By Eleanor Bloxham
March 15, 2012

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE — Not every departing employee gets the chance to sound-off on a former employer in a New York Times op-ed, but Greg Smith, an executive who had worked at Goldman Sachs (GS) for 12 years, took that opportunity yesterday in a forceful indictment of Goldman’s leadership culture and its board.

Individuals are promoted based on the money they bring in even if clients are harmed, Smith wrote. Suggesting that “the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch” and that “this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival,” he wrote: “I hope this can be a wake-up call to the board of directors … get the culture right again, so people want to work here for the right reasons.”

A wake-up call for the board, indeed.

One wonders how much louder the alarm must ring before the drowsy Goldman board stirs. Last week, a judge’s description of Blankfein’s apparent role in persuading its client El Paso Corporation to work with Goldman in a conflicted situation was top news. The week before, Goldman reported that the SEC is looking into client disclosure issues, an alleged continuing problem at the firm.

Others much further from Goldman’s epicenter have heard the alarm, so where is the bank’s board in all of this? Goldman Sachs declined to offer comment for this article but told the New York Times that the company disagreed with Smith and that clients’ success does matter to Goldman.

MORE: Why Greg Smith is leaving Goldman now

In a memo to employees, Blankfein and Cohn brushed off Smith’s criticisms, saying his opinions did not represent general employee viewpoints. This may be so, although it was at least partially disputed in a New York Times article late yesterday and a Bloomberg article this morning. But there are other stakeholders who find Smith’s descriptions apt, and that does matter.

Georgetown University Law Professor Russ Stevenson told me last week that there has been a “dramatic change in self perception” among investment banks.  They used to see themselves as vouching for their product, as acting as a “gatekeeper to the capital markets” and providing a valuable social role. That has been lost, Stevenson said.

Is the SEC at all relevant to Blankfein and Goldman’s board? Blankfein and Cohn did not mention the recent headlines or scrapes with the SEC in the memo to employees. Last month, SEC Chair Mary Schapiro described the need to continuously police these kinds of firms — and yesterday, Propublica traced Goldman’s troubled regulatory history over the last 12 years. With all of these troubling instances, the current board has had several opportunities to awaken and act.

The board failed to seize a big opportunity last year when it oversaw the bank’s Business Practice Review amid the fallout surrounding the company’s role in the financial crisis. That inadequate 67-page document was big on platitudes but small on substance in addressing the ethical conundrums employees face. Goldman told the Times yesterday that client success mattered to the firm. But in the instance in which you are selling what you call junk, does only the seller’s success matter and not the buyer’s?

How much, exactly, does client success matter is the real question. Does it matter more than short-term profits?

Figuring out what would best create client success would mean that Goldman would not just be facilitating financial transactions, they would advise clients in what best suited them and act in their interest. If Goldman wants to say publicly that is the nature of its client relationships, it needs to be darn sure it plans to live up to the advertising. It is hard to see how the firm has been living up to that standard based on its regulatory history. And, unfortunately, on this board’s watch, the business practice review was not sufficiently well thought-out to move that aspiration forward.

The board missed another opportunity yesterday. Instead of brushing off Smith’s comments, the board should have ensured that the CEO took the allegations seriously. It should have used this opportunity to communicate to employees and others that it would move to understand what actions would make all employees and stakeholders comfortable that Goldman’s deeds match their words.

Instead, the board allowed Blankfein and Cohn to take the tact most likely to shut down future whistleblowers: reject Smith’s comments as out of hand. If they are willing to do this in public, what goes on behind closed doors?

MORE: The 10 investment banks employees most want to quit

The board itself should be taking action. It’s serious when your CEO has been publicly called out by both a judge and an employee in a two-week timeframe.

And shouldn’t it be a wake-up call when stakeholders mock the employee whistleblower for being naïve, implying that everyone should know that Goldman is as bad as Smith made it sound?

Last month, I spoke with directors who sit on the boards of approximately 50 different companies and who believe the board’s role in overseeing the corporate culture is one of its most important jobs. That role includes responsibility for redirecting any senior management myopia toward its people, reputation, and ethics, directors say. Of course, righting HR systems of promotions and compensation are primary ways to correct cultural miscues.

Good boards need to know what individuals think, down inside the hierarchy, and get the views of those who will speak up and aren’t already so embedded they can’t see the problems in the organization and its culture, these directors say. While many boards create opportunities to meet with lower level staff in a variety of settings, one director spoke about how his board invites middle managers to the board dinner, the night before the board meeting, without the senior executive team or CEO present. That board has found it a great way to get the real lay of the land.

Blankfein has been on the Goldman board for nine years and some Goldman directors have served terms ranging from seven to 13 years. Are some too embedded? Where have their hearts and minds been? Hello, Goldman board. Are you awake?

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm.

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