Last week, Goldman Sachs disclosed in a regulatory filing that CEO David Solomon’s annual compensation for 2020 was reduced by $10 million because of the failures, penalties, and costs incurred within the 1MDB scandal. The bank incurred more than $5 billion worth of regulatory penalties last year, which some might consider $5 billion in losses for shareholders. Solomon was thus penalized, along with other senior leaders at the bank.
The penalties were imposed pursuant to anti-money laundering failures connected to the infamous fraud perpetrated against the Malaysian government. It is alleged Goldman Sachs managers played proactive roles in facilitating the fraud and laundering the proceeds. Criminal charges have been filed against two managers, and millions in bonuses previously paid have since been forfeited.
In my last column, I proposed compliance officers should not be paid bonuses that could potentially compromise their mission to do the right thing. The case of Goldman Sachs provides an example to underscore this point.
The facts of the settlements, including a $2.9 billion agreement with the Department of Justice and $3.9 billion paid to Malaysian authorities, do reference some compliance challenges to the relationship Goldman Sachs had with Malaysian businessman Jho Low, as well as some of the transactions. Indeed, this was something highlighted by Solomon at the time of the DOJ settlement in October. “We have to acknowledge where our firm fell short,” he said. “While many good people worked on these transactions and tried to do the right thing, we recognize that we did not adequately address red flags and scrutinize the representations of certain members of the deal team, most notably Tim Leissner, and the outside parties as effectively as we should have.”
Applying hindsight, it is simple to propose the role of Goldman Sachs in this scandal was all about decisions, some of which included dismissing or ignoring the concerns raised by the “many good people … [who] tried to do the right thing.” Short-term, profit-first thinking prevailed and subsequently gave rise to long-term costs and damage. All of which causes me to pose the question once again: Could there have been a very different outcome if compliance officers and other risk executives were not paid bonuses derived from the profits the bank made?
To turn this on its head, does anyone believe any of the “many good people” received an extra bonus for their trying “to do the right thing”? Bonuses are not paid for preventing losses that never materialize; they are paid for profits made. Such is the wrinkle that can make bonuses paid to compliance officers and risk managers perverse and distorted because they are never rewarded for preventing losses. Rather, they are rewarded for facilitating and approving short-term profits.
It is illogical to assume bonuses do not distort decision making. This extends to decisions as to what type of character a firm like Goldman Sachs wants as the head of risk or the chief compliance officer. I am not challenging the integrity of such people but, within a spectrum, there will be some who are more risk-averse or business-friendly than others. The decision makers who appoint people to these roles may themselves be influenced by those who are more business-friendly.
This particular case and the $5 billion-plus in penalties paid by Goldman Sachs should cause many to rethink the models that have facilitated bad decisions and huge losses—central to which is the inability to reward and/or calculate rewards for preventing losses that do not materialize. Preventing loss is one of the roles of risk officers, whereas ensuring adherence to rules, laws, regulations, and policies is the role of a compliance officer. It is far easier to perform these roles when actions taken and decisions made are not influenced by bonus assessments and business leaders who scrutinize such decisions prior to allocating bonuses.
All of this sits within the culture of a firm, something that was recognized by regulators after the global financial crisis of 2008 and led to the creation of remuneration committees within firms and banks. Of course, there is far more to culture than money.