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It has never been more evident that business leaders must hold themselves and their companies to the highest ethical and business standards. Only by putting appropriate corporate governance mechanisms in place, and otherwise aligning the interests of management with shareholders, will shareholder interests be adequately promoted and protected. The discussion below is intended to inform our shareholders and other interested parties about our philosophy and actions in this important area. Further information concerning our corporate governance structures is contained in our 2003 Proxy Statement and on our Web site.

On May 7, 1999, Goldman Sachs became a public company—a profound change for the firm. Operating as a partnership for 130 years, it had successfully evolved from its roots as a modest, family-owned business founded in 1869, into one of the most prominent investment banking, securities and investment management firms in the world.

In making the transition to a public company, we were determined to retain the best characteristics of the partnership culture that had led to our success—a key element of which is meaningful ownership of the firm by its people. A major priority was putting in place a strong framework of governance and assembling a Board of Directors that would promote and protect the interests of our new partners, our public shareholders.

RETAINING THE STRENGTHS OF AN OWNER CULTURE
The core of the Goldman Sachs partnership was shared long-term ownership. It shaped individual behavior and our approach to business. The partners were the owners of the enterprise and, with few exceptions, they could not withdraw their capital until they left the firm or retired. Their interests were tied individually and collectively to the well being of the firm as a whole.

As a result, there was a total alignment between ownership and management because they were one and the same. The leaders of virtually every business were partners with their capital tied up in the firm. We are in a business where our success is in large measure a reflection of our people and our reputation. Every partner had a tangible interest in strong operational and legal and ethical controls, effective risk management methodologies and maintaining a culture of integrity. In that regard, we rigorously adhered to mark-to-market accounting to ensure that our recorded positions reflected economic reality. And they had to because our accounting formed the basis for determining partners' individual capital accounts and paying them out when they retired from the firm.

We viewed our public offering as an opportunity to deepen the benefits of ownership by sharing it with all of our people. So we made the largest stock grant to employees in history. Approximately $5 billion of Goldman Sachs stock was distributed to all of our employees, at all levels in the firm. We believed that by making all of our people owners, the firm would benefit by strengthening the culture of ownership.

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