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PROMOTING AND PROTECTING SHAREHOLDER INTERESTS

We also took steps to ensure that our people would retain an important personal stake in Goldman Sachs going forward. First, we established minimum stock retention requirements for all of our Managing Directors (currently over 1,000 individuals) based upon the shares they received at the time of the IPO and subsequently as a portion of their annual compensation. Today, virtually all of our senior executives have the largest part of their personal assets in Goldman Sachs stock. Their financial success is directly tied to the success of Goldman Sachs. We also established compensation plans in which a significant portion of compensation—approximately 45% for our most highly paid people—is in the form of equity. Today, Goldman Sachs is distinctive among large public companies in that a very significant portion of the firm (over one-third) is owned by its people.

Another key element in retaining the best aspects of our partnership culture was the establishment of a partnership compensation plan. Every two years, we elect new partners. Those partners, who currently number about 290, are compensated by their share of a compensation pool, which is determined each year by the firm's overall level of profitability. The effect of this concept is that our most senior managers' compensation is directly linked to the success of the firm as a whole. This is a unique approach to compensation in our industry and it encourages the firm's leaders not to focus narrowly on their individual businesses, but rather to work together to maximize the success of Goldman Sachs.

At the time of the IPO, the firm was owned principally by partners who were engaged full-time in the business. A smaller portion was also held by retired partners and certain institutions. We viewed a major challenge of our transition to a public company to be the orderly distribution of a significant portion of these shares into the public market, with as little disruption as possible, so as to eliminate the market "overhang" issue and to provide deep liquidity for our public shareholders. With the exception of the three most senior officers, we have encouraged our partners to sell a portion of their shares on an orderly and volume-limited basis. Last year, after we reached approximately 50% public ownership, Goldman Sachs was added to the S&P 500, perhaps the most significant index for listed shares in the U.S., and an important milestone for any company, given how many investors use it as a benchmark.

THE FRAMEWORK FOR GOVERNANCE: MANAGEMENT AND THE BOARD
The leadership and oversight task for an investment bank like Goldman Sachs is a complex one. We are one of a handful of truly global investment banks conducting advisory, asset management and securities sales and trading businesses around the world, and are active in virtually every market center. We manage considerable risk, often taking on large capital commitments, on short notice. Senior management must spend considerable time with clients. Our industry is highly regulated, and here again, the global nature of the enterprise adds to the complexity since every jurisdiction has its own regulatory regime or regimes.

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