Goldman Sachs 2012 Annual Report Download - page 79

Management’s Discussion and Analysis
The firm’s governance structure provides the protocol and
responsibility for decision-making on risk management
issues and ensures implementation of those decisions. We
make extensive use of risk-related committees that meet
regularly and serve as an important means to facilitate and
foster ongoing discussions to identify, manage and
mitigate risks.
We maintain strong communication about risk and we have
a culture of collaboration in decision-making among the
revenue-producing units, independent control and support
functions, committees and senior management. While we
believe that the first line of defense in managing risk rests
with the managers in our revenue-producing units, we
dedicate extensive resources to independent control and
support functions in order to ensure a strong oversight
structure and an appropriate segregation of duties. We
regularly reinforce the firm’s strong culture of escalation
and accountability across all divisions and functions.
Processes. We maintain various processes and procedures
that are critical components of our risk management. First
and foremost is our daily discipline of marking
substantially all of the firm’s inventory to current market
levels. Goldman Sachs carries its inventory at fair value,
with changes in valuation reflected immediately in our risk
management systems and in net revenues. We do so because
we believe this discipline is one of the most effective tools
for assessing and managing risk and that it provides
transparent and realistic insight into our
financial exposures.
We also apply a rigorous framework of limits to control
risk across multiple transactions, products, businesses and
markets. This includes setting credit and market risk limits
at a variety of levels and monitoring these limits on a daily
basis. Limits are typically set at levels that will be
periodically exceeded, rather than at levels which reflect
our maximum risk appetite. This fosters an ongoing
dialogue on risk among revenue-producing units,
independent control and support functions, committees and
senior management, as well as rapid escalation of
risk-related matters. See “Market Risk Management” and
“Credit Risk Management” for further information on our
risk limits.
Active management of our positions is another important
process. Proactive mitigation of our market and credit
exposures minimizes the risk that we will be required to
take outsized actions during periods of stress.
We also focus on the rigor and effectiveness of the firm’s
risk systems. The goal of our risk management technology
is to get the right information to the right people at the right
time, which requires systems that are comprehensive,
reliable and timely. We devote significant time and
resources to our risk management technology to ensure that
it consistently provides us with complete, accurate and
timely information.
People. Even the best technology serves only as a tool for
helping to make informed decisions in real time about the
risks we are taking. Ultimately, effective risk management
requires our people to interpret our risk data on an ongoing
and timely basis and adjust risk positions accordingly. In
both our revenue-producing units and our independent
control and support functions, the experience of our
professionals, and their understanding of the nuances and
limitations of each risk measure, guide the firm in assessing
exposures and maintaining them within prudent levels.
Structure
Ultimate oversight of risk is the responsibility of the firm’s
Board. The Board oversees risk both directly and through
its Risk Committee. Within the firm, a series of committees
with specific risk management mandates have oversight or
decision-making responsibilities for risk management
activities. Committee membership generally consists of
senior managers from both our revenue-producing units
and our independent control and support functions. We
have established procedures for these committees to ensure
that appropriate information barriers are in place. Our
primary risk committees, most of which also have
additional sub-committees or working groups, are
described below. In addition to these committees, we have
other risk-oriented committees which provide oversight for
different businesses, activities, products, regions and
legal entities.
Membership of the firm’s risk committees is reviewed
regularly and updated to reflect changes in the
responsibilities of the committee members. Accordingly, the
length of time that members serve on the respective
committees varies as determined by the committee chairs and
based on the responsibilities of the members within the firm.
In addition, independent control and support functions,
which report to the chief financial officer, the general counsel
and the chief administrative officer, or in the case of Internal
Audit, to the Audit Committee of the Board, are responsible
for day-to-day oversight or monitoring of risk, as discussed
in greater detail in the following sections. Internal Audit,
which includes professionals with a broad range of audit and
industry experience, including risk management expertise, is
responsible for independently assessing and validating key
controls within the risk management framework.
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