Latest / Boardroom Conversations with Fexingo: CEOs, Strategy, and Corporate Leadership Explained / How the Goldman Sachs Board Rebuilt Culture After the 1MDB Scandal
Transcript
- Lucas: In December 2020, Goldman Sachs agreed to pay $2.9 billion in penalties to regulators in the US, UK, Singapore, and Malaysia for its role in the 1MDB scandal. That's the single largest fine in the bank's hundred-fifty-year history. And it wasn't just a fine — it was an admission that the bank's internal controls had failed at the highest level. Luna: And for context, this is the same bank that prided itself on a culture of 'long-term greedy.' The board had to decide not just who to fire, but how to fundamentally change the way the institution thought about risk. Lucas: Right. And that's what I want to drill into today — how the Goldman board navigated the aftermath of 1MDB. Because the scandal didn't just reveal a few bad actors. It exposed a governance structure that let those actors operate for years. Luna: If this kind of boardroom analysis has been useful to your own work, the way these episodes stay ad-free is through listener support. You can find us at buy me a coffee dot com slash fexingo. Just a simple way to keep the conversation going. Lucas: Yeah, exactly. So let's start with the scale of the problem. Between 2009 and 2014, Goldman helped raise $6.5 billion in bonds for 1MDB, a Malaysian sovereign wealth fund. The problem was that much of that money was diverted to shell companies and used for bribes and kickbacks. The bank's own compliance officers flagged suspicious activity multiple times — and senior bankers overrode them. Luna: So the issue wasn't that nobody knew. It was that the people who knew didn't have the power to stop it. Lucas: Exactly. And that's a board failure. By 2018, when the scandal was fully public, the board had already started making changes. They created a new Business Standards Committee — a board-level committee specifically tasked with overseeing conduct and culture. Previously, those issues had been folded into the broader risk committee, which was mostly focused on market and credit risk. Luna: Was this a case of the board being proactive, or were they responding to pressure from regulators and shareholders? Lucas: I'd say both. The board had already begun a review of governance in 2018 under then ceo Lloyd Blankfein. But it was really after the Department of Justice and the SEC started demanding changes that the board accelerated. By early 2019, they had separated the roles of chairman and CEO — something shareholders had been pushing for years. Luna: And that separation is still in place today, right? David Solomon is CEO, but the chairman is an independent director. Lucas: Correct. The independent chairman is now David Viniar, who was previously CFO. The board also implemented a clawback policy that goes beyond SEC requirements. In 2021, they clawed back $174 million in compensation from former executives — including Blankfein and former president Gary Cohn — even though those executives hadn't been personally charged with wrongdoing. Luna: That's unusual. Most clawbacks only apply if there's a restatement or a personal misconduct finding. Goldman's policy allowed them to recoup pay simply because the bank suffered a reputational harm. Lucas: Right. And that sends a message. The board was saying: 'We hold top leadership accountable for what happens on their watch, even if they didn't directly participate.' That's a governance innovation that other companies have started to copy. Luna: But let's talk about the structural changes. The board also pushed to separate the investment banking division from the asset management division — two parts of the bank that had been deeply intertwined. Lucas: Yes. Before 1MDB, Goldman's asset management arm would often invest alongside the investment banking deals. That created conflicts — the same bankers who were advising 1MDB were also managing money that invested in 1MDB bonds. The board mandated that asset management become a separate legal entity with its own risk oversight. That was a massive operational change. Luna: And it's one of the reasons Goldman emerged from the scandal with its banking license intact. Regulators in New York and Singapore were considering revoking it. Lucas: Absolutely. The board's willingness to make deep structural changes — not just fire a few people — was critical. They also replaced the head of compliance, the head of legal, and the head of the Asia-Pacific region. And they added two new independent directors with regulatory expertise: one former SEC commissioner and one former UK Financial Conduct Authority official. Luna: So the board itself got more diverse in terms of regulatory background. That seems like a direct lesson: if your business operates in a highly regulated industry, your board should include people who have actually been regulators. Lucas: Exactly. And that's a shift from the old Goldman model, where the board was mostly former CEOs and finance executives. By 2023, Goldman's board had five women out of twelve members, and three members with direct regulatory experience. Luna: Let's zoom out. What's the single biggest governance lesson from the 1MDB scandal for other boards? Lucas: I think it's this: culture is not just a 'soft' issue. It's a risk issue. The Goldman board treated the cultural failure as a systemic risk — and they responded with systemic changes. They didn't just update the code of conduct. They rewired the reporting structure, the compensation structure, and the board composition itself. Luna: And it's also a reminder that the board's job doesn't end when the scandal breaks. The real work is in the years after — rebuilding trust, changing processes, and holding people accountable even when it's uncomfortable. Lucas: Right. And Goldman has largely succeeded. The fine was paid, the executives left, the new structure is in place. But the question now is: will the new governance hold when the next generation of leaders takes over? Culture can revert if the board stops paying attention. Luna: That's the real test. Five years from now, will Goldman's board still have that regulatory expertise? Will the clawback policy still be enforced? Or will it slowly fade back to the old ways? Lucas: That's exactly the question every board should ask itself after a crisis. Not just: 'Did we fix it?' But: 'How do we make sure the fix sticks?'