and compliance improvements. However, neither of the two addressed complaints handling and redress, although both have a general whistleblower program as required by US law, and JPMC did have explicit language on its non-tolerance of misconduct. As expected, neither also addressed gender diversity in the trading floor. While this metric may sound frivolous, the UK parliamentary committee found it impactful enough to recommend, but has never been addressed explicitly by the investment banking industry.

The differences between Goldman Sachs and JPMC lie in the not so much in what they have publicly reported, but in the tone of the reporting, as well as in the company’s actual performance. Let’s start with tone and why it is important. Paragraph 762 of the UK Parliamentary Commission report states:

“The appropriate tone and standard of behaviour at the top of a bank is a necessary condition for sustained improvements in standards and culture. However, it is far from sufficient. Improving standards and culture of major institutions, and sustaining the improvements, is a task for the long-term. For lasting change, the tone in the middle and at the bottom are also important. Unless measures are taken to ensure that the intentions of those at the top are reflected in behaviour at all employee levels, fine words from the post-crisis new guard will do little to alter the fundamental nature of the organisations they run. There are some signs that the leaderships of the banks are moving in the right direction. The danger is that admirable intentions, a more considered approach, and some early improvements, driven by those now in charge, are mistaken for lasting change throughout the organisation.”

Goldman Sachs’ BSC report was a product of one year of engagements within and outside of the company. The 39 recommendations were clearly focused on reducing reputational risk and spoke directly to the problems faced by the company at that time. In the context of the spate of negative publicity of the company (i.e. including the infamous Vampire Squid monicker), the tone of the report appeared to be contrite, sending a message of self-reflection and the intention to improve and get past its sullied reputation. The focused Chairman’s Forum sessions suggest management’s commitment to ensure that everyone is on the same page.

JPMC’s report, in contrast, reads like a regurgitation of its CSR reports, and a compilation of all of the organizational changes the company had carried out over multiple years. The report covers a range of topics and activities from business ethics to community banking. It did not focus on a single problem, but appeared to be intended to educate the public on how JPMC operates. The 87-page report’s message appears to be: This is how we roll, take it or leave it.

On specific provisions on accountability of senior executives for risk failures: While both banks repeatedly stressed personal accountability, neither report had explicit language that speaks to senior officers taking responsibility for risk or on senior officers to be held accountable for risk failures. This is always tricky because when things fail, lower level employees tend to bear the brunt of the blame. In practice, just one trader was held accountable for Goldman Sachs’ Abacus CDO controversy. In contrast, JPMC’s former Chief Investment Officer, Ina Drew, and the CIO management team took the fall for the London Whale controversy. The trader known as London Whale recently said he was only executing a strategy approved by the CIO, so Ms. Drew’s (forced) resignation demonstrated senior executive accountability.

On remuneration: Both companies highlighted the integration of risk management into their remuneration systems. This includes the implementation of a clawback clause in executive remuneration for risk events that materially impact the company. Material impacts include reputational harm. In practice, JPMC used this clawback provision in the wake of the London Whale incident, and CEO Jamie Dimon himself took a 50% pay cut. In contrast, Goldman Sachs did not invoke its clawback policy after the Abacus CDO settlement, although CEO Lloyd Blankfein took a 35% pay cut in 2011 but largely due to lower revenues that year.

But perhaps the most telling indication of success is the outcome of culture change. Which of the two banks managed to reduce reputational risk after releasing their reports? Goldman Sachs did. Since 2013, Goldman Sachs has avoided being in the headlines of major financial media, in sharp contrast to the nearly daily negative coverage of the company in 2009 to 2011. JPMC, however, continued to experience negative media coverage through 2015, over various instances of misconduct, not least on the conflict of interest on its proprietary funds. By this measure alone, it looks like Goldman Sachs’ culture change is on the right direction, but JPMC’s is still a work in progress.


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