What Goldman Sachs can learn from Wal-Mart

(Fortune) -- Goldman Sachs has a public relations problem; of that there is no doubt. Even to those of us who found some of the questions in Monday's Senate hearings as baffling as Goldman's own executives did -- and felt bizarre sympathy at their struggles to answer a number of questions that seemed remarkably off point and ill-worded -- it's nevertheless difficult to miss the whiff of moral bankruptcy hanging about the place.

Lost in the sound and fury of Washington's ritualistic hearings was the other Goldman (GS, Fortune 500) news reported by the Wall Street Journal in mid-April: the fact that investigators are looking into whether a member of Goldman's board of directors might have given an illegal tip to disgraced hedge fund manager Raj Rajaratnam, he of The Galleon Group. It is no small tip, either: news of Warren Buffett's $5 billion investment in Goldman in late September 2008.

Selling your clients a package of loans you think is "shi**y" is one thing. Insider trading is another. The first is unethical. The second, illegal.

The import of the allegations does not seem to have been lost on Goldman's leadership. In March, the firm announced that the board member under suspicion -- Rajat Gupta, the former managing partner of consulting powerhouse McKinsey & Company -- would not stand for reelection at the company's annual meeting next week. (They didn't exactly say why at the time, but the Journal would do that for them soon enough.) In what might be their only smart public relations move in recent memory, Goldman announced that H. Lee Scott, Jr., the president and CEO of Wal-Mart (WMT, Fortune 500) from 2000 to 2009, would stand as Gupta's replacement at its May 7 meeting.

Goldman executives surely feel they are under siege from critics. Mr. Scott knows all about that. Pick your corporate poison -- bad press, employee lawsuits, community anger, finding yourself a political piñata -- and Wal-Mart and Mr. Scott have been there, done that.

When Lee Scott took over the helm of Wal-Mart, the firm had what could be charitably described as an "us-versus-them" mentality, in which "us" was Wal-Mart and "them" was everybody else, from critics to the competition, the government, and yes, sometimes even its own employees. The company's public image as a rapacious behemoth reflected that.

When he stepped down from the CEO role a decade later, the image was undoubtedly that of a softer, gentler giant, if still a fierce one. "Under Lee Scott's guidance and direction, Wal-Mart experienced a transformation of its public image into that of a responsible corporate citizen," says analyst Jaison Blair of Rochdale Securities. "He led a sustainability-green effort, he greatly improved the benefits of its employees, and he approached the new administration as a partner rather than an adversary."

That was the proactive stuff. On the reactive front, Scott had apparently learned that the best way to respond to an attacker was not with an attack of one's own, but to embrace them, something Goldman, for all its strengths, clearly has no idea how to do. At the recent Fortune Brainstorm Green conference, Scott said he had been given transformational advice during his tenure: that the only way to win in his battles was to shift from challenging opponents head-on to turning to the side and letting them "flow by."

While mixing Goldman and Wal-Mart may seem a marriage of high and low, when it comes to circling the corporate wagons, the tactics will likely play well together. Goldman will have to learn its lessons quickly. And watchdogs say they don't plan to fall for any PR moves, even judo-inspired ones.

Nell Minow of The Corporate Library -- which tracks and grades corporate governance -- currently rates Goldman a decidedly weak "D" in the Library's governance rating system. She isn't sure the addition of Scott will improve that. "The reputational hit they are taking now is serious, so I see why they might want someone who understands branding," she says. "But what would be better is if they found their 'Elliot Richardson' -- a former chairman of the Securities and Exchange Commission, for example -- who could send a powerful signal that what they want to do is not just present themselves better but to actually be better. In that light, this change is necessary but not sufficient."

The Goldman folks better be careful, though. Wal-Mart has done more than any other company on the planet to strip costs out of the system with the obsessive and singular goal of reducing the price paid by its own customers. Goldman, on the other hand, clearly puts compensating its own employees above all other goals. And yet the plan is for Scott to be on the compensation committee of Goldman's board. Could the storied Wall Street firm have just let a cost-cutting fox into the compensation henhouse?

Duff McDonald is a business writer in New York. He is also the author of Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase.